Watford Reports 2020 First Quarter Results
05/04/2020 - 07:17 PM
PEMBROKE, Bermuda, May 04, 2020 (GLOBE NEWSWIRE) -- WATFORD HOLDINGS LTD. (“Watford” or the “Company”) (NASDAQ: WTRE) today reported a net loss of $267.8 million , after $1.2 million of preference dividends, for the three months ended March 31, 2020, compared to net income of $47.6 million , after payment of $4.9 million of preference dividends, for the same period in 2019. Book value per diluted common share was $28.21 at March 31, 2020, a decrease of 35.1% from December 31, 2019. The quarterly results include:
Net loss available to common shareholders of $267.8 million , or $(13.42) per diluted common share, compared to net income of $47.6 million , or $2.10 per diluted common share, for the 2019 first quarter; Combined ratio of 104.4% , comprised of a 79.0% loss ratio, a 20.3% acquisition expense ratio and a 5.1% general and administrative expense ratio, compared to a combined ratio of 104.1% for the prior year first quarter, comprised of a 75.9% loss ratio, a 23.3% acquisition expense ratio and a 4.9% general and administrative expense ratio; Net interest income of $27.8 million , a 1.4% yield on average net assets, for the 2020 first quarter, compared to net interest income of $30.4 million and a 1.5% yield on average net assets for the 2019 first quarter; Net investment loss of $262.7 million , a (13.0)% return on average net assets for the 2020 first quarter, compared to net investment income of $58.4 million and a 2.8% return on average net assets for the 2019 first quarter; and During the quarter, the Company repurchased 127,744 common shares at an average price of $22.42 per share for an aggregate cost of $2.9 million under its previously announced $50 million share repurchase program. As of March 31, 2020, up to approximately $47.1 million of share repurchases were available under this program. In addition, on March 11, 2020, the World Health Organization declared a pandemic in relation to the outbreak of the novel coronavirus (COVID-19). The pandemic is causing unprecedented social disruption, global economic volatility, reduced liquidity of capital markets and intervention by various governments around the world.
At this time, there are significant uncertainties surrounding the ultimate number of insurance claims and scope of damage resulting from this pandemic. The Company’s estimates across its insurance and reinsurance lines of business are based on currently available information derived from modeling techniques, preliminary claims information obtained from the Company’s clients and brokers, a review of relevant in-force contracts with potential exposure to the pandemic and estimates of reinsurance recoverables. These estimates include losses only related to claims incurred as of March 31, 2020. Actual losses from these events may vary materially from the estimates due to several factors, including the inherent uncertainties in making such determinations and the evolving nature of this pandemic.
Commenting on the 2020 first quarter financial results, Jon Levy, CEO of Watford, said:
“First of all, we would like to acknowledge the challenging times that the COVID-19 pandemic has created, and express how grateful we are to those on the frontlines serving their communities. Watford is also committed to supporting our customers and clients through this stressful period. I would like to thank the broader Watford team for their efforts to deliver the same level of excellence in operations under these extraordinarily difficult circumstances.
As reported in our press release on April 23, 2020, our results for the first quarter were heavily affected by the investment market volatility caused by the economic shutdown mandated by governments around the world. The pandemic has had significant impacts across the globe, and Watford took its share of that impact, although not to a greater extent than anticipated for an event of this magnitude.
Our net loss of $267.8 million for the quarter was driven by a $262.7 million net investment loss. The net investment loss, in turn, was predominantly the result of $285.5 million of unrealized "mark-to-market" losses in our non-investment grade fixed-income portfolio.
Net interest income, a key driver of long-term shareholder value, remained steady and strong at $27.8 million , representing a quarterly yield on net assets of 1.4% .
Our combined ratio for the quarter was 104.4% , and 102.2% when adjusted for other underwriting income and certain corporate and nonrecurring expenses. While the COVID-19 pandemic has created significant areas of uncertainty for the property and casualty insurance industry, the impact on our first quarter underwriting results was not material, as we believe our mix of business is less exposed to the classes of business likely to be most affected.
Insurance and reinsurance market conditions continue to move in a favorable direction and we remain optimistic about our positioning in the marketplace.”
