Watford Re, the investment-oriented, total return reinsurance joint venture operated by Bermudian re/insurance group Arch Capital alongside asset manager Highbridge Principal Strategies, has launched a U.S. domiciled surplus lines insurer, Watford Specialty Insurance Company.
Watford Re has been adding new business lines, as it seeks to gain greater scale on the underwriting side. By adding premiums and also diversification, the float Watford Re generates for Highbridge Principal Strategies to invest grows and perhaps becomes more stable.
Watford Specialty Insurance Company, headquartered in Morristown, NJ, is a wholly owned subsidiary of Watford Re Ltd. Rating agency A.M. Best has assigned an A- (Excellent) financial strength rating and an “a-” issuer credit rating to the startup.
It appears that Watford Specialty Insurance Company is set to operate as an excess & surplus (E&S) insurer, with a number of insurance departments having the company already approved to underwrite surplus lines insurance in their states.
The name, of course, suggests specialty class surplus lines will be the specific type of insurance business that Watford Specialty focuses on, which would fit with the total return, or hedge fund style remit, of seeking longer term premium float from longer-tailed, more complex risks, in order for the premiums to be invested by Highbridge.
A.M. Best notes the positive contributions to the rating provided by the experienced underwriting manager Arch Underwriters Inc., and leading investment management of Highbridge Principal Strategies, LLC.
The rating agency also notes that Watford Specialty is a “strategic component of Watford Re Ltd.’s broad-based business plan.”
A.M. Best also notes the “inherent risks associated with a start-up company and the risks associated with a subsidiary with a limited geographic footprint.”
Additionally, the currently competitive insurance and reinsurance market conditions in the U.S. could make execution of the business plan more challenging, A.M. Best explains.
Of course the rating announcement also mentions the risks associated with the hedge fund style investment strategy that Watford Re adopts, which was very evident in the fourth-quarter of 2015 as financial market volatility hit the reinsurance firm’s returns.
Given the more active nature of the investment strategy that is always a risk for Watford Re, however the continuous build-up of investment float, provided by increased underwriting activity which Watford Specialty will contribute to, provides it a larger pool of assets to profit from when investment conditions improve.
By diversifying and adding new underwriting arms, Watford Re can create a platform which generates premium float of differing durations, from different risks, which can then be invested by Highbridge. As that premium float grows, the possibility of very profitable quarters increases, but so does the chance of negative quarters when financial market conditions are less conducive.
The goal is that, over the longer-term, Watford Re’s investment strategy will generate positive returns that outperform the wider reinsurance market, while on the underwriting side the aim is to get the combined ratio into positive territory as well, something greater diversification will assist with.
This typical total return reinsurer approach can only be aided by the addition of new subsidiaries, as they add greater premiums float volume to the investment strategies, as well as more diversification and an element of timing, in terms of the length of the underwritten businesses tail.
Last year Watford Re launched Watford Insurance Company Europe, a subsidiary to underwrite UK motor insurance business based in Gibraltar, adding another avenue to generate premium income and float.
As the Watford Re platform grows we should expect other subsidiaries to launch as the company clearly has ambitions to grow its footprint considerably.