Arch, Highbridge to launch third-party capital backed Watford Re

Bermuda-based insurance and reinsurance group Arch Capital is set to launch an interesting new, third-party capital backed venture named Watford Re alongside hedge fund and equity investment management firm Highbridge Capital.

In an SEC filing on Friday, Arch Capital announced that its recently-formed subsidiary Arch Underwriters Ltd. has reached an agreement in principle to act as the reinsurance manager for Watford Re. Watford Re is a newly-formed multi-line reinsurance company, according to the SEC filing, which is expected to be principally funded with third-party capital.

The filing says that Highbridge Principal Strategies LLC, a private equity and credit investment platform of Highbridge Capital Management, LLC, which is itself a subsidiary of JPMorgan Asset Management Holdings Inc., will act as the investment manager for Watford Re.

There have been rumours for a few months that Arch and Highbridge were working on an alternative reinsurance capital play of some description and that it would involve giving third-party capital access to casualty lines of business.

It was never clear whether this was a reinsurance sidecar of some description, but with Highbridge acting as an investment manager Watford Re is perhaps destined to be more similar to a hedge fund reinsurer strategy, possibly sourcing its book of reinsurance through a quota share from Arch itself.

This would allow Arch to leverage a source of third-party capital, passing on a quota share of risk to Watford Re, while Highbridge Capital invest the quota share premiums in its Principal Strategies, seeking to outperform the investment returns of other re/insurers. Arch would also effectively increase its own capacity by being able to pass on a quota share to Watford Re.

Third-party investors might like this strategy, as they get the benefits of an established insurance and reinsurance underwriter, in Arch, and a high-performing investment manager, in Highbridge.

A slightly different strategy might see Watford Re underwriting its own portfolio of reinsurance business with the help of Arch Underwriters Ltd., but again with a typical hedge fund reinsurer strategy to invest the premium float in Highbridge strategies.

We don’t have any more detail on the Watford Re business strategy at this time, but will update you should any announcements be forthcoming from Arch or Highbridge on the new third-party reinsurance venture.