Underwriting
The following table summarizes the Company’s underwriting results on a consolidated basis:
100%; border-collapse:collapse !important;"> Three Months Ended March 31, 58%; width:58% ; min-width:58% ;"> 2%; width:2% ; min-width:2% ;"> 10%; width:10% ; min-width:10% ;">2020 3%; width:3% ; min-width:3% ;"> 1%; width:1% ; min-width:1% ;"> 2%; width:2% ; min-width:2% ;"> 10%; width:10% ; min-width:10% ;">2019 3%; width:3% ; min-width:3% ;"> 1%; width:1% ; min-width:1% ;"> 10%; width:10% ; min-width:10% ;">% Change ($ in thousands) Gross premiums written $ 234,902 $ 186,689 25.8% Net premiums written 186,700 145,387 28.4% Net premiums earned 140,039 146,094 (4.1)% Underwriting income (loss) (1) (6,143 ) (5,970 ) (2.9)% % Point Change Loss ratio 79.0 % 75.9 % 3.1% Acquisition expense ratio 20.3 % 23.3 % (3.0)% General & administrative expense ratio 5.1 % 4.9 % 0.2% Combined ratio 104.4 % 104.1 % 0.3% Adjusted combined ratio (2) 102.2 % 102.3 % (0.1)%
(1) Underwriting income (loss) is a non-U.S. GAAP financial measure and is calculated as net premiums earned, less loss and loss adjustment expenses, acquisition expenses and general and administrative expenses. See “Comments on Regulation G” for further discussion, including a reconciliation of underwriting income (loss) to net income (loss) available to common shareholders.
(2) Adjusted combined ratio is a non-U.S. GAAP financial measure and is calculated by dividing the sum of loss and loss adjustment expenses, acquisition expenses and general and administrative expenses, less certain corporate expenses, by the sum of net premiums earned and other underwriting income (loss). See “Comments on Regulation G” for further discussion, including a reconciliation of our adjusted combined ratio to our combined ratio.
The following table provides summary information regarding premiums written and earned by line of business:
100%; border-collapse:collapse !important;"> Three Months Ended March 31, 72%; width:72% ; min-width:72% ;"> 3%; width:3% ; min-width:3% ;"> 10%; width:10% ; min-width:10% ;">2020 2%; width:2% ; min-width:2% ;"> 3%; width:3% ; min-width:3% ;"> 10%; width:10% ; min-width:10% ;">2019 ($ in thousands) Gross premiums written: Casualty reinsurance $ 83,818 $ 75,601 Other specialty reinsurance 36,880 24,298 Property catastrophe reinsurance 9,832 5,992 Insurance programs and coinsurance 104,372 80,798 Total $ 234,902 $ 186,689 Net premiums written: Casualty reinsurance $ 83,667 $ 75,065 Other specialty reinsurance 35,484 23,182 Property catastrophe reinsurance 9,832 5,982 Insurance programs and coinsurance 57,717 41,158 Total $ 186,700 $ 145,387 Net premiums earned: Casualty reinsurance $ 52,765 $ 63,313 Other specialty reinsurance 35,364 44,561 Property catastrophe reinsurance 4,884 2,971 Insurance programs and coinsurance 47,026 35,249 Total $ 140,039 $ 146,094
The following table shows the components of our loss and loss adjustment expenses for the three months ended March 31, 2020 and 2019:
100%; border-collapse:collapse !important;"> Three Months Ended March 31, 2020 2019 Loss and Loss % of Earned Loss and Loss % of Earned ($ in thousands) 43%; width:43% ; min-width:43% ;">Current year 2%; width:2% ; min-width:2% ;">$ 11%; width:11% ; min-width:11% ;">110,856 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;"> 11%; width:11% ; min-width:11% ;">79.1 2%; width:2% ; min-width:2% ;">% 1%; width:1% ; min-width:1% ;"> 2%; width:2% ; min-width:2% ;">$ 11%; width:11% ; min-width:11% ;">110,901 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;"> 11%; width:11% ; min-width:11% ;">75.9 2%; width:2% ; min-width:2% ;">% Prior year development (favorable)/adverse (180 ) (0.1 )% (51 ) — % Loss and loss adjustment expenses $ 110,676 79.0 % $ 110,850 75.9 %
Results for the three months ended March 31, 2020 versus 2019:
Gross and net premiums written in the 2020 first quarter were 25.8% and 28.4% higher, respectively, than the 2019 first quarter. The increase in gross and net premiums written reflect growth across all lines of business. Casualty reinsurance and other specialty reinsurance premiums increased over the prior year quarter, primarily due to increased personal and commercial auto writings.
