Arch launches Class 4 reinsurer Watford Re

Watford Re, the latest reinsurer to enter the Bermuda market, will marry underwriting expertise from Arch with investment capabilities provided by Highbridge Capital Management.

The new Class 4 reinsurer, which is 15 percent owned by Arch Capital and has been established as a joint venture with New York-based hedge fund Highbridge Capital Management, has already raised $500 million in capital and an A- rating from AM Best.

Watford Re will be led by John Rathgeber, who was until recently vice chairman of Arch Worldwide Reinsurance Group and will pursue a multi-line reinsurance strategy, while leveraging investment expertise from Highbridge.

The strategy mirrors that taken by a number of recent entrants into the Bermuda market, including Hamilton Insurance Group, Swan Re and Third Point Re.

Such players appear to be pursuing a two-fold strategy. For hedge fund investors, reinsurers provide an invaluable offshore float, much like the one described by Warren Buffett recently when he discussed the success of Berkshire Hathaway. The reinsurers provide additional investable funds and the potential for underwriting returns.

While for players such as Arch, they get to complement their underwriting expertise with best in class investment returns from their hedge fund partner, which have tended to far outperform standard investment returns within the sector. Arch will also be entering into quota share arrangements with the new reinsurer.

This all sounds complementary, but there is nevertheless a note of caution. The demise of SAC Re, following well-documented insider trading at its parent SAC Capital, suggests that issues can nonetheless arise in what is being termed a new class for Bermuda.

Commenting on the new entity, AM Best indicated that it had concerns about its elevated risk profile as a result of its likely investment strategy and the fact that it is entering an extremely competitive reinsurance marketplace.