Watford Re combined ratio drops sub-100, investment losses hurt

by Artemis on October 29, 2015

Watford Re, the investment-oriented, hedge fund partnered, hybrid strategy reinsurance joint venture vehicle operated by Bermudian re/insurance group Arch Capital alongside asset manager Highbridge Principal Strategies, achieved one of its targets in the last quarter, getting the combined ratio under 100%.

One of the targets for the hybrid reinsurance strategy, which sees Watford Re acting as a casualty focused vehicle, a little like a reinsurance sidecar for Arch as it takes some cessions from the reinsurer, while leveraging third-party investor capital and on the asset side using an active or hedge fund style investment strategy thanks to Highbridge, has been to get the combined ratio down.

Arch does not want Watford Re to be a reinsurance vehicle that operates with a combined ratio over 100% and tries to make a profit based solely on the investment side of the business. Rather, Arch wants Watford Re to be a sustainable underwriting business, with the added addition of outperforming due to a more active investment strategy.

The Q3 2015 results demonstrate exactly why this is an important part of the Watford Re strategy.

For the third-quarter Watford Re’s combined ratio came in at an impressive 99.4%, the first quarter since the reinsurance vehicle’s launch that it has achieved the goal of getting to sub-100%.

The 99.4% combined ratio meant that Watford Re delivered an underwriting profit for the first quarter, with underwriting income of $1.309 million reported. That helps the first nine months of 2015 underwriting loss get reduced to -$152,000.

However the investment side of Watford Re has suffered during the third-quarter, as has been seen with so many hedge fund and traditional reinsurance firms, as global financial market volatility resulted in higher realised losses hurting the reinsurance vehicle’s results.

Watford Re reported net investment income of $18.98 million for the quarter, but net realised investment losses totaled $36.22 million. With the underwriting profit, this resulted in a loss of $18.59 million before tax and ultimately Watford Re’s quarter resulted in a $2.56 million loss to Arch’s shareholders.

For the first nine months of 2015 Watford Re is close to an underwriting profit, with a combined ratio of 101.3% and an underwriting loss of just $152,000. The investment side performance for the year to date means positive net income for Watford Re and has helped Arch’s shareholders to $641,000 of net income for the year-to-date.

Watford Re underwrote $131.2 million of gross premiums during Q3 2015, the most its underwritten in a quarter so far. That takes total gross premiums written in the first nine months of 2015 to just under $388 million.

Watford Re continues to make good progress towards being a sustainable hybrid reinsurance vehicle, with an alternative and higher-performing investment strategy. The underwriting profit and sub-100% combined ratio is a sign that Arch is controlling the loss ratio and expenses, which should allow investment performance to shine in quarters to come.

Q3 2015 has been unfortunate for many investment oriented reinsurance vehicles, the volatile investment climate has even hit traditional players. But the prior quarters investment returns at Watford Re had demonstrated its potential and with the premiums written growing, resulting in greater float to put to work in Highbridge’s strategies, we should expect to see attractive performance in the future.

When the investment returns rebound the underwriting result will only make performance look even better. Arch will now be striving to keep that combined ratio down, giving even more chance of out-performance compared to the broader market and augmenting Arch’s own results.

The premium float is growing rapidly as well, with Arch reporting that Watford Re’s investable assets had reached $1.268 billion at the end of Q1 2015, growing to $1.341 billion at the end of Q2. That figure, of investable assets, now sits at $1.594 billion at the end of Q3 2015, with total assets at Watford Re now an impressive $2.091 billion.

That’s a lot of capital that can be put to work and the next good investment quarter should deliver an impressive bounce back for Watford.

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