Investors receptive to creative structure of Watford Re: CEO

by Artemis on April 9, 2014

The CEO of newly launched, hybrid-strategy reinsurance company Watford Re has said in a recent interview that investors were ‘overwhelmingly receptive’ to the ‘creative’ structure of the reinsurance startup.

It’s no surprise to read this, in an interview with A.M. Best. Watford Re was always going to be a popular reinsurance linked investment strategy given its hybrid approach of leveraging third-party capital, acting as a type of sidecar for part-owners Arch Capital and its focus on an active, hedge fund style, investment strategy thanks to asset manager Highbridge Principal Strategies.

We’ve written at some length about the strategy and what makes it interesting. Watford Re is not a typical third-party reinsurance capital play, it is also a true startup which allows Arch Capital a chance to begin with a blank canvas on top of which it can pursue reinsurance innovation.

Watford Re Chief Executive Officer John Rathgeber told A.M. Best that when making pitches to investors you never know how it will be received. This is especially true of new concepts or hybrid approaches to a tried and tested industry model, which Watford Re certainly is for the reinsurance industry.

“The response was overwhelmingly receptive from the investor standpoint,” Rathgeber told A.M. Best. The investor base for Watford Re numbers around one thousand investors, according to Rathgeber, with Arch Capital likely one of, if not the, largest with its $100m stake. In total Watford Re raised $1.13 billion from third-party investors before its launch.

Rathgeber puts the track record of Arch Capital and Highbridge Principal Strategies as key factors which made raising capital for Watford Re’s launch an easier task.

Interestingly, Rathgeber agrees with our assessment of the unique factors that Watford Re brings to the reinsurance market. He told A.M. Best that he sees the structure of Watford Re as ‘creative’, saying that the individual pieces of the reinsurer may look familiar but seeing them all together is not as common.

Rathgeber agrees that Watford Re does bear some similarities to a sidecar, as we’ve said due to its ability to take quota-shares from Arch and the way it can act as a unique type of third-party reinsurance capital play. However, Rathgeber believes the difference is that Watford Re is a permanent facility, or at least is designed to be permanent.

Rathgeber said that Watford Re will write the same lines of business as where Arch Capital focuses and has expertise, however it will have a different portfolio. It will underwrite a small amount of property catastrophe risks, but the primary focus will be on casualty lines such as general liability, umbrella, workers compensation and professional liability.

Rathgeber said that Watford Re is aiming to generate “Fairly predictable, stable cash flows — to the extent you can do that in reinsurance.” That is exactly what is required in order for Highbridge Principal Strategies to invest the premium income or float in its non-investment grade corporate credit strategy.

With Watford Re having raised capital seemingly without too much difficulty it is likely that other traditional reinsurers will be watching it closely to see how the strategy plays out. It would not be surprising to see some traditional reinsurers look to introduce more active investment strategies in years to come, especially if underwriting returns have suffered and the reinsurance market cycle becomes more flat.

Are we on the verge of witnessing a historic change in reinsurer strategy, as the best elements of sidecars, third-party capital and hedge fund reinsurer asset strategies come together at traditional players? It’s possible, but this is certainly much easier to attempt with a blank canvas, rather than changing the structure and investment side mandate of an existing traditional reinsurance player. Reinsurance startups may become a bit of a trend in the coming months, which would be fascinating to see in a softening market.

Our other Watford Re coverage:

Watford Re, and start-ups, a blank canvas for reinsurance innovation

Watford Re raises $1.13 billion for diversified reinsurance operations

Watford Re, not your typical third-party reinsurance capital play

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