OLDWICK, N.J.--(BUSINESS WIRE)--AM Best has removed from under review with negative implications and affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of “a-” (Excellent) of Watford Re Ltd. (Bermuda) and its subsidiaries, Watford Insurance Company Europe Limited (Gibraltar), Watford Insurance Company (New Jersey) and Watford Specialty Insurance Company (New Jersey). In addition, AM Best has removed from under review with negative implications and affirmed the Long-Term ICR of “bbb-” (Good) and the Long-Term Issue Credit Rating of “bb” (Fair) on the $225 million ($52 million outstanding) 8.5% cumulative preference shares of Watford Holdings Ltd. (Watford) (Bermuda), the group’s ultimate holding company. The outlook assigned to these Credit Ratings (ratings) is stable.
The ratings reflect Watford’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.
Watford has the strongest level of risk-adjusted capitalization, as measured by Best’s Credit Adequacy Ratio (BCAR), as of year-end 2020. Watford’s BCAR score has been subject to significant recent volatility due to the balance sheet’s exposure to non-investment grade assets and the resulting mark-to-market volatility associated with this exposure. Moving forward, the company is expected to continue de-risking its investment portfolio, leading to more stability in its capitalization. The group’s five-year average operating returns have been volatile, and the company has experienced significant fluctuations in realized and unrealized gains and losses. However, Watford has been profitable in four of the past five years.
Watford has developed a global reinsurance and insurance platform. Business is sourced and underwritten through a contractual relation with Arch Capital Group Ltd., which also provides the core functions to the company’s underwriting operations. Historically, the group has focused on lower-volatility, medium- to long-tailed lines of business; however, with the de-risking of its investment portfolio, the group is expected to diversify into more volatile short-tailed lines of business as well.
A significant deterioration in the group’s operating performance, including outsized investment portfolio losses or an underwriting loss that moves the group’s performance out of line with similarly rated peers, could put downward pressure on the ratings. Negative rating actions could arise if risk-adjusted capitalization were to deteriorate materially or the group’s liquidity is compromised. Negative rating actions also could occur should the group not realize the underwriting results anticipated with its strategic shift toward a more diversified book of business.
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