AM Best has removed from under review with negative implications and affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Ratings of a- (Excellent) of Bermuda-based Watford Re Ltd and its subsidiaries.

In addition, AM Best said that it has removed from under review with negative implications and affirmed the Long-Term ICR of bbb- (Good) and the Long-Term Issue Credit Rating of bb (Fair) on the $225 million ($52 million outstanding) 8.5 per cent cumulative preference shares of Watford Holdings Ltd (Bermuda), the group’s ultimate holding company.

The outlook assigned to these credit ratings is stable.

The ratings reflect Watford’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.

AM Best said that Watford has the strongest level of risk-adjusted capitalisation, as measured by Best’s Credit Adequacy Ratio, as of year-end 2020.

The agency said that Watford’s BCAR score has been subject to significant recent volatility because of the balance sheet’s exposure to non-investment-grade assets and the resulting mark-to-market volatility associated with this exposure.

Moving forward, the company is expected to continue de-risking its investment portfolio, leading to more stability in its capitalisation.

The group’s five-year average operating returns have been volatile, AM Best said, and the company has experienced significant fluctuations in realised and unrealised gains and losses. However, Watford has been profitable in four of the past five years.

AM Best said that Watford has developed a global reinsurance and insurance platform. Business is sourced and underwritten through a contractual relation with Arch Capital Group Ltd, which also provides the core functions to the company’s underwriting operations.

Historically, the group has focused on lower-volatility, medium to long-tailed lines of business. However, with the de-risking of its investment portfolio, the group is expected to diversify into more volatile short-tailed lines of business, as well.