Watford Re raises $1.13 billion for diversified reinsurance operations

Watford Holdings Ltd., the parent of start-up and wholly owned reinsurance subsidiary Watford Re Ltd., has announced that it successfully raised $1.13 billion of capital including $100m from Arch Capital Group Ltd.

Watford Re will launch with $907 million of common equity, which includes the $100m that Arch has invested in the new firm, and $226 million in preference shares. Watford is a Class 4 Bermuda licensed insurer and just the other day received a financial strength rating of A- from A.M. Best Company.

Watford is expected to follow a diversified reinsurance strategy, with some focus on casualty risks and says that its investment strategy will be disciplined and composed primarily of non-investment grade credit assets, which it believes will generate attractive risk-adjusted returns for its shareholders over the long-term.

The Watford Re reinsurance business will be managed by Arch Underwriters Ltd., a newly formed subsidiary of Arch, and its assets will be managed by Highbridge Principal Strategies, LLC, a subsidiary of J.P. Morgan Asset Management.

“We believe our unique strategy will enable us to address an unmet need in the reinsurance marketplace today,” said John Rathgeber, CEO of Watford Re. “We are thrilled to partner with Arch and Highbridge, two leading institutions within their respective fields. Our management team is focused on providing our clients a high level of service, creative reinsurance solutions and prompt claims payment.”

Rathgeber, who will serve as CEO of Watford, has 30 years of reinsurance industry experience and was most recently the Vice Chairman of Arch Worldwide Reinsurance Group. Jon Levy has been announced as Chief Risk Officer and Roderick Romeo as Chief Financial Officer.

The Watford Board of Directors is made up of experienced insurance and finance executives and will be led by Walter Harris, an executive with 30 years of experience in the insurance industry, who will serve as Chairman of the Board. Harris  currently serves as the Senior Advisor and Vice Chairman Emeritus of Alliant Insurance Services and is a Director on the Board of Loews Corporation.

Arch Underwriters will manage Watford’s reinsurance portfolio under a long-term services agreement, it is reported. A subsidiary of insurance and reinsurance group Arch which had $6.55 billion in capital as of December 31, 2013. Marc Grandisson, Chairman and CEO of Arch Worldwide Reinsurance and Mortgage Groups, and Nicolas Papadopoulo, Chairman and CEO of Arch Reinsurance Ltd., have both joined Watford’s Board of Directors.

“Our partnership with Watford is driven by the opportunity we see to underwrite attractive medium- to long-tail, multi-line business,” commented Grandisson. “We look forward to working with Watford to serve the reinsurance needs of its clients and build long-term value for its shareholders.”

Highbridge Prinicipal Strategies will manage Watford’s investment portfolio through a long-term investment management agreement. Founded in 2007 by CEO Scott Kapnick, HPS has around $19 billion in assets under management as of March 2014, predominantly in non-investment grade corporate credit.

Purnima Puri, Managing Director of HPS, stated; “We believe that non-investment grade credit complements Watford’s reinsurance strategy and we are proud to partner with Arch and Watford.”

Watford Re looks set to be fairly opportunistic, following the opportunities in the reinsurance market to underwrite lines of business which offer the best risk adjusted returns and enable it to safely generate premium float which can be invested by HPS. Its website lists lines of business such as Customized Products Reinsurance, Direct & Facultative, 
International Casualty Reinsurance, 
Marine and Offshore Energy, Mortgage Reinsurance, Personal Accident and Life Reinsurance, Property Reinsurance – International, 
Property Reinsurance – US, Specialty Reinsurance, US Casualty Reinsurance, but says that these lines may change over time.

So while Watford Re will target casualty business, it actually looks set to mirror a lot of the business that Arch underwrites to start with, so perhaps casualty may not be quite the focus the market had expected. The option to take a quote share from Arch itself may be a good way to begin operations and we could see that as one of its first deals.

Watford Re’s model, of leveraging third-party investors to lower its cost of capital, the link to Arch and ability to take on quota-shares and having a more active investment strategy through hedge fund manager Highbridge Principal Strategies, perhaps shows where reinsurance business models may be moving.

With traditional reinsurers under pressure from falling rates, which dilutes their returns, perhaps the more active, hedge fund style, investment strategy is something we could see introduced into other reinsurers in future to boost shareholder returns, taking a leaf out of the hedge fund reinsurers book.

Finally, another billion dollars of capacity comes to the reinsurance market at a time when levels of capital are at record highs and returns on underwriting are heading downwards as the market softening broadens. A more challenging time to launch a reinsurer is perhaps hard to identify, so it will be interesting to see whether Watford’s unique hybrid approach, of a reinsurer, backed by some third-party capital, with a hedge fund managing the asset side and sidecar traits, is a success.