Brand-new Bermuda reinsurer Watford Re is all set to open for business.

The multi-line reinsurer’s parent company Watford Holdings said in a statement released yesterday that the company had “raised capital and expects to commence reinsurance operations shortly”.

Rating agency AM Best announced that it had assigned an A- (excellent) financial strength rating to the start-up.

Watford Re is led by chief executive officer John Rathgeber, a 30-year reinsurance industry veteran, who was most recently the vice-chairman of Arch Worldwide Reinsurance Group. Watford Re is licensed as a Class 4 reinsurer by the Bermuda Monetary Authority.

The company is the product of a joint venture between Bermuda Class of 2001 re/insurer Arch Capital and hedge fund firm Highpoint.

It reflects the trend in the Bermuda reinsurance market of increasing convergence between the capital markets and the reinsurance industry. A subsidiary of Arch will do the underwriting, while HPS — a subsidiary of Highbridge Capital Management, which has around $19 billion of assets under management — will manage the investments.

Media reports suggest that Watford Re has initial capital of some $500 million.

In its commentary, AM Best notes the “elevated risk profile” of Watford Re’s business model, but the agency indicates that it believes those managing the risks are good at what they do.

“AM Best believes that underwriting risk coupled with the leveraged investment strategy creates an elevated risk profile that could expose Watford on both the asset and liability sides of the balance sheet,” AM Best stated.

“However, the skilled underwriting of Arch Capital Group Ltd and the experienced investment acumen of Highbridge Principal Strategies, LLC (HPS), along with cash flows produced by Watford’s credit investment strategy, will help manages these risks.”

Money has poured into the reinsurance space as instruments such as catastrophe bonds and other insurance-linked securities have attracted third-party capital, at the same time as a relative lack of catastrophic events last year, have added to the downward pressure on reinsurance pricing.

AM Best said it “anticipates that Watford’s management will be challenged by competition from established reinsurers as well as other start-up entities and alternative capital. The addition of more capacity to an already overcapitalised reinsurance marketplace could pressure underwriting margins.”