A.M. Best Affirms Credit Ratings Of Watford Re

April 7, 2018

A.M. Best has affirmed the Financial Strength Rating of A- [Excellent] and the Long-Term Issuer Credit Ratings [Long-Term ICR] of “a-” of Watford Re Ltd [Bermuda] and its subsidiaries,

In addition, A.M. Best has affirmed the Long-Term ICR of “bbb-” and the Long-Term Issue Credit Rating of “bb” on the $225 million 8.5% cumulative preference shares of Watford Holdings Ltd. [Bermuda]. The outlook of these Credit Ratings [ratings] is stable.

A statement from the rating agency said, “The ratings reflect Watford’s balance sheet strength, which A.M. Best categorizes as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.

“The ratings of Watford have been extended to WICE, WIC, and WSIC based on their strategic role to Watford and the explicit and implicit support provided by Watford.

“Watford’s ratings are based on its solid risk-adjusted capitalization; the experienced underwriting led by Arch Underwriters Ltd. and Arch Underwriters Inc., wholly owned subsidiaries of Arch Capital Group Ltd.; the leading investment expertise of HPS Investment Partners, LLC [HPS]; and Watford’s broad-based business plan. Partially offsetting these positive rating factors are the inherent risks associated with a relatively new company and the risks associated with a leveraged alternative investment strategy. In addition, the competitive market conditions in the reinsurance sector and the company’s significant exposure to mortgage risk may challenge the execution of its business plan.

“Watford’s underwriting risk, coupled with the leveraged alternative investment strategy, creates an elevated risk profile that could expose Watford on both the asset and liability sides of the balance sheet to a significant decline in risk-adjusted capitalization. However, the skilled underwriting of Arch Capital Group Ltd. and the experienced investment acumen of HPS, along with cash flows produced by Watford’s credit investment strategy, should help mitigate these risks partially. Additionally, A.M. Best has stress-tested risk-adjusted capitalization for simultaneous adverse underwriting and investment events and Watford appears to be adequately capitalized under those conditions.

“Watford’s assets are managed primarily by HPS, a New York-based, SEC-registered investment adviser. Watford’s assets generally are not commingled with any other HPS-managed fund.

“Key rating factors that could result in positive rating actions would be Watford meeting or exceeding its business plan over the long term, which includes consistently strong operating results while maintaining strong risk-adjusted capitalization. Negative rating actions could occur if Watford’s operating performance deteriorates or becomes inconsistent, if the company experiences large underwriting or investing losses or if risk-adjusted capitalization becomes strained. “

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