1、DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES,ANALYST CERTIFICATIONS,LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS.US Disclosure:Credit Suisse does and seeks to do business with companies covered in its research reports.As a result,investors should be awar
2、e that the Firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.30 January 2019Americas/United StatesEquity ResearchProperty&Casualty Insurance Property&Casualty Insuran
3、ce COMMENTResearch AnalystsMichael Zaremski212 325 5061michael.zaremskicredit-Robert Cox212 325 2776robert.coxcredit-Watfords IPO Registration Prospectus Save Time And Read Our Key Excerpts SummaryEvent:Yesterday,Watford Holdings filed an IPO prospectus with the SEC.Recall,Watford is a joint venture
4、,founded by Arch Capital(ACGL)and Highbridge,a subsidiary of JPMorgan Asset Management.Below are key excerpts from the filing.Link to Full Document:Click HereOverview:We are a global P&C Insurance and Reinsurance Company with approximately$1.2 billion in total capital as of September 30,2018,compris
5、ed of$220.9 million of contingently redeemable preference shares and$985.4 million of common shareholders equity.Through operations in Bermuda,the United States and Europe,we write insurance and reinsurance on a worldwide basis.Our objective is to deliver attractive returns to shareholders by combin
6、ing disciplined underwriting with superior investment management.Our strategy combines a diversified,casualty-focused underwriting portfolio,accessed through our multi-year,renewable strategic underwriting management relationship with Arch,with a disciplined investment strategy comprising primarily
7、non-investment grade corporate credit assets,managed by HPS.In addition,we have a services arrangement with AIM to manage our investment grade portfolio.While we are positioned to provide a full range of P&C lines,we focus on writing specialty lines of business.We believe that our experienced manage
8、ment team,our relationship with Arch and our strong capital base have enabled us to successfully compete and establish a meaningful presence in the insurance and reinsurance markets in which we participate.We seek to generate an attractive return on average equity across the relevant insurance and i
9、nvestment cycles.We opportunistically seek to underwrite new lines that fit our return profile while maintaining a disciplined underwriting approach.Employees:In accordance with our strategy to maintain an efficient operational structure with minimal fixed expenses,we have chosen to operate largely
10、through experienced service partners,each of which is paid on a variable cost basis and which are monitored by our senior management team.30 January 2019Property&Casualty Insurance2As of September 30,2018,we had ten full-time employees,eight of whom were based in Bermuda,one of whom was based in the
11、 United States and one of whom was based in Europe.In addition,pursuant to our services agreements with Arch,as of September 30,2018,there were thirty-five designated employees of both Arch and us who were provided to us on a non-exclusive basis to perform various services in connection with our ins
12、urance and reinsurance operations(including seven that were designated as officers of WSIC and/or WIC and,in such capacities,negotiate and bind reinsurance,execute documentation and perform other related functions for WSIC and/or WIC,as applicable).We believe that our employee relations are good.Non
13、e of our employees are subject to collective bargaining agreements and we are not aware of any current efforts to implement such agreements.Employees:In accordance with our strategy to maintain an efficient operational structure with minimal fixed expenses,we have chosen to operate largely through e
14、xperienced service partners,each of which is paid on a variable cost basis and which are monitored by our senior management team.As of September 30,2018,we had ten full-time employees,eight of whom were based in Bermuda,one of whom was based in the United States and one of whom was based in Europe.I
15、n addition,pursuant to our services agreements with Arch,as of September 30,2018,there were thirty-five designated employees of both Arch and us who were provided to us on a non-exclusive basis to perform various services in connection with our insurance and reinsurance operations(including seven th
16、at were designated as officers of WSIC and/or WIC and,in such capacities,negotiate and bind reinsurance,execute documentation and perform other related functions for WSIC and/or WIC,as applicable).We believe that our employee relations are good.None of our employees are subject to collective bargain
17、ing agreements and we are not aware of any current efforts to implement such agreements.Current outlook:The current insurance and reinsurance market environment is extremely competitive and reflects a prolonged period of low prices and continued pressure to broaden terms and conditions,though the 20
