10 April 2014News

Watford Re: is Arch leading innovation in Bermuda?

New Bermuda-based reinsurer, Watford Re’s investment strategy will enable it to underwrite casualty business that would not normally make the cut at a traditional casualty reinsurer, as Arch lands another innovative first.

That is the word from John Rathgeber, CEO of Watford Re who tells Bermuda:Re that “while most casualty reinsurers have struggled to get pricing to work in the low interest rate environment, we believe that with the structure we have put in place, we can offer more attractive terms to clients and attract some of the business that has been lost to the market in recent years.”

Rathgeber says that Watford Re’s investment strategy—which leverages investment expertise from Highbridge Capital Management, a subsidiary of JP Morgan—will enable it to establish a niche for itself within the casualty space, writing business that would have otherwise been turned down by traditional underwriters.

The move looks to be another first for Arch, which has been driving innovation in the Bermuda market through deals such as the one it struck with Freddie Mac and its underwriting participation in Watford Re.

Arch’s role within the new entity will be significant. Arch Re will be providing the underwriting, marketing, claims handling and account administration capabilities at Watford Re, while Highbridge will provide investment expertise.

As Rathgeber explains, “the strength of Watford Re is in putting these two entities together and creating a business plan that takes advantage of their respective expertise”.

Watford Re’s underwriting focus will be on medium-to-long-tail casualty and some specialty business, with the potential for life business to be added into the mix at a later date, says Rathgeber.

Watford Re’s investment strategy will target fixed income non-investment grade corporate credit.

“The investment portfolio being constructed by Highbridge is going to be unique, targeting a narrow niche of investments. While it is still conservative and liquid—consisting of senior and collateralised positions—we believe that over time the yields will be considerably higher than what could be achieved in a traditional portfolio, giving us a competitive edge.”

Compared with some of the other hedge fund-backed entrants that have entered the Bermuda market recently, Rathgeber describes Watford Re’s investment approach as “more conservative and less volatile”, with a focus on stable cash flow.

Addressing the reinsurer’s relationship with Arch, Rathgeber says there will be close cooperation. Arch contributed $100 million of the $1.1 billion raised by Watford Re, making it the largest shareholder, and it is evident that there will be close cooperation over the allocation and division of business.

Rathgeber says that, ultimately, the majority of Watford Re’s business should be written on Watford paper, but Watford Re will take a 10 percent quota share of Arch excess of loss property catastrophe book as a source of diversifying risk for its casualty portfolio and share in other Arch business. Arch, in turn, will participate in a 15 percent quota share of Watford's portfolio.

“Arch will have a significant underwriting stake in any business written at Watford Re, but fundamentally the business rationale of the two entities is very different. Watford Re’s portfolio will contain a very different mix of business to Arch.”

Watford Re will enable Arch to consider a broader pool of clients, rather than increasing line size as has been the case with other alternative plays, explains Rathgeber.

“Watford Re enables Arch to satisfy client and broker needs, not by putting out larger lines, but by being able to participate in a broader segment of the market.”

As a permanent sidecar with an A- rating from AM Best, it is apparent that Watford Re will be a long-term complement to Arch’s capabilities and an innovative entrant to the casualty reinsurance market.