Net premiums earned in the 2020 first quarter were 4.1% lower than the 2019 first quarter. The decrease in premiums reflected a non-renewal of one multi-line quota share contract within casualty reinsurance and a non-recurring exposure within other specialty reinsurance earned in the first quarter of 2019. This was partially offset by increased writings in insurance programs and coinsurance, and, to a lesser extent, property catastrophe reinsurance.
The loss ratio was 79.0% in the 2020 first quarter compared to 75.9% in the 2019 first quarter. The acquisition expense ratio was 20.3% in the 2020 first quarter, compared to 23.3% in the 2019 first quarter. In the 2020 first quarter, the increase in loss ratio and corresponding decrease in acquisition expense ratio were driven by losses incurred related to COVID-19 and impacted other specialty reinsurance business. A portion of this increase in losses is offset by loss sensitive commission decreases, which are reflected as benefits to the acquisition ratio. Other movements reflect changes in mix and the type of business. The prior year loss reserve development for both the 2020 and 2019 first quarters was essentially flat.
The general and administrative expense ratio was 5.1% in the 2020 first quarter, compared to 4.9% in the 2019 first quarter. The 0.2 point increase versus the prior year first quarter was attributable to ongoing public company expenses. Removing certain corporate expenses, our adjusted general and administrative expense ratio was 3.0% in the 2020 first quarter compared to 3.5% in the 2019 first quarter.
Investments
The following table summarizes the Company’s key investment returns on a consolidated basis:
100%; border-collapse:collapse !important;"> Three Months Ended March 31, 69%; width:69% ; min-width:69% ;"> 2%; width:2% ; min-width:2% ;"> 11%; width:11% ; min-width:11% ;">2020 2%; width:2% ; min-width:2% ;"> 1%; width:1% ; min-width:1% ;"> 2%; width:2% ; min-width:2% ;"> 11%; width:11% ; min-width:11% ;">2019 2%; width:2% ; min-width:2% ;"> ($ in thousands) Interest income $ 37,824 $ 43,141 Investment management fees - related parties (4,352 ) (4,409 ) Borrowing and miscellaneous other investment expenses (5,669 ) (8,298 ) Net interest income 27,803 30,434 Realized gains (losses) on investments (5,046 ) 1,282 Unrealized gains (losses) on investments (285,456 ) 32,438 Investment performance fees - related parties — (5,800 ) Net investment income (loss) $ (262,699 ) $ 58,354 Unrealized gains on investments (balance sheet) $ 40,525 $ 32,106 Unrealized losses on investments (balance sheet) (413,791 ) (111,535 ) Net unrealized gains (losses) on investments (balance sheet) $ (373,266 ) $ (79,429 ) Net interest income yield on average net assets (1) 1.4 % 1.5 % Non-investment grade portfolio (1) 1.7 % 1.9 % Investment grade portfolio (1) 0.5 % 0.6 % Net investment income return on average net assets (1) (13.0 )% 2.8 % Non-investment grade portfolio (1) (17.4 )% 3.4 % Investment grade portfolio (1) 0.8 % 1.1 % Net investment income return on average total investments (excluding accrued investment income) (2) (10.1 )% 2.1 % Non-investment grade portfolio (2) (14.9 )% 2.7 % Investment grade portfolio (2) 0.8 % 1.1 %
(1) Net interest income yield on average net assets and net investment income return on average net assets are calculated by dividing net interest income, and net investment income (loss), respectively, by average net assets. Net assets is calculated as the sum of total investments, accrued investment income and receivables for securities sold, less revolving credit agreement borrowings, payable for securities purchased and payable for securities sold short. For the three-month period, average net assets is calculated using the averages of each quarterly period. However, for the investment grade portfolio component of these returns, revolving credit agreement borrowings are not subtracted from the net assets calculation. The separate components of these returns (non-investment grade portfolio and investment grade portfolio) are non-U.S. GAAP financial measures. See “Comments on Regulation G” for further discussion, including a reconciliation of these components of our net interest income yield on average net assets and net investment income return on average net assets.