18、17 and 2018 catastrophe events seem to have somewhat dampened the downward pricing pressure.While the insurance and reinsurance market historically has been subject to pricing and capacity cycles,the overall market has not experienced true cyclicality in the period since our inception of operations
19、in 2014.Over the past several years,the industry has witnessed a gradual rate softening in response to a surplus of industry capital and a number of years of benign catastrophe activity,and this market dynamic has led to reduced underwriting profitability.However,due to the hurricane,wildfire and ea
20、rthquake activity over the past two years,pricing on certain product lines appears to be firming and becoming more attractive on a risk-adjusted basis.Against this backdrop,we are selectively growing our business in areas that we believe present attractive opportunities.In this market environment,ou
21、r Bermuda reinsurance platform has maintained its premium volume while reshaping its portfolio in response to market conditions.We have developed a portfolio with concentrations in professional liability,multiline,workers compensation,and motor product lines.through reinsurance cedants on a worldwid
22、e basis and retrocessions of Arch.We continue to deploy resources opportunistically in product lines that meet our risk and return profile.Our insurance underwriting platforms in the United States and Europe are growing.In Europe,WICE began writing P&C insurance in December 2015,concentrating on per
23、sonal lines but also writing commercial casualty lines accessed through specialized insurance agents known as program administrators and coinsurance relationships,and,in 2017,WICE contributed a meaningful premium volume to our portfolio.30 January 2019Property&Casualty Insurance3In the United States
24、,we began writing excess and surplus lines through our non-admitted carrier,WSIC,in April 2016.In August 2016,we gained access to the larger admitted insurance market in the United States,through the acquisition of WIC,further expanding our U.S.insurance capabilities.We are growing our U.S.insurance
25、 business through a select group of program administrators.Arch,our underwriting manager,continuously monitors the broad reinsurance and insurance markets for opportunities.Specifically,Arch monitors opportunities that provide attractive risk-adjusted returns with a particular focus on product lines
26、,such as European motor insurance,which may have previously experienced adverse results,have benefited from an increase in premium rates,and thus provide a reasonable basis to increase activity in those markets.Similarly,by reason of the soft market pricing in the property catastrophe product line,w
27、e have purposely written less premium in that line of business versus what we had originally projected.Following the severe 2017 Atlantic hurricanes,earthquake activity and U.S.wildfires,the property catastrophe market pricing and terms and conditions have improved marginally but not enough to entic
28、e us to provide more capacity.While these several recent actions demonstrate purposeful increases or decreases in underwriting activity in response to market dynamics,it is also important to recognize that certain product lines are written for the diversification effect they provide.When facing soft
29、 phases of the insurance and/or reinsurance cycles,we continue to have the ability to generate higher returns from investment income through our relationship with HPS.For example,during the latter half of 2015 as the insurance and reinsurance markets continued their multi-year softening,credit sprea
30、ds widened and were viewed by HPS as providing an attractive risk-adjusted return,and consequently we increased borrowings to purchase additional non-investment grade investments.When credit spreads later tightened,assets were sold and the proceeds were used to repay borrowings.In managing our busin
31、ess,we are mindful that changing climate and economic conditions could have a material impact on the frequency and severity of claims and,therefore,could negatively impact our underwriting results.In addition,volatility in the financial markets,or even lack thereof,could cause fluctuations in invest
32、ment returns,reported net income and shareholders equity.We consider the potential impact of economic trends in our insurance and reinsurance loss reserve estimation process and in determining our investment strategies,with a continued focus on meeting our obligations to our insureds.Reinsurance ope
33、rations:Watford Re is a licensed,Class 4 Bermuda-based reinsurer operating under the supervision of the BMA.Arch serves as our exclusive reinsurance portfolio manager and provides reinsurance-related services including exposure modeling,loss reserve recommendations,claims handling and other related
34、services as part of our long-term services agreements with them.All reinsurance contracts are bound on our behalf by designated employees made available to us by Arch,or,in certain circumstances,by Watford Re management.We assume reinsurance from third-party cedants or from Arch entities on a reinsu
