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Arch Capital Group (ACGL) |
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WIKI ANALYSIS
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%,[1] 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.[2] 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). [3]
Corporate Overview
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Competition
Competitors are insurance subsidiaries of global conglomerates or independent companies. As defined by Arch Capital Group, its competitors in insurance are: [4]
- Ace (ACE)
- Allied World Assurance Company Holdings (AWH)
- American International Group (AIG)
- Axis Capital Holdings (AXS)
- Berkshire Hathaway (BRK)
- Chubb (CB)
- Endurance Specialty Holdings (ENH)
- Hartford Financial Services Group (HIG)
- HCC Insurance Holdings (HCC)
- Lloyds Tsb Group (LYG)
- ST PAUL TRAVELERS (STA)
- W.R. Berkley (BER)
- XL CAPITAL LIMITED (XL)
- Zurich Insurance Group.
In response to price competition from larger insurers and subsidiary companies, Arch is aggressively shifting its strategy toward opening smaller insurance policies with businesses in a diverse set of specialty markets, where it can offer a higher level of expertise than many of its larger competitors. [5]
The company also faces competition from emerging alternatives to insurance, such as catastrophe bonds and alternatives to traditional reinsurance such as finite reinsurance products.
References
- ↑ ACGL. ACGL Annual Report 2007, To Our Shareholders Letter, Pg 1.
- ↑ ACGL. Annual Report 2007, Cash Flow, Investable Assets and Investment Income, Pg 2.
- ↑ WSJ. AIG reports $5.36 billion quarterly net loss.
- ↑ ACGL. Annual Report 2007, Pg 23.
- ↑ ACGL. Annual Report 2007, Market Positions and Strategic Principles, Pg 2.
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