(2) Net investment income return on average total investments (excluding accrued investment income) is calculated by dividing net investment income by average total investments. For the three-month period, average total investments is calculated using the averages of each quarterly period. The separate components of these returns (non-investment grade portfolio and investment grade portfolio) are non-U.S. GAAP financial measures. See “Comments on Regulation G” for further discussion, including a reconciliation of these components of our net investment income return on average total investments (excluding accrued investment income).
The following tables summarize the composition of the Company's non-investment grade and investment grade portfolios by sector as of March 31, 2020 and December 31, 2019:
100%; border-collapse:collapse !important;"> March 31, 2020 Total Financials Health Care Technology Consumer Services Industrials Consumer Goods Oil & Gas All Other (1) ($ in thousands) Non-Investment Grade Portfolio: Term loan investments 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">906,999 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">190,535 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">195,084 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">199,837 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">98,518 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">89,778 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">40,415 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">32,049 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">60,783 Corporate bonds 240,570 24,927 43,028 15,702 49,761 27,585 19,947 18,522 41,098 Equities- sector specific 95,112 59,714 27,174 5,868 — 1,026 — 242 1,088 Short-term investments - sector specific 47,703 7,703 — — — — — 40,000 — Subtotal 1,290,384 282,879 265,286 221,407 148,279 118,389 60,362 90,813 102,969 Equities- sector specific 26,148 Short-term investments - non-sector specific 222,065 Asset-backed securities 140,613 Other investments 30,682 Mortgage-backed securities 8,529 Total Non-Investment Grade Portfolio $ 1,718,421 $ 282,879 $ 265,286 $ 221,407 $ 148,279 $ 118,389 $ 60,362 $ 90,813 $ 102,969 Investment Grade Portfolio: Corporate bonds $ 167,570 $ 62,046 $ 13,752 $ 12,135 $ 15,481 $ 14,133 $ 34,718 $ 7,346 $ 7,959 Short-term investments 74,093 U.S. government and government agency bonds 265,423 Non-U.S. government and government agency bonds 149,858 Asset-backed securities 113,583 Mortgage-backed securities 21,785 Municipal government and government agency bonds 2,073 Total Investment Grade Portfolio $ 794,385 $ 62,046 $ 13,752 $ 12,135 $ 15,481 $ 14,133 $ 34,718 $ 7,346 $ 7,959 Total Investments $ 2,512,806 $ 344,925 $ 279,038 $ 233,542 $ 163,760 $ 132,522 $ 95,080 $ 98,159 $ 110,928
(1) Includes telecommunications, utilities and basic materials.
100%; border-collapse:collapse !important;"> December 31, 2019 Total Financials Health Care Technology Consumer Services Industrials Consumer Goods Oil & Gas All Other (1) ($ in thousands) Non-Investment Grade Portfolio: Term loan investments 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">1,061,934 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">212,800 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">221,982 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">232,659 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">121,434 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">111,912 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">46,827 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">52,200 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">62,120 Corporate bonds 213,841 17,547 19,160 10,972 28,144 13,822 23,491 27,632 73,073 Equities - sector specific 101,551 55,946 30,640 11,263 — 1,283 — 1,040 1,379 Short-term investments - sector specific 16,620 8,261 — 3,030 — 5,329 — — — Subtotal 1,393,946 294,554 271,782 257,924 149,578 132,346 70,318 80,872 136,572 Equities - sector specific 23,586 Short-term investments - non-sector specific 215,816 Asset-backed securities 190,738 Other investments 30,461 Mortgage-backed securities 7,706 Total Non-Investment Grade Portfolio $ 1,862,253 $ 294,554 $ 271,782 $ 257,924 $ 149,578 $ 132,346 $ 70,318 $ 80,872 $ 136,572 Investment Grade Portfolio: Corporate bonds $ 158,632 $ 72,707 $ 12,087 $ 8,035 $ 11,752 $ 10,548 $ 32,046 $ 5,734 $ 5,723 Short-term investments 96,867 U.S. government and government agency bonds 285,609 Non-U.S. government and government agency bonds 133,409 Asset-backed securities 145,433 Mortgage-backed securities 24,750 Municipal government and government agency bonds 2,184 Total Investment Grade Portfolio $ 846,884 $ 72,707 $ 12,087 $ 8,035 $ 11,752 $ 10,548 $ 32,046 $ 5,734 $ 5,723 Total Investments $ 2,709,137 $ 367,261 $ 283,869 $ 265,959 $ 161,330 $ 142,894 $ 102,364 $ 86,606 $ 142,295
(1) Includes telecommunications, utilities and basic materials.
