AM Best Maintains Under Review With Negative Implications Status for Credit Ratings of Watford Re Ltd. and Its Subsidiaries
AM Best has maintained a negative outlook for Watford Re Ltd. (NASDAQ: WTRE), reflecting the company's under review status for its Financial Strength Rating of A- and Long-Term Issuer Credit Ratings. This follows Arch Capital Group's revised merger proposal offering $35 per share, a 96% premium from prior market value. Despite improvements in investment income to $29 million, Watford faces ongoing risks from unrealized losses in its non-investment grade bond portfolio, with a $300 million investment loss reported in Q1 2020 due to market volatility from the pandemic.
- Arch Capital's revised all-cash offer at $35 per share provides a significant 96% premium to Watford's previous closing price.
- Investment income for the year-to-date improved to approximately $29 million.
- Watford incurred $300 million in investment losses in Q1 2020, severely impacting capital and performance.
- Significant exposure to unrealized losses in a non-investment grade bond portfolio remains a concern.
OLDWICK, N.J.--(BUSINESS WIRE)--AM Best has maintained the under review with negative implications status for the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of “a-” of Watford Re Ltd. (Watford Re) (Bermuda) and its subsidiaries, Watford Insurance Company Europe Limited (WICE) (Gibraltar), Watford Insurance Company (WIC) (New Jersey) and Watford Specialty Insurance Company (WSIC) (New Jersey). In addition, AM Best has maintained the under review with negative implications status for the Long-Term ICR of “bbb-” and the Long-Term Issue Credit Rating of “bb” on the
This Credit Rating (rating) action considers the recent announcement that Arch Capital Group Ltd. (Arch) [NASDAQ: ACGL] has revised its merger agreement with Watford to an all-cash offer of
AM Best acknowledges that the proposed transaction with Arch could benefit the Watford group through potential further de-risking of its investment portfolio, removing the burden of public company status, and possible rating enhancement stemming from being a member of a very large, well-diversified group. However, AM Best has maintained the under review with negative implications status given Watford’s significant, albeit somewhat improved, exposure to investment losses stemming mostly from its non-investment grade bond portfolio, which is subject to significant unrealized losses if credit spreads widen.
In the first quarter of 2020, the Watford group incurred investment losses of about
AM Best will reassess the under review implications status as the group continues to de-risk. The transaction is expected to close in the first quarter of 2021 and remains subject to customary conditions, including regulatory and shareholder approval. Arch expects to assign its interests and obligations under the merger agreement to a newly formed entity under which Arch will own approximately a
The under review status is expected to be resolved when the transaction closes and AM Best has met with management and analyzed the group's business plans, including an analysis of future investment risk, financial projections and operating structure within the Arch group. AM Best will continue to evaluate Watford’s balance sheet strength, operating performance and enterprise risk management to assess that it stays in line with projected amounts.
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