Watford Re debuts on Nasdaq at steep discount

Shares of Watford Holdings began trading Thursday at a steep discount to reported book value signalling a potential lack of investor appetite for a new generation of total return reinsurers. 

The insurance holding company, which uses the symbol “WTRE”, began trading at $25.26 per share, according to Nasdaq records. The shares jumped to an intra-day high of $27.40 and closed at $27.00. The intra-day trading range represents a 31 percent to near-36 percent discount to the reported book value of $39.22 per share, according to the firm’s S1 form submitted to the Securities and Exchange Commission.

 The discount valuation likely represents a disappointment to founding shareholders Arch Capital and HPS Investment Partners, though perhaps not a surprise. 

 Other public total return vehicles Greenlight Re and Third Point Re also currently trade at discounts of around 15 percent to 20 percent to reported book value. By comparison, the SNL US Reinsurance index currently trades at 105 percent of reported equity. 
 
The Bermuda-based company received approval on Tuesday to begin listing its shares on the exchange, according to a letter filed by the US Securities and Exchange Commission. 

"This is an important milestone in the evolution of Watford," CEO John Rathgeber said in a statement released after the market closed on Thursday. The closing price was $27, according to Nasdaq.

"Listing the Company on the Nasdaq achieves the objective of providing a liquidity mechanism for our existing shareholders," he continued. "It will allow us to diversify our investor base; and it will give us access to the public capital markets when we need to finance our growth.”

Watford Holdings, the parent of Watford Re, is a joint venture of Arch Capital and financial investor HPS Investment Partners.  
 
The listing of the shares has been widely viewed as a test of investor appetite for a new generation of hedge fund and total return insurers.  

The prior generation of comparable vehicles Greenlight Re and Third Point Re, have struggled to win over investors of late despite initial success based on their affiliations with star hedge fund managers David Einhorn and Dan Loeb, respectively.   

Without the “pull” of a Loeb or Einhorn to win over retail investors, the successful listing of the next wave of hedge fund reinsurers – like Watford Re – will have to rely on convincing institutional investors of the soundness of their business model.  

Other comparable vehicles like Chubb-backed ABR Re potentially viewing an eventual public are likely to view Watford’s debut as a concerning indicator of a lack of investor appetite for side-car style total return reinsurers. 

The publication has speculated that Watford Re would likely float at well below book value, noting the business model’s dependence on a one-cedant strategy carried significant risks that made it ill-suited for public equity markets.