KBRA Assigns BBB+ Rating to Senior Unsecured Notes to be Issued by Watford Holdings Ltd.
NEW YORK–(BUSINESS WIRE)–Kroll Bond Rating Agency (KBRA) assigns a rating of BBB+ with a Stable Outlook to the proposed senior unsecured notes to be issued by Watford Holdings Ltd. (Watford) (NASDAQ: WTRE). Watford Re Ltd., (Watford Re) the organization’s lead operating company, has a KBRA insurance financial strength rating (IFSR) of A with a Stable Outlook.
KBRA expects Watford to issue up to $175 million of fixed rate notes with a ten-year maturity. The company intends to use the net proceeds from the offering to retire a commensurate portion of the company’s 8.5% cumulative redeemable preference shares plus accumulated dividends. Accordingly, the offering will have minimal impact on the company’s total debt and preferred to capital ratio of 19%. Management plans to maintain financial leverage below 20%, which KBRA views as prudent.
As Watford Re is domiciled in Bermuda, the ability to upstream dividends to Watford is limited by the Insurance Act. Watford Re is prohibited from declaring or paying in any fiscal year dividends of more than 25% of its prior year’s statutory capital and surplus unless authorized by the Bermuda Monetary Authority (BMA). As of December 31, 2018, Watford Re could pay dividends or return capital in 2019 of approximately $278.7 million without BMA authorization. Watford Re paid $19.3 million in dividends to Watford during 2018. KBRA expects that the amount of dividends needed from Watford Re to service the debt and preference shares will decrease after the offering. KBRA further believes that Watford Re’s dividend capacity is more than sufficient to cover holding company obligations.
Watford’s ratings reflect the organization’s sound financial condition, diversified risk profile, and seasoned management team. Watford is a global property/casualty insurance and reinsurance company with operating subsidiaries in Bermuda, Europe, and the United States. Watford pursues a total return business model, combining medium- to long-tail insurance and reinsurance risk with a complementary, non-investment grade corporate credit fixed income investment strategy tailored to the (re)insurance risk profile and duration. Watford outsources underwriting and distribution to subsidiaries of Arch Capital Group Ltd. (NASDAQ: ACGL) and investment management largely to HPS Investment Partners, LLC, each of which have long-term contracts with Watford and operate in accordance with pre-agreed guidelines. Watford’s overall operations are supported by a comprehensive risk management framework that focuses on mitigating the potential of Watford being required to meet liquidity needs by selling assets in a distressed market. Balancing these strengths are Watford’s limited operating history, its higher than traditional level of investment risk, and the potential for liquidity issues in a scenario in which shock underwriting losses were combined with a simultaneous severe investment market dislocation, though the former is mitigated by Watford’s purposely lower catastrophe exposure and the longer-tail nature of the lines of business underwritten.
To achieve positive momentum in the rating, Watford would require sustained growth in earnings, continued favorable capital trends, maintenance of sound financial flexibility and the absence of any liquidity events. A negative rating action could result from greater than expected earnings volatility, considerable decline in capitalization, loss of, or considerable reduction in support from key business partners, or a liquidity event requiring sale of assets into a distressed market.
The ratings are based on KBRA’s Global Insurer & Insurance Holding Company Rating Methodology, published on October 10, 2017.
An updated rating report will soon be available on www.kbra.com.
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KBRA is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and is a certified Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.
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