Watford Re, Bermudian specialist re/insurer Arch Capital and asset manager Highbridge Principal Strategies third-party capital backed total-return reinsurance venture, continued its trend towards portfolio growth in the second-quarter, reporting another 15% jump in premiums underwritten.
This follows a huge almost 40% increase in gross premiums underwritten in the first-quarter of the year, meaning its gross premiums for the half-year in 2018 are now up by almost 28% on the first-half of 2017.
Watford Re, which seeks a total-return for its investors and sponsors, aims to be profitable on the underwriting side of the business, underwriting longer-tailed risks and putting the premium float to work, invested by Highbridge Principal Strategies, looking to outperform through the combination of profitable underwriting and an outsized, compared to the majority of traditional reinsurers, investment return.
The reinsurance firm provides sponsor and part-owner Arch Capital with another valuable lever to bring third-party capital into its business, adding a modicum of efficiency through the enhanced investment returns as well and meaning the firm can use Watford Re to help drive expansion and earn additional fee income as well.
The underwriting side of Watford Re continues to see improvements and in the second-quarter of 2018 the firms combined ratio came out at just 100.6%, one of the lowest quarters yet achieved and down on the prior years 102.3%. For the first-half of 2018 the combined ratio is 100.7%, so Watford Re is getting closer to underwriting technical profitability.
In Q2 2018 Watford Re underwrote over $175 million of premiums, up by 15% on the prior year. The company also purchased more retrocessional reinsurance, ceding almost $34.6 million of premiums in the period, which is almost three times the cessions seen in the prior year period.
This shows that Watford Re, like so many other reinsurance firms, has been taking advantage of market conditions to underwrite more business, but at the same time also capitalising on the appetite of retro markets to shave off the peak exposures and ensure its enlarged book does not bring with it significantly higher PML’s.
The underwriting loss for the second-quarter was just $318,000, down from $2.643 million in the prior year, thanks to the reduced combined ratio, although this was largely driven by an expense reduction, in terms of operating and acquisition expenses, as the loss ratio remained static.
It’s perhaps a sign of the maturing of Watford Re, as well as its ongoing expansion of the insurance platform, helping the firm to bring in more business at lower cost, likely also originating more for itself in the process.
Net investment income came in at $27.9 million, well up on the $18.6 million earned in the prior year quarter. However, realised investment losses came out at -$17 million, which dented the investment result and led to overall income before tax of $13. 7 million, which was still up on the prior year though, as foreign exchange effects also helped here.
Most of the income earned is distributed to the investors in Watford Re, with Arch’s share amounting to just over $1 million for Q2 2018, below the prior years $1.16 million.
Had the realised investment losses not occurred though, the result could have been very different and there would have been roughly another $17 million before tax to distribute between the third-party investors and Arch. The timing of those investment results is all important and future quarters may see gains rather than losses, hence it’s important to look at the total-return reinsurance model results over longer periods than quarters alone.
The scale of Watford Re’s investment pot continued to grow as well, rising to $2.65 billion, while the total return vehicles overall assets passed $3.34 billion.
As investment conditions stabilise for the unit the result, if the combined ratio can be kept controlled, could rise significantly and the investors and Arch shareholders will do very well from the total return strategy in quarters to come.
It’s also worth a reminder that Watford Holdings Ltd., the parent to Watford Re, said recently that it is “exploring potential avenues toward becoming a registered, publicly-traded company.”
A few quarters of bumper performance from Watford Re should help to spice up the pricing of any proposed IPO in years to come.