Total return reinsurance vehicle Watford Re, which is part-owned and operated by re/insurer Arch Capital Group alongside asset manager Highbridge Principal Strategies, has seen relatively stable performance in the first-quarter of 2017, although a slightly higher loss ratio dented its results a little.
Once again the investment side of the total-return strategy at Watford Re rescued it from a loss during the first-quarter, as its combined ratio again came in above the magic 100%.
But Watford Re continues to gain scale, although growth in premiums written in Q1 2017 was a little slower than in recent quarters. Watford Re underwrote just over $154 million of gross premiums in Q1, a slight increase on the $148.6 million written in Q1 2016.
Net premiums written actually declined though, as premiums ceded more than doubled compared to the prior year, but a lower change in unearned premium meant that net premiums earned was up at almost $122 million for Q1 2017, compared to $115.5 million a year earlier.
But with the combined ratio reported at 102.5% for Q1 2017, with the loss ratio making up 70% of it, Watford Re fell to a $2.295 million underwriting loss, compared to a combined ratio of 101.6% and an underwriting loss of $944 thousand in Q1 2016.
Once again it is the investment income earned through Highbridge Principal Strategies and its HPS Investment Partners, LLC management of the investment float that has helped Watford Re to a profitable quarter, reflecting the balancing act between underwriting and investments in this strategy.
Arch reports that Watford Re had investment income of almost $22.1 million and an investment gain of $5.64 million as well in the first-quarter, which after interest expenses and foreign exchange factors gave the total return reinsurance vehicle net income before tax of just under $23 million.
In the prior year quarter, a slightly higher investment return was eroded by negative interest developments and foreign exchange, leading to net income before tax being a little below that at just over $22.8 million.
For Arch, the net income attributable to it and its shareholders from Watford Re’s activities in Q1 2017 was $2.021 million, just slightly up on the $2.01 million reported for Q1 2016.
That stability, even with a slightly higher loss ratio is impressive and Arch’s shareholders are certainly finding some benefits from the Watford Re play. Fee income is not reported, which would be an additional boost for the underwriting services Arch provides to the vehicle.
Investable assets, or the float that Highbridge gets to invest, rose again in the quarter, now reaching $1.903 billion, while the total assets of Watford Re reached $2.514 billion.
Continued growth of these assets means a larger pot of investments for Highbridge to manage, which in turn can deliver steady returns for the investors and a steady income to Arch and its shareholders. Of course, when the investment portfolio really delivers there will be quarters with quite outsized returns, which with a growing float could result in very attractive income for all involved.
Watford Re continues to show that this total-return reinsurance strategy can deliver tangible profits, while also adding efficiency as a third-party capital play for Arch’s own reinsurance needs.
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