Handing over the reins

John Rathgeber is speaking to this publication from Charleston, South Carolina. He should be in Bermuda but with all arrivals now quarantined for 14 days, he has decided to stay put. The world and the risk transfer industry are facing unprecedented times thanks to COVID-19—and at a time when Rathgeber’s focus is handing the reins of the company he built up to a successor.

On March 31, Rathgeber retired as the chief executive of Watford Re after six years at the helm of the business he helped found. He has been succeeded by Jonathan Levy, Watford’s president, who has also been in the business since its inception. Levy joined the business as chief risk officer having previously worked for Endurance as chief pricing actuary.

In the six years of running the business, Rathgeber has grown the business to reach some $754 million in gross premiums written in 2019, while steadily growing its book value per share over time. As of December 31, 2019, this stood at $43.49. For the 2019 full year, the increase in book value per diluted common share was 10.9 percent.

Reflecting on this period of his career, he says his biggest learning curve was having to deal with so many different stakeholders, something he had been somewhat shielded from in his previous roles. Before joining Watford, he worked for parent company Arch in a variety of roles, including heading its US reinsurance company. An actuary by profession, before that he held senior roles in St Paul Re and F&G Re.

“Although I had worked in very senior positions on the front line for many years, I had not been involved in some key things including the investments side or dealing with investors and analysts,” Rathgeber recalls.

“That was the new part of the job and it gave me a whole new perspective on running a company. The biggest thing was ensuring good communication with all parties, but it gave me a much more holistic perspective, which I enjoyed.”

He has faced challenges over the years. Some of the ups and downs the company has weathered in the investment markets have caused specific challenges. Another, which he says was more unexpected, was the process of listing the company on the Nasdaq in 2019.

“I didn’t realise a direct listing was uncommon, so that caused some interesting challenges. But navigating all of these things has been really interesting.

“We have a great team of people, so it has always been fun and enjoyable going to work in that capacity,” he says.

Success story

In terms of his achievements at Watford Re, Rathgeber highlights the way the company has succeeded in diversifying in recent years. Some 45 percent of its book is now direct insurance business and this book increased by a remarkable 26 percent in 2019 alone.

It operates the direct side from Watford Insurance and Watford Speciality in the US and a Gibraltar-based insurer in Europe. In late 2019 it entered into an agreement to acquire French insurer Axeria IARD which, it believes, will give it access to more business across the EU.

Rathgeber says the growth of the insurance side is important because it allows the company greater diversity, while direct control over pricing means it has the ability to achieve better combined ratios.

“It also means there is no collateral attached to the business, unlike what is often the case with reinsurance or retro, which then allows us to maximise our investment strategy,” he explains.

He highlights some of the other lines of business it has diversified into including mortgage business and UK motor.

Writing more insurance business has helped replace some less profitable reinsurance contracts the company has been in the process of exiting. These contracts were to blame for it having to strengthen its reserves in the fourth quarter of 2019 to the tune of $28 million ($24 million for previous years and $4 million for 2019).

The reserve increase primarily relates to two large casualty reinsurance contracts, one of which is in run-off. The other has been renewed at progressively smaller participations over the past several years.

Rathgeber says the reserve strengthening highlights some positive things about the company: that it is prepared to adjust its book of business to achieve better underwriting results and that it operates a very prudent approach to its financial stability and reserves.

“While painful in the short term, this was the prudent and responsible course of action based on the level of ceding company-reported losses compared to actuarial projections,” he says.

“Our response to the data was decisive and we feel confident about the overall level of our net loss reserves, which stand at $1.1 billion.

“The problem is isolated to two large contracts, but one is now in run-off and the other we have been scaling back on. This action illustrates our very conservative approach to setting reserves.

“We react to bad news quickly but we do not react to good news. We do not release reserves prematurely either. That is a very prudent way of running a company.”

Number crunching

For the whole of 2019, the company’s gross premiums written were $754 million, up 2.7 percent from $735 million in 2018. Its net profit was $45 million, compared to a loss of $54.5 million in 2018, while its adjusted combined ratio was 107 percent, compared to 103 percent in 2018.

Following a $75 million share repurchase programme during the 2019 fourth quarter, the board has authorised a new share repurchase programme for up to $50 million. The company said that this would contribute to growth in the coming year.

Its investment income was also strong. Net investment income return on net invested assets was 6 percent for the full year. The ratio of net invested assets to equity was 2.5:1 as of December 31, 2019, which points to the return on equity potential of the business going forward.

Rathgeber says its 2019 results held a lot of positives. He reiterates that the company’s main objective is to grow book value per share over time.

“We achieved 10.9 percent growth in book value per share in 2019 despite a number of headwinds and volatility,” he notes, “while maintaining our capital position and financial strength ratings.”

Asked if he expects any radical changes in strategy at Watford Re, Rathgeber says it is more a question of fine-tuning the company and executing its existing business model.

He will remain on the company’s board and feels he is leaving the business in a good position and in good hands.

“If anything, the business model has been tested and challenged in recent years. We have shown it is very resilient and can work in the long term.”

Rathgeber says he now has no other plans in business. He will remain on the board of Watford Re, but says he is looking forward to enjoying his personal life more.

He and his wife are heavily involved in a number of charities including learning centres in Kenya. “I am looking forward to getting more involved in that,” he concludes.