Arch Capital Group Ltd. (NASDAQ:ACGL) writes major insurance policies for businesses and sells reinsurance to other insurance companies. The company targets insurance policies that have an anticipated minimum return (ROE) of 15%, which is problematic in economic downturns as companies become more price sensitive. This ROE litmus test means that Arch first evaluates a projected combined ratio for a potential policy, and from that ratio Arch attaches a projected net income to the policy. If this is below what is needed to generate a 15% ROE, then Arch does not write the policy.
Like other insurance companies, Arch invests the premiums it collects to earn income. Its portfolio consists solely of fixed income securities rated in the range of AAA to AA, with virtually no investment in hedge funds or private equity. Importantly, its portfolio of investments holds no collateralized debt obligations (CDOs) or loan obligations (CLOs). This conservative investment strategy stands in stark contrast to the investments of many other insurance companies, most notably AIG, whose well-publicized write-offs were centered on collateralized debt obligations (CDOs). (Read more at Wikinvest )