Watford Re, the third-party capital backed total-return reinsurance venture part-owned by Bermudian specialist re/insurer Arch Capital and asset manager Highbridge Principal Strategies, started off the year 2018 with a significant jump in premiums underwritten.
Watford Re, which operates in a total-return style, seeking to be profitable on the underwriting side of the business, writing longer-tailed risks and putting the premium float to work, invested by Highbridge Principal Strategies, to try to outperform through the combination of profitable underwriting and an outsized, compared to the majority of traditional reinsurers, investment return.
The strategy has been developing over recent quarters, with the premium float increasing in size and driving the majority of the profits, when investment market conditions have been conducive. On the other side, of underwriting, Watford Re has been reporting a combined ratio typically just above 100, as its liabilities become better understood the firm will be hoping this moves into profitability as well.
But now, about to enter its fifth year of operations having launched in 2014, Watford Re is beginning to achieve a level of scale that should both help to grow its investment float more rapidly, as well as deliver higher underwriting returns, when it can get the combined ratio down.
During the first-quarter of 2018, Watford Re underwrote almost $214 million of gross premiums, around 40% up on the $154 million underwritten in Q1 a year earlier.
With reinsurance rates generally seen to have been stable to up at the key January renewal season, Watford Re will likely have created a larger portfolio that also has more return potential as well for this year. It will be interesting to see how premiums earn out across the year, but again the key will be in getting the combined ratio to sub-100.
With higher premiums ceded during the first-quarter of this year, along with higher losses than a year earlier, Watford Re still managed to report a lower underwriting loss, at -$560,000 for the quarter, compared to an underwriting loss of -$2.3 million in Q1 2017.
Investment income was up year-on-year, at almost $26.5 million for Q1, compared to $22 million a year earlier. However, higher interest expenses and a foreign exchange loss dented the result, so net income is reported at $17.4 million for the quarter, lower than Q1 2017’s $22.9 million.
The majority of the income is distributed to the investors in Watford Re, with Arch’s share amounting to $1.4 million for Q1 2018, below the prior years $2 million.
Overall though, the Watford Re combined ratio fell to 101% (down from Q1 2017’s 102.5%) largely due to lower acquisition expenses in the quarter.
But it is the quarters ahead that will perhaps be more interesting for Watford Re, with a larger portfolio of risk underwritten in January and a much larger pool of premium investment float to put to work. If the total-return reinsurance firm can control the underwriting and keep the combined ratio as close to 100 as possible, while the asset side of the business delivers, there could be much higher profit quarters to come.
The scale of Watford Re’s total investable assets continued to grow in the quarter, rising to $2.49 billion, while the total return vehicles overall assets passed $3.15 billion.
In fact, Watford Re’s assets now account for roughly 10% of Arch Capital’s total assets, which shows just how important the strategy could be in future.
It’s going to be very interesting to see how Watford Re can deliver higher returns, with its enlarged underwriting portfolio and greater pool of investable assets. If the stars align, the underwriting remains controlled and the investment portfolio performs we could see some significant increases in the vehicles returns in quarters to come.