Watford : Re Financial Condition Reports 2020

GROUP FINANCIAL CONDITION REPORT

FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2020

Issue Date: 31 May 2021

FINANCIAL CONDITION REPORT
Table of Contents
Introduction.....................................................................................................................................	1
SECTION A - Business and Performance .....................................................................................	2
Name of the Designated Insurer ..................................................................................................	2
Insurance and Group Supervisor: ................................................................................................	2
Approved Auditor ........................................................................................................................	2
Ownership details ........................................................................................................................	2
Insurance Business Written (figures provided are US GAAP)....................................................	3
Investment Performance (figures provided are US GAAP) ........................................................	5
Material Income & Expenses (figures provided are US GAAP).................................................	7
Any other material information ...................................................................................................	8
SECTION B - Overview of Group Structure and Business ...........................................................	9
Board and Senior Executives.......................................................................................................	9
Fitness and Propriety Requirements ............................................................................................	9
Remuneration.............................................................................................................................	14
Material transactions with shareholder controllers....................................................................	15
Risk Management and Solvency Self-Assessment....................................................................	15
Internal Controls ........................................................................................................................	17
Internal Audit.............................................................................................................................	18
Actuarial Function .....................................................................................................................	19
Outsourcing................................................................................................................................	20
Any other material information .................................................................................................	20
SECTION C - Risk Profile...........................................................................................................	21
Overview....................................................................................................................................	21
Underwriting Risk......................................................................................................................	21
Investment Risk .........................................................................................................................	22
Liquidity Risk ............................................................................................................................	23
Credit Risk .................................................................................................................................	23
Operational Risk ........................................................................................................................	24
Reputational Risk.......................................................................................................................	24
Risk Mitigation in the Organization ..........................................................................................	25

Material Risk Concentrations ....................................................................................................	25
Investment in Assets in Accordance With the Prudent Person Principles of the Code of
Conduct......................................................................................................................................	26
Stress Testing.............................................................................................................................	26
Any other material information .................................................................................................	26
SECTION D - Solvency Valuation ..............................................................................................	27
Valuation Bases, Assumptions and Methods to Derive the Value of Each Asset Class ...........	27
Valuation Bases, Assumptions and Methods to Derive the Value of Technical Provisions .....	27
Description of Recoverable from Reinsurance Contracts..........................................................	28
Valuation Bases, Assumptions and Methods to Derive the Value of Other Liabilities.............	28
Any other material information .................................................................................................	28
SECTION E - Capital Management.............................................................................................	29
Capital Management Policy.......................................................................................................	29
Confirmation of Eligible Capital That is Subject to Transitional Arrangements ......................	30
Identification of Any Factors Affecting Encumbrances on Capital ..........................................	30
Identification of Ancillary Capital Instruments Approved by the Authority.............................	30
Identification of Differences in Shareholder's Equity as Stated in the Financial Statements
Versus the Available Capital and Surplus .................................................................................	30
ECR and MSM Requirements at the End of the Reporting Period ...........................................	30
A Description of the Amount and Circumstances Surrounding the Non-Compliance, the
Remedial Measures and Their Effectiveness.............................................................................	31
Where the Non-Compliance is not Resolved, a Description of the Amount of the Non-
Compliance ................................................................................................................................	31
Approved Internal Capital Model ..............................................................................................	31
Any other material information .................................................................................................	31
SECTION F - Subsequent Events ................................................................................................	32
Declaration....................................................................................................................................	33
Appendix 1 - Corporate Structure ................................................................................................	34

INTRODUCTION

Watford Holdings Ltd. and its subsidiaries ("Watford" or "the Group" or "WHL" or "we" or "our") is a global insurance and reinsurance group regulated by the Bermuda Monetary Authority (the "BMA") in Bermuda. Watford writes business through its wholly owned subsidiaries of Watford Re Ltd ("WRL"), Watford Specialty Insurance Company ("WSIC") and Watford Insurance Company ("WIC") and Watford Insurance Company Europe Limited ("WICE"). In March 2014, WHL raised $1.1 billion for its initial funding, and began underwriting reinsurance in the first half of 2014.

