Bermuda-based Watford Re, a subsidiary of Watford Holdings Ltd, has raised capital and is ready to begin operations.
Rating agency AM Best has assigned an 'A- (excellent)' rating to the new operation. AM Best noted that the new operation had an "elevated risk profile". The agency said that it "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".
It added that "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".
The agency anticipated that 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 overcapitalised reinsurance marketplace could pressure underwriting margins."
Watford Re is being led by John Rathberger, most recently vice-chairman of Arch Worldwide Re.
Watford Re is a joint venture of Arch Capital and hedge fund operation Highpoint. A subsidiary of Arch Capital will be responsible for the underwriting. Highbridge Capital Management subsidiary HPS, a New York-based SEC-registered investment advisor, will manage the investment side of the business. Analysts have observed that this makes Watford Re almost a hybrid between a sidecar (the Arch side) and an alternative capital provider (the Highbridge side) It is reported to have a total of $500m in backing, of which $400m is in cash and $100m is in preferred equity. Initial reports had Watford Re looking for up to $1bn in backing
The business model of Watford Re on the funding side would see Arch passing on quota share to Watford Re, thus leveraging the extra capital, while Highbridge would attempt to outperform the investment returns of other reinsurers by investing those premiums, and the premium float of Watford Re from its own reinsurance contracts, in Highbridge's Principal Strategies. However, it would appear that the bulk of Watford Re's underwriting will be undertaken by Arch employees within the Arch underwriting system. The question as to whether a risk will be categorized as Watford Re's or as Arch's, of which Watford Re will take a quota share, might often be more one of accountancy and semantics than fundamental significance.
Watford Re has not only made waves in the traditional markets with its innovative hybrid structure; it is also a major sign that alternative capital, having eaten the low-hanging fruit of property-catastrophe, is looking to casualty for greater returns.
Arch Capital CEO Dinos Iordanou said during Arch's Q4 conference call that "the underwriting standards of Watford Re will be the same underwriting standards as we have at Arch. I’m not reprogramming the brains of our underwriters." He said that some business could be selected to go to Watford Re, rather than to Arch, because of liability duration, depending on the expected return of the Highbridge Principal investment strategy.