The table below summarizes the credit quality of the Company's non-investment grade and investment grade portfolios as of March 31, 2020 and December 31, 2019, as rated by Standard & Poor’s Financial Services, LLC, or Standard & Poor’s, Moody’s Investors Service, or Moody’s, Fitch Ratings Inc., or Fitch, Kroll Bond Rating Agency, or KBRA, or DBRS Morningstar, or DBRS, as applicable:
100%; border-collapse:collapse !important;"> Credit Rating (1) March 31, 2020 Fair Value AAA AA A BBB BB B CCC CC C D Not Rated ($ in thousands) Non-Investment Grade Portfolio: Term loan investments 1%; width:1% ; min-width:1% ;">$ 6%; width:6% ; min-width:6% ;">906,999 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 4%; width:4% ; min-width:4% ;">— 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 5%; width:5% ; min-width:5% ;">— 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 5%; width:5% ; min-width:5% ;">— 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 5%; width:5% ; min-width:5% ;">— 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 4%; width:4% ; min-width:4% ;">10,277 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 5%; width:5% ; min-width:5% ;">650,028 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 5%; width:5% ; min-width:5% ;">161,307 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 4%; width:4% ; min-width:4% ;">2,823 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 4%; width:4% ; min-width:4% ;">1,314 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 4%; width:4% ; min-width:4% ;">1,590 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 5%; width:5% ; min-width:5% ;">79,660 Corporate bonds 240,570 — — — 5,933 14,447 84,955 118,847 1,872 — 3,699 10,817 Asset-backed securities 140,613 — — 3,339 85,572 19,727 7,395 1,418 — — — 23,162 Mortgage-backed securities 8,529 — — — — 1,190 — — — — 2,552 4,787 Short-term investments 269,768 26,024 133,548 402 62,091 — 40,000 — — — — 7,703 Total fixed income instruments and short-term investments 1,566,479 26,024 133,548 3,741 153,596 45,641 782,378 281,572 4,695 1,314 7,841 126,129 Other Investments 30,682 Equities 121,260 Total Non-Investment Grade Portfolio $ 1,718,421 $ 26,024 $ 133,548 $ 3,741 $ 153,596 $ 45,641 $ 782,378 $ 281,572 $ 4,695 $ 1,314 $ 7,841 $ 126,129 Investment Grade Portfolio: Corporate bonds $ 167,570 $ — $ 34,647 $ 76,063 $ 52,085 $ 4,775 $ — $ — $ — $ — $ — $ — U.S. government and government agency bonds 265,423 — 265,423 — — — — — — — — — Asset-backed securities 113,583 1,628 — 15,980 95,975 — — — — — — — Mortgage-backed securities 21,785 — — 4,600 17,185 — — — — — — — Non-U.S. government and government agency bonds 149,858 — 149,858 — — — — — — — — — Municipal government and government agency bonds 2,073 1,023 570 480 — — — — — — — — Short-term investments 74,093 4,150 21,239 — 48,704 — — — — — — — Total Investment Grade Portfolio $ 794,385 $ 6,801 $ 471,737 $ 97,123 $ 213,949 $ 4,775 $ — $ — $ — $ — $ — $ — Total $ 2,512,806 $ 32,825 $ 605,285 $ 100,864 $ 367,545 $ 50,416 $ 782,378 $ 281,572 $ 4,695 $ 1,314 $ 7,841 $ 126,129
(1) For individual fixed maturity investments, Standard & Poor’s ratings are used. In the absence of a Standard & Poor’s rating, ratings from Moody’s are used, followed by ratings from Fitch, followed by ratings from KBRA, followed by ratings from DBRS.
