Kroll Bond Rating Agency (KBRA) has affirmed the A insurance financial strength ratings (IFRS) of the operating subsidiaries of Watford Holdings Ltd., and revised the outlook for all the ratings to Negative.
This revision follows a recent letter in which investment firm Capital Returns Management called for Watford to consider selling itself, potentially to a runoff specialist, as a result of unprofitable underwriting returns and poor investment results.
Watford’s subsidiaries include Watford Re Ltd., Watford Insurance Company Europe Limited, Watford Specialty Insurance Company, and Watford Insurance Company.
KBRA notes that it has also affirmed the issuer rating of BBB+ for Watford Holdings. In addition, KBRA has affirmed the BBB+ credit rating for Watford Holdings’ senior unsecured notes due 2029, and also the BBB- credit rating of the company’s outstanding cumulative contingently redeemable preference shares.
The outlook for all ratings is revised to negative, explains KBRA. “The Negative Outlook reflects Watford’s performance in recent years that has fallen short of KBRA expectations, as well as heightened potential capital erosion from realized investment portfolio losses in light of recent increases in market volatility.”
After pre-warning of sizeable investment losses as a result of COVID-19-induced financial market volatility, Watford announced a Q1 2020 loss of almost $267 million.
As well as the investment hit, the Bermuda domiciled reinsurer also suffered another underwriting loss, with performance on this side of the balance sheet deteriorating year-on-year.
The ratings agency also noted a heightened potential for capital erosion from realized investment portfolio losses in light of recent increases in market volatility.
KBRA will continue to monitor Watford’s liquidity position to confirm there continues to be sufficient resources from premium and interest income to cover expected claims payments, operating expenses, interest payments on its senior notes and dividend payments on its preference shares.
