JPMorgan to Invest in Junk Bonds for New Reinsurer

JPMorgan Chase & Co. (JPM) will manage funds for a Bermuda-based reinsurer that raised $1.13 billion in capital, concentrating the investments in junk bonds.

JPMorgan’s Highbridge Principal Strategies LLC will oversee the assets for Watford Re Ltd., the reinsurer said yesterday in a statement. Watford said it raised $907 million in common equity, including a $100 million investment by Arch Capital Group Ltd., and $226 million in preferred shares. The reinsurer is targeting an initial public offering in two to three years, Chief Executive Officer John Rathgeber said in an interview.

The reinsurer’s portfolio will be “comprised primarily of non-investment grade credit assets, which it believes will generate attractive risk-adjusted returns for its shareholders over the long term,” Watford said.

Money managers including Dan Loeb have started Bermuda-based reinsurers in recent years to raise funds that are less subject to client withdrawals and can provide tax advantages. Pine River Capital Management LP, the hedge-fund firm founded by Brian Taylor, was seeking to raise $500 million to $750 million for a reinsurance company, a person familiar with the matter said in February.

JPMorgan, the largest U.S. bank by assets, owns Highbridge through its investment arm, JPMorgan Asset Management. Highbridge Principal Strategies is led by Chief Executive Officer Scott Kapnick, who came to the firm in 2007 after 21 years at Goldman Sachs Group Inc., where he was global co-head of investment banking. HPS had about $19 billion of assets under management as of March, Watford said.

Casualty Coverage

Rathgeber was vice chairman of Arch Worldwide Reinsurance Group. Jon Levy was named chief risk officer and Roderick Romeo will be chief financial officer. Reinsurers shoulder risk for primary carriers.

Management is aiming for annualized returns of about 15 percent over time, Rathgeber said. He plans to focus on casualty lines such as automobile liability, workers’ compensation and medical malpractice coverage while limiting risks tied to natural disasters.

“It wouldn’t make sense to have this kind of investment strategy and be heavily into that kind of volatile, capital-intensive reinsurance exposure,” he said.

Constantine Iordanou, the CEO of Bermuda-based Arch Capital, has been diversifying risk through deals including an agreement last year to add assets from bankrupt mortgage insurer PMI Group Inc.

Arch slipped 0.8 percent to $57.07 at 10:17 a.m. in New York, narrowing its gain to about 8.6 percent over the past year. JPMorgan climbed 0.3 percent and is up 27 percent in the past 12 months.

Corporate Debt

Junk-rated corporate debt worldwide returned 2.9 percent since Dec. 31, beating global stocks and setting the stage for a sixth year of gains, according to Bank of America Merrill Lynch index data. The bonds now yield 6.1 percent, compared with an average of about 10 percent in the decade through 2007. Junk bonds are high-yield, high-risk debt rated below BBB-by Standard & Poor’s and lower than Baa3 by Moody’s Investors Service.

“We believe that non-investment-grade credit complements Watford’s reinsurance strategy,” Purnima Puri, HPS’s managing director, said in the statement.

New York-based JPMorgan advised on the capital structuring, and Clifford Chance LLP was Watford’s outside counsel.

To contact the reporters on this story: Dan Reichl in San Francisco at dreichl@bloomberg.net; Zachary Tracer in New York at ztracer1@bloomberg.net

To contact the editors responsible for this story: Dan Kraut at dkraut2@bloomberg.net David Scheer

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