35、rance or retrocessional basis.The retrocessions from Arch are from its reinsurance operations in the United States,Bermuda,Europe,and Australia,levering Archs distribution and local expertise in its markets.We also have provided,and may continue to provide,reinsurance to Archs insurance operations i
36、n the United States,the United Kingdom and elsewhere.Insurance operations:In 2015 and 2016,we established insurance operations in Europe and the United States.These insurance operations provide additional points of access to our target lines of business,with the potential added benefit for lower acq
37、uisition costs and other distribution efficiencies.All of our insurance subsidiaries carry our A.M.Best“A-”(Excellent)rating 30 January 2019Property&Casualty Insurance4and our KBRA“A”rating and through them we pursue insurance product lines similar to those we target through our reinsurance operatio
38、ns.In the United States,our principal insurance subsidiaries are WSIC and its wholly-owned subsidiary,WIC,both of which are domiciled in New Jersey.WSIC is an eligible E&S lines insurer in all 50 states and the District of Columbia.WIC is an admitted insurer in all 50 states and the District of Colu
39、mbia.Following our acquisition of WIC in 2016,we have expanded our certificates of authority to cover a broad range of lines of business in 43 states and the District of Columbia,and we are in the process of similarly expanding our authority in the remaining seven states.Both WSIC and WIC are locate
40、d in Morristown,New Jersey.Through WSIC and WIC we have the flexibility to access both the E&S and admitted sectors of the U.S.P&C market.Our U.S.insurance subsidiaries concentrate primarily on commercial casualty lines of insurance and have initiated writing business through select program managers
41、.Our insurance operations in Europe are conducted through WICE,which has its principal office in the British Overseas Territory of Gibraltar.WICE was formed to provide access to insurance risks across the European Union.WICE concentrates on U.K.and Western European risks,predominantly in personal li
42、nes of insurance but will also entertain commercial casualty lines.Our goal within our insurance operations is to be a valued,long-term capacity partner with a select group of well-established,proven program managers,with our integrated total return strategy providing them with competitive solutions
43、 for their clients.We have a strong market position as an“A-”rated carrier with approximately$1.2 billion in capital.Many of the insurers providing capacity to program managers are neither as substantially capitalized nor as highly rated as we are;having a strong insurance partner gives program mana
44、gers an edge when promoting products to clients.We believe that our ability to enter insurance markets on a largely variable cost basis,unburdened by the fixed costs that would otherwise be required to create a standalone insurance operation,provides us with another significant and fundamental advan
45、tage.We benefit from AUIs and AULs industry contacts and market acumen to identify,attract,and retain those program managers who satisfy our guidelines in terms of reputation,technical track record and quality of administration.While we benefit from AUIs and AULs infrastructure,our acquisition and a
46、dministrative costs are largely based on premiums actually produced.Policy service and claims management:Arch provides underwriting services,portfolio management,exposure modeling,loss reserve recommendations,claims-handling,legal oversight,regulatory compliance,policy issuance and development,under
47、writing systems review,program manager audits,accounting support and administrative support,in each case,subject to the terms and conditions of our services agreements with Arch,including our underwriting and operational guidelines,as well as the oversight of our management and board of directors.We
48、 believe that handling claims is an important component of customer service through which we can differentiate ourselves from our competitors.The ability to handle claims in accordance with industry best practices and standards fosters credibility in the market both with customers and with program m
49、anagers.Through this arrangement with Arch,we gain access on a very cost-effective basis to highly experienced underwriting,claims,and support function professionals and benefit from the exemplary customer service reputation Arch has earned over its 16-year history.In administering claims on our beh
50、alf,Arch may engage third-party claims-handling firms to monitor,adjust and pay claims up to designated approval levels.Arch provides close supervision over any such third-party managers.Claims-handling firms are monitored and audited on an ongoing basis.When considering any proposed claims-handling