100%; border-collapse:collapse !important;"> Credit Rating (1) December 31, 2019 Fair Value AAA AA A BBB BB B CCC CC C D Not Rated ($ in thousands) Non-Investment Grade Portfolio: Term loan investments 1%; width:1% ; min-width:1% ;">$ 6%; width:6% ; min-width:6% ;">1,061,934 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 4%; width:4% ; min-width:4% ;">— 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 5%; width:5% ; min-width:5% ;">— 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 5%; width:5% ; min-width:5% ;">— 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 5%; width:5% ; min-width:5% ;">— 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 4%; width:4% ; min-width:4% ;">9,617 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 5%; width:5% ; min-width:5% ;">761,168 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 5%; width:5% ; min-width:5% ;">215,909 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 4%; width:4% ; min-width:4% ;">6,823 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 4%; width:4% ; min-width:4% ;">2,119 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 4%; width:4% ; min-width:4% ;">— 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 5%; width:5% ; min-width:5% ;">66,298 Corporate bonds 213,841 — — — — 9,003 58,345 135,613 — — — 10,880 Asset-backed securities 190,738 — — 4,002 105,706 29,695 18,381 — — — — 32,954 Mortgage-backed securities 7,706 — — — — 976 — — — — 2,497 4,233 Short-term investments 232,436 — 116,805 34,903 64,108 — — 8,359 — — — 8,261 Total fixed income instruments and short-term investments 1,706,655 — 116,805 38,905 169,814 49,291 837,894 359,881 6,823 2,119 2,497 122,626 Other Investments 30,461 Equities 125,137 Total Non-Investment Grade Portfolio $ 1,862,253 $ — $ 116,805 $ 38,905 $ 169,814 $ 49,291 $ 837,894 $ 359,881 $ 6,823 $ 2,119 $ 2,497 $ 122,626 Investment Grade Portfolio: Corporate bonds $ 158,632 $ — $ 36,128 $ 81,401 $ 41,103 $ — $ — $ — $ — $ — $ — $ — U.S. government and government agency bonds 285,609 — 285,609 — — — — — — — — — Asset-backed securities 145,433 2,006 — 25,177 118,250 — — — — — — — Mortgage-backed securities 24,750 — — 1,100 23,650 — — — — — — — Non-U.S. government and government agency bonds 133,409 — 132,460 — 949 — — — — — — — Municipal government and government agency bonds 2,184 1,135 573 476 — — — — — — — — Short-term investments 96,867 25,783 20,037 — 51,047 — — — — — — — Total Investment Grade Portfolio $ 846,884 $ 28,924 $ 474,807 $ 108,154 $ 234,999 $ — $ — $ — $ — $ — $ — $ — Total $ 2,709,137 $ 28,924 $ 591,612 $ 147,059 $ 404,813 $ 49,291 $ 837,894 $ 359,881 $ 6,823 $ 2,119 $ 2,497 $ 122,626
(1) For individual fixed maturity investments, Standard & Poor’s ratings are used. In the absence of a Standard & Poor’s rating, ratings from Moody’s are used, followed by ratings from Fitch, followed by ratings from KBRA, followed by ratings from DBRS.
Corporate Function
The Company has a corporate function that includes general and administrative expenses related to corporate activities, interest expense, net foreign exchange gains (losses), income tax expense and items related to the Company’s contingently redeemable preference shares.
The Company incurred an interest expense of $2.9 million for the three months ended March 31, 2020, in relation to the Company’s 6.5% senior notes issued on July 2, 2019. Interest is paid semi-annually in arrears on January 2 and July 2.
Preference dividends were $1.2 million and $4.9 million for the three months ended March 31, 2020 and 2019, respectively.
During the quarter, the Company repurchased 127,744 common shares at an average price of $22.42 per share for an aggregate cost of $2.9 million . As of March 31, 2020, up to approximately $47.1 million of share repurchases were available under the program. In light of COVID-19 and the uncertain economic outlook, the Company has temporarily halted repurchases under the program.
Conference Call
The Company will hold a conference call on Tuesday, May 5, 2020 at 1:00 p.m. Eastern time to discuss its 2020 first quarter results. The Company also plans to discuss how the COVID-19 pandemic could impact its underwriting and investment portfolios in future periods and certain actions the Company has taken in response to the crisis. A live webcast of this call will be available via the Investors section of the Company’s website at http://investors.watfordre.com
About Watford Holdings Ltd.
