Watford has fallen 'horribly short of expectations', investor suggests sale

Investment firm Capital Returns Management has called for Bermuda-based reinsurer Watford Holdings to conduct a "strategic review" and consider selling itself after generating "extremely disappointing results" for its shareholders.

Capital Returns is a shareholder of Watford Re. The company's president Ronald Bobman has sent a letter to the reinsurer's chairman Walter Harris urging him to immediately engage financial advisors and take a "bold action".

In the letter, Capital Returns described the company's poor performance for shareholders and noted the company's current public market valuation is equivalent to a 60+ percent discount to tangible book value.

"The company's performance has fallen horribly short of expectations," said Bobman. "This is the lowest valuation multiple across every operating publicly traded reinsurer."

Bobman believes that liquidation or sale of the company would be the best path forward for its stockholders.

"The best course of action, I suspect, is for the company to be sold, possibly to a runoff specialist, or alternatively, to forego its ratings and self-administer its runoff, so that shareholders can receive a substantial return of capital in the short term, and thereafter a cumulative amount close to tangible book value."

Bobman went on to say that "Watford's consistently poor operating and stock performance as compared to peers reflects a complete absence of competitive advantages.

He added that the company maintains "no inherent competitive strengths or core competencies, relying on third parties for all critical operating functions."

"With minimal inherent skills, no competitive strengths and just a dozen employees, the company's success has been entirely dependent upon Arch, HPS, both of which have benefited greatly in form of fees paid by Watford," he said.

Capital Returns also pointed out that Watford's shareholders have not benefited from Arch. It said Watford has generated "extremely disappointing results" and "destroyed capital" by allocating it to unprofitable reinsurance opportunities and "below investment grade" investments.

Additionally, it noted that the reinsurer's decision to acquire a French insurer with an estimated purchase price greater than 20 percent of its market value is a "waste of shareholder capital that can be put to much better use".

According to Bobman, Watford should follow the approach of Blue Capital Re to execute a self-administered runoff in order to generate value for shareholders.