Preliminary Proxy Soliciting materials



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UNITED STATES




SECURITIES AND EXCHANGE COMMISSION





Washington, D.C. 20549



SCHEDULE 14A




PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934




(Amendment No. 1)


Filed by the Registrant ☒


Filed by a Party other than the Registrant





Check the appropriate box:














Preliminary Proxy Statement


















Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))



















Definitive Proxy Statement



















Definitive Additional Materials



















Soliciting Material under Rule 14a-12


















WATFORD HOLDINGS LTD.



(Name of Registrant as Specified In Its Charter)






(Name of Person(s) Filing Proxy Statement, if other than the Registrant)


































































































































































































Payment of Filing Fee (Check the appropriate box):













No fee required.













Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.










(1)







Title of each class of securities to which transaction applies:



























(2)







Aggregate number of securities to which transaction applies:



























(3)







Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined):



























(4)







Proposed maximum aggregate value of transaction:



























(5)







Total fee paid:




























Fee paid previously with preliminary materials.













Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.










(1)







Amount Previously Paid:



























(2)







Form, Schedule or Registration Statement No.:



























(3)







Filing Party:



























(4)







Date Filed:












































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PRELIMINARY PROXY STATEMENT—SUBJECT TO COMPLETION




DATED FEBRUARY 1, 2021









Waterloo House, 1

st

Floor




100 Pitts Bay Road




Pembroke HM 08, Bermuda




[•], 2021


Dear Shareholder:


We cordially invite you to attend a special general meeting (the “Special Meeting”) of the shareholders of Watford Holdings Ltd. (the “Company,” “Watford” or “we,” “us” and “our”) to be held on [•], 2021 starting at [•] Atlantic time, at our offices at 100 Pitts Bay Road, 1st Floor, Pembroke HM 08, Bermuda.


At the Special Meeting, the holders of our common shares and our preference shares will be asked to consider and vote on the Agreement and Plan of Merger, dated as of October 9, 2020 (as amended by Amendment No. 1 thereto, dated November 2, 2020, the “Merger Agreement”), among the Company, Arch Capital Group Ltd. (“Arch”) and Greysbridge Ltd. (“Merger Sub”), which is a wholly-owned subsidiary of Arch, and on the statutory merger agreement that is an exhibit to the Merger Agreement. Arch has assigned its rights under the Merger Agreement to Greysbridge Holdings Ltd. (“Holdco”), a newly-formed company organized by Arch for the purpose of facilitating the merger. However, as provided in the Merger Agreement, Arch remains contractually responsible for the performance of its obligations under the Merger Agreement.


The Merger Agreement provides that, subject to our shareholders approving the Merger Agreement and subject to certain other conditions, Merger Sub will be merged with and into the Company, with the Company surviving the merger as a wholly-owned subsidiary of Holdco (the “Merger”) and, at the effective time of the Merger (the “Effective Time”), (i) each holder of common shares of the Company, $0.01 par value per share (the “common shares”), issued and outstanding immediately prior to the Effective Time (other than any common shares that are owned by the Company as treasury shares or by Arch, Merger Sub or any of their respective direct or indirect wholly-owned subsidiaries) will be entitled to receive, with respect to each such common share, $35.00 in cash, without interest and (ii) each of the 8½% Cumulative Redeemable Preference Shares of the Company, $0.01 par value per share (the “preference shares”), issued and outstanding immediately prior to the Effective Time will continue as a preference share of the surviving company and will be entitled to the same dividend and other relative rights, preferences, limitations and restrictions as currently apply to the preference shares. Our common shares are currently quoted on the Nasdaq Global Select Market under the symbol “WTRE.” Our preference shares are currently quoted on the Nasdaq Global Select Market under the symbol “WTREP.”


We are soliciting proxies for use at the Special Meeting or any adjournment thereof to consider and vote upon a proposal to approve the Merger Agreement, the statutory merger agreement and the Merger (the “Merger Proposal”).


Our board of directors (the “Board” or “board of directors”) has carefully reviewed and considered the terms and conditions of the Merger Agreement and the transactions contemplated by the Merger Agreement, including the merger. Our Board has (1) determined that the Merger Agreement, the statutory merger agreement and the transactions contemplated thereby, including the Merger, are fair to, and in the best interests of, the Company and our shareholders (other than Arch and its subsidiaries), (2) approved the Merger Agreement, the statutory merger agreement and the Merger, and (3) resolved to recommend that our shareholders approve the Merger Agreement, the statutory merger agreement and the merger.




Two members of our board of directors were appointed to serve on our board by Arch (the “Arch Directors”). The Arch Directors did not participate in the Board’s deliberations relating to the Merger Agreement, the statutory merger agreement and the transactions contemplated thereby, and did not participate in the vote to approve the Merger Agreement, the statutory merger agreement or the merger.


















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At the Special Meeting, shareholders also will be asked to vote on proposals to approve (i) on an advisory (non-binding) basis, as required by the rules of the Securities and Exchange Commission, the compensation that may be paid or become payable to the Company’s named executive officers in connection with the Merger, as described in the accompanying proxy statement (the “Compensation Advisory Proposal”) and (ii) an adjournment of the Special Meeting, if necessary or appropriate, to solicit additional proxies, in the event that there are insufficient votes to approve the Merger Proposal at the Special Meeting (the “Adjournment Proposal”).


Holders of common shares will be entitled to vote on all three proposals. Holders of preference shares will be entitled to vote on the Merger Proposal and the Adjournment Proposal. The affirmative vote of shares carrying not less than 50% of the total voting rights of all issued and outstanding common shares and preference shares, voting together as a single class, will be required to approve the Merger Proposal. Arch and Enstar, our two largest shareholders, have entered into separate voting and support agreements pursuant to which they have agreed to vote such shares in favor of the Merger Proposal.

Our board of directors recommends that the Company’s


shareholders vote “FOR” the Merger Proposal, “FOR” the Compensation Advisory Proposal and “FOR” the


Adjournment Proposal.



The accompanying proxy statement provides you with detailed information about the Special Meeting, the Merger Agreement, the Merger and the Compensation Advisory Proposal. A copy of the Merger Agreement is attached as Annex A to the accompanying proxy statement. A copy of the statutory merger agreement is included as Exhibit A to the Merger Agreement attached as Annex A to the proxy statement. Your vote is important. We urge all shareholders to read the proxy statement and the documents included with the proxy statement carefully and in their entirety and to vote your shares by proxy as soon as possible prior to the Special Meeting.


Thank you for your support of Watford Holdings Ltd.



Important note regarding the COVID-19 pandemic

:

Our bye-laws prohibit us from conducting a virtual


meeting of our shareholders if any of our shareholders who are based in the United States participate in the meeting.


In order to allow all of our shareholders an equal opportunity to participate in the Special Meeting, we intend to hold


the Special Meeting in person. Although shareholders of record will be entitled to attend the Special Meeting and vote


in person, in light of the rapidly changing COVID-19 pandemic, attendance in person may be discouraged or


prohibited by government regulations or action or based on general health and safety considerations. Your vote is


important and, regardless of whether you plan to attend the Special Meeting in person, we encourage you to review


the proxy materials and vote your shares by proxy as soon as possible prior to the Special Meeting.


We expect that,


if we are prevented by governmental action from holding the Special Meeting in person, we will postpone the Special


Meeting.






























Sincerely,













Walter Harris





Chairman of the Board








Jonathan Levy





Chief Executive Officer




The proxy statement is dated [•], 2021, and is first being mailed to Watford’s shareholders on or about [•], 2021.


NONE OF THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION, THE REGISTRAR OF COMPANIES IN BERMUDA OR THE BERMUDA MONETARY AUTHORITY HAS APPROVED OR DISAPPROVED THE MERGER, PASSED UPON THE MERITS OR FAIRNESS OF THE MERGER AGREEMENT OR THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER, OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE INFORMATION CONTAINED IN THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.


















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PRELIMINARY PROXY STATEMENT—SUBJECT TO COMPLETION




DATED FEBRUARY 1, 2021









Waterloo House, 1

st

Floor




100 Pitts Bay Road




Pembroke HM 08, Bermuda




Notice of Special General Meeting of Shareholders


To Our Shareholders:


Watford Holdings Ltd. (the “Company,” “Watford” or “we,” “us” and “our”) will hold a special general meeting (the “Special Meeting”) on [•], 2021, starting at [•] Atlantic time at our offices at 100 Pitts Bay Road, 1st Floor, Pembroke HM 08, Bermuda. The matters to be considered and acted upon at the Special Meeting, which are described in detail in the accompanying materials, are:








1.





To consider and vote on a proposal to approve and adopt the Agreement and Plan of Merger, dated as of October 9, 2020, as amended by Amendment No. 1 thereto dated November 2, 2020 (the “Merger Agreement”), and the related statutory merger agreement, by and among the Company, Arch Capital Group Ltd. (“Arch”), a Bermuda exempted company, and Greysbridge Ltd. (“Merger Sub”), a Bermuda exempted company limited by shares and wholly-owned subsidiary of Holdco (as defined below), and the transactions contemplated thereby, including the merger (the “Merger Proposal”);









2.





To approve, on an advisory (non-binding) basis, specified compensation that may become payable to the named executive officers of the Company in connection with the merger (the “Compensation Advisory Proposal”);









3.





To approve the adjournment of the Special Meeting, if necessary, to solicit additional proxies if there are insufficient votes at the time of the Special Meeting to approve the Merger Proposal (the “Adjournment Proposal”); and









4.





To act upon any other business that may properly come before the Special Meeting or any adjournment or postponement thereof.



The Merger Agreement and the merger are more fully described in the accompanying proxy statement, which you should read carefully in its entirety before voting. Arch has assigned its rights under the Merger Agreement to Greysbridge Holdings Ltd. (“Holdco”), a newly-formed company organized by Arch for the purpose of facilitating the merger, however, as provided in the Merger Agreement, Arch remains contractually responsible for the performance of its obligations under the Merger Agreement.


Two members of our board of directors were appointed to serve on our board by Arch (the “Arch Directors”). The Arch Directors did not participate in any deliberations of our board of directors or any committee thereof relating to the Merger Agreement, the statutory merger agreement and the transactions contemplated thereby, and did not participate in the vote to approve the Merger Agreement, the statutory merger agreement or the merger.


Our board of directors has fixed the close of business on [•], 2021 as the record date used to determine the shareholders entitled to notice of, and to vote at, the Special Meeting and any adjournment thereof. Only holders of our common shares or preference shares at the close of business on the record date are entitled to vote at the Special Meeting.


Our board of directors has approved the Merger Agreement, the statutory merger agreement, the merger and the other transactions contemplated by the Merger Agreement and has determined that the Merger Agreement, the merger and the other transactions contemplated by the Merger Agreement are fair to, and in the best interests of, the Company and our shareholders (other than Arch and its affiliates).


















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OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE MERGER PROPOSAL, “FOR” THE COMPENSATION ADVISORY PROPOSAL AND “FOR” THE ADJOURNMENT PROPOSAL.


Our bye-laws prohibit us from conducting a virtual meeting of our shareholders if any of our shareholders who are based in the United States participate in the meeting. In order to allow all of our shareholders an equal opportunity to participate in the Special Meeting, we intend to hold the Special Meeting in person. Although shareholders of record will be entitled to attend the Special Meeting and vote in person, in light of the rapidly changing COVID-19 pandemic, attendance in person may be discouraged or prohibited by government regulations or action or based on general health and safety considerations. We expect that, if we are prevented by governmental action from holding the Special Meeting in person, we will postpone the Special Meeting.


Whether or not you plan to attend the Special Meeting in person, please complete, date, sign and return, as promptly as possible, the enclosed proxy card in the enclosed prepaid envelope, or submit your proxy through the Internet or by telephone by following the instructions in the enclosed proxy materials. Properly executed and dated proxy cards with no instructions indicated on the proxy card will be voted

FOR

approval of the Merger Proposal,

FOR

approval of the Compensation Advisory Proposal and

FOR

approval of the Adjournment Proposal.


Your vote is very important, regardless of the number of shares you own. Approval of the Merger Proposal is necessary to complete the merger.

The Merger Proposal cannot be approved (and the merger cannot


be completed) without the affirmative vote of shares carrying not less than 50% of the total voting rights of all issued


and outstanding common shares and preference shares, voting together as a single class. Holders of common shares


and preference shares each have one vote per share. A quorum of two or more persons present in person at the start


of the Special Meeting and representing in person or by proxy in excess of 50% of the total voting rights of all issued


and outstanding common and preference shares in the Company is required for the Merger Proposal to be put to a


vote at the Special Meeting. If you fail to attend the Special Meeting or submit your proxy, your shares will not be


counted when determining whether a quorum is present at the Special Meeting.



You may revoke your proxy at any time before the vote at the Special Meeting by following the procedures outlined in the enclosed proxy statement. If you are a shareholder of record, attend the Special Meeting and wish to vote in person, you may revoke your proxy and vote in person (subject to any COVID-19 related restrictions).


If you are a shareholder who holds your common shares and/or preference shares, as applicable, in “street name” through a broker, bank or other nominee, please be aware that you will need to follow the directions provided by such broker, bank or nominee regarding how to instruct it to vote your common shares at the Special Meeting.









































By order of the Board of Directors,




















Shane Reynolds




















For and on behalf of




Conyers Corporate Services (Bermuda) Limited




Secretary



















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SUMMARY TERM SHEET


This Summary Term Sheet discusses certain material information contained in this proxy statement, including with respect to the Agreement and Plan of Merger, dated as of October 9, 2020, by and among Watford Holdings Ltd. (the “Company,” “Watford” or “we,” “us” and “our”), a Bermuda exempted company, Arch Capital Group Ltd. (“Arch”), a Bermuda exempted company limited by shares, and Greysbridge Ltd. (“Merger Sub”), a Bermuda exempted company limited by shares and a wholly-owned subsidiary of Arch (the “Initial Merger Agreement,” and as amended by Amendment No. 1, dated November 2, 2020 (“Amendment No. 1”), the “Merger Agreement”). We encourage you to carefully read this entire proxy statement, including its annexes and the documents referred to or incorporated by reference in this proxy statement, as this Summary Term Sheet may not contain all of the information that may be important to you. Each item in this Summary Term Sheet includes page references directing you to a more complete description of that item in this proxy statement.


Arch has assigned its rights under the Merger Agreement to Greysbridge Holdings Ltd. (“Holdco”), however, as provided in the Merger Agreement, Arch remains contractually responsible for the performance of its obligations under the Merger Agreement. If the merger is completed, all of the surviving company’s common shares will be owned by Holdco, and Holdco will be owned by Arch Reinsurance Limited, a wholly owned subsidiary of Arch (“ARL”), certain investment funds managed by Kelso & Company (“Kelso”) and certain investment funds managed by Warburg Pincus LLC (“Warburg Pincus”).




Two members of our current board of directors were appointed to serve on our board by Arch (the “Arch Directors”). The Arch Directors did not participate in the Board’s or any Board committee’s deliberations relating to the Merger Agreement, the statutory merger agreement or any transaction contemplated by either agreement (including the merger), and did not participate in the vote to approve the Merger Agreement, the statutory merger agreement, or any transaction contemplated by either agreement (including the merger).


Accordingly, as used in this summary, references to the “Board” or the “board of directors” or the “transaction committee” or to any action taken by “directors” of the Company or any recommendation made by the “Board” or “board of directors” means the board of directors or Watford’s transaction committee acting without the participation of the Arch Directors.







The Parties to the Merger and Their Principal Affiliates


Watford Holdings Ltd.


Watford Holdings Ltd. is a Bermuda exempted company that was formed in 2013. Watford is a global property and casualty (“P&C”) insurance and reinsurance company with approximately $1.1 billion in capital as of September 30, 2020 and with operations in Bermuda, the United States and Europe. For information about the Company, see “

Important Information Regarding the Company—Company Background

” beginning on page [

93

].


The principal executive office of Watford Holdings Ltd. is located at Waterloo House, 1

st

Floor, 100 Pitts Bay Road, Pembroke HM 08, Bermuda.


Additional information about Watford is contained in its public filings, certain of which are incorporated by reference into this proxy statement. See “

Where You Can Find Additional Information

” beginning on page [

116

].





Arch Capital Group Ltd. and Certain Affiliates


Arch Capital Group Ltd., a Bermuda exempted company limited by shares (“ACGL” or “Arch”), with approximately $15.2 billion in capital at September 30, 2020, provides insurance, reinsurance and mortgage insurance on a worldwide basis through its wholly-owned subsidiaries. Certain of Arch’s subsidiaries manage Watford’s insurance and reinsurance underwriting operations and part of Watford’s investment grade portfolio. Arch Reinsurance Ltd., a Bermuda exempted company limited by shares (“ARL” or “Arch Re Bermuda”), is a wholly owned direct subsidiary of ACGL. ARL owns 2,500,000 shares (or approximately 12.6%) of Watford’s outstanding common shares. Gulf Reinsurance Limited, a company limited by shares incorporated in the United Arab Emirates (“Gulf Re”), is a wholly owned indirect subsidiary of ACGL. Gulf Re owns 141,985 shares (or approximately 6.6%) of Watford’s outstanding preference shares. The registered offices of ACGL and ARL are located at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda. The registered offices of Gulf Re are located at Unit 304, Level 3, Park Towers, Dubai International Financial Centre, Dubai, 506766, United Arab Emirates.






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See “

The Parties to the Merger and Their Principal Affiliates—Arch Capital Group Ltd. and Certain Affiliates

” beginning on page [

1

] and “

Important Information Regarding the Arch Filing Persons

” beginning on page [

100

].


Merger Sub


Greysbridge Ltd. (“Merger Sub”), a newly formed Bermuda exempted company limited by shares and a wholly-owned direct subsidiary of ACGL, has been organized by ACGL for the sole purpose of facilitating the merger. Merger Sub has not engaged in any business other than in connection with the merger. Merger Sub’s corporate existence will terminate upon consummation of the merger. The registered office of Merger Sub is c/o Carey Olsen Services Bermuda Limited, 2nd Floor, Atlantic House, 11 Par-la-Ville Road, Hamilton HM 11, Bermuda. See “

The Parties to the Merger and Their Principal Affiliates—Greysbridge Ltd.

” beginning on page [

67

] and “

Important Information Regarding the Arch Filing Persons

” beginning on page [

100

].





Greysbridge Holdings Ltd.


Greysbridge Holdings Ltd. (“Holdco”), a newly formed Bermuda exempted company limited by shares and a wholly-owned indirect subsidiary of ACGL, has been organized by ACGL for the purpose of facilitating the merger and other related transactions. Arch has assigned its rights under the Merger Agreement to Holdco, however, as provided in the Merger Agreement, Arch remains contractually responsible for the performance of its obligations under the Merger Agreement. Holdco has not engaged in any business other than in connection the merger and related transactions. The registered office of Holdco is c/o Carey Olsen Services Bermuda Limited, 2nd Floor, Atlantic House, 11 Par-la-Ville Road, Hamilton HM 11, Bermuda. See “

The Parties to the Merger and Their


Principal Affiliates—


Greysbridge Holdings Ltd.

” beginning on page [

67

].





Kelso & Company


Kelso is a leading private equity firm focused on the North American middle market. Since 1980, Kelso has invested approximately $14 billion of equity capital in over 125 transactions. See “

The Parties to the Merger and


Their Principal Affiliates—Kelso & Company LLC

” beginning on page [

67

].


Kelso’s principal executive offices are located at 320 Park Avenue, New York, NY 10022.





Warburg Pincus LLC


Warburg Pincus is a leading global private equity firm focused on growth investing. The firm has more than $56 billion in private equity assets under management. See “

The Parties to the Merger and Their Principal


Affiliates—Warburg Pincus LLC

” beginning on page [

2

].


Warburg Pincus’ principal executive offices are located at 450 Lexington Avenue, New York, NY 10017.





The Merger Proposal


You are being asked to consider and vote upon a proposal to approve and adopt the Merger Agreement, the related statutory merger agreement (the “Statutory Merger Agreement”) and the transactions contemplated thereby, including the merger (the “Merger Proposal”).


The Merger Agreement and the Statutory Merger Agreement provide that, at the closing of the merger, Merger Sub will be merged with and into the Company, with the Company as the surviving entity in the merger. Upon completion of the merger, (i) each of the common shares of the Company, par value $0.01 per share (the “common shares”) then issued and outstanding (other than (x) shares to be canceled pursuant to the Merger Agreement and (y) restricted share units (“RSUs”) to be canceled and exchanged pursuant to the Merger Agreement, as described more fully under “

The Merger Agreement—Effect of the Merger on the Shares of the Company and


Merger Sub

” beginning on page [

73

]), will be converted into the right to receive $35.00 per common share, in cash, without interest and less any required withholding taxes (the “Merger Consideration”) and (ii) each of the 8½% Cumulative Redeemable Preference Share of the Company, $0.01 par value per preference share (the “preference shares”) then issued and outstanding will continue as a preference share of the surviving company and will be entitled to the same dividend and other relative rights, preferences, limitations and restrictions as currently apply to the preference shares. Upon completion of the merger, the holders of Watford common shares (other than ARL) will cease to have any ownership interest in the common shares of the Company.






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The special general meeting of our shareholders will be held at Watford’s offices at 100 Pitts Bay Road, 1

st

Floor, Pembroke HM 08, Bermuda, on [•], 2021, starting at [•] Atlantic time.





Record Date and Quorum (Page [

68

])


The holders of record of the common shares and preference shares as of the close of business on [•], 2021 (the record date for determination of shareholders entitled to notice of and to vote at the special general meeting) are entitled to receive notice of and to vote at the special general meeting.


At the special general meeting, the presence of two or more persons at the start of the meeting representing, in the aggregate, in person or by proxy, in excess of 50% of the total voting rights of all issued and outstanding common and preference shares in the Company will form a quorum for the transaction of business. If a quorum is not present, the special general meeting may be adjourned from time to time until a quorum is obtained. Abstentions and broker non-votes are counted as present for determining whether a quorum exists. A broker non-vote occurs when a bank, broker or other intermediary holding shares for a beneficial owner (a “custodian”) does not vote on a particular proposal because the custodian does not have discretionary voting power for that particular proposal and has not received instructions from the beneficial owner as to how the shares should be voted. The Company has been advised that the New York Stock Exchange’s rules, which apply to banks, brokers and other member organizations, do not permit custodians that are subject to those rules to exercise discretionary voting authority with respect to any of the proposals to be voted on at the special general meeting. Accordingly, if any beneficial owner of common shares or preference shares fails to instruct the custodian of those shares as to how the shares should be voted, those shares may not be voted at the special general meeting.





Required Shareholder Votes for the Merger (Page [

68

])


If a quorum is present at the special general meeting, (i) the approval of the Merger Proposal will require the affirmative votes of shares carrying not less than 50% of the total voting rights of all issued and outstanding common shares and preference shares, voting together as a single class; (ii) the approval of the Adjournment Proposal will require the affirmative vote of a majority of the votes cast by the holders of common shares and preference shares, voting together as a single class; and (iii) the approval of the Compensation Advisory Proposal will require the affirmative vote of a majority of the votes cast by the holders of common shares.


Holders of common shares and preference shares will be entitled to vote on the merger proposal and the adjournment proposal. Common shares carry one vote per share and preference shares carry one vote per share. The affirmative vote of shares carrying not less than 50% of the total voting rights of all issued and outstanding common shares and preference shares, voting together as a single class, will be required to approve the merger proposal. In accordance with the Company’s bye-laws, if the votes conferred by the “controlled shares” (as defined below), directly or indirectly or by attribution, to any shareholder would represent more than 9.9% of the voting power of all shares entitled to vote, the votes conferred by the controlled shares on such shareholder will be reduced by whatever amount is necessary so that after any such reduction the votes conferred by the controlled shares of such shareholder will constitute 9.9% of the total voting power of all shares of the Company entitled to vote.


The approval of the Merger Proposal by the holders of common shares and preference shares as described above is a condition to the parties’ obligations to consummate the merger.


As of the record date, there were [19,886,979] common shares issued and outstanding and [2,145,202] preference shares issued and outstanding.


As of the record date, Arch beneficially owned 2,500,000 common shares (or approximately 12.6% of the issued and outstanding common shares) and 141,985 preference shares (or approximately 6.6% of the issued and outstanding preference shares). Arch has agreed to vote those common and preference shares in favor of the Merger Proposal. Arch will not be entitled to vote all those shares at the special general meeting, however, because the Company’s bye-laws contain provisions that limit the voting power of “controlled shares” to 9.9% of the combined voting power of all shares eligible to vote. All common and preference shares eligible to be voted at the special general meeting by Arch or its subsidiaries are “controlled shares” for this purpose. The Company’s Board has determined that after giving effect to these bye-law provisions, Arch and its subsidiaries will be entitled to cast an aggregate of [  ] votes on the Merger Proposal and the Adjournment Proposal, representing [9.9%]% of the issued and outstanding common and preference shares as of the record date, and they will be entitled to cast an aggregate of [  ] votes on the Compensation Advisory Proposal, representing [9.9%]% of the issued and outstanding common shares as of the record date.






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Enstar beneficially owns 1,815,858 common shares (or approximately [9.1]% of the issued and outstanding common shares as of the record date) and has agreed to vote those shares in favor of the Merger Proposal.


For a description of the voting agreements with Arch and Enstar, see “

Voting and Support Agreements

” below.


After giving effect to the reduction in Arch’s voting power required under the Company’s bye-laws, and assuming no other shareholder will own shares in excess of the 9.9% limit specified in the Company’s bye-laws, the aggregate number of votes eligible to be cast by all shareholders on the Merger Proposal will be [ ]. Because the Merger Agreement requires the merger be approved by the affirmative vote of not less than 50% of the holders of the issued and outstanding common shares and preference shares, voting as a single class, [ ] votes will be required to approve the Merger Proposal.


Each of the directors and executive officers of the Company has informed the Company that, as of the date of this proxy statement, he or she intends to vote the Watford common shares and preference shares owned by them in favor of the Merger Proposal.





Conditions to the Merger (Page [

72

])


Each party’s obligation to complete the merger is subject to the satisfaction or, to the extent permitted by law, waiver of the following conditions:












approval and adoption of the Merger Proposal by the affirmative votes of shares carrying not less than 50% of the total voting rights of all issued and outstanding common shares and preference shares, voting together as a single class at the special general meeting at which a quorum is present (the “Company Shareholder Approval”);













the expiration or termination of any waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), the receipt of pre-clearance or similar approvals under the antitrust or competition laws of certain other jurisdictions, the receipt of regulatory clearances required under other applicable laws including laws regulating insurance companies, without the imposition of “Burdensome Conditions” (as defined in the Merger Agreement) and all such required regulatory approvals being in full force and effect; and













no law or order being in effect that prevents, makes illegal or prohibits the consummation of the merger and the other transactions contemplated by the Merger Agreement (the “Absence of Legal Restraints Condition”).



The obligations of the Company to consummate the merger are subject to the satisfaction or, to the extent permitted by law, waiver of the following conditions:












the representations and warranties of Arch and Merger Sub in the Merger Agreement must be true and correct, subject to materiality thresholds set forth therein, as of the closing as if made at and as of such time (except with respect to certain representations and warranties made as of a specified earlier date) (the “Arch Representation Condition”);













Arch and Merger Sub shall have performed in all material respects all obligations required to be performed under the Merger Agreement at or prior to the closing of the merger (the “Arch Covenant Condition”); and













Arch shall have delivered to the Company a certificate, dated as of the closing date of the merger and signed by an authorized officer of Arch, certifying to Arch’s compliance with the above described conditions.



The obligations of Arch and Merger Sub to consummate the merger are subject to the satisfaction or, to the extent permitted by law, waiver of the following conditions:












the representations and warranties of the Company in the Merger Agreement must be true and correct, subject to materiality thresholds set forth therein, as of the closing as if made at and as of such time (except with respect to certain representations and warranties made as of a specified earlier date) (the “Company Representation Condition”);













the Company shall have performed in all material respects all obligations required to be performed by it under the Merger Agreement at or prior to the closing of the merger (the “Company Covenant Condition”);







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the Company shall have delivered to Arch a certificate, dated as of the closing date of the merger and signed by its Chief Executive Officer or Chief Financial Officer, certifying to the Company’s compliance with the above described conditions;













no “Company Material Adverse Effect” (as defined in the Merger Agreement) shall have occurred since the date of the Merger Agreement: and













the net investment loss (defined as net interest income plus realized and unrealized losses (if any) and net of realized and unrealized gains (if any)) on the Company’s non-investment grade portfolio between September 30, 2020 and the date that is two business days before the closing date (the “Non-Investment Grade Portfolio Loss”) must be less than $208 million.






Expected Timing of the Merger


We anticipate completing the merger in the first quarter of 2021, subject to approval of the Merger Proposal by the Company’s shareholders as specified herein, receipt of required regulatory approvals and the satisfaction or waiver of the other conditions to closing, although the Company cannot assure completion by any particular date, if at all.





Governmental Approvals


Consummation of the merger is subject to obtaining required regulatory approvals from the U.S. Federal Trade Commission, the European Commission, the Turkish Competition Authority, the Bermuda Monetary Authority, the New Jersey Department of Banking and Insurance, the California Department of Insurance and the Financial Services Commission of Gibraltar. In addition, in the event Watford completes its pending acquisition of Axeria IARD, a French

société anonyme

, prior to consummation of the merger, the approval of the French Prudential Supervision and Resolution Authority (Autorité de Contrôle Prudentiel et de Résolution) will also be required to consummate the merger.





Purpose and Reasons of the Company for the Merger; Position of the Company as to Fairness of the Merger; Recommendation of the Board of Directors (Page [

29

])


Watford’s Board of Directors (the “Board of Directors” or the “Board”) after considering various factors described herein, adopted resolutions at a meeting duly called at which a quorum of directors was present (i) determining that the Merger Consideration constitutes fair value for each common share in accordance with the Companies Act 1981 of Bermuda (the “Bermuda Companies Act”), (ii) determining that the continuation of each issued and outstanding preference share as a preference share of the surviving company with the same dividend and other relative rights, preferences, limitations and restrictions as are now provided to the preference shares constitutes fair value for each preference share in accordance with the Bermuda Companies Act, (iii) determining that the terms of the Merger Agreement and the Statutory Merger Agreement and the transactions contemplated thereby, including the merger, are fair to and in the best interests of the Company and its shareholders, (iv) approving and declaring advisable the execution, delivery and performance of the Merger Agreement and the Statutory Merger Agreement and the consummation of the transactions contemplated thereby, including the merger, and (v) subject to the right of the Board of Directors to change its recommendation in certain circumstances, recommending that the Company’s shareholders vote in favor of the Merger Proposal at a duly held meeting of such shareholders for such purpose.


The Board of Directors recommends that you vote “

FOR

” the Merger Proposal.


For purposes of Section 106(2)(b)(i) of the Bermuda Companies Act, the Board of Directors considers that $35.00 per common share, without interest and less any applicable withholding taxes, represents fair value for each issued and outstanding common share and that the continuation of each issued and outstanding preference share as a preference share of the surviving company with the same dividend and other relative rights, preferences, limitations and restrictions as are now provided to the preference shares represents fair value for each issued and outstanding preference share.


For a more complete discussion of the factors considered by the Board of Directors in reaching its decision to approve and adopt the Merger Proposal, see “

Special Factors—Purpose and Reasons of the Company for the Merger;


Position of the Company as to Fairness of the Merger; Recommendation of the Board of Directors

” beginning on page [

29

].






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Opinion of Morgan Stanley & Co. LLC (Page [

35

] and

Annex D

)


Morgan Stanley & Co. LLC (“Morgan Stanley”) was retained by the Board of Directors to act as its financial advisor in connection with the merger. On November 1, 2020, Morgan Stanley rendered its oral opinion, which was subsequently confirmed in writing, to the Board of Directors to the effect that, as of that date and based upon and subject to the assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of review undertaken by Morgan Stanley as set forth in its written opinion, the consideration to be received by the holders of the common shares (other than shares held in treasury or held by Arch, Merger Sub, Watford or any of their respective direct or indirect wholly-owned subsidiaries or as to which dissenters’ rights have been perfected (the “Excluded Shares”)) pursuant to the Merger Agreement was fair from a financial point of view to such holders (as described more fully under “

Special Factors—Opinion of Morgan Stanley & Co. LLC

” on page [

35

]).


The full text of the written opinion of Morgan Stanley, dated November 2, 2020, is attached as Annex D and is incorporated by reference into this proxy statement in its entirety. The opinion sets forth, among other things, the assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of the review undertaken by Morgan Stanley in rendering its opinion. The summary of the opinion of Morgan Stanley in this proxy statement is qualified in its entirety by reference to the full text of the opinion. You are encouraged to, and should, read Morgan Stanley’s opinion and the section below captioned “

Special Factors—Opinion of Morgan


Stanley & Co. LLC

” on page [

35

], summarizing Morgan Stanley’s opinion, carefully and in their entirety. Morgan Stanley’s opinion was directed to the Board of Directors, in its capacity as such, and addresses only the fairness from a financial point of view of the consideration to be received by the holders of common shares of Watford (other than Excluded Shares) pursuant to the Merger Agreement, as of the date of the opinion, and does not address any other aspects or implications of the merger. Morgan Stanley expressed no opinion or recommendation as to how the shareholders of Watford should vote at the shareholders meeting to be held in connection with the merger. Morgan Stanley’s opinion was not intended to, and does not, constitute advice or a recommendation to any shareholder as to how to vote at any shareholders meeting to be held in connection with the merger or whether to take any other action with respect to the merger.


For more information, see the section entitled “

Special Factors—Opinion of Morgan Stanley & Co. LLC

” beginning on page [

35

].





Purposes and Reasons of the Purchaser Filing Persons for the Merger (Page [

43

])


For the Purchaser Filing Persons, the purpose of the merger is to enable Holdco to acquire all of the common shares of Watford so that Holdco can operate Watford as a privately held company while retaining access to Watford’s underwriting platform and its licenses in Bermuda, the United States and Europe. For more information, see “

Special Factors—Purposes and Reasons of the Purchaser Filing Persons for the Merger

” beginning on page [

43

].





Certain Effects of the Merger (Page [

50

])


If shareholders approve the Merger Proposal and the other conditions to the closing of the merger are either satisfied or (to the extent permissible) waived, Merger Sub will be merged with and into the Company with the Company being the surviving company. If the merger is completed, at the effective time, (i) each common share issued and outstanding immediately prior to the effective time (other than (x) shares to be canceled pursuant to the Merger Agreement and (y) RSUs to be canceled and exchanged pursuant to the Merger Agreement) will automatically be canceled and converted into the right to receive the Merger Consideration and (ii) each preference share issued and outstanding immediately prior to the effective time will continue as a preference share of the surviving company and will be entitled to the same dividend and other relative rights, preferences, limitations and restrictions as currently apply to the preference shares. When this happens, all of the Company’s common shares will be owned by Holdco. None of the Company’s current common shareholders (other than ARL) will have any ownership interest in, or be a holder of, the Company’s common shares after the completion of the merger. As a result, our current holders of common shares will no longer benefit from any increase in the Company’s value or bear the risk of any decrease in the Company’s value. Following the merger, only Holdco and its owners (and potentially the holders of preference shares, until those shares are redeemed) will benefit from any increase in the Company’s value and also will bear the risk of any decrease in the Company’s value. Following the merger, the Watford common shares will no longer be publicly traded.


For more information about certain effects of the merger, see “

The Merger Agreement—Effect of the Merger on


the Shares of the Company and Merger Sub

” beginning on page [

73

].






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Treatment of Company Equity Awards (Page [

74

])


The Merger Agreement provides that effective as of immediately prior to the effective time of the merger, each outstanding performance-based RSU and time-based RSU granted under the Company’s 2018 Stock Incentive Plan (the “2018 Incentive Plan”) will become fully vested, with vesting of any performance-based RSUs vesting as if performance goals had been achieved at target level, and be canceled in exchange for the right to receive a single lump sum cash payment, without interest, equal to (i) the Merger Consideration, less (ii) any applicable taxes required to be withheld.


All such payments are required to be made by the surviving company, without interest, on or as soon as practicable following the effective time of the merger, and in no event later than five business days following the effective time of the merger.





Interests of the Company’s Directors and Executive Officers in the Merger (Page [

51

])


In considering the recommendations of the Board of Directors with respect to the Merger Proposal, you should be aware that, aside from their interests as shareholders of the Company, certain of the Company’s directors and executive officers have interests in the merger that are different from, or in addition to, those of shareholders of the Company generally.


Two members of Watford’s board of directors (the “Arch Directors”) were appointed to serve on our board by Arch. At a board meeting on June 17, 2020, the Arch Directors recused themselves from further discussions regarding strategic alternatives potentially available to Watford, recognizing that in any potential transaction that might result from those discussions, the interests of Arch could diverge from the interests of the Company and its other shareholders. Accordingly, the Arch Directors did not participate in the Board’s deliberations regarding acquisition proposals submitted by Arch or by other parties or in the Board’s deliberations relating to the Merger Agreement, and did not participate in the vote to approve the Merger Agreement or recommend that the shareholders approve the Merger Proposal.


In addition, certain facts that may cause the interests of the Company’s executive officers and directors to be different from or in addition to the interests of the Company’s shareholders include the following:












the Company’s executive officers hold unvested performance-based RSUs and time-based RSUs that will become fully vested (with vesting of any performance-based RSUs vesting as if performance goals had been achieved at target level) and canceled in exchange for the right to receive the Merger Consideration;













the Company’s executive officers have entered into amended and restated employment agreements that provide for certain severance protections upon a qualifying termination;













the Company’s executive officers may receive retention payments and will receive pro-rated annual bonus payments, in each case in connection with the merger;













the Company’s executive officers may enter into arrangements with Arch prior to or following the closing; and













the Company’s directors and executive officers are entitled to continued indemnification and insurance coverage under the Merger Agreement, and the Company’s directors and certain executive officers are entitled to continued indemnification and insurance coverage under indemnification agreements.



These interests are discussed in more detail in the section entitled “

Special Factors—Interests of the Company’s


Directors and Executive Officers in the Merger

” beginning on page [

7

]. The Board of Directors was aware of the different or additional interests described herein and considered those interests along with other matters in recommending and/or approving, as applicable, the Merger Proposal.





Voting and Support Agreements (Page [

58

])


As a condition to the Company’s willingness to enter into the Initial Merger Agreement and to proceed with the transactions contemplated thereby, including the merger, Arch Reinsurance Ltd. (“ARL”) and Gulf Reinsurance Limited (“Gulf Re” and together with ARL, the “Arch Parties”), each of which is a wholly-owned subsidiary of Arch, entered into a Voting and Support Agreement dated as of October 9, 2020 with the Company (the “Arch Voting and Support Agreement”). In the Arch Voting and Support Agreement, the Arch Parties agreed (among other things) to vote their common shares and preference shares in favor of the Merger Proposal. At the date of this proxy






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statement, Arch Parties beneficially own in the aggregate 2,641,985 shares (consisting of 2,500,000 common shares and 141,985 preference shares), representing approximately 12.0% of Watford’s total issued and outstanding shares. However, the Company’s bye-laws contain provisions that limit the voting power of “controlled shares” to 9.9% of the voting power of all shares entitled to vote and all common and preference shares owned by Arch or its subsidiaries are “controlled shares” for this purpose. The Company’s Board has determined that after giving effect to these bye-law provisions, Arch and its subsidiaries will be entitled to cast an aggregate of [  ] votes on the Merger Proposal and the Adjournment Proposal, representing [9.9%]% of the issued and outstanding common and preference shares as of the record date, and they will be entitled to cast an aggregate of [  ] votes on the Compensation Advisory Proposal, representing [9.9%]% of the issued and outstanding common shares as of the record date.


Under the Arch Voting and Support Agreement, the same voting obligations will apply to any additional common shares or preference shares acquired by the Arch Parties between October 9, 2020 and the termination of the Arch Voting and Support Agreement.


As a condition to Arch’s willingness to execute Amendment No. 1 (and thereby agree to an increase in the Merger Consideration from $31.10 per common share to $35.00 per common share), Enstar Group Limited (“Enstar”) and its wholly-owned subsidiary Cavello Bay Reinsurance Ltd. (“Cavello”) entered into a Voting and Support Agreement dated as of November 2, 2020 with Arch and the Company (the “Enstar Voting and Support Agreement”). In the Enstar Voting and Support Agreement, Enstar and Cavello agreed (among other things) that Cavello will vote in favor of the Merger Proposal. At the date of this proxy statement, Cavello beneficially owns 1,815,858 common shares, representing approximately 9.1% of the issued and outstanding common shares. Under the Enstar Voting and Support Agreement the same voting obligations will apply to any additional common shares or preference shares acquired by Cavello or Enstar between November 2, 2020 and the termination of the Enstar Voting and Support Agreement. Under the Enstar Voting and Support Agreement, Enstar has agreed not to pursue any other proposal to acquire the Company.


For more information, see “

Voting and Support Agreements

” beginning on page [

58

] and “

Special


Factors—Background of the Merger

” beginning on page [

19

].





Certain U.S. Federal Income Tax Consequences of the Merger (Page [

59

])


The receipt of cash in exchange for common shares pursuant to the merger will be a taxable transaction for U.S. federal income tax purposes. Although not free from doubt due to a lack of directly governing authority, we believe that the Company should not be treated as a “passive foreign investment company,” or a “PFIC,” for U.S. federal income tax purposes under current law because we believe that the income of Watford Re Ltd. (“Watford Re”) should qualify for an exception to the PFIC rules for income that is derived in the active conduct of an insurance business by a corporation satisfying certain requirements, which we refer to as the “Insurance Company Exception.” Assuming that our view on the application of the PFIC rules is correct, subject to the possible application of Section 1248 of the Code (as discussed in more detail in the section entitled “

Special Factors—


Certain


U.S. Federal Income Tax Consequences of the Merger

”), U.S. holders (as defined in such section) should generally recognize capital gain or loss on the receipt of cash in exchange for common shares pursuant to the merger equal to the difference, if any, between (1) the amount of cash received and (2) the U.S. holder’s adjusted tax basis in those shares (determined separately for each share). Notwithstanding the foregoing, the ability of the Company to qualify for the Insurance Company Exception will depend on the Company’s continuing operations and operating results. Furthermore, there is a lack of currently applicable authority interpreting the Insurance Company Exception, and as a result no assurance can be provided that the Insurance Company Exception has applied to the Company to date. Moreover, the Insurance Company Exception has been subject to a number of proposed changes of law in recent years. Most recently, on December 4, 2020, the Treasury released certain final regulations (the “2020 Final Regulations”) and proposed regulations (the “2020 Proposed Regulations”) regarding the application of the Insurance Company Exception. We believe that the 2020 Final Regulations should not adversely impact the Company’s ability to satisfy the Insurance Company Exception and avoid being treated as a PFIC with respect to periods prior to the merger. In addition, although the 2020 Proposed Regulations could adversely impact the Company’s ability to satisfy the Insurance Company Exception if finalized in their current form, the 2020 Proposed Regulations are proposed to apply on a prospective basis after they are finalized, and as a result it is not expected that the 2020 Proposed Regulations would apply to the Company with respect to periods prior to the merger. As a result, we do not believe that these regulations should adversely impact the Company’s ability to satisfy the Insurance Company Exception with respect to periods prior to the merger. Notwithstanding the foregoing, no assurance can be provided that future guidance or legislation regarding the Insurance Company Exception will not apply retroactively in a manner that could cause the Company to fail to satisfy the Insurance Company Exception with respect to periods prior to the merger. Furthermore, given the lack of currently applicable authority regarding the Insurance Company Exception, no assurance can be provided that that taxing authorities






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may not seek to apply principles similar to the 2020 Proposed Regulations in interpreting the Insurance Company Exception for prior periods, notwithstanding the prospective application of those regulations. In addition, it is possible that the 2020 Proposed Regulations, if finalized in their current form, could adversely impact the ability of the Company to satisfy the Insurance Company Exception in future years, and as a result could impact the tax consequences of U.S. holders holding shares of the Company in the event that the merger closes later than planned. As a result, no assurance can be provided that the Internal Revenue Service (the “IRS”) would not assert that the Company should be classified as a PFIC.


If the Company were treated as a PFIC for U.S. federal income tax purposes at any time during a U.S. holder’s holding period, any gain recognized by such U.S. holder would be subject to special adverse tax rules if the U.S. holder has not made a timely “qualified electing fund” election. In addition, it is possible that Section 1248 could cause any gain recognized by a U.S. holder in the merger to be treated as ordinary income, as discussed in the section entitled “

Special Factors—


Certain


U.S. Federal Income Tax Consequences of the Merger

” beginning on page [

59

], which you should read in its entirety.


Holders of preference shares should not be treated as disposing of or exchanging their preference shares in the merger. Instead, the preference shares should be treated as remaining outstanding for U.S. federal income tax purposes. As a result, holders of the preference shares should not recognize gain or loss with respect to such shares in the merger.


The tax consequences of the merger to you will depend upon your own personal circumstances. You should consult your tax advisors for a full understanding of the U.S. federal, state, local, non-U.S. and other tax consequences of the merger to you.





Litigation Relating to the Merger (Page [

64

])


As of January 26, 2021, the Company was aware of two lawsuits that were filed by purported Watford shareholders against Watford and its directors, challenging the transactions contemplated by the merger agreement. For a more detailed description of the litigation, see the section of this proxy statement titled “

Special


Factors—Litigation Relating to the Merger

” beginning on page [

64

].





Appraisal Rights (Page [

59

] and

Annex E

)


Under Bermuda law, the Company’s shareholders of record have rights of appraisal, pursuant to which those Company shareholders who do not vote in favor of the Merger Proposal and who are not satisfied that they have been offered fair value for their shares will be permitted to apply to the Supreme Court of Bermuda (the “Bermuda Court”) for an appraisal of the fair value of their shares. Company shareholders intending to exercise such appraisal rights must file their application for appraisal of the fair value of their shares with the Bermuda Court within one month from the giving of the notice convening the special general meeting. For the avoidance of doubt, this proxy statement constitutes such notice. Under the Company’s bye-laws, notice of a special meeting is deemed to have been served seven days after the notice is deposited, with postage prepaid, in the mail. The Company expects to complete the mailing of this proxy statement on or about [•], 2021 and, accordingly, the Company expects that shareholders of the Company who wish to exercise their appraisal rights will have until on or about [•], 2021 to apply to the Bermuda Court. See the sections of this proxy statement titled “

Special Factors—Appraisal Rights

” beginning on page [

59

] and “

Appraisal Rights

” beginning on page [

111

] for a more detailed description of the appraisal rights available to Company shareholders.





No Solicitation; No Adverse Recommendation Change (Page [

81

])


This section of the Summary Term Sheet uses the terms “alternative proposal,” “superior proposal,” and “intervening event” all of which are defined in the later section entitled “

The Merger Agreement—Other Covenants


and Agreements—No Solicitation; No Adverse Recommendation Change

” beginning on page [

81

].


In the Merger Agreement, the Company agreed that subject to certain exceptions, none of the Company, its subsidiaries, or its or their officers, directors, managers, employees or representatives will: (i) solicit, initiate, knowingly encourage or facilitate any inquiry, discussion, offer or request that constitutes, or would reasonably be expected to lead to, an alternative proposal (an “inquiry”); (ii) furnish non-public information regarding the Company or its subsidiaries to any person in connection with an inquiry or an alternative proposal; (iii) enter into, continue or maintain discussions or negotiations with any person with respect to an inquiry or an alternative proposal; (iv) otherwise cooperate with or assist or participate in or facilitate any discussions or negotiations regarding, or furnish or cause to be furnished to any person or group any non-public information with respect to, or take any other action to facilitate any inquiries or the making of any proposal that constitutes, or could be reasonably expected to






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result in, an alternative proposal; (v) approve, agree to, accept, endorse or recommend any alternative proposal; (vi) submit to a vote of its shareholders, approve, endorse or recommend any alternative proposal; (vii) effect any adverse recommendation change; or (viii) enter into any letter of intent, agreement in principle, term sheet, acquisition agreement, merger agreement, option agreement, joint venture agreement, partnership agreement or other Contract (as such term is defined in the Merger Agreement) or agreement relating to any alternative proposal.


The Merger Agreement provides, however, that at any time before the special general meeting, the Board of Directors may, subject to certain conditions, if the Company has received a superior proposal, change the Company’s recommendation that its shareholders give the Company Shareholder Approval (the “Company Recommendation”), in each case, if the Board of Directors has determined in good faith, after consultation with outside legal counsel, that the failure to take such action would be inconsistent with the directors’ exercise of their fiduciary duties under applicable law, subject to complying with certain notice and other specified conditions set forth therein, including negotiating with Holdco (to the extent Holdco desired to so negotiate) with respect to the terms and conditions of the Merger Agreement in response to such a superior proposal. If the Company has received a superior proposal (after taking into account the terms of any revised offer by Holdco), the Company may terminate the Merger Agreement to enter into a definitive written agreement providing for such superior proposal simultaneously with the termination of the Merger Agreement. Doing so would require the Company to pay Holdco a fee of $28,100,000 prior to or simultaneously with such termination as described in “

The Merger Agreement



Termination Fee

” beginning on page [

88

].


For a full description of the no solicitation and no adverse recommendation, see “

The Merger Agreement—Other


Covenants and Agreements—No Solicitation; No Adverse Recommendation Change

” beginning on page [

81

].





Financing (Page [

57

])


Arch has assigned its rights and obligations under the Merger Agreement to Holdco; however, as provided in the Merger Agreement, Arch remains contractually responsible for the performance of its obligations under the Merger Agreement. Holdco has obtained equity commitments as follows: (i) funds managed by Kelso have committed to make an aggregate cash contribution of up to $210,000,000, (ii) funds managed by Warburg Pincus have committed to make an aggregate cash contribution of up to $210,000,000, and (iii) ARL has committed to make a cash contribution of up to $192,500,000 and to contribute the 2,500,000 shares of common stock of Watford already owned by ARL (the foregoing, collectively, being referred to herein as the “Equity Financing”). Upon consummation of the Equity Financing, ARL will own 40% of Holdco, funds managed by Kelso will own 30% of Holdco, and funds managed by Warburg Pincus will own 30% of Holdco. Neither Arch nor Holdco has made any alternative financing arrangements or alternative financing plans in the event the Equity Financing does not occur. Arch’s obligation to pay the Merger Consideration as and when required under the Merger Agreement is not conditioned upon obtaining any financing, including the Equity Financing.


Watford and Arch estimate that the total amount of funds required to complete the merger and pay related fees and expenses will be approximately $[•] million. Arch expects that Holdco will fund such amount with cash proceeds from the Equity Financing at the effective time of the merger and cash on hand at Watford.


See “

Special Factors—Financing

” beginning on page [

57

].





Termination (Page [

87

])


The Company and Holdco may terminate the Merger Agreement by mutual written consent at any time prior to the effective time of the merger. The Company or Holdco may also terminate the Merger Agreement:












if the merger is not consummated on or before October 10, 2021 (the “end date”); provided, however, that if all of the conditions to closing have been satisfied or waived (other than those conditions that by their nature are to be satisfied at the closing) except for the condition that the Non-Investment Grade Portfolio Loss (as such term is defined in the Merger Agreement) is less than $208 million (the “Non-Investment Grade Portfolio Loss Condition”), the Company may elect at any time, or from time to time, during the three months following the date on which the conditions to Closing, other than the Non-Investment Grade Portfolio Loss Condition, have first been satisfied or waived (the “Extended Condition Date”), to deliver another certificate setting forth the Non-Investment Grade Portfolio Loss with a view to satisfying the Non-Investment Grade Portfolio Loss Condition before the expiration of the Extended Condition Date;













if the Absence of Legal Restraints Condition is not satisfied and the legal restraint that causes the condition not to be satisfied is final and non-appealable; or







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if the Company Shareholder Approval shall not have been obtained at a duly convened meeting of the Company’s shareholders (or any adjournment or postponement thereof) at which the Merger Agreement was submitted to the shareholders for adoption.



The Company may terminate the Merger Agreement:












if Arch, Holdco or Merger Sub has breached any representation, warranty, covenant or agreement contained in the Merger Agreement, or if any representation or warranty of Arch or Merger Sub has become untrue, in each case, such that the Arch Representation Condition or the Arch Covenant Condition could not be satisfied and, in either such case, such breach is incapable of being cured by the end date or, if curable, has not been cured by the earlier of (i) 60 days after receipt of notice of such breach or (ii) the end date; or













at any time prior to receipt of the Company Shareholder Approval, in order to enter into a definitive written agreement providing for a superior proposal in accordance with the Merger Agreement, provided that the Company pays the termination fee of $28,100,000 prior to or simultaneously with such termination (as described in “

The Merger Agreement



Termination Fee

” beginning on page [

88

]).



Holdco may terminate the Merger Agreement:












if the Company has breached any representation, warranty, covenant or agreement contained in the Merger Agreement, or if any representation or warranty of the Company has become untrue, in each case, such that the Company Representation Condition or the Company Covenant Condition could not be satisfied and, in either such case, such breach is incapable of being cured by the end date or, if curable, has not been cured by the earlier of (i) 60 days after receipt of notice of such breach or (ii) the end date;













if at any time prior to the time the Company holds a shareholders meeting to approve the Merger Agreement, the Company’s Board of Directors shall have acted in a way that constitutes an adverse recommendation change; or













if any condition to closing has not been satisfied by the end date (as extended, if applicable).






Termination Fee (Page [

88

])


Except as specifically provided in the Merger Agreement, all fees and expenses incurred in connection with the merger and the other transactions contemplated by the Merger Agreement will be paid by the party incurring such fees or expenses, whether or not such transactions are consummated.


The Company will be required to pay to Holdco a fee of $28,100,000 if:












the Company terminates the Merger Agreement prior to receipt of the Company Shareholder Approval in order to enter into a definitive written agreement providing for a superior proposal;













Holdco terminates the Merger Agreement before the Company holds a shareholders meeting to approve the Merger Agreement and after the Company’s Board of Directors has acted in a way that constitutes an adverse recommendation change; or













(i) an alternative proposal is made by a third party to the Company or directly to the Company’s shareholders and in either case the alternative proposal is not publicly withdrawn before the Company holds a shareholders meeting to approve the Merger Agreement; (ii) subsequently, the Merger Agreement is terminated because at the shareholders meeting held to approve the Merger Agreement the Company Shareholder Approval is not obtained; and (iii) within 12 months after the Merger Agreement is terminated, (x) the Company enters into a definitive letter of intent, agreement in principle, term sheet, acquisition agreement, merger agreement, option agreement, joint venture agreement, partnership agreement or other Contract or agreement relating to any alternative proposal or (y) an “alternative proposal” (as defined below) is consummated, provided that for purposes of this bullet, the references to 20% in the definition of “alternative proposal” shall be deemed to be references to 50.1%.



The Merger Agreement provides that payment of the termination fee will be the sole and exclusive remedy available to Arch, Holdco and Merger Sub with respect to the Merger Agreement and the transactions contemplated thereby in the event any such payment becomes due and payable, and, upon payment of the termination fee, the Company (and the Company’s affiliates and its and their respective directors, officers, employees, shareholders and representatives) will have no further liability to Arch, Holdco and Merger Sub under the Merger Agreement, but this






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does not limit (i) the Company’s right to seek specific performance of the Merger Agreement before termination of the Merger Agreement or (ii) each party’s right to seek damages for any wilful breach of the Merger Agreement. In no event will the Company be obligated to pay the termination fee on more than one occasion. See “

The Merger


Agreement—Termination Fee

” beginning on page [

88

].






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QUESTIONS AND ANSWERS ABOUT THE SPECIAL GENERAL MEETING AND THE MERGER


The following questions and answers address briefly some questions you may have regarding the special general meeting, the Merger Agreement, the Statutory Merger Agreement and the merger. These questions and answers may not address all questions that may be important to you as a shareholder of Watford. Please refer to the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to or incorporated by reference in this proxy statement for further information.








Q:





What is the proposed transaction?









A:





The proposed transaction is the merger of Merger Sub with and into Watford pursuant to the Merger Agreement. If the merger is consummated, (i) each common share issued and outstanding immediately prior to the effective time (other than (x) shares to be canceled pursuant to the Merger Agreement and (y) RSUs to be canceled and exchanged pursuant to the Merger Agreement) will automatically be canceled and converted into the right to receive the Merger Consideration and each preference share issued and outstanding immediately prior to the effective time will continue as a preference share of the surviving company and will be entitled to the same dividend and other relative rights, preferences, limitations and restrictions as are now provided to the preference shares. Accordingly, immediately after the effective time of the merger all of the Company’s common shares will be owned by Holdco and the preference shares will remain issued and outstanding.









Q:





What will holders of common shares receive in the merger?









A:





If the merger is completed and a holder of common shares does not properly exercise appraisal rights, such holder will be entitled to receive the $35.00 cash consideration, without interest and less any applicable withholding taxes, for each common share that it owns.









Q:





What will holders of preference shares receive in the merger?









A:





If the merger is completed and a holder of preference shares does not properly exercise appraisal rights, such holder will continue as a preference share of the surviving company and will be entitled to the same dividend and other relative rights, preferences, limitations and restrictions as currently apply to the preference shares.









Q:





When and where is the special general meeting?









A:





The special general meeting will take place on [•], 2021, starting at [•] Atlantic time, at the Company’s offices at 100 Pitts Bay Road, 1

st

Floor, Pembroke HM 08, Bermuda.









Q:





What matters will be voted on at the special general meeting?









A:





At the special general meeting, the holders of common shares and preference shares will be asked to vote:













to approve and adopt the Merger Proposal; and













if necessary, to approve the Adjournment Proposal.



Also at the special general meeting, the holders of common shares will be asked:












to vote to approve the Compensation Advisory Proposal, on an advisory (non-binding) basis; and













to act upon any other business that may properly come before the special general meeting or any adjournment or postponement thereof.






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Q:





Who will be entitled to vote on these matters at the special general meeting?









A:





All common shares owned by our shareholders as of the record date, which is the close of business on [


], 2021, may be voted by those shareholders on the Merger Proposal, the Compensation Advisory Proposal and the Adjournment Proposal, and all preference shares owned by our shareholders as of the record date may be voted by those shareholders on the Merger Proposal and the Adjournment Proposal, in each case, subject to certain restrictions on “controlled shares” described under the heading, “

Will I be entitled to vote all


of my shares at the Annual General Meeting?

” below. Our shareholders may cast one vote per common share and one vote per preference share that they held on the record date at the special general meeting. These shares include shares that are:













held directly in their name as the shareholder of record; and













held for them as the beneficial owner through a broker, bank or other nominee.









Q:





Will I be entitled to vote all my shares at the special general meeting?









A:





If your shares are treated as “controlled shares” of any person (which generally includes shares owned directly or indirectly by such person and, in the case of a person treated as a United States person for U.S. federal income tax purposes, shares attributed to such United States person under section 958 of the Internal Revenue Code of 1986, as amended (the “Code”)) and the votes conferred by the controlled shares represent more than 9.9% of the voting power of all shares entitled to vote, the votes conferred by the controlled shares will be reduced by whatever amount is necessary so that after any such reduction the votes conferred by the controlled shares to such person shall constitute 9.9%. In addition, the Board of Directors may limit a shareholder’s voting rights when it deems it appropriate to do so to: (i) avoid the existence of any 9.9% shareholder; and (ii) avoid certain material adverse tax, legal or regulatory consequences to us, any of our subsidiaries or any direct or indirect shareholder or its affiliates. Any reduction in the voting power of a shareholder as required by the controlled shares provisions will have the effect of increasing the percentage voting power of all other shareholders. To the extent this causes another shareholder’s voting power to exceed 9.9%, that other shareholder’s voting power also will be reduced. These controlled share adjustments continue until no shareholder has voting power in excess of 9.9%. The applicability of the voting power reduction provisions to any particular shareholder depends on facts and circumstances that may be known only to the shareholder or related persons. Accordingly, we request that any holder of shares with reason to believe that they are a 9.9% shareholder contact us promptly so that we may determine whether the voting power of such holder’s shares should be reduced. By submitting a proxy, a holder of shares will be deemed to have confirmed that, to their knowledge, they are not, and are not acting on behalf of, a 9.9% shareholder. The Board of Directors is empowered to require any shareholder to provide information as to that shareholder’s beneficial ownership of shares, the names of persons having beneficial ownership of the shareholder’s shares, relationships with other shareholders or any other facts the Board of Directors may consider relevant to the determination of the number of shares attributable to any person. The Board of Directors may disregard the votes attached to shares of any holder who fails to respond to such a request or who, in their judgment, submits incomplete or inaccurate information. The Board of Directors retains certain discretion to make such final adjustments that they consider fair and reasonable in all the circumstances as to the aggregate number of votes attaching to the shares of any shareholder to ensure that no person has voting power in excess of 9.9% at any time.









Q:





What constitutes a quorum for the special general meeting?









A:





The presence of two or more persons at the start of the meeting and representing, in the aggregate, in person or by proxy, in excess of 50% of the total voting rights of all issued and outstanding common and preference shares in the Company will form a quorum for the transaction of business.









Q:





What vote of the Company’s shareholders is required to approve the Merger Agreement?









A:





The consummation of the merger is conditioned upon the approval of the Merger Proposal by the affirmative vote of not less than 50% of the issued and outstanding common shares and preference shares, voting as a single class. Common shares carry one vote per share and preference shares carry one vote per share. As of the record date, there were [19,886,979] issued and outstanding common shares and [2,145,202] issued and outstanding preference shares.






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Arch beneficially owns 2,500,000 common shares (or approximately 12.6% of the issued and outstanding common shares) and 141,985 preference shares (or approximately 6.6% of the issued and outstanding preference shares) and has agreed to vote such shares in favor of the Merger Proposal. Arch has agreed to vote those common and preference shares in favor of the Merger Proposal. Arch will not be entitled to vote all those shares at the special general meeting, however, because the Company’s bye-laws contain provisions that limit the voting power of “controlled shares” to 9.9% of the combined voting power of all shares eligible to vote. All common and preference shares eligible to be voted at the special general meeting by Arch or its subsidiaries are “controlled shares” for this purpose. The Company’s Board has determined that after giving effect to these bye-law provisions, Arch and its subsidiaries will be entitled to cast an aggregate of [  ] votes on the Merger Proposal and the Adjournment Proposal, representing [9.9%]% of the issued and outstanding common and preference shares as of the record date, and they will be entitled to cast an aggregate of [  ] votes on the Compensation Advisory Proposal, representing [9.9%]% of the issued and outstanding common shares as of the record date.


Enstar beneficially owns 1,815,858 common shares (or approximately [9.1]% of the issued and outstanding common shares as of the record date) and has agreed to vote those shares in favor of the Merger Proposal.


For a description of the voting agreements with Arch and Enstar, see “

Voting and Support Agreements

” below.


After giving effect to the reduction in Arch’s voting power required under the Company’s bye-laws, and assuming no other shareholder will own shares in excess of the 9.9% limit specified in the Company’s bye-laws, the aggregate number of votes eligible to be cast by all shareholders on the Merger Proposal will be [ ]. Because the Merger Agreement requires the merger be approved by the affirmative vote of not less than 50% of the holders of the issued and outstanding common shares and preference shares, voting as a single class, [ ] votes will be required to approve the Merger Proposal.








Q:





What effect do abstentions and “broker non-votes” have on the proposals?









A:





Abstentions and “broker non-votes” will be counted toward the presence of a quorum at the special general meeting. Abstentions and “broker non-votes” will not be considered votes cast on any proposal brought before the special general meeting. Because the vote required to approve the Merger Proposal at the special general meeting is the affirmative vote of shares carrying not less than 50% of the total voting rights of all issued and outstanding common shares and preference shares, voting together as a single class assuming a quorum is present, an abstention or a “broker non-vote” with respect to the Merger Proposal at the special general meeting will have the effect of a vote against the Merger Proposal. Because (i) the vote required to approve the Compensation Advisory Proposal at the special general meeting is the affirmative vote of a majority of the votes cast by holders of issued and outstanding common shares present in person or represented by proxy and entitled to vote at the special general meeting or any adjournment thereof assuming a quorum is present and (ii) the vote required to approve the Adjournment Proposal at the special general meeting is the affirmative vote of a majority of the votes cast by holders of issued and outstanding common shares and preference shares, voting as a single class, present in person or represented by proxy and entitled to vote at the special general meeting or any adjournment thereof assuming a quorum is present, an abstention or a “broker non-vote” with respect to either of those proposals at the special general meeting will not have the effect of a vote for or against the applicable proposal, but will reduce the number of votes cast and therefore increase the relative influence of those shareholders who do vote.









Q:





If I do not favor the adoption and approval of the Merger Agreement, what are my appraisal rights?









A:





If you are a shareholder of the Company as of the close of business on [•], 2021, which is the record date, and you do not vote your common shares or your preference shares, as applicable, in favor of the Merger Proposal and you are not satisfied that you have been offered fair value for your common shares or your preference shares, as applicable, you will have the right under Section 106(6) of the Bermuda Companies Act to apply to the Bermuda Court for an appraisal of the fair value of your shares within one month of the giving of notice convening the special general meeting (and such notice is constituted by this proxy statement). The right to make this demand is known as an “appraisal right.” Shareholders of the Company who wish to exercise their appraisal rights must: (i) not vote affirmatively in favor of the Merger Proposal (either in person or by proxy), and (ii) apply to the Bermuda Court to appraise the fair value of their common shares and/or preference shares, as applicable, within one month after the giving of the notice of the special general meeting at which the Merger






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Proposal will be voted upon. Under the Company’s bye-laws, notice of a special meeting is deemed to have been served seven days after the notice is deposited, with postage prepaid, in the mail. The Company expects to complete the mailing of this proxy statement on or about [•], 2021 and, accordingly, the Company expects that shareholders of the Company who wish to exercise their appraisal rights will have until on or about [•], 2021 to apply to the Bermuda Court. For additional information regarding appraisal rights, see “

Special


Factors—Appraisal Rights”

beginning on page [

59

] of this proxy statement, “

Appraisal Rights

” beginning on page [

111

] of this proxy statement and the complete text of the applicable sections of the Bermuda Companies Act attached to this proxy statement as Annex E.








Q:





What vote of the Company’s shareholders is required to approve other matters to be presented at the special general meeting?









A:





The advisory (non-binding) Compensation Advisory Proposal requires the affirmative vote of a majority of the votes cast by holders of issued and outstanding common shares at the special general meeting or any adjournment thereof assuming a quorum is present. The Adjournment Proposal requires the affirmative vote of a majority of the votes cast by holders of issued and outstanding common shares and preference shares, voting together as a single class, at the special general meeting or any adjournment thereof assuming a quorum is present.









Q:





With respect to the advisory (non-binding) Compensation Advisory Proposal to approve specified compensation that may be payable to the named executive officers of the Company in connection with the merger, why am I being asked to cast an advisory (non-binding) vote to approve specified compensation that may become payable to the named executive officers of the Company in connection with the merger?









A:





The SEC’s rules require us to seek an advisory, non-binding vote with respect to certain categories of compensation that may be provided to named executive officers in connection with a merger transaction.









Q:





What will happen if shareholders do not approve the advisory (non-binding) Compensation Advisory Proposal regarding compensation matters?









A:





Approval of the advisory (non-binding) proposal regarding compensation matters is not a condition to the completion of the merger. This vote is an advisory vote and will not be binding on the Company. Therefore, if shareholders approve the Merger Proposal by the requisite majority and the merger is completed, the payments that are the subject of the vote may become payable to the named executive officers regardless of the outcome of the vote on the Compensation Advisory Proposal.









Q:





How does the Board of Directors recommend that I vote?









A:





The Board of Directors recommends that the Company’s shareholders vote:














FOR

the Merger Proposal;














FOR

the Compensation Advisory Proposal; and














FOR

the Adjournment Proposal, if necessary, to solicit additional proxies if there are insufficient votes at the time of the special general meeting to approve the Merger Proposal.



The Arch Directors did not participate in the Board’s deliberations relating to the Merger Agreement, the statutory merger agreement or any transaction contemplated by either agreement (including the merger), or to the compensation arrangements described in the Compensation Advisory Proposal, and did not participate in the vote to approve the Merger Agreement, the statutory merger agreement or any transaction contemplated by either agreement (including the merger), or the vote to approve such compensation arrangements.


Jonathan Levy, the Company’s CEO, did not vote with respect to the compensation arrangements described in the Compensation Advisory Proposal.


You should read “

Special Factors—Purpose and Reasons of the Company for the Merger; Position of the


Company as to Fairness of the Merger; Recommendation of the Board of Directors

” beginning on page [

29

] for a discussion of the factors that the Board of Directors considered in deciding to recommend and/or approve, as applicable, the Merger Agreement. See also “

Special Factors—Interests of the Company’s Directors and


Executive Officers in the Merger

” beginning on page [

51

].





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Q:





What effects will the merger have on the Company?









A:





If the merger is completed, at the effective time, (i) each common share issued and outstanding immediately prior to the effective time (other than (x) shares to be canceled pursuant to the Merger Agreement and (y) RSUs to be canceled and exchanged pursuant to the Merger Agreement) shall automatically be canceled and converted into the right to receive the Merger Consideration and (ii) each preference share issued and outstanding immediately prior to the effective time will continue as a preference share of the surviving company and will be entitled to the same dividend and other relative rights, preferences, limitations and restrictions as currently apply to the preference shares. The common shares and the preference shares are currently registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are quoted on the Nasdaq Global Select Market under the symbols “WTRE” and “WTREP,” respectively. As a result of the merger, the only holder of common shares will be Holdco.



Following the consummation of the merger, Watford’s common shares will be delisted from the Nasdaq Global Select Market and the registration of the common shares and our reporting obligations with respect to the common shares under the Exchange Act will be terminated upon application to the SEC. Watford’s preference shares will remain outstanding and, so long as the preference shares remain outstanding, Watford will remain obligated to file reports under the Exchange Act. See “Special Factors – Plans for the Company.”








Q:





What will happen to my RSUs under the 2018 Incentive Plan?









A:





If the merger is completed, all RSUs will become fully vested, with vesting of any performance-based RSUs vesting as if performance goals had been achieved at target level, and be canceled in exchange for the right to receive a single lump sum cash payment, without interest, equal to (i) the Merger Consideration, less (ii) any applicable taxes required to be withheld.









Q:





What will happen if the merger is not consummated?









A:





If the merger is not consummated for any reason, the holders of Watford common shares will not receive any payment for their common shares in connection with the merger. Instead, Watford will remain a public company and the common shares and preference shares will continue to be registered under the Exchange Act, and listed and traded on the Nasdaq Global Select Market. Under specified circumstances, if the Merger Agreement is terminated, the Company may be required to pay Holdco a termination fee of $28,100,000. See “

The Merger


Agreement—Termination

” beginning on page [

87

] and “

The Merger Agreement—Termination Fee

” beginning on page [

88

].









Q:





What do I need to do now?









A:





We urge you to read this entire proxy statement carefully, including its annexes and the documents referred to or incorporated by reference in this proxy statement, as well as the related Schedule 13E-3, including the exhibits thereto, filed with the SEC, and to consider how the merger affects you.



If you are a shareholder of record, you can ensure that your shares are voted at the special general meeting by submitting your proxy via:












telephone, using the toll-free number listed on your proxy and voting instruction card;













the Internet, at the address provided on your proxy and voting instruction card; or













mail, by completing, signing, dating and mailing your proxy and voting instruction card and returning it in the envelope provided.



If you hold your shares in “street name” through a broker, bank or other nominee, you should follow the directions provided by it regarding how to instruct it to vote your shares. Without those instructions, your shares will not be voted, which will have the same effect as voting against the Merger Proposal.








Q:





How can I attend the special general meeting?









A:





Our bye-laws prohibit us from conducting a virtual meeting of our shareholders if any of our shareholders who are based in the United States participate in the meeting. In order to allow all of our shareholders an equal opportunity to participate in the special general meeting, we intend to hold the special general meeting in person. Although shareholders of record will be entitled to attend the special general meeting and vote in person, in light of the rapidly






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changing COVID-19 pandemic, attendance in person may be discouraged or prohibited by government regulations or action or based on general health and safety considerations. Your vote is important, and we encourage you to review this entire proxy statement and the related documents and vote your shares by proxy as soon as possible prior to the special general meeting. We expect that, if we are prevented by governmental action from holding the special general meeting in person, we will postpone the special general meeting.








Q:





Should I send in evidence of ownership now?









A:





No. After the merger is completed, if you hold common shares you will be sent a letter of transmittal with detailed written instructions for exchanging your common shares for the Merger Consideration. If your common shares are held in “street name” by your broker, bank or other nominee, you may receive instructions from your broker, bank or other nominee as to what action, if any, you need to take to effect the surrender of your “street name” common shares in exchange for the Merger Consideration. Please do not send in your common share certificates now. If you hold preference shares, you need take no action because your shares will remain outstanding following the effective time of the merger. If Holdco elects after the effective time of the merger to cause the Company to redeem your preference shares, you will be sent instructions for how to receive the redemption price for your preference shares.









Q:





Can I revoke my proxy and voting instructions?









A:





Yes. You may revoke your proxy or change your voting instructions at any time prior to the vote at the special general meeting by:













providing written notice to the Secretary of the Company;













delivering a valid, later-dated proxy by mail or altering your voting instructions via the Internet or by telephone; or













attending the special general meeting and voting in person (subject to any COVID-19 related restrictions).



Please note that your attendance at the special general meeting in person will not cause your previously granted proxy to be revoked unless you specifically so request. Shares held in “street name” may be voted in person by you at the special general meeting only if you obtain a signed proxy from the broker, bank or other nominee that is the registered shareholder of record of the shares, giving you the right to vote the shares.








Q:





What does it mean if I get more than one proxy and voting instruction card?









A:





It means your shares are registered differently or are in more than one account. Please provide voting instructions for all proxy and voting instruction cards you receive.









Q:





Who will count the votes?









A:





A representative of American Stock Transfer & Trust Company, LLC (“AST”), the Company’s transfer agent, will tabulate the votes and act as the inspector of the election.









Q:





Who can help answer my other questions?









A:





If you have more questions about the merger, or require assistance in submitting your proxy or voting your common shares or need additional copies of the proxy statement or the enclosed proxy and voting instruction card(s), please contact D.F. King & Co., which is acting as the proxy solicitation agent and information agent in connection with the merger.



Proxy solicitation agent contact info


D.F. King & Co., Inc.




48 Wall Street, 22nd Floor




New York, New York 10005




Banks and Brokers may call: (212) 269-5550




Stockholders may call toll free: (866) 207-3648




watford@dfking.com


If your broker, bank or other nominee holds your common shares, you can also call your broker, bank or other nominee for additional information.





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SPECIAL FACTORS





Background of the Merger


Background of the Company


Watford was formed in Bermuda in 2013 to operate as a “total return insurer.” Total return insurers are insurance companies that aim to generate higher investment returns for their shareholders than traditional insurers by investing their financial assets in higher yielding asset classes than traditional insurers.


Watford was initially capitalized with $1.1 billion raised in private offerings of Watford common shares and preference shares in March 2014. As one of Watford’s founding investors, Arch’s subsidiary, ARL, purchased $100 million in Watford common shares at a price of $40 per common share. Since March 2014, Arch, through one or more of its subsidiaries, has exclusively managed Watford’s insurance and reinsurance underwriting portfolio pursuant to exclusive services agreements and HPS Investment Partners, LLC (“HPS”) has exclusively managed Watford’s non-investment grade portfolio, which represents the majority of Watford’s financial assets, pursuant to exclusive investment management agreements. Pursuant to various agreements, Arch, through its subsidiaries, also provides services critical to Watford’s insurance underwriting operations, including underwriting, accounting, collections, actuarial, reserve recommendations, claims, legal, information technology and other administrative services, and manages a portion of Watford’s investment grade portfolio. As subsequently amended, the services agreements with Arch and the investment management agreements with HPS have terms ending on December 31, 2025. By contracting with Arch for its underwriting operations and with HPS and Arch for its investment management functions, Watford has been able to maintain an efficient operational structure while benefitting from access to Arch’s underwriting expertise, global underwriting infrastructure and distribution platform and HPS’s investment management expertise. At the same time, Watford’s ability to deliver attractive risk-adjusted returns for shareholders in accordance with its strategy depends upon the services performed for it by Arch and HPS. For the years ended December 31, 2019 and 2018, Watford paid Arch and its subsidiaries approximately $45.4 million and $41.1 million respectively in fees and other compensation for services provided. For the years ending December 2019 and 2018, Watford paid HPS $29.5 million and $15.9 million in fees and other compensation for services provided. For additional information about the existing agreements between Arch and the Company, see the Company’s Definitive Proxy Statement on Schedule 14A, as supplemented, filed with the SEC on April 14, 2020, under the caption “Certain Relationships and Related Party Transactions” which disclosure is incorporated herein by reference.


Since Watford’s inception, its officers and its Board have regularly reviewed and assessed, among other things, Watford’s long-term strategic goals and opportunities, the competitive environment in which it operates and industry trends, and its past and projected future short- and long-term performance, with the goal of maximizing shareholder value. In connection with these activities, the Company’s officers and its Board periodically have evaluated potential strategic alternatives, including acquisitions, sales of portions of its liabilities, and other changes to the Company’s business model. During these reviews, the Company’s officers and its Board have noted that the Company’s financial performance has not consistently been at levels that the Company would like to have seen. In March 2019, Watford completed a “direct listing” of its common shares, which began trading on the Nasdaq Global Select Market. Since then, the Company’s common shares have consistently traded at a substantial discount to book value per common share. From time to time since Watford's inception, Arch has taken actions outside of its original services agreement to improve Watford's financial performance. Examples include the development and expansion of Watford's U.S. and European insurance franchises, novations of certain insurance contracts, and modifications to the initial collateral requirements for certain business ceded to Watford.


Background of the Merger


The following summarizes the material events, conversations and contacts that led to the signing of the Merger Agreement.




On April 23, 2020, Watford announced that its 2020 first quarter earnings would include a net investment loss of approximately $300 million, predominantly comprised of unrealized mark-to-market losses, due to investment market volatility following the global economic shutdown related to the COVID-19 pandemic. On May 1, 2020, rating company A.M. Best announced that, following Watford’s April 23 announcement, A.M. Best had “placed under review with negative implications” its financial strength and other ratings applicable to Watford and certain of its subsidiaries.





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Since Watford’s direct listing, some of the Company’s shareholders have expressed dissatisfaction to the Company’s officers and Board regarding the Company’s performance. These expressions of dissatisfaction became more assertive after the Company’s April 23, 2020 announcement. For example, in a letter dated May 15, 2020, one shareholder stated “Watford’s capital has been allocated to unprofitable reinsurance underwriting opportunities and below investment grade investment allocations that have destroyed capital.” The shareholder also criticized the amounts of fees paid to Arch and HPS and their impact on Watford’s net income. When the Company’s officers and its Board discussed these comments, they agreed that the observations had merit. They also noted, however, that the Company’s ability to address the highlighted issues was limited by its long-term contracts with Arch and HPS. The Board noted that the shareholder who sent the May 15, 2020 letter previously had advocated that the Board should seek to enhance shareholder value through share buybacks but now appeared to be advocating for a “self-administered run-off.” The Board further noted that absent concessions by Arch and HPS, an economically efficient “self-administered” run-off would not be feasible because under the terms of their agreements with Watford, during any “run-off” Arch and HPS would be entitled to continue managing substantial parts of Watford’s business and to receive substantial fees. On May 15, 2020, the closing price per share for the Company’s common shares on the Nasdaq Global Select Market was $11.63.


In early or mid-May 2020, an investment management firm (“Party A”) contacted certain senior executives of Arch, including Maamoun Rajeh, who is Chairman and CEO of Arch Worldwide Reinsurance Group and is also a member of Watford’s Board, to discuss Party A’s abilities to act as a potential capital provider. Party A broached the possibility of a capital transaction involving Watford and the Arch senior executives indicated to Party A that it would need to discuss any such role with respect to Watford with Watford’s Board.


In May 2020, the Board asked HPS and Arch to present to the Board, at its regularly-scheduled meeting on May 22, 2020, potential changes to the Company’s business model that could improve its risk-adjusted performance. At the May 22 Board meeting, HPS presented a conceptual strategy to upgrade the Company’s investment portfolio by transitioning to higher quality bonds and redeploying capital from near-term maturities into strategies with lower mark-to-market volatility, all with a view to increasing liquidity and limiting exposure to further capital market downturns. Arch presented a conceptual underwriting plan with increased expected margins to Watford that would benefit from an anticipated improved underwriting environment for insurers and reinsurers, adjusting certain pricing parameters for underwriting transactions that require posting of substantial collateral to ensure the transactions were sufficiently profitable to the Company, generally reducing the amount of collateral the Company is required to post, and potentially expanding into different classes of insurance business.


Also at the May 22, 2020 Board meeting, Walter Harris, the chairman of the Board, advised the Board that on May 16, 2020, he had been contacted by Party A, which inquired whether there might be a role for Party A to act as a “value added capital provider” to the Company. The Board authorized management to explore a possible transaction with Party A. On May 22, 2020, the closing price per share for the Company’s common shares on the Nasdaq Global Select Market was $13.91.


On May 24, 2020, Mr. Harris, Mr. Rajeh, Jonathan Levy, who is Watford’s CEO, and representatives of Party A participated in a conference call. Party A expressed potential interest in various types of financing transactions including investing in the Company’s common shares or its preference shares. Following the call, on May 27, 2020, Watford and Party A signed a confidentiality agreement and Party A subsequently was provided access to non-public information about Watford.


On June 12, 2020, representatives of Party A spoke to Mr. Harris and Mr. Levy and conveyed Party A’s interest in two possible transactions. The first possible transaction was a take-private transaction that would lead to Party A owning a majority of the Company’s common equity and Arch owning a substantial minority interest with all of the Company’s other common shareholders being cashed out. Party A’s representatives advised that in this transaction, holders of common shares would receive an all-cash price representing a “more than 30% premium to the Company’s current share price.” The closing share price for the Company’s common shares that day was $15.71, so Mr. Harris and Mr. Levy understood this to mean Party A proposed to pay approximately $21 per common share (an approximately 34% premium to the $15.71 per common share price). The second possible transaction was a purchase by Party A of Watford’s underwriting platform, operating infrastructure and insurance licenses. Party A’s representatives requested the Company’s permission for it to discuss with Arch potential changes to the terms of the services agreements between Watford and Arch’s subsidiaries that Party A would want to make in connection with any potential transaction.





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On June 14, 2020, Mr. Harris and Mr. Levy called Mr. Rajeh, who confirmed to them that Arch was willing to discuss potential transactions with Party A. Mr. Levy then called Party A to authorize Party A having discussions with Arch as it had requested, subject to Party A agreeing to keep the Company informed regarding its discussions with Arch.


On June 17, 2020, the Board held a telephonic meeting at which Mr. Harris and Mr. Levy briefed the other directors on the discussions with Party A. During the meeting, the Board determined that it should engage a financial advisor. Also, during the meeting, Mr. Rajeh and Nicolas Papadopoulo determined that they would recuse themselves from any further discussions regarding strategic alternatives potentially available to Watford, recognizing that in any potential transaction that might result from those discussions, the interests of Arch could diverge from the interests of the Company and its other shareholders.


As hereinafter used in this summary, references to the “Board” or the “board of directors” or the “transaction committee” or any action taken by “directors” of the Company after June 17, 2020, means the board of directors acting without the participation of Maamoun Rajeh and Nicolas Papadopoulo, the directors appointed to the Watford board by Arch (the “Arch Directors”). The Arch Directors did not participate in the Board’s or any Board committee’s deliberations relating to the Merger Agreement, the statutory merger agreement or any transaction contemplated by either agreement (including the merger), and did not participate in the Board’s or any Board committee’s vote to approve the Merger Agreement, the statutory merger agreement or any transaction contemplated by either agreement (including the merger).


On June 22, 2020, the Board received presentations from Morgan Stanley and another investment bank. Subsequently, at the direction of the Board, the Company retained Morgan Stanley as its financial advisor. The Board selected Morgan Stanley based on its relevant experience, familiarity with the insurance industry including the specialty reinsurance segment, and reputation.


On June 28, 2020, Mr. Rajeh called Mr. Harris and Mr. Levy to report that while Arch remained open to discussions with Party A, Arch would also be exploring potential transactions in which it would partner with Kelso and/or Warburg Pincus. Mr. Harris and Mr. Levy agreed that the Company would provide access to non-public information to Kelso and Warburg Pincus subject to their entering into customary confidentiality agreements. Watford signed a confidentiality agreement with Warburg Pincus on June 30, 2020 and with Kelso on July 1, 2020. Subsequently, Watford provided each of them with access to non-public information. In late June 2020, Arch also entered into separate confidentiality agreements with each of Party A, Kelso and Warburg Pincus with respect to a possible Watford transaction.


On July 1, 2020, Francois Morin, a senior Arch executive, called Mr. Harris and Mr. Levy to advise that Arch wished to explore a transaction in which Arch would acquire a majority of the common equity of the Company. On July 2, 2020, on a telephonic Board meeting, Mr. Harris and Mr. Levy advised the Board of this development. On July 1, 2020, the closing price per share for the Company’s common shares on the Nasdaq Global Select Market was $16.62.


During July 2020, there were periodic calls between Arch and Watford to check-in and confirm the parties’ interest in continuing discussions with respect to a possible transaction. Arch informed Watford that it intended to review Watford’s second quarter operating results, including its non-investment grade portfolio valuations, and that a proposal would be forthcoming after such review. Arch continued discussions with Kelso and Warburg Pincus with respect to a potential transaction.


On August 13, 2020, Mr. Morin called Mr. Levy to advise him that Arch expected it shortly would deliver a verbal indication of the price per common share Arch and its co-investors would be willing to pay to acquire Watford. Mr. Morin further advised that Arch was considering various structures and that, in a transaction involving Arch, Kelso and Warburg Pincus, Arch would likely hold an equity interest representing less than 50% of the surviving entity.


On August 14, 2020, at the request of the Company’s Board, representatives of Morgan Stanley made a presentation to the Board regarding various potential strategic alternatives that might be available to the Company. The principal alternatives discussed at the meeting were (i) a “stay the course” strategy, (ii) a “hybrid strategy” with various potential modifications to the Company’s business model being made that could be pursued individually or in combination, including adjustments to the terms of the Company’s agreements with Arch and HPS that would include financial concessions by Arch and HPS, de-risking the Company’s investment portfolio, and reallocating the





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Company’s “risk capital” to increase insurance underwriting risk while decreasing investment risk, (iii) placing the Company into “run-off” (in other words, ceasing to write new insurance risk and thereafter managing the incurred or possible claims under previously written policies with a view to realizing for shareholders the net value of the Company’s investment assets that remain after paying or providing for those claims), and (iv) establishing a new insurance franchise that would operate independently of Arch. In its discussion of these alternatives, the Board noted that the benefits to be derived from the various potential changes to the Company’s business model in the stay the course strategy and the hybrid strategy were difficult to forecast with certainty, for the most part could be executed only with cooperation from Arch and HPS, and would still leave the Company dependent on how well Arch and HPS performed for the Company. The Board further noted that the projected returns from a run-off strategy were lower as a percentage of book value than intuitively would be expected, and this appeared to be attributable principally to the length of time before the run-off generated cash flows that could be returned to shareholders, and to the amount of fees that the Company would have to pay Arch and HPS during the run-off absent their agreement to accept reduced fees. The Board asked Morgan Stanley to perform some additional analyses regarding the alternatives discussed at the meeting.


On August 16, 2020, Mr. Morin called Mr. Levy to convey a verbal indication of interest by Arch and its co-investors in taking the Company private for $25.00 per common share in cash. The following day, August 17, 2020, the Board held a regularly scheduled meeting at which Mr. Levy communicated Arch’s indication of interest. On August 17, 2020, the closing price per share for the Company’s common shares on the Nasdaq Global Select Market was $16.45.


On or about August 14, 2020, Arch requested and each of Kelso and Warburg Pincus separately agreed that they would exclusively partner with Arch in any transaction involving Watford. Such exclusivity enabled Arch to curtail its discussions with other potential co-investors and provided comfort to Kelso and Warburg Pincus insofar as they would be co-investing alongside a party familiar with the Company’s business. On or about August 17, 2020, Arch informed Party A that Arch would no longer pursue a potential transaction with Party A.


On August 19, 2020, the Board held a telephonic meeting at which representatives of Morgan Stanley provided an updated presentation that took into account the discussions at the August 14 meeting and also addressed Arch’s indication of interest. At the meeting, members of the Board expressed disappointment with the $25.00 per common share price presented by Arch. The members of the Board agreed that the Company should continue to explore all the possible alternatives it had discussed at its August 14 meeting and in that connection should press Arch and HPS to agree to potential changes to their agreements with Watford, including changes to the fees paid under their respective services agreements in various scenarios including run-off.


On August 21, 2020, in order to further explore the strategic options and alternatives discussed at Board meetings on August 14 and 19, 2020, Mr. Levy called Mr. Morin to ask for an update on the potential changes to Watford’s business model that Arch had presented to the Board at its May 22, 2020 meeting. Mr. Levy also asked Mr. Morin whether Arch was willing to engage with Watford in discussing modifications to the services agreements so as to improve Watford’s profitability. Mr. Levy asked Mr. Morin to arrange for coordination between representatives of Morgan Stanley, Watford’s financial advisor, and Goldman Sachs & Co. LLC (“Goldman Sachs”), Arch’s financial advisor, regarding the various strategic alternatives being considered by Watford’s Board.


On August 24, 2020, the Board met telephonically with its advisors, including representatives of Morgan Stanley, to discuss the shareholder value implications of the various alternatives being considered. Management presented its analyses of the feasibility and potential financial implications of implementing the conceptual changes presented by Arch and HPS at the May 22, 2020 Board meeting; a run-off strategy; and the “hybrid” options previously discussed. Management advised the Board that in its opinion all of these approaches had the potential to deliver a better result for shareholders than the $25.00 per common share buyout suggested by Arch. The Board concluded that the Company should press Arch for a substantial improvement in its $25.00 per common share indication of interest and, at the same time, press for Arch’s cooperation in exploring the other strategic alternatives potentially available to the Company.


On August 26, 2020, Mr. Harris and Mr. Levy met with Mr. Rajeh and Mr. Papadopoulo by video conference. In the meeting Mr. Rajeh and Mr. Papadopoulo conveyed that the conceptual business plan Arch had presented to the Board on May 22, 2020 would be difficult to implement because (i) the A.M. Best ratings review with negative





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implications was making Watford’s insurance and reinsurance underwriting activities more challenging than anticipated and (ii) the market was re-evaluating “total return insurers” such as Watford and clients were resisting accepting Watford as a counterparty, thus potentially requiring Arch to front more of the business that was intended to be Watford business.


Later on August 26, 2020, Arch delivered a letter to Watford confirming and reiterating the verbal preliminary indication of interest that Arch had conveyed on August 16, 2020, pursuant to which Arch proposed, together with its co-investors, Kelso and Warburg Pincus, to take the Company private for $25.00 per common share in cash. In the August 26 letter Arch noted that $25.00 per common share represented a premium of 49.3% over the closing price of the common shares on August 14, 2020 and 51.3% over the volume-weighted average trading price of the common shares over the period of 30 trading days ended August 14, 2020, that a buyout “would eliminate the significant risks to Watford and its shareholders currently posed by its ratings status,” and that the proposal was subject to internal approvals of all three investors and satisfactory completion of diligence.


On or about August 28, 2020, representatives of Goldman Sachs conveyed, as directed by the Arch Board, to representatives of Morgan Stanley that Arch would continue to operate under the terms of the existing services agreements and that Arch would not agree to discussing modifications to the services agreement related to fees for services or related to establishing or entering into arrangements with insurance franchises independent of Arch. On August 28, 2020 the Board met telephonically with its advisors, including representatives of Morgan Stanley. Mr. Harris and Mr. Levy provided a summary to the Board of their August 26, 2020 meeting with Mr. Rajeh and Mr. Papadopoulo. Additionally, representatives of Morgan Stanley provided a summary to the Board of their discussions with representatives of Goldman Sachs. The members of the Board not affiliated with Arch believe that Arch may have been unwilling to discuss reduced fees and the Company’s entry into independent insurance arrangements because Arch is a public company with its own shareholders and fiduciary duties require its board to maximize Arch shareholder value. The Board directed representatives of Morgan Stanley to continue to press on these points while at the same time explaining to representatives of Goldman Sachs why the Board believed that Arch should be willing to pay a substantially higher price for Watford than the $25.00 per common share it had proposed. The Board discussed various means by which Arch’s proposal could be improved, including by offering Watford common shareholders the choice of either being paid cash for their common shares or, alternatively, having an option to “roll over” their Watford common shares into shares of the surviving company following the purchase of Watford by Arch.


On September 1, 2020, Mr. Levy delivered a letter to Arch notifying Arch that Watford’s Board, after consultation with its financial advisors, determined that $25.00 per common share was inadequate. Subsequently, representatives of Morgan Stanley conveyed the Board’s views on the Arch proposal to representatives of Goldman Sachs.


On September 3, 2020, representatives of Goldman Sachs, as directed by the Arch Board, told representatives of Morgan Stanley that Arch was willing to raise the price Arch and its co-investors proposed to pay to $27.00 in cash per common share, with no equity roll-over option for Watford common shareholders that Arch had substantial concerns about the possibility of future declines in the value of Watford's non-investment grade fixed income portfolio and that it was Arch's view that Watford would likely struggle as a public company if it remained independent, which could limit the types of underwriting opportunities it would be able to provide to Watford. The Board discussed this revised indication of interest with Morgan Stanley and its other advisors in a telephonic meeting held on September 4, 2020.


On September 8, 2020, various press stories were published describing rumors that Arch had offered $26.00 per common share for Watford.


On September 9, 2020, following further discussions between the Board and its advisors, representatives of Morgan Stanley conveyed a counteroffer on behalf of the Board to representatives of Goldman Sachs of $32.00 per common share, subject to a reduction to $30.00 and increase to $34.00 based on future movements in the value of Watford’s investment portfolio between signing and closing, and including an equity roll-over option for Watford common shareholders.


On September 15, 2020, representatives of Goldman Sachs, as directed by the Arch Board, told representatives of Morgan Stanley that Arch was willing to raise the price Arch and its co-investors proposed to pay to $28.25 per common share in cash, with no equity roll-over option for Watford common shareholders.





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On September 20, 2020, at the Board’s direction, representatives of Morgan Stanley conveyed a counteroffer to representatives of Goldman Sachs of $32.00 per common share, with a hedging mechanism intended to protect Arch from major declines in the value of Watford’s investment portfolio between signing and closing, coupled with an equity roll-over option for Watford common shareholders. Later that evening, representatives of Goldman Sachs, as directed by the Arch Board, indicated that Arch would propose an alternative structure in the coming days to address Arch’s concern about declines in the value of Watford’s non-investment grade portfolio.


On September 21, 2020, Enstar, a 5% shareholder of the Company, filed a statement on Schedule 13D with the SEC in which they reported that in the previous 60 days they had purchased an aggregate of 735,480 common shares of Watford at prices between $22.61 and $25.35 per common share, increasing their beneficial ownership of Watford’s outstanding common shares from approximately 5.2% to approximately 9.1%, and making them Watford’s second largest shareholder. Enstar had previously disclosed their 5% ownership on a Form 13F filed with the SEC (indicating passive investment intent).


On September 22, 2020, representatives of Goldman Sachs, as directed by the Arch Board, told representatives of Morgan Stanley that Arch was willing to offer $30.00 per common share in cash, with downside protection to Arch: if Watford’s non-investment grade portfolio’s realized and unrealized losses exceeded $85 million, the purchase price would be reduced dollar for dollar, with a closing condition that Watford’s non-investment grade portfolio’s realized and unrealized losses did not exceed $170 million. The alternative structure did not include an equity roll-over option for Watford common shareholders.


Also on September 22, 2020, at the Board’s direction following a telephonic meeting of the Board that evening, representatives of Morgan Stanley contacted senior executives at Enstar to inquire as to its objectives in announcing its recent acquisitions of Watford common shares. Enstar responded that it made the purchases because it considered the common shares to be undervalued. Later that evening, Mr. Levy, Mr. Morin and representatives of Morgan Stanley and representatives of Goldman Sachs held a telephonic meeting in which Mr. Levy conveyed a counteroffer of $31.00 per common share, with two alternative mechanisms intended to protect Arch from major declines in the value of Watford’s non-investment grade portfolio between signing and closing, coupled with an equity roll-over option for Watford common shareholders.


On September 24, 2020, Mr. Harris called Mr. Grandisson and conveyed to Mr. Grandisson the Board’s views on the September 22 proposal, as well as the Board’s reasoning with respect to the value to Watford’s common shareholders of having an equity roll-over component. On or about September 25, 2020, Arch directed its counsel and financial advisors to analyze whether an equity roll-over for Watford common shareholders was feasible. After reviewing various permutations, and taking into consideration the requirements of Bermuda corporate law, Arch determined that an equity roll-over available to all existing Watford common shareholders would be complex to execute and would jeopardize the primary purpose of its proposed transaction, which was to take Watford private.


On September 26, 2020, Mr. Morin called Mr. Levy to convey that Arch and its co-investors remained willing to pay $30.00 per common share in cash, with no equity roll-over option for Watford common shareholders, but the price reduction mechanism and closing condition from the September 22 proposal did not adequately protect Arch and its co-investors and would be replaced with a closing condition that Watford’s book value had not declined by more than 29% as a result of net realized and unrealized losses in Watford’s non-investment grade portfolio. On September 29, 2020, at the Board’s direction, representatives of Morgan Stanley conveyed a counteroffer to representatives of Goldman Sachs of $31.00 per common share, with no equity roll-over option for Watford common shareholders, and subject to a closing condition that Watford’s book value had not declined to below $31.00 per common share due to losses in Watford’s non-investment grade portfolio.


On September 30, 2020, Watford received a letter from Enstar, addressed to Watford’s Board, setting forth a “non-binding indicative proposal” to acquire all of the outstanding common shares of the Company for $31.00 per common share in cash, “subject to the satisfactory completion of our diligence and the agreement of definitive transaction documents.” Enstar filed the letter with the SEC the following day, as an exhibit to a Schedule 13D amendment.


In its letter, Enstar stated:


Our purchase price is based on the assumption that the key contracts with Arch Capital Group and HPS Investment Partners would remain in place, but we are willing to discuss the early termination of those agreements if that would be preferable to such parties.





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Enstar’s letter also contained this statement:


We would require the opportunity to conduct detailed due diligence that is commensurate with an acquisition of this size in all key areas including financial, actuarial, claims, legal, regulatory diligence. In addition, we would seek to engage with Arch and HPS on the potential for an early termination or restructuring of their contracts with the Company, particularly in light of any potential changes to the Company’s business plan following the consummation of the transaction.


On October 1, 2020, at the Board’s direction, representatives of Morgan Stanley held a call with senior executives at Enstar to further explore their offer.


Later that day, Mr. Morin told Mr. Levy that Arch was willing to raise the price Arch and its co-investors proposed to pay to $31.00 per common share, with no equity roll-over option for Watford common shareholders, and subject to a closing condition that Watford’s book value had not declined to below $31.00 per common share due to losses in Watford’s non-investment grade portfolio. Mr. Morin noted that Arch would not stand by while Watford attempted to negotiate with Enstar and if it appeared that Enstar was to engage in a bidding war, Arch would abandon discussions regarding a potential acquisition of Watford. Mr. Morin also noted that outside of any requirements to continue to perform under its services agreements with Watford if Enstar were to acquire Watford, Arch was not willing to work with Enstar to facilitate a transaction between Watford and Enstar. Finally, he said that if Watford agreed in principle to Arch’s offer, Arch believed a definitive agreement could be reached within a few days. On October 1, 2020, the closing price per share for the Company’s common shares on the Nasdaq Global Select Market was $28.81 per share.


On October 2, 2020, Watford’s Board met telephonically with its advisors to discuss the recent proposals from Arch and Enstar. At the meeting, representatives of Morgan Stanley reported on their October 1, 2020 conversation with Enstar. They noted that it was clear to them that Enstar had done a fair amount of diligence on Watford based on publicly available information. Morgan Stanley’s representatives also reported that they sought clarity from Enstar on the extent to which Enstar’s interest was contingent on reaching some accommodation with Arch and HPS, and that Enstar’s responses were inconclusive. Finally, they noted that Enstar expressed concern about proceeding if Arch was unwilling to cooperate with their proposal for Watford. The Board members agreed that ideally, Watford would quickly engage with Enstar to assess the level of its interest in a transaction at a price higher than $31.00 per common share, and also would use Enstar’s public expression of interest to extract a higher price from Arch. The Board noted, however, that Arch had stated it would abandon its potential acquisition of Watford if it felt that it was engaging in a bidding war. The Board noted that Enstar’s September 30 letter appeared to convey a need on Enstar’s part to “engage with Arch and HPS” before proceeding with a transaction, and therefore, and in light of Arch having conveyed that it would not be cooperative with Enstar (outside of any requirements to continue to perform under its services agreements with Watford if Enstar were to acquire Watford), there was substantial uncertainty as to how viable Enstar’s proposal would prove to be. Also, Enstar’s initial Schedule 13D filing had disavowed any plans or proposals to seek to acquire Watford, raising questions as to Enstar’s level of seriousness. The Board noted it was possible that Enstar had made public a $31.00 per common share proposal in order to drive up the price of Watford common shares and the price that Arch would be willing to pay in its rumored negotiations with Watford, for the purpose of making a profit on Enstar’s investment in Watford common shares. Finally, the Board took seriously Arch’s expression that it would not stand by while Watford attempted to negotiate with Enstar.


After deliberating, the Board determined to take actions necessary to secure a deal with Arch while preserving the Board’s flexibility to entertain a higher bid from Enstar later, if Enstar’s interest proved to be robust. The Board did so in the belief that if it engaged with Enstar and Enstar then proved unwilling to proceed with an offer (including potentially because Arch or HPS declined to engage with Enstar in the way Enstar’s letter contemplated), Watford could be left with no buyout transaction and a fractured relationship with Arch (which was an especially unappealing prospect given Watford’s substantial dependence on Arch to manage its insurance and reinsurance underwriting operations). At its October 2, 2020 meeting, the Board also authorized certain adjustments to the compensation arrangements of Watford’s management team (involving an incremental compensation expense of approximately $2 million in the aggregate). The Board took this action after discussing the need to induce employees to stay with the Company to ensure Watford remained able to operate and fulfill its merger-related obligations after the announcement of any change of control transaction.


At the Board’s direction, later on October 2, 2020, Mr. Levy contacted Mr. Morin to propose a transaction at $32.00 per common share in cash coupled with a closing condition that Watford’s book value had not declined below





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$32.00 per common share due solely to losses in the non-investment grade portfolio. Mr. Levy also advised Mr. Morin that the Board had authorized certain adjustments to the compensation arrangements of Watford’s management team (involving an incremental compensation expense of approximately $2 million in the aggregate), and that the Board sought assurances that Watford’s junior employees would receive customary contractual protections. Later that same day, October 2, 2020, Mr. Grandisson contacted Mr. Harris and noted that $31.00 was Arch’s final offer and if Watford did not accept before the end of the day, Arch would withdraw its proposal.


Mr. Levy and Mr. Morin subsequently reached an agreement in principle on a price of $31.10 per share with a closing condition that the value of Watford’s non-investment grade fixed income portfolio had not declined by more than $238 million, coupled with an ability for Watford to postpone the closing in order to allow the portfolio time to recover from any such decline. Thereafter, Arch proposed that Watford enter into an exclusivity agreement that would have prevented Watford from engaging with competing bidders while the parties negotiated a definitive agreement, but no such agreement was executed.


On October 4, 2020, Arch’s counsel, Cahill Gordon & Reindel LLP (“Cahill”) sent Watford’s counsel, Clifford Chance US LLP (“Clifford Chance”), a draft merger agreement. On October 6, 2020, lawyers from Cahill, Arch and Clifford Chance held a call to discuss the draft. On the call, the Clifford Chance lawyers explained that the draft merger agreement was problematic from Watford’s perspective for a variety of reasons including because (i) it contemplated that the acquirer would be a newly-formed entity to be owned by Arch and its co-investors, raising questions as to the viability of remedies in case of a default; (ii) it contained several “deal protection” provisions, including a “force the vote” provision that would prevent Watford from terminating the merger agreement to enter into an agreement for a transaction it deemed superior, a termination fee (or “break fee”) of 4.5% of transaction value, and a requirement for Watford to reimburse all of Arch’s transaction expenses (in an unlimited amount) if Watford’s shareholders voted against the merger; (iii) it required Watford to comply with operating covenants covering aspects of Watford’s business that are run by Arch under the services agreements; (iv) it required detailed representations on aspects of Watford’s business handled by Arch; and (v) some of the closing conditions proposed by Arch could allow Arch to not close under circumstances where Watford deemed such refusal inappropriate. Clifford Chance subsequently sent Cahill a revised draft of the merger agreement containing changes addressing these objections. On the call, representatives of Clifford Chance also said Watford expected Arch would commit to vote its Watford shares in favor of the transaction, and Clifford Chance subsequently sent a draft of a voting and support agreement to Cahill.


On October 5, 2020, Enstar delivered a letter addressed to the Board that said in part:


“Following-up on our non-binding indicative proposal dated September 30, 2020, for an all-cash acquisition of 100% of the ordinary share capital of Watford Holdings Ltd. (“Watford”) at $31.00 per share, and our subsequent conversations with Morgan Stanley, we are pleased to reconfirm our continued interest in a potential transaction. We believe that the appropriate next step would be to enter into a non-disclosure agreement to allow us to complete our due diligence in an expeditious manner.


On completion of due diligence, it is likely that we may be able to increase our offer.”


Enstar filed the letter with the SEC as an exhibit to a Schedule 13D amendment on the same day.


Arch, Watford and their respective advisors continued negotiating the terms of the merger agreement and the voting and support agreement through the week of October 5, 2020. On October 7, 2020, the Board met telephonically for a briefing on the status of negotiations and to discuss Enstar’s latest letter. The Board noted that Enstar had not increased its $31.00 per common share price, and that the suggestion in Enstar’s letter of a possible increase in price seemed non-committal and highly conditional, with no material changes in price or certainty of execution since their prior letter. Representatives of Clifford Chance participated in the meeting and reported that negotiations on the merger agreement and the voting and support agreement were proceeding well. The Board determined to continue to work toward a deal with Arch that gave sufficient flexibility to engage with Enstar later, should Enstar wish to do so. The Board noted that Arch and its advisors had indicated a willingness to eliminate many of the “deal protection” provisions contained in Arch’s initial draft of the merger agreement that would have limited this flexibility.


On October 8, 2020, the Board met telephonically to receive a further briefing on negotiations. Representatives of Clifford Chance participated in the meeting and reported that the issues it had previously raised with Arch’s proposal had been satisfactorily addressed, with a handful of items, including the size of the break fee, remaining to





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be resolved. Representatives of Morgan Stanley and Clifford Chance and the members of the Board then discussed certain reasons for the merger, including both positive and negative factors, that the members of the Board had considered and discussed at prior meetings. Representatives of Morgan Stanley made a presentation to the Board on the financial aspects of the transaction. Morgan Stanley rendered its oral opinion, subsequently confirmed in writing, by delivery of a written opinion dated October 8, 2020, to the effect that, as of such date, and based upon and subject to the various assumptions, procedures, matters, qualifications and limitations on the scope of the review undertaken by Morgan Stanley as set forth in the written opinion, the consideration to be received by the holders of common shares (other than Excluded Shares) pursuant to the Initial Merger Agreement was fair from a financial point of view to such holders. The Board also discussed that, due to provisions in Watford’s bye-laws and because of COVID-19 related travel restrictions, formal approval of the definitive merger agreement and the transactions contemplated by it would have to be taken by the three directors who were physically present in Bermuda, acting on their own behalf and as representatives of the other directors pursuant to authorizations granted by those other directors in accordance with the Company’s bye-laws and Bermuda law. The terms of the merger agreement and the voting and support agreement were finalized in accordance with the Board’s directions overnight.


On the morning of October 9, 2020, at a Board meeting held telephonically in Bermuda using the procedures and appointed representatives as described above, the Board approved the Initial Merger Agreement and the transaction contemplated thereby, including a merger in which the holders of Watford common shares would receive $31.10 per common share in cash and the Arch Voting and Support Agreement. After the Board meeting, the Company, Arch, Merger Sub and their respective affiliates entered into the Initial Merger Agreement and the Arch Voting and Support Agreement. Before market open in the U.S. on October 9, 2020, the Company issued a press release announcing it had entered into the Initial Merger Agreement and the Arch Voting and Support Agreement, and describing the $31.10 per common share consideration provided for in the Initial Merger Agreement.


On October 15, 2020, Enstar delivered a letter addressed to Watford’s directors which included the following statement: “Subject to satisfactory completion of diligence, Enstar is hereby providing a revised indicative, non-binding proposal to acquire 100% of the outstanding common shares of Watford at $34.50 per share, payable in all cash.” Enstar filed the letter with the SEC on the same day, as an exhibit to a Schedule 13D amendment.


On October 19, 2020 the Board, using the procedures and appointed representatives as described above, determined that Enstar’s $34.50 per common share proposal reasonably could be expected to lead to a “Superior Proposal” as defined in the Initial Merger Agreement and that, subject to entering into a suitable confidentiality agreement and complying with the terms of the Initial Merger Agreement, Watford should furnish non-public information to Enstar and discuss Enstar’s proposal with Enstar. Watford issued a press release reporting this development later the same day. Also on October 19, 2020, the Board appointed a transaction committee comprising all of the then-current members of the Board, other than the Arch Directors, and delegated to the transaction committee the authority to take any and all actions under or with respect to the Initial Merger Agreement. Later that day, Watford sent Enstar a proposed form of confidentiality agreement and, on October 24, 2020, Watford entered into a confidentiality agreement with Enstar. Watford subsequently provided Enstar access to non-public information about Watford and, at the Board’s direction, representatives of Morgan Stanley engaged with Enstar to seek more information about its proposal.


Between October 22 and October 26, 2020, representatives of Arch and representatives of Enstar had discussions, and Enstar indicated it would be willing to support an Arch proposal of $35.00 per common share.


On October 27, 2020, Arch advised Watford that Arch was willing to increase the Merger Consideration from $31.10 per common share in cash to $35.00 per common share in cash if Enstar would agree to vote its shares in favor of the revised deal. Arch advised that Enstar had indicated a willingness to consider such an arrangement, contingent on its being satisfied with the revised terms of the merger agreement. Cahill subsequently sent Clifford Chance a draft amendment to the Initial Merger Agreement and a draft voting and support agreement to be signed by Enstar.


At a telephonic meeting of Watford’s transaction committee held on October 28, 2020, Clifford Chance reported that the draft documents provided by Cahill provided for amendments to the “deal protection” provisions of the Initial Merger Agreement that would eliminate the ability of Watford’s Board (and the transaction committee) to (i) respond to unsolicited alternative proposals that appeared potentially to be superior, (ii) change the Board’s recommendation to shareholders in response to a superior proposal, and (iii) terminate the merger agreement to enter into an agreement for a superior proposal. The drafts also provided for an increase in the break fee payable under certain circumstances by Watford from 3.0% of the equity value implied by the transaction terms to 5.0%, and for





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payment by Watford of an expense reimbursement of up to $5.0 million if Watford’s shareholders voted against the Arch merger. The draft documents also reduced the size of the maximum permitted non-investment grade portfolio net investment loss that would be a closing condition from $238 million to $160 million, and removed Arch’s consent to executive compensation arrangements costing approximately $2.0 million and to certain junior employee compensation protections that were expressly permitted under the Initial Merger Agreement. The transaction committee directed management and its advisors to reject the non-price terms reflected in the draft documents and to propose instead an amendment to the Initial Merger Agreement in which the only changes would be an increase in the Merger Consideration from $31.10 per common share to $35.00 per common share and an increase in the break fee payable by Watford under certain circumstances from 3.0% of the equity value implied by the transaction terms to 3.5%.


Representatives of Clifford Chance conveyed the transaction committee’s position in two conference calls held on October 29, 2020 with representatives of Cahill. During the calls, in addition to discussing their respective clients’ positions, Cahill and Clifford Chance discussed the status of Watford’s discussions with Enstar. Cahill advised that Enstar had not yet reviewed the amendment containing the revised merger terms as proposed by Arch, and that Enstar’s review and approval of the revised deal terms agreed by Watford and Arch would be required prior to its execution of a voting and support agreement. At the direction of the Board, representatives of Morgan Stanley held separate discussions with representatives of Goldman Sachs, including regarding the closing condition tied to losses in Watford’s non-investment grade portfolio and Arch’s proposal to reduce the maximum permitted loss from $238 million to $160 million. The transaction committee received periodic email updates regarding the status and substance of these discussions.


On November 1, 2020, following a series of discussions between the respective representatives of Arch and Watford, Mr. Morin and Mr. Levy reached an agreement in principle under which Arch would agree to pay $35.00 per common share in cash; the ability of Watford’s Board to deal with unsolicited competing offers would remain unchanged from the Initial Merger Agreement except that the termination fee would be increased from 3.0% of the equity value implied by the transaction terms to 4.0%; the closing condition tied to the maximum permitted net investment losses in Watford’s non-investment grade portfolio would be reduced from $238 million to $208 million but Watford would be granted additional flexibility under the amended merger agreement to “de-risk” its non-investment grade portfolio; and Watford’s ability to make specified adjustments to executive and junior employee compensation arrangements as provided in the Initial Merger Agreement would remain unchanged. This understanding was subject to approval by Watford’s transaction committee (acting pursuant to authority delegated by the Board) and also was subject to Enstar’s willingness to agree to the Enstar Voting and Support Agreement (on which negotiations with Enstar were being led by Arch).


On November 1, 2020, the transaction committee met telephonically with its advisors to discuss the proposed amendment to the Initial Merger Agreement. Representatives of Morgan Stanley made a presentation to the Board on the financial aspects of the transaction and advised the Board that Morgan Stanley was prepared to deliver its opinion as to the fairness from a financial point of view of the terms of the proposed merger at a price per common share of $35.00. The transaction committee members discussed that, due to provisions in Watford’s bye-laws and because of COVID-19 related travel restrictions, formal approval of the proposed amendment to the Initial Merger Agreement and the transactions contemplated by it would have to be taken by the three directors (other than the Arch Directors) who were physically present in Bermuda, acting on their own behalf and as representatives of the other directors (other than the Arch Directors) pursuant to authorizations granted by those other directors in accordance with the Company’s bye-laws and Bermuda law. Morgan Stanley rendered its oral opinion, subsequently confirmed in writing by delivery of a written opinion dated November 1, 2020, and attached to this proxy statement as Annex D, to the effect that, as of such date, and based upon and subject to the various assumptions, procedures, matters, qualifications and limitations on the scope of the review undertaken by Morgan Stanley as set forth in the written opinion, the consideration to be received by the holders of the common shares (other than Excluded Shares) pursuant to the Merger Agreement was fair from a financial point of view to such holders. Thereafter, at a duly called transaction committee meeting held in Bermuda using the procedures described above at which a quorum of directors was present, the transaction committee (acting on behalf of the Board pursuant to authority delegated by the Board), after considering various factors described herein, adopted resolutions (i) determining that the revised Merger Consideration of $35.00 per common share constitutes fair value for each common share in accordance with the Bermuda Companies Act, (ii) determining that the continuation of each outstanding preference share as a preference share of the surviving company with the same dividend and other relative rights, preferences, limitations and restrictions as are now provided to the preference shares constitutes fair value for each preference share in accordance





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with the Bermuda Companies Act, (iii) determining that the terms of the Merger Agreement (as amended by Amendment No. 1) and the Statutory Merger Agreement and the transactions contemplated thereby, including the merger, are fair to and in the best interests of the Company and its shareholders, (iv) approving and declaring advisable the execution, delivery and performance of the Merger Agreement and the Statutory Merger Agreement and the consummation of the transactions contemplated thereby, including the merger, (v) subject to the right of the Board of Directors to change its recommendation in certain circumstances, recommending that the Company’s shareholders vote in favor of the Merger Proposal at a duly held meeting of such shareholders for such purpose and (vi) approving and authorizing the Enstar Voting and Support Agreement.


After being advised that Watford’s transaction committee had approved Amendment No. 1 and the Enstar Voting and Support Agreement, Arch furnished Enstar with a copy of Amendment No. 1 and the latest draft of the Enstar Voting and Support Agreement. Enstar subsequently advised that after reviewing Amendment No. 1 it was willing to sign the Enstar Voting and Support Agreement.


Before market open in the U.S. on November 2, 2020, the parties executed Amendment No. 1 and the Enstar Voting and Support Agreement, and Arch and Watford issued press releases announcing them. In addition, on November 2, 2020, Arch assigned its rights under the Merger Agreement to Holdco.


Separately, on or about November 2, 2020, each of Arch, Kelso and Warburg Pincus entered into an equity commitment letter dated November 2, 2020 with Holdco, pursuant to which Arch, Kelso and Warburg Pincus each agreed to fund equity contributions to Holdco on the closing date of the merger, in an aggregate amount sufficient to enable Holdco to pay the cash purchase price under the Merger Agreement. Watford was not involved in the negotiations of the equity commitment letters.





Purpose and Reasons of the Company for the Merger; Position of the Company as to Fairness of the Merger; Recommendation of the Board of Directors


Two members of our board of directors (the “Arch Directors”) were appointed to serve on our board by Arch. The Arch Directors did not participate in the Board’s deliberations relating to the merger agreement, the statutory merger agreement or any transaction contemplated by either agreement (including the merger), did not participate in the vote to approve the merger agreement, the statutory merger agreement or any transaction contemplated by either agreement (including the merger), and are not making any recommendation with respect to any proposal in this proxy statement. Accordingly, all references in this section to the “Board” or the “board of directors” or the “transaction committee” or to any action taken by or recommendation made by the “Board”, the “board of directors”, the “transaction committee” or any “directors” of the Company in connection with the merger and related transactions means the board of directors acting without the participation of the Arch Directors.




Watford’s Board concluded and believes, based on its consideration of the factors relating to the substantive and procedural fairness described below, that the Merger Agreement, the Statutory Merger Agreement and the transactions contemplated thereby, including the merger, are fair to, and in the best interests of, the Company. The Company’s purpose and reasons for undertaking the merger at this time are to enable holders of common shares to realize the value of their investment in the Company in cash at a favorable price.


Recommendation of our Board of Directors


The Board recommends that you vote “

FOR

” the Merger Proposal.


For purposes of Section 106(2)(b)(i) of the Bermuda Companies Act, the Board considers $35.00 in cash, without interest and less any applicable withholding taxes, to be fair value for each issued and outstanding common share. The Board also considers that the continuation of each issued and outstanding preference share as a preference share of the surviving company with the same dividend and other relative rights, preferences, limitations and restrictions as are now provided to the preference shares constitutes fair value for each preference share in accordance with the Bermuda Companies Act.


Watford’s Reasons for the Merger


On November 1, 2020, Watford’s transaction committee (acting on behalf of the Board pursuant to authority delegated by the Board), after considering various factors described herein, adopted resolutions at a meeting duly called at which a quorum of directors was present (i) determining that the Merger Consideration constitutes fair value for each common share in accordance with the Bermuda Companies Act, (ii) determining that the continuation of





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each outstanding preference share as a preference share of the surviving company with the same dividend and other relative rights, preferences, limitations and restrictions as are now provided to the preference shares constitutes fair value for each preference share in accordance with the Bermuda Companies Act, (iii) determining that the terms of the Merger Agreement and the Statutory Merger Agreement and the transactions contemplated thereby, including the merger, are fair to and in the best interests of the Company and its shareholders, (iv) approving and declaring advisable the execution, delivery and performance of the Merger Agreement and the Statutory Merger Agreement and the consummation of the transactions contemplated thereby, including the merger, and (v) subject to the right of the Board to change its recommendation in certain circumstances, recommending that the Company’s shareholders vote in favor of the Merger Proposal at a duly held meeting of such shareholders for such purpose.


In evaluating the Merger Agreement and the Statutory Merger Agreement and the transactions contemplated thereby, including the merger, the Board consulted with Watford’s senior management, outside counsel and independent financial advisors. In recommending that Watford’s shareholders vote their common shares in favor of the Merger Proposal, the Board also considered the following potentially positive factors, which are not intended to be exhaustive and are not presented in any relative order of importance:












The belief of the directors who participated in the Board’s deliberations, after a thorough review of, and based on the directors’ knowledge of, Watford’s current and historical financial condition, results of operations, prospects, business strategy, competitive position, industry trends, long-term strategic goals and opportunities, properties and assets, including the potential impact of those factors on the trading price of Watford common shares, and discussions with Watford’s senior management and outside financial and legal advisors, that the value to be provided to Watford’s shareholders pursuant to the Merger Agreement and the Statutory Merger Agreement is significantly more favorable to Watford’s shareholders than the potential value that might reasonably be expected to result from the alternatives considered by the directors, specifically remaining an independent public company, changing Watford’s business model or executing a “run-off” process.













The current and historical market prices of the Company’s common shares, including the fact that the Merger Consideration of $35.00 per common share constituted a premium of:













approximately 128.5% over the volume weighted average share price of the common shares during the 90 days ended September 8, 2020, the last trading day before rumors of Arch’s proposal to acquire Watford first appeared in the press;













approximately 95.9% over the closing share price on September 8, 2020, the last trading day before rumors of Arch’s proposal to acquire Watford first appeared in the press;













approximately 21.1% over the highest trading price of the Company’s common shares in the 52 weeks preceding September 8, 2020, the last trading day before rumors of Arch’s proposal to acquire Watford first appeared in the press; and













approximately 222.3% over the lowest trading price of the Company’s common shares in the 52 weeks preceding September 8, 2020, the last trading day before rumors of Arch’s proposal to acquire Watford first appeared in the press.



In its evaluation, the Board did not consider the relationship between the Merger Consideration of $35.00 per common share and the prices at which the Company had repurchased shares pursuant to its share repurchase programs, because those repurchases were made at a time when the Board generally considered the Company’s shares to be undervalued and, accordingly, the prices at which those repurchases were made were not considered a useful metric when evaluating the Merger Agreement. If the Board had considered this metric, it would have noted that the Merger Consideration of $35.00 per common share reflects a premium of approximately 21.3% over the highest average daily purchase price paid by the Company pursuant to its share repurchase programs during the 52 weeks preceding the date of the Merger Agreement.


In its evaluation, the Board considered the market price of its common shares to be the best indicator of the Company’s going concern value.












The fact that, prior to the announcement of Watford’s entry into the Merger Agreement, Watford common shares had never traded at a price higher than the Merger Consideration of $35.00 per common share.






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The fact that the recent trading prices of Watford common shares may have reflected market expectations of an announcement of a potential strategic transaction involving Watford, and that absent such announcement it is likely that the trading price of Watford common shares would decline materially.













The fact that the Board and Watford’s senior management, in coordination with Watford’s independent legal and financial advisors, carefully analyzed the strategic alternatives potentially available to Watford including the feasibility of those alternatives and the likely consequences of implementing those alternatives.













The potential risks to Watford of remaining as an independent public company, including risks and uncertainties relating to:













successfully implementing Watford’s business strategy in light of the likelihood of continued volatility in the financial markets and the resulting impacts on the future performance of Watford’s investment portfolio, and the recent underperformance of Watford’s underwriting portfolio relative to its peers and the potential for it to continue;













Watford’s substantial reliance on Arch and HPS; and













the “risk factors” set forth in Watford’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and other filings with the SEC.













The financial analyses of Morgan Stanley, financial advisor to Watford in connection with the merger, and the oral opinion rendered by Morgan Stanley to the Board, which was confirmed by delivery of a written opinion, dated November 2, 2020, to the effect that, as of that date and based on and subject to various assumptions made, procedures followed, matters considered and limitations and qualifications on the review undertaken by Morgan Stanley as set forth in its written opinion, the Merger Consideration was fair, from a financial point of view, to the holders of Company common shares (other than holders of Excluded Shares). For more information, see the section entitled “

Special Factors—Opinion of Morgan Stanley &


Co. LLC

” beginning on page [

35

].













The fact that the Merger Consideration per common share consists solely of cash, which will provide certainty of value and liquidity to Watford common shareholders.













The fact that the Merger Consideration of $35.00 per common share provided for in the Merger Agreement represents an increase of 12.5% from the $31.10 per common share cash consideration in the Initial Merger Agreement and 40% from Arch’s initial indicative bid of $25.00 per common share.













The fact that each issued and outstanding preference share will be continued as a preference share of the surviving company with the same dividend and other relative rights, preferences, limitations and restrictions as are now provided to the preference shares.













The fact that, in the opinion of the Board, the Merger Agreement was the product of extensive, arm’s-length negotiations; as evidenced by the fact that (i) the Arch Directors did not participate in any of the negotiations or the Board deliberations related to the merger; and (ii) as discussed in more detail above under “

—Background of the


Merger

”, the Company’s management and the Board repeatedly pressed Arch to raise its purchase price per common share throughout the negotiation process, even after Arch advised the Company that it had already provided its final offer, and the Board successfully made use of Enstar’s interest in acquiring Watford to extract a higher purchase price from Arch, which the Board was able to do only because it insisted, over Arch’s objection, that the Initial Merger Agreement the Company signed with Arch contained provisions allowing the Board to engage and negotiate with additional parties for an alternative transaction at a higher price.













Based on their review of Watford’s strategic alternatives, the exploration of those alternatives and related discussions and negotiations with Arch, all as overseen by the Board and undertaken by Watford’s management and its financial advisor, including that, as described above, the Merger Agreement was the product of extensive, arm’s-length negotiations, and taking into account the advice of the Company’s financial and legal advisors, the belief of the Board that the $35.00 per common share Merger Consideration was the highest price per common share that Arch was willing to pay, that the proposed transaction had a relatively high degree of certainty of consummation and that the terms and conditions of the Merger Agreement were the most favorable to Watford and its shareholders that Arch would be willing to agree to.






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The availability of appraisal rights to Watford’s shareholders who do not vote in favor of the Merger Proposal, which rights provide eligible shareholders with the opportunity to have the Bermuda Court determine the fair value of their shares.













The view of the Board that the value that would be received by Watford’s common shareholders in a liquidation transaction would be significantly lower compared to the Merger Consideration, coupled with the Board’s recognition that the value to be received by the common shareholders in a liquidation would be received over a period of years and likely in installments, and the actual aggregate amount that would be payable to the common shareholders in a liquidation was unknown, whereas the Merger Consideration will be payable in full at the closing of the transaction and is fixed at $35.00 per share.













The fact that after the announcement of a transaction with Arch at $31.10 per share, the only competing proposal received by the Board was Enstar’s proposal to pay $34.50 per common share and subsequently Enstar, which has a reputation as an experienced operator in the insurance industry, including in run-off transactions, declined to bid more than the $35.00 per common share price that Arch ultimately agreed to.













The view of the Board that, despite the termination fee payable to Holdco under certain circumstances, the terms of the Merger Agreement would be unlikely to deter any other third party from making an unsolicited superior proposal (other than Enstar, as result of its agreements under the Enstar Voting and Support Agreement), and the fact that Watford successfully negotiated with Arch for the right to terminate the Merger Agreement in order to enter into a new agreement for an alternative transaction that the Board determines to be a superior proposal, subject to certain conditions.













The other terms of the Merger Agreement, including:













The limited termination rights available to Holdco;













The obligation of each of Holdco and Arch to use its reasonable best efforts to take all actions and do all things necessary, proper or advisable to obtain applicable antitrust and other regulatory approvals, except that neither Holdco nor Arch is required to take any action that could result in a Burdensome Condition (as defined in the Merger Agreement);













The inclusion of provisions that permit the Board, under certain circumstances and subject to certain conditions, to withdraw, qualify or modify its recommendation that Watford’s shareholders approve and adopt the Merger Agreement; and













The other terms and conditions of the Merger Agreement, as discussed in the section entitled




The


Merger Agreement

” beginning on page [

71

], which the Board (other than the Arch Directors), after consulting with the Company’s legal advisor, considered to be reasonable.



The Board also considered a number of factors that are discussed below relating to the procedural safeguards that it believes were and are present to ensure the fairness of the merger. The Board believe these factors support its determinations and recommendations and provide assurance of the procedural fairness of the merger to the Company’s shareholders who are unaffiliated with Holdco and Arch:












the Merger Proposal must be approved by the affirmative votes of shares carrying not less than 50% of the total voting rights of all issued and outstanding common shares and preference shares, voting together as a single class, at the special general meeting;













the fact that the Arch Directors did not participate in any meetings of the Board or any board committee relating to the Board’s review of strategic alternatives after June 17, 2020 and did not participate in any of the Board’s or any board committee’s discussions or deliberations related to that review or in any of the Board’s or any board committee’s discussions or deliberations or negotiations related to Arch’s merger proposal and the negotiations leading to the execution of the Merger Agreement;













the Board held numerous meetings and met regularly to discuss and evaluate the strategic alternatives potentially available to Watford, as discussed in more detail in the section entitled “

Special


Factors—Background of the Merger

” beginning on page [

19

], and each member of the Board (other than the Arch Directors) was actively engaged in the process on a regular basis;






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the opinion, dated November 2, 2020, of Morgan Stanley as described above and as more fully described in the section entitled “

Special Factors—Opinion of Morgan Stanley & Co. LLC

” beginning on page [

35

]; and













the recognition by the Board that it had no obligation to approve or recommend the approval of the merger or any other transaction.



The Board also considered and balanced against the potentially positive factors a number of uncertainties, risks and other potentially negative factors in its deliberations concerning the merger and the other transactions contemplated by the Merger Agreement and the Statutory Merger Agreement, which are not intended to be exhaustive and are not presented in any relative order of importance:












The fact that the holders of the Company’s common shares (other than ARL) will have no ongoing equity participation in the Company following the merger, and that such common shareholders would forgo the opportunity to participate in the potential future earnings or growth of the Company, if any.













The fact that the Merger Consideration of $35.00 per common share represents a discount of approximately 2.8% to the closing price of the common shares on October 30, 2020, the last trading day before the Board’s approval of Amendment No. 1.













The fact that the Merger Consideration of $35.00 per common share represents a discount of approximately 20% to the Company’s book value per common share at September 30, 2020. In considering this point, the Board took into account that, since the Company's common shares had commenced trading on the Nasdaq Global Select Market, the common shares had never traded at a price above 80% of the Company's most recently publicly disclosed book value per common share. Further, on October 30, 2020, the last trading day before the Board’s approval of Amendment No. 1, the shares of the Company's total return insurance company peers, Third Point Re and Greenlight Capital Re, traded at discounts between approximately 54% to 56% compared to their respective book values per share at September 30, 2020. As a result, the Board viewed the discount of the Merger Consideration to the Company’s book value per share relative to the discounts of the current and historical market prices of the Company's common shares to the Company's book value per share, as well as the comparable market price to book value discounts of the Company's total return insurance company peers.













The fact that receipt of the all-cash Merger Consideration would be taxable, for U.S. federal income tax purposes, to Watford common shareholders that are subject to U.S. federal income taxation.













The fact that, under specified circumstances, Watford may be required to pay a termination fee, which is larger than the termination fee provided for in the Initial Merger Agreement, and to bear various expenses incurred by it, in the event the Merger Agreement is terminated and the effect this could have on Watford.













The fact that, while Watford expects the merger to be consummated if the Merger Proposal is approved by Watford’s shareholders, there can be no assurance that all conditions to the parties’ obligations to consummate the merger, including the receipt of regulatory approvals without the imposition of any Burdensome Condition, will be satisfied on a timely basis, or at all.













The significant costs involved in connection with entering into and completing the merger and the substantial time and effort of management required to consummate the merger, which could disrupt Watford’s business operations.













The fact that the announcement and pendency of the merger, or the failure to complete the merger, may cause substantial harm to Watford’s relationships with its employees (including making it more difficult to attract and retain key personnel and the possible loss of key management and other personnel), and its relationships with Arch and HPS (on whom Watford is substantially dependent).













The restrictions in the Merger Agreement on Watford’s ability to actively solicit competing bids to acquire it and to entertain other acquisition proposals unless certain conditions are satisfied and the requirement that, if the Board elects to terminate the Merger Agreement to accept a superior proposal, Watford will be required to pay a termination fee.






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The restrictions imposed under the Merger Agreement on Watford’s conduct of business before completion of the merger, which could delay or prevent Watford from undertaking business opportunities that may arise or taking other actions with respect to its operations during the pendency of the merger, whether or not the merger is completed.













The fact that, as a result of the Enstar Voting and Support Agreement, Enstar would be prohibited from submitting further proposals to acquire Watford common shares.













The fact that Arch’s obligation to consummate the merger is conditioned on the Non-Investment Grade Portfolio Loss (as such term is defined in the Merger Agreement) being less than $208 million.



The members of the Board were also aware of the fact that certain of Watford’s directors and executive officers may have interests in the merger that may be deemed to be different from, or in addition to, those of Watford’s shareholders. The members of the Board were made aware of and considered these interests; for more information about such interests, see below under the heading “

Special Factors—Interests of the Company’s Directors and


Executive Officers in the Merger

” beginning on page [

57

].


In addition, the Board also considered that:












The transaction committee did not structure the merger to require approval of at least a majority of unaffiliated security holders (i.e., shareholders other than Arch and its affiliates). In considering this point, the Board took into account the fact that Arch and its affiliates beneficially own an aggregate of approximately 12.8% of the outstanding common and preference shares and, accordingly, unaffiliated security holders own approximately 87.2% of the outstanding common and preference shares (which is more than five times the combined voting power of Arch, Kelso, Warburg Pincus and their respective affiliates). As noted above, Enstar has entered into an agreement with Arch and Watford pursuant to which Enstar agreed to vote its shares in support of the merger; however, Arch does not have a proxy to vote Enstar’s shares, and does not otherwise have or share the power to vote Enstar’s shares, and, accordingly, Watford does not consider Arch to have beneficial ownership of such shares.













The majority of the directors are independent and are not employees of Watford or Arch, but the Board did not hold a separate vote of the independent directors to approve the merger. In considering this point, the Board took into account that a majority of the members of the Board who voted to approve the merger and the Merger Agreement are not employees of the Company or Arch and are independent.













The independent directors of the Board, who constitute a majority of the Board, did not separately retain an unaffiliated representative to act solely on behalf of unaffiliated security holders for purposes of negotiating the terms of the merger or preparing a report concerning the fairness of the merger. In considering this point, the Board took into account the fact that the transaction committee, which included the independent directors of the Board as well as the Company’s CEO, who also serves as a director, engaged Morgan Stanley to advise it on the fairness of the transaction to the shareholders other than Arch and its affiliates.



After taking into account all of the factors set forth above, and others, the Board concluded that the potential benefits of the merger to Watford and its shareholders outweighed the risks, uncertainties, restrictions and potentially negative factors associated with the merger.


The Arch Directors did not participate in any of the above-described analyses and deliberations of the Board or the transaction committee.




The foregoing discussion of factors considered by Watford’s Board is not intended to be exhaustive, but summarizes the material factors considered by the members of the Board, including the substantive and procedural factors considered by those Board members as discussed above. In light of the variety of factors considered in connection with their evaluation of the merger, the Board did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching their determinations and recommendations. Moreover, each director who participated in these analyses and deliberations applied his or her own personal business judgment to the process and may have given different weight to different factors. The Board did not undertake to make any specific determination as to whether any factor, or any particular aspect of any factor, supported or did not support their ultimate determinations. The Board based its recommendations on the totality of the information presented, including thorough discussions with, and questioning of, Watford’s senior management,





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and outside financial advisor and counsel. This explanation of the reasoning of the Board and certain information presented in this section is forward-looking in nature and should be read in light of the factors set forth in “Cautionary Statement Concerning Forward-Looking Information” beginning on page [

66

].





Opinion of Morgan Stanley & Co. LLC


Watford retained Morgan Stanley to provide it with financial advisory services in connection with the merger. The Board selected Morgan Stanley based on its relevant experience, familiarity with the insurance industry including the reinsurance industry specifically, and reputation. Morgan Stanley rendered its oral opinion, which was subsequently confirmed by delivery of a written opinion, dated November 2, 2020, to the Board to the effect that, as of such date and based upon and subject to the assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of review undertaken by Morgan Stanley as set forth in its written opinion, the consideration to be received by the holders of common shares of Watford, other than shares held in treasury by Watford or held by Arch, Merger Sub, Watford or any of their respective direct or indirect wholly owned subsidiaries or as to which dissenters’ rights have been perfected (the “Excluded Shares”), pursuant to the Merger Agreement was fair from a financial point of view to such holders.


The Arch Directors did not participate in any of the Board or transaction committee meetings or deliberations discussed in this section.


The full text of the written opinion of Morgan Stanley, dated November 2, 2020, is attached to this proxy statement as

Annex D

, and is incorporated by reference into this proxy statement in its entirety. The opinion sets forth, among other things, the assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of the review undertaken by Morgan Stanley in rendering its opinion. The summary of the opinion of Morgan Stanley in this proxy statement is qualified in its entirety by reference to the full text of the opinion. You are encouraged to, and should, read Morgan Stanley’s opinion and this section summarizing Morgan Stanley’s opinion carefully and in their entirety. Morgan Stanley’s opinion was directed to the Board, in its capacity as such, and addresses only the fairness to the holders of common shares of Watford (other than Excluded Shares), from a financial point of view, of the consideration to be received by such holders pursuant to the Merger Agreement, as of the date of the opinion, and does not address any other aspects or implications of the merger. Morgan Stanley expressed no opinion or recommendation as to how the shareholders of Watford should vote at the shareholders meeting to be held in connection with the merger. Morgan Stanley’s opinion was not intended to, and does not, constitute advice or a recommendation to any shareholder as to how to vote at any shareholders meeting to be held in connection with the merger or whether to take any other action with respect to the merger.


The reports, opinions or appraisals referenced in this section will be made available for inspection and copying at the principal executive offices of Watford during its regular business hours by any interested equity security holder of Watford or representative who has been so designated in writing.


In connection with rendering its opinion, Morgan Stanley, among other things:












reviewed certain publicly available financial statements and other business and financial information of Watford;













reviewed certain internal financial statements and other financial and operating data concerning Watford;













reviewed certain financial projections prepared by the management of Watford and approved by the Board, including both on a standalone basis and under a run-off scenario;













discussed the past and current operations and financial condition and the prospects of Watford with senior executives of Watford;













reviewed the reported prices and trading activity for the common shares of Watford;













compared the financial performance of Watford and the prices and trading activity of the common shares of Watford with that of certain other publicly-traded companies comparable with Watford, and their securities;













reviewed the financial terms, to the extent publicly available, of certain comparable acquisition transactions;






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participated in certain discussions and negotiations among representatives of Watford and Arch and their financial and legal advisors;













reviewed the Merger Agreement and a draft, dated October 28, 2020 of the Enstar Voting and Support Agreement, and certain related documents; and













performed such other analyses, reviewed such other information and considered such other factors as Morgan Stanley deemed appropriate.



In arriving at its opinion, Morgan Stanley assumed and relied upon, without independent verification, the accuracy and completeness of the information that was publicly available or supplied or otherwise made available to it by Watford, and which formed a substantial basis for its opinion. With respect to the financial projections of Watford on a standalone basis, Morgan Stanley assumed that they had been reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of Watford of the future financial performance of Watford if Watford were to continue on a standalone basis. With respect to the financial projections of Watford under a run-off scenario, Morgan Stanley assumed that they had been reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of Watford of the future financial performance of Watford under a run-off scenario. In addition, Morgan Stanley assumed that the merger will be consummated in accordance with the terms set forth in the Merger Agreement without any waiver, amendment or delay of any terms or conditions, including, among other things, that the definitive Merger Agreement would not differ in any material respect from the draft thereof furnished to Morgan Stanley. Morgan Stanley assumed that in connection with the receipt of all the necessary governmental, regulatory or other approvals and consents required for the proposed merger, no delays, limitations, conditions or restrictions will be imposed that would have a material adverse effect on the contemplated benefits expected to be derived in the proposed merger. Morgan Stanley is not a legal, tax, regulatory or actuarial advisor. Morgan Stanley is a financial advisor only and relied upon, without independent verification, the assessment of Watford and its legal, tax, regulatory or actuarial advisors with respect to legal, tax, regulatory or actuarial matters. Morgan Stanley expressed no opinion with respect to the fairness of the amount or nature of the compensation to any of Watford’s officers, directors or employees, or any class of such persons, relative to the consideration to be received by the holders of common shares of Watford in the merger. Morgan Stanley expressed no opinion with respect to the treatment of Watford’s 8½% Cumulative Redeemable Preference Shares in the merger.


Morgan Stanley did not make any independent valuation or appraisal of the assets or liabilities of Watford, nor was it furnished with any such valuations or appraisals. Morgan Stanley’s opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to Morgan Stanley as of, October 31, 2020. Events occurring after such date may affect Morgan Stanley’s opinion and the assumptions used in preparing it, and Morgan Stanley did not assume any obligation to update, revise or reaffirm its opinion. In arriving at its opinion, Morgan Stanley was not authorized to solicit, and did not solicit, interest from any party with respect to the acquisition, business combination or other extraordinary transaction, involving Watford, nor did Morgan Stanley negotiate with any of the parties, other than Arch and Enstar, which expressed interest to Morgan Stanley in the possible acquisition of Watford or certain of its constituent businesses.


Summary of Financial Analyses


The following is a brief summary of the material financial analyses performed by Morgan Stanley in connection with the preparation of its opinion to the Board. The following summary is not a complete description of Morgan Stanley’s opinion or the financial analyses performed and factors considered by Morgan Stanley in connection with its opinion, nor does the order of analyses described represent the relative importance or weight given to those analyses. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before October 30, 2020 (the last trading day immediately preceding the November 1, 2020 presentation by Morgan Stanley to the Board), and is not necessarily indicative of current market conditions.

Some of the summaries of financial analyses below include information presented in tabular


format. In order to fully understand the financial analyses used by Morgan Stanley, the tables must be read


together with the text of each summary. The tables alone do not constitute a complete description of the


financial analyses. The analyses listed in the tables and described below must be considered as a whole;


considering any portion of such analyses and of the factors considered, without considering all analyses and


factors, could create a misleading or incomplete view of the process underlying Morgan Stanley’s opinion.






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In performing the financial analysis summarized below and arriving at its opinion, Morgan Stanley used and relied upon certain financial projections provided by Watford’s management and approved by the Board and referred to in this proxy statement as the “Management Projections,” and certain financial projections based on Wall Street research reports. For more information regarding the Management Projections, see “—

Projected Financial


Information

” below.


Historical Trading Range Analysis


Morgan Stanley reviewed the historical trading range of Watford common shares on the Nasdaq Global Select Market for the 52-week period ending September 8, 2020 (the last trading day prior to the date on which information regarding Arch’s proposal became publicly known) and noted that, during such period, the maximum trading price per common share was $28.90 and the minimum trading price per common share was $10.86. Morgan Stanley also noted that with respect to trading of Watford common shares on the Nasdaq Global Select Market, the volume weighted average price per common share for the three-month period ending September 8, 2020 was $15.31 and the closing price per common share on September 8, 2020 was $17.87.


Comparable Company Analysis


Morgan Stanley performed a comparable company analysis, which attempts to provide an implied value of a company by comparing it to similar companies that are publicly traded.


Morgan Stanley reviewed and compared, using publicly available information, certain current and historical financial information for Watford with corresponding current and historical financial information, ratios and public market multiples for certain total return reinsurance companies selected based on Morgan Stanley’s professional judgment and experience (we refer to these companies as the comparable companies). These companies were the following:


Total Return Reinsurers:












Third Point Reinsurance Ltd.













Greenlight Capital Re, Ltd.



For each of the comparable companies, Morgan Stanley calculated (i) the ratio of such company’s price per share of common equity divided by the tangible book value of such company’s common equity (“P/TBV”), (ii) the ratio of such company’s price per share of common equity divided by the book value of such company’s common equity (“P/BV”) and (iii) the ratio of such company’s price per share of common equity divided by the 2021 estimated earnings per share (utilizing publicly available estimates of earnings prepared by equity research analysts available as of October 30, 2020) (“P/2021E EPS”), in each case using market data as of October 30, 2020. The results of this analysis are summarized as follows:



































P/TBV







P/BV







P/2021E EPS



Mean









0.56x







0.56x







5.6x



Based on the analysis of the relevant metrics for each of the comparable companies, Morgan Stanley selected a representative range of financial multiples of the comparable companies and applied this range of multiples to the relevant Watford financial statistic. Morgan Stanley determined as a result of this analysis that the reference ranges that it would use in its analysis were approximately:












0.40x-0.60x for the P/TBV ratio, which indicates an implied per share valuation range of approximately $17.25 to $25.75 per common share;













0.40x-0.60x for the P/BV ratio, which indicates an implied per share valuation range of approximately $17.25 to $26.00 per common share; and













4.0x-7.0x for the P/2021E EPS ratio, which indicates an implied per share valuation range of approximately $15.75 to $27.50 per common share.



In each case, the implied per share valuation range for the common shares was compared to the closing price per common share of $17.87 on September 8, 2020, the consideration under the Initial Merger Agreement of $31.10 per common share and the Merger Consideration of $35.00 per common share.





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No company included in the comparable company analysis is identical to Watford. In evaluating comparable companies, Morgan Stanley made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, which are beyond the control of Watford. These include, among other things, the impact of competition on the business of Watford and the industry generally, industry growth, and the absence of any adverse material change in the financial condition and prospects of Watford and the industry, and in the financial markets in general. Mathematical analysis (such as determining the mean) is not, in itself, a meaningful method of using comparable company data.


Dividend Discount Analysis


Based on the Management Projections, Morgan Stanley performed a dividend discount analysis to calculate a range of implied present values of the distributable cash flows that Watford was forecasted to have the capacity to distribute during the period from June 30, 2020 through December 31, 2025 and a terminal value both on a standalone basis and in a run-off scenario.


In performing its analysis, Morgan Stanley estimated a cost of equity of 9.0% to 11.0% based on the Management Projections, which it used as the discount rate. Morgan Stanley calculated the terminal value for the common shares on a standalone basis by applying P/BV multiples of 0.4x to 0.6x, derived by Watford’s unaffected P/BV multiples based on the Management Projections as well as comparable company P/BV multiples. Morgan Stanley calculated the terminal value for the common shares in a run-off scenario by applying P/BV multiples from 0.7x to 0.9x, based upon the precedent P&C run-off transaction analysis. This analysis resulted in an implied per share equity value range of the common shares on a standalone basis of $27.50 to $35.00 per common share and in a run-off scenario of $27.25 to $30.25 per common share, in each case as compared to the closing price per common share of $17.87 on September 8, 2020, the consideration under the Initial Merger Agreement of $31.10 per common share and the Merger Consideration of $35.00 per common share.


Premiums Paid Analysis


Using publicly available information, Morgan Stanley reviewed the 25-year average of the percentage of premiums paid over unaffected stock price for announced all-cash bids for control of U.S. public targets with an aggregate value of $100 million or more (excluding terminated transactions, employee stock option plans, self-tenders, spin-offs, share repurchases, minority interest transactions, exchange offers, recapitalizations and restructurings) between January 1, 1996 and June 30, 2020, based on the annual mean percentage premiums paid during such period. The annual amount of mean percentage premiums paid over unaffected stock price during such period were calculated based on the target’s stock price as of four weeks prior to the earliest of the deal announcement, announcement of a competing bid and market rumors. Based on the results of this analysis and its professional judgment, Morgan Stanley applied a premium range of 20.0% to 40.0% to Watford’s unaffected share price of $17.87 per common share on September 8, 2020, which indicates an implied per share valuation range of $21.50 to $25.00 per common share.


Precedent Transactions


Morgan Stanley performed a precedent transactions analysis, which is designed to imply a value of a company based on publicly available financial terms and premia of selected transactions. Morgan Stanley compared publicly available statistics for five property and casualty insurance (“P&C”) run-off transactions that were announced since May 30, 2008. The following is a list of the transactions reviewed:















































































Selected Insurance Run-Off Transactions



Announcement Date







(Target/Acquiror)







P/TBV







P/BV



7/26/2016







Downloads Liability & HFPI/Catalina







0.83x







0.83x



6/2/2013







American Safety/Fairfax







0.95x







0.89x



8/30/2012







Flagstone/Validus Holdings







0.78x







0.74x



8/27/2012







SeaBright/Enstar Group







0.72x







0.71x



5/30/2008







Quanta/Catalina







0.85x







0.82x



For each of the precedent run-off transactions, Morgan Stanley calculated (i) the ratio of price to tangible book value and (ii) the ratio of price to book value. Based on its review of the financial terms of the precedent run-off transactions and its professional judgment, Morgan Stanley selected a representative range of financial multiples of





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the precedent run-off transactions and applied this range of multiples to the relevant Watford financial statistic. Morgan Stanley determined as a result of this analysis that the reference ranges that it would use in its analysis were approximately:












0.70x-1.0x for the P/TBV ratio, which indicates an implied per share valuation range of $30.00 to $43.00 per common share; and













0.70x-0.90x for the P/BV ratio, which indicates an implied per share valuation range of $30.25 to $39.00 per common share.



In each case this was compared to the closing price per common share of $17.87 on September 8, 2020, the consideration under the Initial Merger Agreement of $31.10 per common share and the Merger Consideration of $35.00 per common share.


No company or transaction utilized in the precedent transactions analysis is identical to Watford or the merger. In evaluating the precedent transactions, Morgan Stanley made numerous assumptions with respect to industry performance, general business, regulatory, economic, market and financial conditions and other matters, many of which are beyond our control. These include, among other things, the impact of competition on Watford’s business and the industry generally, industry growth, and the absence of any adverse material change in the financial condition and prospects of Watford and the industry, and in the financial markets in general, which could affect the public trading value of the companies and the aggregate value and equity value of the transactions to which they are being compared. The fact that points in the range of implied present value per share of Watford derived from the valuation of precedent transactions were less than or greater than the consideration is not necessarily dispositive in connection with Morgan Stanley’s analysis of the consideration for the merger, but is one of many factors Morgan Stanley considered.


Preliminary Presentations and October 8, 2020 Presentation and October 8, 2020 Opinion by Morgan Stanley


In addition to its November 2, 2020 opinion and presentation to the Board and the underlying financial analyses performed in relation thereto, Morgan Stanley also delivered preliminary presentation materials to the Board on August 14, 2020, August 19, 2020, August 24, 2020, August 28, 2020, September 4, 2020, September 16, 2020, September 20, 2020, September 23, 2020 and September 27, 2020 (the “Preliminary Presentation Materials”) and presentation materials, dated as of October 8, 2020 (the “October 8 Presentation Materials”), provided in connection with the delivery of Morgan Stanley’s October 8, 2020 opinion (the “October 8 Opinion”). The preliminary financial considerations and other information in the Preliminary Presentation Materials were based on information and data that was available as of the dates of the respective presentations. Morgan Stanley also continued to refine various aspects of its financial analyses. Accordingly, the results and other information presented in the Preliminary Presentation Materials differ from the November 1, 2020 financial analyses.


The Preliminary Presentation Materials were for discussion purposes only and did not present any findings or make any recommendations or constitute an opinion of Morgan Stanley with respect to the fairness of the Merger Consideration or otherwise. The financial analyses performed by Morgan Stanley in relation to its opinion dated November 2, 2020 superseded all analyses and information presented in the Preliminary Presentation Materials.


The October 8 Presentation Materials contained material financial analyses performed by Morgan Stanley in connection with the preparation of its October 8 Opinion that were substantially similar to the material financial analyses that were performed in connection with the preparation and delivery of Morgan Stanley’s opinion to the Board on November 2, 2020, as described above under “Opinion of Morgan Stanley—Summary of Financial Analyses,” except that the October 8 Presentation Materials and the October 8 Opinion were based on information and data that was available as of such date of such presentation.


General


In connection with the review of the merger by the Board, Morgan Stanley performed a variety of financial and comparative analyses for purposes of rendering its opinion. The preparation of a financial opinion is a complex process and is not necessarily susceptible to a partial analysis or summary description. In arriving at its opinion, Morgan Stanley considered the results of all of its analyses as a whole and did not attribute any particular weight to any analysis or factor it considered. Morgan Stanley believes that selecting any portion of its analyses, without considering all analyses as a whole, would create an incomplete view of the process underlying its analyses and opinion. In addition, Morgan Stanley may have given various analyses and factors more or less weight than other





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analyses and factors, and may have deemed various assumptions more or less probable than other assumptions. As a result, the ranges of valuations resulting from any particular analysis described above should not be taken to be Morgan Stanley’s view of the actual value of Watford. In performing its analyses, Morgan Stanley made numerous assumptions with respect to industry performance, general business, regulatory, economic, market and financial conditions and other matters, many of which are beyond Watford’s control. These include, among other things, the impact of competition on Watford’s business and the industry generally, industry growth, and the absence of any adverse material change in the financial condition and prospects of Watford and the industry, and in the financial markets in general. Any estimates contained in Morgan Stanley’s analyses are not necessarily indicative of future results or actual values, which may be significantly more or less favorable than those suggested by such estimates.


Morgan Stanley conducted the analyses described above solely as part of its analysis of the fairness from a financial point of view to the holders of common shares of Watford (other than Excluded Shares) of the consideration to be received by such holders pursuant to the Merger Agreement and in connection with the delivery of its opinion to the Board. These analyses do not purport to be appraisals or to reflect the prices at which the common shares might actually trade. The consideration to be paid by Arch pursuant to the Merger Agreement was determined through negotiations on an arms-length basis between the Board and Arch and was approved by the Board. Morgan Stanley provided advice to the Board during these negotiations but did not, however, recommend any specific consideration to the Board, nor did Morgan Stanley opine that any specific consideration to be received by shareholders constituted the only appropriate consideration for the merger. Morgan Stanley’s opinion and its presentation to the Board was one of many factors taken into consideration by the Board in deciding to approve the Merger Agreement and the transactions contemplated thereby. Consequently, the analyses as described above should not be viewed as determinative of the recommendation of the Board with respect to the consideration to be received by shareholders pursuant to the Merger Agreement or of whether the Board would have been willing to agree to a different form or amount of consideration. Morgan Stanley’s opinion was approved by a committee of Morgan Stanley investment banking and other professionals in accordance with Morgan Stanley’s customary practice.


Morgan Stanley’s opinion was not intended to, and does not, constitute advice or a recommendation to any shareholder of Watford as to how to vote in connection with the merger or whether to take any other action with respect to the merger. Morgan Stanley’s opinion did not address the relative merits of the merger as compared to any other alternative business transaction, or other alternatives, or whether or not such alternatives could be achieved or are available.


The Board retained Morgan Stanley based on its relevant experience, familiarity with the insurance industry including the reinsurance industry specifically, and reputation. Morgan Stanley is a global financial services firm engaged in the securities, investment management and individual wealth management businesses. Its securities business is engaged in securities underwriting, trading and brokerage activities, foreign exchange, commodities and derivatives trading and prime brokerage, as well as providing investment banking, financing and financial advisory services. Morgan Stanley and its affiliates, directors and officers may at any time invest on a principal basis or manage funds that invest, hold long or short positions and finance positions and may trade or otherwise structure and effect transactions, for their own account or the accounts of its customers, in debt or equity securities or loans of Watford, Arch and their respective affiliates, or any other company, or any currency or commodity, that may be involved in the merger, or any related derivative instrument.


Under the terms of its engagement letter, Morgan Stanley provided the Board with financial advisory services and a fairness opinion, described in this section and attached to this proxy statement as Annex D, in connection with the merger, and Watford has agreed to pay Morgan Stanley a fee of approximately $7 million for its services, $4.5 million of which is contingent upon the closing of the merger and $2.5 million of which was payable upon rendering its opinion. Watford has also agreed to reimburse Morgan Stanley for its reasonable and documented expenses, including reasonable fees of outside counsel and other professional advisors, incurred in connection with its engagement, up to an amount equal to $150,000. In addition, Watford has agreed to indemnify Morgan Stanley and its affiliates, their respective directors, officers, agents and employees and each person, if any, controlling Morgan Stanley or any of its affiliates against certain liabilities and expenses, including certain liabilities under the U.S. federal securities laws, relating to or arising out of Morgan Stanley’s engagement.


In the two years prior to the date of its opinion, Morgan Stanley and its affiliates have provided financing services to Watford and its affiliates and have received aggregate fees of less than $3 million from Watford and its affiliates in connection with such services. In the two years prior to the date of its opinion, Morgan Stanley and its affiliates have not been engaged on any financial advisory or financing assignments for Arch and have not received





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any fees for such services from Arch during this time. Morgan Stanley and its affiliates may seek to provide financial advisory and financing services to Arch and its affiliates in the future and would expect to receive fees for the rendering of these services. In addition, a Managing Director of Morgan Stanley, who was a member of the Morgan Stanley deal team advising Watford in connection with the transaction, is a member of the Morgan Stanley coverage team for Arch.





Projected Financial Information


The Company does not as a matter of course make public financial projections as to future revenues, earnings or other results given, among other reasons, the uncertainty, unpredictability and subjectivity of the underlying assumptions and estimates. However, in connection with their consideration of the merger, certain forward-looking financial information prepared by the Company’s management and approved by the Board was provided to Morgan Stanley. This financial information was prepared on the basis of Company pursuing two hypothetical strategies: (1) the “stay the course” strategy, without modifications to the Company’s business model or the Company’s agreements with Arch and HPS, and (ii) the “run-off” strategy, with the Company ceasing to write new insurance business. The Company has included financial projections in this proxy statement based on this financial information to give the Company’s shareholders access to certain nonpublic information considered by the Board and Morgan Stanley for purposes of considering and evaluating the merger. At the Board’s direction, Morgan Stanley relied on the financial projections prepared by Company management in performing its financial analyses and rendering its opinion. These financial projections are not being included in this proxy statement to influence the decision of the Company’s shareholders whether to vote for or against the Merger Proposal and should not be regarded as a reliable prediction of the Company’s future results under either the stay the course or the run-off strategy.


The financial projections are necessarily subjective in many respects. Although presented with numerical specificity, the financial projections reflect and are based on numerous assumptions and estimates with respect to underwriting performance and loss experience, investment returns, financial strength and credit ratings, insurance and reinsurance industry conditions, general business, economic, political, market and financial conditions, competitive uncertainties, the impact of the COVID-19 global pandemic, and other matters, all of which are difficult to predict and beyond the control of the Company. For example, the financial projections assume a favorable resolution of A.M. Best’s review of the Company’s ratings, that the Company will achieve certain underwriting portfolio growth and improved combined ratios, continued hardening in the insurance and reinsurance markets, no further worsening of the macroeconomic environment from the COVID 19 pandemic, and no changes to the Company’s agreements with Arch. Further, the Company’s operating results under either scenario addressed in the projections would be dependent on Arch (in its capacity as the manager of Watford’s insurance and reinsurance underwriting operations and part of Watford’s investment grade portfolio) and HPS (in its capacity as the manager of Watford’s non-investment grade portfolio and part of Watford’s investment grade portfolio). The Company has little ability to control how the respective underwriting and investment portfolios constructed on behalf of Watford by Arch and HPS will ultimately perform and the Company’s projections of how they would perform over the time periods and under the scenarios covered by the projections necessarily are speculative. As a result, there can be no assurance that the Company’s financial results would conform to the results shown in the financial projections and there is a significant likelihood that the Company’s actual results over the time periods and under the scenarios covered by the projections would be materially different. The financial projections are forward-looking statements and should be read with caution. See “

Cautionary Statement Concerning Forward-Looking Information

” beginning on page [

66

]. The financial projections cover multiple years and such projections by their nature become less reliable with each successive year.


The financial projections were prepared by the Company’s management to assist the Board in evaluating the merger and not with a view toward public disclosure or toward complying with U.S. generally accepted accounting principles, the published guidelines of the SEC regarding projections or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of financial projections. The financial projections do not take into account any circumstances or events occurring after the date they were prepared. The financial projections should be evaluated, if at all, in conjunction with the historical financial statements and other information regarding the Company contained in the Company’s public filings with the SEC.


The projected financial information included in this document has been prepared by, and is the responsibility of, the Company’s management. PricewaterhouseCoopers Ltd. has not audited, reviewed, examined, compiled nor applied agreed-upon procedures with respect to the accompanying projected financial information and, accordingly,





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PricewaterhouseCoopers Ltd. does not express an opinion or any other form of assurance with respect thereto. The PricewaterhouseCoopers Ltd. report incorporated by reference in this document relates to the Company’s previously issued financial statements. It does not extend to the projected financial information and should not be read to do so.


Readers of this proxy statement are cautioned not to place undue reliance on the financial projections set forth below. No one has made or makes any representation to any shareholder regarding the information included in these financial projections.


The financial projections do not take into account any circumstances or events occurring after the date they were prepared, including the transactions contemplated by the Merger Agreement. Further, the financial projections do not take into account the effect of any failure of the merger to occur and should not be viewed as accurate or continuing in that context.

Except as may be required by applicable securities laws, the Company does not intend to




update, or otherwise revise, the financial projections or the specific portions presented to reflect circumstances




existing after the date when made or to reflect the occurrence of future events, even in the event that any or




all of the assumptions are shown to be in error.



For the foregoing reasons, as well as the bases and assumptions on which the financial projections were compiled, the inclusion of specific portions of the financial projections in this proxy statement should not be regarded as an indication that such projections are an accurate prediction of future events, and they should not be relied on as such.


The following is a summary of the financial projections prepared by the Company’s management for the Board and Morgan Stanley in respect of each of the stay the course and the run-off strategies and relied upon, at the Board’s direction, by Morgan Stanley in performing its financial analyses and rendering its opinion.


Financial Projections (Stay the Course)




($ in millions)




























































































































































































































































































2020E







2021E







2022E







2023E







2024E







2025E



Statement of Operations Data:















































Net Premiums Earned










642









676









721









672









675









680




Net Investment Income










50









100









103









105









107









108




Total Revenues










695









777









826









778









782









788




Net Income to Common Shareholders










19









78









99









96









99









102




Distributions to Common Shareholders




















114









72









86









94









99

















































Balance Sheet Data:















































Total Assets









3,618







3,769







3,902







3,987







4,037







4,080



Total Liabilities









2,528







2,715







2,821







2,896







2,942







2,982



Contingently Redeemable Preference Shares










52









52









52









52









52









52




Total Shareholders’ Equity










874









839









866









876









881









884




Financial Projections (Run-Off)




($ in millions)



































































































































































































































2020E







2021E







2022E







2023E







2024E







2025E







2026E







2027E



Statement of Operations Data:





























































Net Premiums Earned









642







443







127








19









4




























Net Investment Income










49









28









22









19









14









9









7









5




Total Revenues









693







474







150








39









18









9









7









5




Net Income to Common Shareholders




















(10)









(11)








(15)








(13)









(6)









(5)









(5)




Distributions to Common Shareholders



















265



























266







62







44







29

































































42



















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2020E







2021E







2022E







2023E







2024E







2025E







2026E







2027E



Balance Sheet Data:





























































Total Assets









3,068







2,365







2,078







1,763







1,073







824







642







516



Total Liabilities









2,143







1,766







1,491







1,191








780








599







467







375



Contingently Redeemable Preference Shares










52










































































Total Shareholders’ Equity










872









599









587









572









293








225







175







141



The actual results of the year 2020 and subsequent periods may differ materially from those presented above.





Purposes and Reasons of the Purchaser Filing Persons for the Merger


Under the SEC’s rules governing “going-private” transactions, including Rule 13e-3 under the Exchange Act, each of (i) Arch Capital Group Ltd. (“ACGL”), Arch Reinsurance Ltd. (“ARL”), Gulf Reinsurance Limited., Greysbridge Holdings Ltd. (“Holdco”), Greysbridge Ltd., Nicolas Papadopoulo and Maamoun Rajeh (collectively, the “Arch Filing Persons”), (ii) Kelso Investment Associates X, L.P., KEP X, LLC, and KSN Fund X, L.P. (collectively, the “Kelso Filing Persons”), and (iii) Warburg Pincus (Callisto) Global Growth (Cayman), L.P., Warburg Pincus (Europa) Global Growth (Cayman), L.P., Warburg Pincus Global Growth-B (Cayman), L.P., Warburg Pincus Global Growth-E (Cayman), L.P., Warburg Pincus Global Growth Partners (Cayman), L.P., WP Global Growth Partners (Cayman), L.P., Warburg Pincus Financial Sector (Cayman), L.P., Warburg Pincus Financial Sector-D (Cayman), L.P., Warburg Pincus Financial Sector Partners (Cayman), L.P. (collectively, the “Warburg Pincus Entities”) and WP Windstar Investments Ltd (together with the Warburg Pincus Entities, the “Warburg Pincus Filing Persons” and, together with the Arch Filing Persons and the Kelso Filing Persons, the “Purchaser Filing Persons”) is an “affiliate” of Watford and is required because of its affiliate status to disclose among other things its purpose for the merger, its reasons for structuring the transaction as proposed and any alternative structure that it considered, and its reasons for pursuing the merger at this time. Each of the Purchaser Filing Persons is making the statements included in this part of the proxy statement solely for the purpose of complying with the requirements of Rule 13e-3 and other rules under the Exchange Act. None of the Purchaser Filing Persons is making any recommendation to any shareholder of Watford as to how that shareholder should vote on the Merger Proposal or any other proposal considered at the special general meeting, and the Purchaser Filing Persons’ views as described in this part of the proxy statement should not be so construed as such a recommendation.


For the Purchaser Filing Persons, the purpose of the merger is to enable Holdco to acquire all of the common shares of Watford so that Holdco can operate Watford as a privately held company while retaining access to Watford’s underwriting platform and its licenses in Bermuda, the United States and Europe. When the Equity Financing and the merger are completed, all of Watford’s common shares will be owned by Holdco and Holdco will be owned 40% by ARL, 30% by the Kelso Filing Persons and 30% by the Warburg Pincus Filing Persons.


The Purchaser Filing Persons determined that structuring the transaction as a merger is efficient and appropriate because (i) it will enable Holdco to acquire all of the outstanding common shares that it does not already own, (ii) it allows the common shareholders of Watford (other than ARL) to receive cash in the amount of $35.00 per common share and (iii) the structure is consistent with recent precedent transactions involving publicly traded companies organized under Bermuda law. Because the transaction structure is consistent with the objectives of the Purchaser Filing Persons and with market practice, the Purchaser Filing Persons did not pursue or propose an alternative transaction structure.


The Purchaser Filing Persons decided to pursue the merger at this time due to (i) the generally unfavorable market conditions for alternative/total return reinsurers resulting in an undervalued stock price, and (ii) the fact that A.M. Best’s placing Watford under review with negative implications as a result of the volatility of Watford’s non-investment grade assets made insurance and reinsurance underwriting activities on behalf of Watford more challenging. Holdco will benefit from any future earnings and growth of Watford after the merger, and will bear the risk of its investment in Watford. Watford’s unaffiliated common shareholders will not benefit from any future earnings and growth of Watford after the merger, and they will no longer bear the risk of investment in Watford. The unaffiliated common shareholders’ receipt of cash in exchange for their common shares pursuant to the merger generally will be a taxable transaction for U.S. federal income tax purposes to the unaffiliated common shareholders that are subject to U.S. federal income taxation. See “

Special Factors—


Certain


U.S. Federal Income Tax


Consequences of the Merger

”.





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Position of the Purchaser Filing Persons as to Fairness of the Merger


Under the SEC’s rules governing “going-private” transactions, including Rule 13e-3 under the Exchange Act, the Purchaser Filing Persons are required to provide certain information regarding their position as to the substantive and procedural fairness of the merger to the unaffiliated shareholders of Watford, as described in Rule 13e-3 under the Exchange Act. The Purchaser Filing Persons are making the statements included in this section solely for the purposes of complying with such requirements. The views of the Purchaser Filing Persons as to the fairness of the merger should not be construed as a recommendation to any shareholder of Watford as to how that shareholder should vote on the Merger Proposal or any other proposal considered at the special general meeting.


The Purchaser Filing Persons did not participate in the deliberations of the Board or the transaction committee regarding, and did not receive advice from the Board’s or transaction committee’s legal or financial advisors as to, the fairness of the merger. Although Goldman Sachs generally acted as financial advisor to Arch and provided certain financial advisory services with respect to the proposed acquisition of Watford., Goldman Sachs was not requested to provide, and it did not provide, to Arch, the Company, the holders of any class of securities, creditors or other constituencies of Arch or the Company, or any other person any opinion as to the fairness, from a financial point of view or otherwise, of the transaction contemplated by the Merger Agreement or the Merger Consideration to Arch, any stockholder of common shares, or the holders of any other class of securities, creditors or other constituencies of Arch or the Company, any other valuation of Arch or the Company for the purpose of assessing the fairness of the Merger Consideration to any such person or any advice as to the underlying decision by Arch to engage in the transaction contemplated by the Merger Agreement, or as to any other matter.


The Purchaser Filing Persons believe that the merger is substantively and procedurally fair, and that the Merger Consideration is fair, to the unaffiliated shareholders of Watford based on the following factors:












the Merger Consideration of $35.00 per common share in cash represents a premium of approximately 128.5% over the volume weighted average share price of the common shares during the 90 days ended September 8, 2020, the last trading day before rumors of Arch’s proposal to acquire Watford first appeared in the press; and approximately 95.9% over the closing share price on September 8, 2020, the last trading day before rumors of Arch’s proposal to acquire Watford first appeared in the press;













the Merger Consideration of $35.00 per common share represents an increase of approximately 40% over the price per common share initially proposed by Arch, and an increase of approximately 12.5% over the price per common share agreed to in the Initial Merger Agreement;













the Merger Consideration of $35.00 per common share in cash exceeds a subsequent conditional proposal of $34.50 per common share made by Enstar Group Limited (“Enstar”), and Enstar has agreed to vote its shares in favor of the merger;













by delivering merger consideration consisting entirely of cash to common shareholders, unaffiliated common shareholders of Watford that are subject to U.S. federal income taxation generally should be able to have cash on hand with which to pay all or a portion of their U.S. federal income taxes in connection with the sale of their common shares of Watford;













by delivering merger consideration consisting entirely of cash to common shareholders, the transaction eliminates the uncertainty in valuing the Merger Consideration and brokerage and other costs typically associated with market sales;













no external financing is required for the transaction, thus increasing the likelihood that the merger will be consummated and the cash merger consideration will be paid to the unaffiliated common shareholders;













subject to compliance with certain obligations under the Merger Agreement, each of the transaction committee and the board of directors of Watford retains the flexibility to explore and respond to an alternative transaction proposed by a third party that it concludes constitutes, or could reasonably be expected to constitute, a “Superior Proposal” (as defined in the Merger Agreement), to change its recommendation to the shareholders of Watford, and to terminate the Merger Agreement in order to approve a Superior Proposal, in each case upon the payment to Holdco of a termination fee of $28,100,000;













Watford’s board of directors established the transaction committee (comprising all of the then-current members of the Board, other than the Arch Directors) to negotiate with Arch, and the Purchaser Filing Persons believe the transaction committee was therefore able to represent the interests of the unaffiliated shareholders of Watford;






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none of the Purchaser Filing Persons participated in or had any influence on the deliberative process of, or the conclusions reached by, or the negotiating positions of the transaction committee;













Watford’s board of directors retained its own nationally recognized financial advisor, and received an opinion from such financial advisor, attached to the proxy statement as Annex D, to the effect that, as of the date of the opinion, and based upon and subject to the factors and assumptions set forth in the opinion, the Merger Consideration to be received by the holders of common shares of Watford pursuant to the Merger Agreement was fair from a financial point of view to such holders;













the transaction committee had the authority to reject the transaction proposed by Arch;













The Arch Directors did not participate in the deliberations of the transaction committee and did not participate in the vote to approve the merger due to conflict of interest;













the financial and other terms and conditions of the Merger Agreement were the product of extensive negotiations between the transaction committee and its financial and legal advisors, on the one hand, and the Purchaser Filing Persons and their respective financial and legal advisors, on the other hand;













the merger will only occur if it is approved by a majority of Watford common and preference shares, voting as a single class, at Watford’s special general meeting; and













the availability of appraisal rights to any shareholder of Watford who does not vote in favor of the Merger Agreement and the merger and who is not satisfied that it has been offered fair value for its shares, subject to such shareholder applying to the Supreme Court of Bermuda to appraise the fair value of its shares, within one month of the date of the giving of notice convening the Watford special general meeting.



In addition to the foregoing positive factors, the Purchaser Filing Persons also considered that:












The transaction committee did not conduct an auction process or solicit offers from other parties, and shareholders of Watford may believe that a transaction with a third party could deliver greater value than the merger. In considering this point, the Purchaser Filing Persons took into account the fact that third parties were free to make proposals and Watford was able to consider any such proposal that could reasonably be expected to constitute a “Superior Proposal” (as defined in the Merger Agreement).













The transaction committee did not structure the transaction to require approval of at least a majority of unaffiliated security holders. In considering this point, the Purchaser Filing Persons took into account the fact that the Arch Filing Persons beneficially own an aggregate of approximately 12.8% of the outstanding common and preference shares and, accordingly, unaffiliated security holders own approximately 87.2% of the outstanding common and preference shares (which is more than five times the combined voting power of the Arch Filing Persons and the other Purchaser Filing Persons). As noted above, Enstar has entered into an agreement with Arch and Watford pursuant to which Enstar agreed to vote its shares in support of the merger; however, Arch does not have a proxy to vote Enstar’s shares, and does not otherwise have or share the power to vote Enstar’s shares, and, accordingly, the Arch Filing Persons do not consider Arch to have beneficial ownership of such shares.



The Purchaser Filing Persons believe the fact that Watford did not pursue these shareholder-protective actions does not outweigh the positive factors discussed above and does not change the Purchaser Filing Persons’ conclusion that the merger is substantively and procedurally fair, and that the Merger Consideration is fair, to the unaffiliated shareholders of Watford.


Given that the purpose of the Purchaser Filing Persons participating in the merger is to acquire Watford and continue to operate it as a going concern, the Purchaser Filing Persons did not consider the liquidation value, runoff value, or book value per common share relevant to their determination that the Merger Consideration is fair to the unaffiliated shareholders. The Purchaser Filing Persons did not find it practicable to assign, and did not assign, relative weights to the individual factors considered in reaching its conclusion as to the fairness of the merger to the unaffiliated shareholders of Watford. Rather, their determination that the Merger Consideration is fair to the unaffiliated shareholders of Watford was made after consideration of all of the above factors as a whole.





Summary of Certain Presentations Provided by Goldman Sachs


Arch retained Goldman Sachs as Arch’s financial advisor in connection with its consideration of the acquisition by Arch of the outstanding common shares of the Company that were not owned by Arch’s wholly owned subsidiary ARL. In this capacity, representatives of Goldman Sachs provided Arch with financial advice and assistance,





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including performing financial analyses and assisting Arch in negotiating the financial aspects of the transaction contemplated by the Merger Agreement. Although Goldman Sachs generally acted as financial advisor to Arch, Goldman Sachs was not requested to provide, and it did not provide, to the board of directors of Arch (the “Arch Board”), the Company, the holders of any class of securities, creditors or other constituencies of Arch or the Company, or any other person (i) any opinion as to the fairness, from a financial point of view or otherwise, of the transaction contemplated by the Merger Agreement or the Merger Consideration to Arch, any shareholder of the Company, or the holders of any other class of securities, creditors or other constituencies of Arch or the Company, (ii) any other valuation of Arch or the Company for the purpose of assessing the fairness of the Merger Consideration to any such person or (iii) any advice as to the underlying decision by Arch to engage in the transaction contemplated by the Merger Agreement. Because Goldman Sachs was not requested to, and did not, deliver a fairness opinion in connection with the transaction contemplated by the Merger Agreement, it did not perform financial analyses with a view towards those analyses supporting a fairness opinion. At various times during the course of Goldman Sachs’s engagement as financial advisor to Arch, representatives of Goldman Sachs discussed with the management of Arch various considerations with respect to the proposed acquisition by Arch of the outstanding common shares of the Company that were not owned by ARL, including what financial analyses would be helpful to the management of Arch and to the Arch Board, and Goldman Sachs produced various analyses during the course of Goldman Sachs’s engagement as financial advisor to Arch. References to the “management of Arch” in this section “Summary of Certain Presentations Provided by Goldman Sachs” refer to the limited subgroup of Arch’s executive management that were involved with the negotiation of the transaction contemplated by the Merger Agreement.


The full text of all presentations prepared by representatives of Goldman Sachs and provided to the Arch Board (the “Goldman Sachs Presentations”) have been filed as exhibits to the Schedule 13E-3 filed with the SEC in connection with the transaction contemplated by the Merger Agreement and are incorporated herein by reference. The Schedule 13E-3, including the Goldman Sachs Presentations, may be examined at, and copies may be obtained from, the SEC in the manner described under “—

Where You Can Find Additional Information

.” The information in each Goldman Sachs Presentation is subject to the assumptions, limitations, qualifications and other conditions contained therein and is necessarily based on economic, monetary, market and other conditions as in effect on, and the information made available to Goldman Sachs as of, the date of such presentation. The Goldman Sachs Presentations do not constitute a recommendation to the Arch Board, the Company, or any other entity with respect to the transaction contemplated by the Merger Agreement, or any other matter. The Goldman Sachs Presentations do not constitute, and are not intended to represent, any view or opinion as to the fairness, from a financial point of view or otherwise, of the transaction contemplated by the Merger Agreement or the Merger Consideration to Arch, the shareholders of the Company or to any other person.


The Goldman Sachs Presentations were provided for the benefit of the Arch Board for their information and assistance in connection with the Arch Board’s consideration of the transaction contemplated by the Merger Agreement. The Goldman Sachs Presentations do not convey rights or remedies upon the holders of any class of securities, creditors or other constituencies of Arch or the Company or any other person and should not be relied on as the basis for any other purpose or any investment decision.


In connection with the Goldman Sachs Presentations, Goldman Sachs reviewed, among other things, certain publicly available business and financial information concerning the Company, certain non-public information regarding the business and prospects of the Company prepared by management of the Company and approved for Goldman Sachs’s use by Arch, and certain financial analyses and forecasts for the Company prepared by management of Arch and approved for Goldman Sachs’s use by Arch. Goldman Sachs also held discussions with the management of Arch and the Arch Board regarding their assessment of the strategic and financial rationale for, and the potential benefits of, the transaction contemplated by the Merger Agreement and the past and current business operations, financial condition, and future prospects of Arch and the Company and considered such other factors as Goldman Sachs deemed appropriate. The management of Arch did not give any specific instructions nor impose any limitations on Goldman Sachs with respect to Goldman Sachs’s preparation of the Goldman Sachs Presentations.


In preparing the Goldman Sachs Presentations and providing the analysis set forth in the Goldman Sachs Presentations, Goldman Sachs, with Arch’s consent, relied upon and assumed, without assuming responsibility or liability for independent verification, the accuracy, completeness and reasonableness of all industry, financial, legal, regulatory, tax, accounting and other information that was publicly available or obtained from data suppliers and other third parties or was furnished to or discussed with Goldman Sachs by Arch or otherwise reviewed by or for Goldman Sachs. Goldman Sachs assumed with the consent of Arch that the financial analyses and forecasts for the





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Company prepared by the management of Arch have been reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of Arch. With respect to any financial projections, other estimates and/or other forward-looking information obtained by Goldman Sachs from public sources, data suppliers and other third parties, Goldman Sachs assumed that such information was reasonable and reliable. Goldman Sachs expressed no view as to any of the foregoing analyses, projections or forecasts or the assumptions on which they were based. No representation or warranty, express or implied, was made by Goldman Sachs in relation to the accuracy or completeness of the information presented in the Goldman Sachs Presentations or their suitability for any particular purpose.


Goldman Sachs (i) expressed no view, opinion, representation, guaranty or warranty (in each case, express or implied) regarding the reasonableness or achievability of any financial projections, other estimates and other forward-looking information or the assumptions upon which they are based and (ii) relied upon the assurances of the management of Arch that they were unaware of any facts or circumstances that would make such information (including, without limitation, any financial projections, other estimates and other forward-looking information) incomplete, inaccurate or misleading. Goldman Sachs did not conduct and was not provided with any independent valuation or appraisal of any assets or liabilities (including any contingent, derivative or other off-balance sheet assets and liabilities) of Arch, the Company or any other company or business, nor did Goldman Sachs evaluate the solvency of Arch, the Company or any other company or business under any state or federal laws relating to bankruptcy, insolvency or similar matters or the ability of Arch or the Company to pay their respective obligations when they come due.


Goldman Sachs expressed no opinion as to the prices at which shares of the Company will trade at any time, or as to the potential effects of volatility in the credit, financial and stock markets on Arch, the Company or the transaction contemplated by the Merger Agreement, or as to the impact of the transaction contemplated by the Merger Agreement on the solvency or viability of Arch or the Company or the ability of Arch or the Company to pay their respective obligations when they come due. The matters considered by Goldman Sachs in their financial analyses and reflected in the Goldman Sachs Presentations were necessarily based on various assumptions, including assumptions concerning general business, economic and capital markets conditions and industry-specific and company-specific factors as in effect on, and information made available to Goldman Sachs as of the date of such Goldman Sachs Presentation. Many such conditions are beyond the control of Arch, the Company and Goldman Sachs. Accordingly, the analyses included in the Goldman Sachs Presentations are inherently subject to uncertainty, and neither of Goldman Sachs nor any other person assumes responsibility if future results are different from those forecasted. Furthermore, it should be understood that subsequent developments may affect the views expressed in the Goldman Sachs Presentations and that Goldman Sachs does not have any obligation to update, revise or reaffirm its financial analyses or the Goldman Sachs Presentations based on circumstances, developments or events occurring after the date of such Goldman Sachs Presentation. With respect to the financial analyses performed by Goldman Sachs in the Goldman Sachs Presentations: (a) such financial analyses are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by these analyses; (b) while none of the selected companies referred to in the Goldman Sachs Presentations are directly comparable to the Company, the companies were chosen because they are publicly traded companies with operations that for purposes of analysis may be considered similar to certain operations of the Company based on Goldman Sachs’s familiarity with the insurance industry in North America; (c) while none of the selected precedent transactions used in the premia paid analyses and the comparable precedent transactions analyses referred to below are identical to the transaction contemplated by the Merger Agreement and while none of the selected companies involved in such transactions is identical or directly comparable to the Company, the transactions were selected because they involved publicly traded companies with operations that for purposes of analysis may be considered similar to certain operations of the Company based on Goldman Sachs’s familiarity with the insurance industry in North America; and (d) such financial analyses do not purport to be appraisals or to reflect the prices at which shares or other securities or financial instruments of or relating to the common shares of the Company may trade or otherwise be transferable at any time.


The Goldman Sachs Presentations should not be viewed as a recommendation with respect to any matter pertaining to the transaction contemplated by the Merger Agreement. The terms of the transaction contemplated by the Merger Agreement, including the Merger Consideration, were determined solely through negotiations between the parties to the Merger Agreement. The Goldman Sachs Presentations did not address the relative merits of the transaction contemplated by the Merger Agreement or any other transaction contemplated in connection with the transaction contemplated by the Merger Agreement compared to other business strategies or transactions that may have been considered by the management of Arch.





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The following is a summary of the Goldman Sachs Presentations, which is qualified in its entirety by the full text of the Goldman Sachs Presentations. The following summary does not, however, purport to be a complete description of the financial analyses or data presented by Goldman Sachs, nor does the order of analyses or presentations represent relative importance or weight given to those analyses or presentations by Goldman Sachs. Considering the summaries set forth below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying these analyses, could create a misleading or incomplete view of the Goldman Sachs Presentations.


The Goldman Sachs Presentations


The Goldman Sachs Presentations are presentations that representatives of Goldman Sachs presented to the Arch Board with respect to the transaction contemplated by the Merger Agreement and consisted of preliminary financial analyses related to such transaction as described below. During the course of Goldman Sachs’s engagement as financial advisor to Arch, representatives of Goldman Sachs prepared other presentations that were not presented to or considered by the Arch Board and are not summarized herein.


The August 3 Presentation


The presentation that representatives of Goldman Sachs sent to the management of Arch and the Arch Board on August 3, 2020 included (i) an overview of the Company and its business model based on information Goldman Sachs obtained from AM Best, SNL Financial, and public filings; (ii) the Company’s historical financial performance over time based on information Goldman Sachs obtained from public filings; (iii) an overview of the Company’s non-investment grade portfolio based on information Goldman Sachs obtained from public filings; (iv) credit rating perspectives for the Company based on information Goldman Sachs obtained from AM Best; (v) the historical price performance of the Company’s common shares for the time period from March 28, 2019 (the “Company Listing Date”) to July 31, 2020 based on information Goldman Sachs obtained from Bloomberg; (vi) a comparison of the historical price performance of the Company’s common shares against share of common stock for hedge fund reinsurers and the S&P 500 Index based on information Goldman Sachs obtained from Bloomberg and Capital IQ; (vii) a comparison of the P/BV, P/TBV and P/E for the Company against certain total return reinsurers for the time period from the Company Listing Date to July 31, 2020 based on information Goldman Sachs obtained from Capital IQ, Bloomberg, and IBES; (viii) a review and comparison of certain financial information, ratios and public market multiples for the Company and other selected total return reinsurers and traditional reinsurers based on information Goldman Sachs obtained from Capital IQ, IBES, and public filings; (ix) a review of the acquisition premia for selected acquisition transactions announced from 2010 to July 2020 involving a public company based in the United States as the target where the disclosed equity value for the transaction was greater than $0.3 billion and less than $1.5 billion based on information Goldman Sachs obtained from Refinitiv Eikon; (x) an overview of certain publicly available research analyst reports for the Company based on information Goldman Sachs obtained from IBES, Capital IQ, and DataStream; and (xi) and overview of key issues to consider related to the proposed transaction.


The September 14 Presentation


The presentation that representatives of Goldman Sachs sent to the management of Arch and the Arch Board on September 14, 2020 included an assessment of a proposal from the Company with purchase price adjustments in the form of a collar based on the Company’s non-investment grade portfolio performance.


The September 18 Presentation


The presentation that representatives of Goldman Sachs sent to the management of Arch and the Arch Board on September 18, 2020 included certain hedging considerations and strategies.


The September 21 Presentation


The presentation that representatives of Goldman Sachs sent to the management of Arch and the Arch Board on September 21, 2020 included an overview of the proposed transaction structure based on the September 20, 2020 proposal from the Company and an illustration of the proposed purchase price at different book values for the Company.





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The September 26 Presentation


The presentation that representatives of Goldman Sachs sent to the management of Arch and the Arch Board on September 26, 2020 included an overview of the revised proposed transaction structure based on the September 24, 2020 proposal from Arch and its co-investors and an illustration of the proposed purchase price at different book values for the Company.


Miscellaneous


As described above, Goldman Sachs was not asked to, and did not, render any opinion as to the fairness, from a financial point of view or otherwise, of the transaction contemplated by the Merger Agreement or the Merger Consideration to the Arch Board, the Company, the holders of any class of securities, creditors or other constituencies of Arch or the Company. The Goldman Sachs Presentations were one of many factors taken into consideration by the Arch Board in its deliberations in connection with the transaction contemplated by the Merger Agreement.


Goldman Sachs believes that the foregoing summary and its analyses must be considered as a whole and that selecting portions of the foregoing summary and these analyses, without considering all of these analyses as a whole, could create an incomplete view of the processes underlying the analyses. As a result, any potential indications of valuation resulting from any particular analysis or combination of analyses described above were merely utilized to create points of reference for analytical purposes. The order of analyses described does not represent the relative importance or weight given to those analyses by Goldman Sachs. In preparing the Goldman Sachs Presentations, Goldman Sachs did not attribute any particular weight to any analyses or factors considered and did not form an opinion as to whether any individual analysis or factor (positive or negative), considered in isolation, supported or failed to support the analysis set forth in the Goldman Sachs Presentations. Rather, Goldman Sachs considered the totality of the factors and analyses performed in preparing the Goldman Sachs Presentations.


Moreover, Goldman Sachs’s analyses are not and do not purport to be appraisals or otherwise reflective of the prices at which businesses actually could be acquired or sold. None of the selected transactions referred to in the above summaries is identical to the transaction contemplated by the Merger Agreement and no company used in the aforementioned analyses as a comparison is directly comparable to the Company. However, the transactions were chosen because they involve transactions that, for purposes of Goldman Sachs’s analysis, may be considered similar to the transaction contemplated by the Merger Agreement. The analyses necessarily involve complex considerations and judgments concerning differences in financial and operational characteristics of the companies involved and other factors that could affect the companies compared to the Company.


Goldman Sachs did not recommend any specific merger consideration to the Arch Board or that any specific amount constituted the only appropriate merger consideration for the transaction contemplated by the Merger Agreement.


Goldman Sachs and its affiliates are engaged in advisory, underwriting and financing, principal investing, sales and trading, research, investment management and other financial and non-financial activities and services for various persons and entities. Goldman Sachs and its affiliates and employees, and funds or other entities they manage or in which they invest or have other economic interests, or with which they co-invest, may at any time purchase, sell, hold or vote long or short positions and investments in securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments of Arch, the Company and any of their respective affiliates and third parties, including affiliates of the holders of common shares of the Company, or any currency or commodity that may be involved in the transaction contemplated by the merger agreement, as amended for the accounts of Goldman Sachs and its affiliates and employees and their customers.


During the two year period ended December 30, 2020, the Investment Banking Division of Goldman Sachs has not been engaged by the Company, Arch or their respective affiliates to provide financial advisory or underwriting services for which Goldman Sachs has recognized compensation. Goldman Sachs acted as financial advisor to Arch in connection with the transaction contemplated by the Merger Agreement. Goldman Sachs may also in the future provide financial advisor and/or underwriting services to Arch, the Company, and any of their respective affiliates and third parties, including affiliates of the holders of shares of the Company, for which the Investment Banking Division of Goldman Sachs may receive compensation.


Arch selected Goldman Sachs as its financial advisor because it is an internationally recognized investment banking firm that has substantial experience in transactions similar to the transaction contemplated by the Merger Agreement. Pursuant to a letter agreement, dated December 30, 2020 (the “Merger Engagement Letter”), Arch





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engaged Goldman Sachs to act as its financial advisor in connection with its consideration of the acquisition by Arch of the outstanding common shares of the Company that were not owned by Arch. The Merger Engagement Letter provides for a transaction fee of $4 million, all of which will become payable at the consummation of the Merger. Pursuant to a letter agreement, dated December 30, 2020 (the “Structuring Engagement Letter”), Arch engaged Goldman Sachs to act as structuring agent in connection with the proposed private offering, issue and sale of securities of a reinsurance sidecar or other vehicle that will own 50% or more of the stock or all or substantially all of the assets of the Company. The Structuring Engagement Letter provides for a structuring fee of $1.5 million, all of which will become payable at the consummation of the offering. In addition, Arch has agreed to reimburse Goldman Sachs for certain of its expenses, including reasonable attorneys’ fees and disbursements, and to indemnify Goldman Sachs and related persons against various liabilities, including certain liabilities under the federal securities laws.





Plans for the Company After the Merger


After the merger, it is anticipated that the Company will generally continue its current operations, but will cease to be an independent public company. As of the date of this proxy statement, other than the merger and as described in this section, the Purchaser Filing Persons have advised the Company that they do not have any specific plans or proposals or negotiations that relate to or would result in: (1) an extraordinary transaction, such as a merger, reorganization or liquidation, involving Watford or any of its subsidiaries; (2) any purchase, sale or transfer of a material amount of assets of Watford or any of its subsidiaries; (3) any material change in the present dividend rate or policy, or indebtedness or capitalization of Watford; (4) any change in the present board of directors or management of Watford, including, but not limited to, any plans or proposals to change the number or the term of directors or to fill any existing vacancies on the board or to change any material term of the employment contract of any executive officer; (5) any other material change in Watford’s corporate structure or business; (6) any class of equity securities of Watford to be delisted from a national securities exchange; (7) any class of equity securities of Watford becoming eligible for termination of registration under the Exchange Act; or (8) the suspension of Watford’s obligation to file reports under the Exchange Act.













Dividend rate or policy, or indebtedness or capitalization

. Watford has not declared or paid dividends on its common shares prior to the merger. After the merger, Watford’s dividend policy with respect to its common shares will be determined by the board of the surviving company and the surviving company’s sole shareholder which will be Holdco. Holders of Watford preference shares will be entitled to the same dividend and other relative rights, preferences, limitations and restrictions after the merger as are applied to the preference shares prior to the merger. Holdco has advised the Company that Holdco intends to explore options to and may cause the surviving company to implement changes to lower its cost of capital including, potentially, subject to applicable capital requirements, incurring indebtedness and applying the proceeds thereof to redeem Watford’s preference shares.














Board of directors; management

. At the effective time of the merger, the directors of Merger Sub immediately prior to the effective time will become the initial directors of the surviving company.














Delisting and deregistration of Watford equity securities

. After the merger, the Watford common shares will be delisted from the Nasdaq Global Select Market, and the registration of the common shares under the Exchange Act will be terminated pursuant to Section 12(g)(4) of the Exchange Act. Watford’s preference shares will remain outstanding and, so long as the preference shares remain outstanding, Watford will remain obligated to file reports under the Exchange Act. As noted above, Holdco has advised the Company that it is exploring options which may include redemption of outstanding preference shares. If such redemption occurs, Watford’s preference shares thereafter would be delisted from the Nasdaq Global Select Market, registration of the preference shares under the Exchange Act would be terminated pursuant to Section 12(g)(4) of the Exchange Act and Watford’s obligation to file reports under Section 15(d) of the Act thereafter would be suspended.






Certain Effects of the Merger


If shareholders approve the Merger Proposal and the other conditions to the closing of the merger are either satisfied or waived, Merger Sub will be merged with and into the Company with the Company being the surviving company.





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If the merger is completed, at the effective time,












each common share issued and outstanding immediately prior to the effective time (other than (i) shares to be canceled pursuant to the Merger Agreement and (ii) RSUs to be canceled and exchanged pursuant to the Merger Agreement) shall automatically be canceled and converted into the right to receive the Merger Consideration;













each RSU will become fully vested, with vesting of any performance-based RSUs vesting as if performance goals had been achieved at target level, and be canceled in exchange for the right to receive a single lump sum cash payment, without interest, equal to (A) the Merger Consideration, less (B) any applicable taxes required to be withheld; and













each preference share issued and outstanding immediately prior to the effective time will continue as a preference share of the surviving company and will be entitled to the same dividend and other relative rights, preferences, limitations and restrictions as are now provided to the preference shares.



Accordingly, immediately after the effective time of the merger all of the Company’s common shares will be owned by Holdco. None of the Company’s current common shareholders (other than ARL) will have any ownership interest in, or be a holder of, the Company’s common shares after the completion of the merger. As a result, our current holders of common shares will no longer benefit from any increase in the Company’s value or bear the risk of any decrease in the Company’s value. Following the merger, only Holdco and its affiliates (and potentially the holders of preference shares, until those shares are redeemed) will benefit from any increase in the Company’s value and also will bear the risk of any decrease in the Company’s value.





Interests of the Company’s Directors and Executive Officers in the Merger


In considering the recommendations of the Board of Directors with respect to the Merger Proposal, you should be aware that, aside from their interests as shareholders of the Company, certain of the Company’s directors and executive officers have interests in the merger that are different from, or in addition to, those of other shareholders of the Company generally.


Two members of Watford’s board of directors (the “Arch Directors”) were appointed to serve on our board by Arch. At a board meeting on June 17, 2020, the Arch Directors recused themselves from further discussions regarding strategic alternatives potentially available to Watford, recognizing that in any potential transaction that might result from those discussions, the interests of Arch could diverge from the interests of the Company and its other shareholders. Accordingly, the Arch Directors did not participate in the Board’s deliberations regarding acquisition proposals submitted by Arch or by other parties or in the Board’s deliberations relating to the Merger Agreement, and did not participate in the vote to approve the Merger Agreement or recommend that the shareholders approve the Merger Proposal.


In addition, Mr. Levy did not participate in the deliberations or voting of the Board with respect to the compensation arrangements relating to the Compensation Advisory Proposal.


Interests of executive officers and directors that may be different from or in addition to the interests of the Company’s shareholders include the facts that:












the Company’s executive officers hold unvested RSUs that will become fully vested (with vesting of any performance-based RSUs vesting as if performance goals had been achieved at target level) and canceled in exchange for the right to receive the Merger Consideration;













the Company’s executive officers have entered into amended and restated employment agreements that provide:













for a cash payment ($325,000 to Mr. Levy, $250,000 to each of Messrs. Hawley and Richardson, and $125,000 to each of Ms. Cunningham and Mr. Scherer) to such executive officer on the six-month anniversary of the closing date of the merger if he or she remains employed by the Company or one of its affiliates at such time, unless he or she is terminated without Cause prior thereto, in which case the amount will be paid within five days of termination;






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if the closing date of the merger occurs in 2021, a cash payment to the executive officer on the closing date of the merger equal to such executive officer’s pro rata 2021 target annual bonus based on the number of days elapsed in 2021 through the closing date (with the equity component of such target annual bonus being paid in cash in lieu of units or shares), which shall be no less than such executive officer’s 2020 target annual bonus levels;













that the change of control severance payments payable under the applicable employment agreement will also be due if we give notice of any non-extension at the end of the original or any extended employment period;













for the duration of the non-competition covenant under the applicable employment agreement to be reduced to three months following termination of employment (previously twelve months following termination of employment);













if the employment of such executive officer is terminated by the Company without “Cause” or by the executive officer for “Good Reason” (each as defined in the employment agreements and summarized below) or if the Company provides notice of non-extension at the end of the original or extended employment period, in each case at any time following a “Change in Control” (as defined in the employment agreements and which would include the merger), and if he or she signs a general release of claims and complies with the covenants described below, that (A) such executive officer will be entitled to: (i) continue to receive his or her base salary for a period of twenty-four months (such period, thirty-six months for Mr. Levy); (ii) an amount equal to two times the executive officer’s target annual bonus then in effect, payable in a lump sum (such amount, three times for Mr. Levy); (iii) for a period of twenty-four months following the date of termination, continue to receive his or her major medical insurance coverage under the Company’s plans in effect on the date of termination (such period, thirty-six months for Mr. Levy); and (iv) other than with respect to Mr. Scherer, continue to receive a housing allowance for the lesser of twenty-four months following the date of termination and the period during which the executive officer remains a resident of Bermuda, including reimbursement for taxes incurred by such executive officer as a result of such benefits (including any taxes imposed on the reimbursement payment itself) (such period, thirty-six months for Mr. Levy); and (B) (i) the unvested portion of such Executive Officer’s equity grant in connection with the Company’s direct listing on the Nasdaq Global Select Market will thereupon vest; (ii) the unvested portion of any time-based RSUs held by such executive officer will thereupon vest; and (iii) the unvested portion of any performance-based RSUs held by such executive officer will thereupon vest as if performance goals with respect to such performance-based RSUs had been achieved at target level;













the Company’s executive officers may receive annual bonuses in respect of calendar year 2020 (including both cash and equity components), which shall (i) be based on the greater of target and actual performance (provided that the Company may exclude from the determination of actual performance the impact of any costs and expenses associated with the transactions contemplated by the Merger Agreement or any non-recurring events that would not reasonably be expected to have affected the Company or any its subsidiaries had the transactions contemplated by the Merger Agreement not arisen in a manner intended to neutralize such impact), (ii) if the closing date of the merger occurs in calendar year 2020, not be prorated based on the number of days elapsed during the period commencing on January 1, 2020 and ending on the closing date of the merger, and (iii) be payable solely in cash;













the Company’s executive officers may enter into arrangements with Holdco or Arch prior to or following the closing; and













the Company’s directors and executive officers are entitled to continued indemnification and insurance coverage under the Merger Agreement, and the Company’s directors and certain executive officers are entitled to continued indemnification and insurance coverage under indemnification agreements.






Treatment of Company Equity Awards


All of the Company’s executive officers hold RSUs. The Merger Agreement provides that effective as of immediately prior to the effective time of the merger, each outstanding performance-based RSU and time-based RSU granted under the Company’s 2018 Stock Incentive Plan (the “2018 Incentive Plan”) will become fully vested, with vesting of any performance-based RSUs vesting as if performance goals had been achieved at target level, and be





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canceled in exchange for the right to receive a single lump sum cash payment, without interest, equal to (i) the Merger Consideration, less (ii) any applicable taxes required to be withheld.


All such payments are required to be made by the surviving company, without interest, on or as soon as practicable following the effective time of the merger, and in no event later than five business days following the effective time of the merger.


The table below sets forth the estimated value of unvested performance-based RSUs and time-based RSUs held as of December 31, 2020, the last practicable date prior to the date of this proxy statement, by the Company’s executive officers, based on the Merger Consideration. None of the Company’s non-employee directors holds any RSUs. Depending on when the merger is completed, certain outstanding equity awards shown in the table below may become vested in accordance with their terms without regard to the merger.


































































































































Name







Aggregate




Number of




Unvested




Performance-




Based




RSUs




(#)

(1)








Aggregate




Value of




Unvested




Performance-




Based




RSUs




($)







Aggregate




Number of




Unvested




Time-




Based




RSUs




(#)







Aggregate




Value of




Unvested




Time-




Based




RSUs




($)







Total




Value of




Unvested




RSUs




($)



Executive Officers








































Jonathan D. Levy









8,696







304,360







31,312







1,095,920







1,400,280



Robert L. Hawley









4,892







171,220







18,083








632,905









804,125




Elizabeth A. Cunningham









3,261








114,135









3,261









114,135









228,270




Laurence B. Richardson, II









3,804







133,140








3,805









133,175









266,315




Alexandre J.M. Scherer









2,717








95,095








12,141








424,935









520,030














(1)





Reflects the number of shares underlying unvested performance-based RSUs held by the Company’s executive officers with vesting of any performance-based RSUs vesting as if performance goals had been achieved at target level.






Employment Agreements with Executive Officers


The Company has entered into amended and restated employment agreements (the “Employment Agreements”) with each of its executive officers. Under the Employment Agreements:












if the employment of such executive officer is terminated by the Company without “Cause” or by the executive officer for “Good Reason” (each as defined in the Employment Agreements and summarized below) or if the Company provides notice of non-extension at the end of the original or extended employment period, in each case at any time following a “Change in Control” (as defined in the Employment Agreement and which would include the merger), and if he or she signs a general release of claims and complies with the covenants described below, then (A) such executive officer will be entitled to: (i) continue to receive his or her base salary for a period of twenty-four months (such period, thirty-six months for Mr. Levy); (ii) an amount equal to two times the executive officer’s target annual bonus then in effect, payable in a lump sum (such amount, three times for Mr. Levy); (iii) for a period of twenty-four months following the date of termination, continue to receive his or her major medical insurance coverage under the Company’s plans in effect on the date of termination (such period, thirty-six months for Mr. Levy); and (iv) other than with respect to Mr. Scherer, continue to receive a housing allowance for the lesser of twenty-four months following the date of termination and the period during which the executive officer remains a resident of Bermuda, including reimbursement for taxes incurred by such executive officer as a result of such benefits (including any taxes imposed on the reimbursement payment itself) (such period, thirty-six months for Mr. Levy); and (B) (i) the unvested portion of such Executive Officer’s equity grant in connection with the Company’s direct listing on the Nasdaq Global Select Market will thereupon vest; (ii) the unvested portion of any time-based RSUs held by such executive officer will thereupon vest; and (iii) the unvested portion of any performance-based RSUs held by such executive officer will thereupon vest as if performance goals with respect to such performance-based RSUs had been achieved at target level;













if the executive officer remains employed by us or an affiliate of ours on the six-month anniversary of the merger, such executive officer will receive a cash payment ($325,000 to Mr. Levy, $250,000 to each of






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Messrs. Hawley and Richardson, and $125,000 to each of Ms. Cunningham and Mr. Scherer) on the six-month anniversary of the merger, unless he or she is terminated without Cause prior thereto, in which case the amount will be paid within five days of termination (such payments, the “Retention Payments”),












if the closing date of the merger occurs in 2021, a cash payment to the executive officer on the closing date of the merger equal to such executive officer’s pro rata 2021 target annual bonus based on the number of days elapsed in 2021 through the closing (with the equity component of such annual bonus being paid in cash in lieu of units or shares), which shall be no less than such executive officer’s 2020 target annual bonus levels (such payment, the “2021 Pro Rata Annual Bonus Payment”);













if any amounts to be paid to such executive officer would constitute an “excise parachute payment” (within the meaning of Section 280G of the Code), the amount of payments or other benefits payable to the executive officer will be reduced to the extent necessary until no amount payable to such executive officer constitutes an excess parachute payment, but only if such reduction results in a higher after-tax payment to him or her; and













each executive officer covenants not to (a) own, manage, control, participate in, consult with, render services for or in any manner engage in any business competing with the business of the Company as such businesses exist or are in process as of the date of termination, within any geographical area in which the Company engages or plans to engage in such businesses (i) for three months following termination by the executive officer for Good Reason or by the Company not for Cause or (ii) for three months following termination by the executive officer other than for Good Reason or by the Company for Cause if the Company (A) provides written notice of its intention to enforce such restrictions within ten business days following such termination pursuant to this clause (ii), (B) continues to pay the executive officer’s base salary for such three-month period, (C) makes a lump sum payment equal to 25% of the executive officer’s target annual bonus, (D) continues to provide major medical insurance coverage for such three-month period, and (E) except with respect to Mr. Scherer, continues to provide the executive officer’s housing allowance for such three-month period, including reimbursement for taxes incurred by such executive officer as a result of such benefits (including any taxes imposed on the reimbursement payment itself), or (b) induce or attempt to induce any employee of the Company to leave the employ of the Company or in any way interfere with the relationship between the Company and any employee thereof or induce or attempt to induce any customer, supplier, client, insured, reinsured, reinsurer or other business relation of the Company to cease doing business with the Company at any time during the twelve months following termination of the executive officer’s employment for any reason.



For purposes of the Employment Agreements:












“Good Reason” means, in summary: (i) the assignment to the executive officer of any duties materially inconsistent with such executive officer’s then status as an executive officer of the Company or a substantial adverse alteration in the nature of the executive officer’s responsibilities; (ii) a material reduction by the Company in the executive officer’s base salary, target bonus or annual RSU award; (iii) the relocation of the executive officer’s principal place of employment outside of his or her current location; or (iv) any material breach by the Company of the provisions contained in the executive officer’s Employment Agreement; and













“Cause” means, in summary: (i) theft or embezzlement by the executive officer with respect to the Company; (ii) willful disregard or gross negligence in the performance of the executive officer’s duties; (iii) the executive officer’s conviction of any felony or any crime involving moral turpitude; (iv) willful or prolonged absence from work by the executive officer or failure, neglect or refusal by the executive officer to perform his or her duties and responsibilities; (v) continued and habitual use of alcohol by the executive officer to an extent which materially impairs the executive officer’s performance of his or her duties or the executive officer’s use of illegal drugs; (vi) other than in the case of Mr. Scherer, the executive officer’s failure to use his or her best efforts to obtain, maintain or renew a work permit by the Bermuda government as applicable; or (vii) the material breach by the executive officer of any of the covenants contained in his or her Employment Agreement.



Annual Bonus Payments


Under the Merger Agreement, the Company must pay, no later than the closing date of the merger, annual bonuses in respect of calendar year 2020 (including both cash and equity components), which shall (i) be based on





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the greater of target and actual performance (provided that the Company may exclude from the determination of actual performance the impact of any costs and expenses associated with the transactions contemplated by the Merger Agreement or any non-recurring events that would not reasonably be expected to have affected the Company or any its subsidiaries had the transactions contemplated by the Merger Agreement not arisen in a manner intended to neutralize such impact), (ii) if the closing date of the merger occurs in calendar year 2020, not be prorated based on the number of days elapsed during the period commencing on January 1, 2020 and ending on the closing date of the merger, and (iii) be payable solely in cash.


The table below sets forth the amount of the 2020 annual bonus payment that would be payable to each of the Company’s executive officers assuming that the consummation of the merger occurred on December 31, 2020, the last practicable date prior to the date of this proxy statement.








































Name







2020 Annual Bonus




Payment Pursuant




to the Merger




Agreement




($)

(1)




Jonathan D. Levy









632,500



Robert L. Hawley









342,500



Elizabeth A. Cunningham









305,000



Laurence B. Richardson, II









321,500



Alexandre J.M. Scherer









251,250













(1)





Reflects for each executive officer his or her target annual bonus for 2020.



If the merger is completed in 2021, the Company will make a cash payment to each executive officer of his or her 2021 Pro Rata Annual Bonus Payment.


Retention Payments


The Company will make a cash payment of the Retention Payments, in each case, on the six-month anniversary of the effective date of the merger if the executive officer remains employed by the Company or an affiliate thereof on such anniversary, unless the executive officer is terminated without Cause prior thereto, in which case the amount will be paid within five days of such termination.


The table below sets forth the amounts that would be payable to each of the Company’s executive officers pursuant to the Employment Agreements with each executive officer described above assuming that the consummation of the merger occurred on December 31, 2020, the last practicable date prior to the date of this proxy statement, and each of the Company’s executive officers remained employed by the Company on the six-month anniversary of the effective date of the merger.








































Name







Retention




Payments




Pursuant to the




Merger




Agreement




($)

(1)




Jonathan D. Levy









325,000



Robert L. Hawley









250,000



Elizabeth A. Cunningham









125,000



Laurence B. Richardson, II









250,000



Alexandre J.M. Scherer









125,000













(1)





Reflects a cash payment to be made to each executive officer on the six month anniversary of the effective date of the merger if such executive officer remains employed by the Company or an affiliate thereof on such anniversary, unless the executive officer is terminated without Cause prior thereto, in which case the amount will be paid within five days of such termination.






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No Golden Parachute Excise Tax Gross-Up


In connection with the merger, no executive officer or director will be entitled to a gross-up payment related to excise taxes imposed on any executive officer or director in the event that any payments or benefits result in an “excess parachute payment” within the meaning of Section 280G of the Code.


Benefits Continuation Pursuant to the Merger Agreement


For the one-year period beginning at the effective time of the merger, Holdco has agreed to provide each employee who is employed by the Company or any subsidiary of the Company at the closing date of the merger (including each of the Company’s executive officers employed at the closing date), during such employee’s employment within such one-year period, with (i) a base salary or hourly wage rate that is at least equal to the base salary or hourly wage rate provided to such employee immediately prior to the effective time; (ii) short- and long-term cash incentive compensation opportunities that are no less favorable than the short- and long-term incentive compensation opportunities in effect for such employee immediately prior to the effective time; (iii) employee benefits that are no less favorable in the aggregate than the employee benefits provided to such employee immediately prior to the effective time; and (iv) a position with substantially comparable duties and responsibilities and the same work location as the position such employee had immediately prior to the effective time.


In addition, Holdco has agreed to provide each employee of the Company or any subsidiary of the Company who remains employed following the effective time (including each of the Company’s executive officers who remains employed following the effective time) and who incurs a termination of employment by the surviving company without cause during the one-year period immediately following the effective time of the merger with severance benefits of (i) a lump sum payment equal to twelve months of such employee’s base salary and (ii) a lump sum payment equal to the target value of such employee’s annual incentive compensation (including both cash and equity incentive compensation) for the calendar year in which such termination occurs, which target value will be no less than such target value for calendar year 2020 (including both cash and equity incentive compensation); provided that in all events, (x) if such employee is subject to an employment agreement that provides for greater severance benefits than the severance benefits described in this paragraph, the severance provisions of such employment agreement will govern in lieu of the severance benefits described in this paragraph, (y) such severance benefits will be no less than the severance allowance required to be provided to such employee under applicable law and (z) Holdco will, or will cause the surviving company to, comply with all notice requirements under applicable law.


Indemnification and Insurance


Pursuant to the terms of the Merger Agreement, following the effective time of the merger, the Company’s current and former directors and officers will be entitled to certain ongoing rights of indemnification and to coverage under directors’ and officers’ liability insurance policies. For a description of such ongoing indemnification and insurance obligations, refer to the section entitled “

The Merger Agreement—Other Covenants and


Agreements—Directors’ and Officers’ Indemnification

” beginning on page [

85

].





Merger Related Compensation


This section sets forth the information required by Item 402(t) of Regulation S-K regarding the compensation for each named executive officer of the Company that is based on or otherwise relates to the merger. This compensation is referred to as “golden parachute” compensation by the applicable SEC disclosure rules, and in this section we use such term to describe the merger related compensation payable to the Company’s named executive officers. The “golden parachute” compensation payable to these individuals is subject to an advisory (non-binding) vote of the Company’s shareholders.


The following table sets forth the amount of payments and benefits that each named executive officer would receive in connection with the merger. For purposes of quantifying these potential payments and benefits for the table below, the following assumptions were used:












the consummation of the merger occurred on December 31, 2020;













the employment of each named executive officer was terminated by the Company without Cause or the named executive officer for Good Reason, in each case immediately following the effective time of the merger; and













the value of a Company common share of $35.00, which is equal to the Merger Consideration.






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Golden Parachute Compensation


































































































































Name







Cash







Equity







Perquisites/




Benefits







Tax




Reimbursement







Total










($)


(1)









($)


(2)









($)


(3)









($)


(4)









($)



Jonathan D. Levy









2,422,500







1,400,280







921,223







270,000







5,014,003



Robert L. Hawley









1,005,000








804,125








461,431

















2,270,556



Elizabeth A. Cunningham










930,000









228,270








436,849


















1

,595,119



Laurence B. Richardson, II









1,029,000








266,315








176,000








80,000








1,551,315



Alexandre J.M. Scherer










757,500









520,030









68,

000

















1,345,530













(1)





Amounts reported represent, for each named executive officer (i) (A) other than in the case of Mr. Levy, the value of the sum of his or her base salary for twenty-four months and two times his or her target annual bonus for the year of termination and (B) in the case of Mr. Levy, the value of the sum of his base salary for thirty-six months and three times his target annual bonus for the year of termination and (ii) the value of a target 2020 annual bonus. Set forth below are the values of the cash payments that the Company’s named executive officers are expected to receive in connection with the merger:








































































Name







Cash




Severance







Pro-Rated




Annual Bonus




Pursuant to




the Merger




Agreement







Total

















($)










Jonathan D. Levy









1,425,000







997,500







2,422,500



Robert L. Hawley










670,000








335,000







1,005,000



Elizabeth A. Cunningham










620,000








310,000








930,000




Laurence B. Richardson, II










686,000








343,000