Our strategy combines a diversified, casualty-focused underwriting portfolio, accessed through our strategic relationship with Arch Capital Group Ltd. and its subsidiaries ("Arch"), with disciplined investment strategies comprising primarily non-investment grade corporate credit assets, managed by HPS Investment Partners LLC ("HPS"). We have designed our investment strategies to complement the characteristics of our underwriting portfolios in order to generate attractive risk-adjusted returns for our shareholders.

In 2019, the Company entered into an agreement to acquire Axeria IARD, a property and casualty insurance company based in France. The Company committed to acquiring 100% of the capital stock of Axeria IARD from the APRIL group. The transaction was completed on April 9, 2021.

On October 9, 2020, we entered into an Agreement and Plan of Merger with Arch and Greysbridge Ltd., or Merger Sub, pursuant to which, among other things, Merger Sub will merge with and into our company. Further, on November 2, 2020, we entered into Amendment No. 1 to the Agreement and Plan of Merger with Arch and Merger Sub, and Arch assigned its interests and obligations under the Merger Agreement to Greysbridge Holdings Ltd., a newly formed entity, or HoldCo, of which Arch will own approximately 40%, and funds managed by Warburg Pincus LLC and Kelso

• Company will each own approximately 30%. Arch remains contractually responsible for the performance of its obligations under the Merger Agreement.

We and our operating subsidiaries all carry a financial strength rating of "A-" (Excellent) from A.M. Best Company, or A.M. Best, which is the fourth highest of 15 ratings that A.M. Best confers. Each of our operating subsidiaries also carry a financial strength rating of "A" with a stable outlook from Kroll Bond Rating Agency, or KBRA, which is the 6th highest of 22 ratings that KBRA confers.

Commentary, results and financial information presented herein reflect both WHL and those of WRL, on a consolidated basis. Where differences between WHL and WRL are relevant separate analysis has been provided. Such differences relate entirely to eligible capital amounts.

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SECTION A - BUSINESS AND PERFORMANCE

Name of the Designated Insurer

Watford Re Ltd.

Waterloo House, 1st Floor

100 Pitts Bay Road

Pembroke, HM 08

Bermuda

Insurance and Group Supervisor:

Bermuda Monetary Authority

BMA House

43 Victoria Street

Hamilton, HM 12

Bermuda

Approved Auditor

PricewaterhouseCoopers Ltd.

Washington House

4th Floor

16 Church Street

Hamilton HM 11

Bermuda

Ownership details

In the first quarter of 2014, WHL raised approximately $1.1 billion of capital consisting of $907.3 million in common equity and $226.6 million in preferred equity. Through its wholly-owned subsidiary, Arch Reinsurance Ltd. ("ARL"), Arch invested $100.0 million and acquired approximately 11% of the Company's common equity. Due to share repurchase activities undertaken during 2019 and 2020, Arch's ownership percentage stands at 12.6% at December 31, 2020.

On October 9, 2020, we entered into an Agreement and Plan of Merger with Arch and Greysbridge Ltd., or Merger Sub, pursuant to which, among other things, Merger Sub will merge with and into our company. Further, on November 2, 2020, we entered into Amendment No. 1 to the Agreement and Plan of Merger with Arch and Merger Sub, and Arch assigned its interests and obligations under the Merger Agreement to Greysbridge Holdings Ltd., a newly formed entity, or HoldCo, of which Arch will own approximately 40%, and funds managed by Warburg Pincus LLC and Kelso

• Company will each own approximately 30%. Arch remains contractually responsible for the performance of its obligations under the Merger Agreement.

On February 16, 2021, ARL sold an aggregate of 230,400 common shares to affiliates of Kelso & Company ("Kelso") and 230,400 common shares to an affiliate of Warburg Pincus LLC

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