Watford Re, the Arch Capital and Highbridge Principal Strategies joint-venture investment-oriented, total return focused, hybrid strategy reinsurance vehicle, bounced back in the first-quarter of 2016, with positive investment results driving profitability.
Watford Re suffered in the fourth-quarter of 2015, as global financial market volatility negatively affected the reinsurance vehicles investment return, resulting in a net loss of $34.93 million before tax and a $4.36 million loss to Arch’s shareholders in the quarter.
But 2016 has started more brightly for Watford Re, as the investment strategy managed by Highbridge Principal Strategies bounced back helping to deliver a profitable quarter for the total return reinsurance venture.
Watford Re, operated by Bermudian insurance and reinsurance firm Arch Capital alongside hedge fund style asset manager Highbridge Principal Strategies, acts as a kind reinsurance sidecar for Arch, taking some cessions from the reinsurer, while also leveraging third-party investor capital, and on the asset side using an active or hedge fund style investment approach thanks to Highbridge, contributing to the total return strategy of growth on both sides of the balance sheet.
And the total return strategy at Watford Re does seem to be coming together, as the reinsurer has managed to get its combined ratio under control, although it does sit just above 100 and Arch’s ambition is to get it just under, suggesting that its underwriting portfolio is perhaps less volatile (or lumpy) than some other hedge fund reinsurers and investment oriented vehicles.
For Q1 of 2016 Watford Re achieved a combined ratio of 101.6%, which is inflated over Q1 2015’s 100.3%, but the reason for the inflation is an increase in other operating expenses, which increased 1.8% year-on-year.
So had those other operating expenses not increased the other contributors to the combined ratio, the loss ratio which was the same as a year earlier and acquisition expenses which dropped slightly, Watford Re would have reported a sub-100 combined ratio for the quarter.
So the combined ratio does seem to be controlled, at the moment, which means that when the investment portfolio sees positive performance, Watford Re should be able to make a profit for its investor shareholders, Arch and Highbridge.
And that has been the case in Q1, as the investment portfolio returned $23.3m of net income and almost $5.5m of realised gains. With the underwriting a slight loss, of $944,000, Watford Re’s net income after interest expenses and foreign exchange factors was just over $22.8m.
Watford Re delivered $2.01m of income to Arch and its shareholders for the quarter, helping to boost the re/insurers own profitability, while the portion of Watford Re’s earnings attributable to its third-party investors is reported by Arch as around $20.8m for Q1 2016.
Also of note is the fact that Watford Re increased its gross premiums written during the quarter, at $148.6m compared to $128.6m a year earlier. This is a sign of the increasing scale achieved by Watford Re, as the float builds and it generates profits which increase its underwriting clout.
And on the subject of the all important premium float, which Highbridge invests in its strategies, further growth was recorded in the quarter as Watford Re gains scale.
Arch reported that Watford Re’s investable assets hit just over $1.7 billion at the end of Q1 2016, only slight growth over the end of 2015 likely due to unrealised losses in that quarter in the investment portfolio, but up over $440m in a year. Total assets at Watford Re are now $2.32 billion, up from $2.12 billion at the end of 2015.
So Watford Re continues to look like a good strategy for Arch, as it generates income as well as providing an efficient source of reinsurance or retrocession (in a sidecar or active capital style manner), and for Highbridge which benefits from management and performance fees for investing the growing float.
If the combined ratio can be controlled down to below 100, bringing underwriting profit to add to the investment performance and the financial markets are kind to Highbridge’s strategies, Watford Re could begin to deliver quite significant profits to the joint-venture partners and the reinsurers third-party investors in quarters to come.
And having launched two subsidiaries in the last year, one a U.S. specialty insurance company and the other a Gibraltar based insurer, Watford Re looks set to continue to expand and bring more underwriting premiums to Highbridge to manage.