An announcement from Watford Holdings Ltd. and its wholly-owned reinsurance subsidiary Watford Re Ltd. says that the much-discussed casualty focused, third-party capital backed reinsurer is set to start underwriting shortly.
The announcement says that Watford Re, a multi-line Bermuda domiciled reinsurer, has now raised capital and expects to commence its reinsurance operations shortly. Update: Watford Re announced on the 1st April that it has raised $1.13 billion.
Watford Re will be led by CEO John Rathgeber, a reinsurance sector veteran with 30 years of experience. Rathgeber was most recently Vice Chairman of Arch Worldwide Reinsurance Group.
On the underwriting side its understood that Watford Re will utilise third-party investors to lower its cost of capital, thus taking advantage of the capital markets price advantage in the reinsurance underwriting space. The link to Arch Capital and ability to take on quota-shares of business from it also gives Watford an interesting sidecar type look.
On the asset side investment manager Highbridge Capital gives this strategy an interesting twist, making Watford Re an interesting hybrid of a reinsurer, backed by some third-party capital, with a hedge fund managing the asset side and sidecar traits due to the relationship with Arch.
Rating agency A.M. Best has announced that it has assigned a financial strength rating of A- (Excellent) and issuer credit rating (ICR) of “a-” to Watford Re Ltd. Best notes that there are risks attached to Watford Re’s leveraged investment strategy as well as the competitive conditions in the reinsurance market.
A.M. Best explained;
A.M. Best believes that underwriting risk coupled with the leveraged investment strategy creates an elevated risk profile that could expose Watford on both the asset and liability sides of the balance sheet. However, the skilled underwriting of Arch Capital Group Ltd. and the experienced investment acumen of Highbridge Principal Strategies, LLC (HPS), along with cash flows produced by Watford’s credit investment strategy, will help manage these risks.
In addition, A.M. Best anticipates that Watford’s management will be challenged by competition from established reinsurers as well as other start-up entities and alternative capital. The addition of more capacity to an already overcapitalized reinsurance marketplace could pressure underwriting margins.
Watford’s assets will be managed by HPS, a subsidiary of Highbridge Capital Management, LLC, a New York-based SEC-registered investment advisor. HPS has approximately $19 billion of assets under management. Watford will own the individual investments and hold the assets on its balance sheet. Watford’s assets will not be comingled with any HPS-managed funds with other investors of HPS.
It’s no surprise to see A.M. Best comment on these aspects, the higher risk investment strategy combined with the targeting of lines of business like casualty and the aim to leverage third-party capital all make Watford Re a unique proposition in the reinsurance market. A.M. Best clearly recognises that.
Read our other articles on Watford Re for much more on the start-up reinsurer: