Watford Re Ltd. has formed a new excess and surplus lines insurer called Watford Specialty Insurance Co. (WSIC), based in Morristown, N.J.

WSIC’s lines of business “will be similar to what we’ve been targeting on the reinsurance side, i.e., casualty and non-catastrophe exposed property,” said John F. Rathgeber, CEO of Bermuda-based Watford Re.

“The business will be primarily written through managing general agents on a program basis,” he said.

Alex Scherer, former AXA Insurance Co. president and CEO, will be WSIC’s president and CEO.

WSIC will operate on a similar basis as Watford Re, with Arch Capital Ltd. “overseeing the underwriting, insurance accounting and claims handling, while Highbridge Principal Strategies will serve as the investment manager of the high yield bond and leveraged loan portfolio,” Rathgeber added. (Arch Capital owns about 11 percent of Watford Re).

“In addition, Arch Investment Managers will manage an investment grade fixed income account for WSIC,” he said, noting the company invests a relatively high percentage of its assets in non-investment grade corporate credit.

WSIC received a financial strength rating of A- (Excellent) and an issuer credit rating of “a-” from A.M. Best, with a stable outlook assigned to both ratings.

As a wholly owned subsidiary of Watford Re, A.M. Best said the ratings are based on:

• WSIC’s strong risk-adjusted capitalization
• Experienced underwriting partner in Arch Underwriters Inc., a wholly owned subsidiary of Arch Capital Group Ltd.
• Leading investment acumen of Highbridge Principal Strategies LLC and
• WSIC’s strategic component of Watford Re Ltd.’s broad-based business plan.

Partially offsetting these positive rating factors are the inherent risks associated with a start-up company and the risks associated with a subsidiary with a limited geographic footprint, A.M. Best said.

When A.M. Best mentioned the company’s “limited geographic footprint,” Rathgeber explained the ratings agency was referring to the fact that WSIC is focused on the U.S. E&S market as opposed to writing an international account through multiple branch offices.

In addition, A.M. Best said, the competitive market conditions in the insurance and reinsurance sectors in the United States may challenge the execution of the business plan

Responding to these concerns, Rathgeber said: “It’s a legitimate caveat but one that applies to all insurers and reinsurers.”

No company is guaranteed success in the current environment, he added. “However, we believe the combination of Arch’s underwriting expertise with Highbridge’s investment acumen gives us a competitive edge and a good chance to succeed.”

A.M. Best went on to say that the underwriting risk and WSIC’s alternative investment strategy “creates an elevated-risk profile that could expose WSIC on the asset and liability sides of the balance sheet.” However, the ratings agency suggested that the skilled underwriting of Arch Capital, “coupled with the experienced investment acumen of [Highbridge Principal Strategies] will help manage these risks.”

Rathgeber noted the company is domiciled in New Jersey because Arch already has an operation in the state with an established rapport with the regulators.