Watford Holdings Ltd. is a global property and casualty insurance and reinsurance company with approximately $788.9 million in capital as of March 31, 2020, comprised of: $172.5 million of senior notes, $52.3 million of contingently redeemable preference shares and $564.1 million of common shareholders’ equity, with operations in Bermuda, the United States and Europe. Its operating subsidiaries have been assigned financial strength ratings of “A-” (Excellent) from A.M. Best and “A” from Kroll Bond Rating Agency. On May 1, 2020, A.M. Best announced that it had placed under review with negative implications the financial strength ratings of our operating subsidiaries.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
100%; border-collapse:collapse !important;"> (Unaudited) March 31, December 31, 75%; width:75% ; min-width:75% ;"> 1%; width:1% ; min-width:1% ;"> 10%; width:10% ; min-width:10% ;">2020 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;"> 10%; width:10% ; min-width:10% ;">2019 1%; width:1% ; min-width:1% ;"> Assets ($ in thousands) Investments: Term loans, fair value option (Amortized cost: $1,113,510 and $1,113,212) $ 906,999 $ 1,061,934 Fixed maturities, fair value option (Amortized cost: $504,750 and $432,576) 392,452 416,594 Short-term investments, fair value option (Cost: $348,059 and $325,542) 343,861 329,303 Equity securities, fair value option 58,091 59,799 Other investments, fair value option 30,682 30,461 Investments, fair value option 1,732,085 1,898,091 Fixed maturities, available for sale (Amortized cost: $749,835 and $739,456) 717,552 745,708 Equity securities, fair value through net income 63,169 65,338 Total investments 2,512,806 2,709,137 Cash and cash equivalents 96,580 102,437 Accrued investment income 16,344 14,025 Premiums receivable 281,541 273,657 Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses 197,458 170,974 Prepaid reinsurance premiums 128,570 132,577 Deferred acquisition costs, net 71,402 64,044 Receivable for securities sold 26,789 16,288 Intangible assets 7,650 7,650 Funds held by reinsurers 40,520 42,505 Other assets 27,287 17,562 Total assets $ 3,406,947 $ 3,550,856 Liabilities Reserve for losses and loss adjustment expenses $ 1,300,249 $ 1,263,628 Unearned premiums 478,663 438,907 Losses payable 46,424 61,314 Reinsurance balances payable 71,204 77,066 Payable for securities purchased 63,829 18,180 Payable for securities sold short 30,076 66,257 Revolving credit agreement borrowings 576,486 484,287 Senior notes 172,486 172,418 Amounts due to affiliates 4,168 4,467 Investment management and performance fees payable 5,428 17,762 Other liabilities 41,552 21,912 Total liabilities $ 2,790,565 $ 2,626,198 Commitments and contingencies Contingently redeemable preference shares 52,328 52,305 Shareholders’ equity Common shares ($0.01 par; shares authorized: 120 million; shares issued: 22,703,170 and 22,692,300) 227 227 Additional paid-in capital 898,693 898,083 Retained earnings (deficit) (224,737 ) 43,470 Accumulated other comprehensive income (loss) (32,206 ) 5,629 Common shares held in treasury, at cost (shares: 2,917,149 and 2,789,405) (77,923 ) (75,056 ) Total shareholders’ equity 564,054 872,353 Total liabilities, contingently redeemable preference shares and shareholders’ equity $ 3,406,947 $ 3,550,856
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
100%; border-collapse:collapse !important;"> (Unaudited) Three Months Ended March 31, 71%; width:71% ; min-width:71% ;"> 2%; width:2% ; min-width:2% ;"> 11%; width:11% ; min-width:11% ;">2020 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;"> 2%; width:2% ; min-width:2% ;"> 11%; width:11% ; min-width:11% ;">2019 1%; width:1% ; min-width:1% ;"> Revenues ($ in thousands except share and per share data) Gross premiums written $ 234,902 $ 186,689 Gross premiums ceded (48,202 ) (41,302 ) Net premiums written 186,700 145,387 Change in unearned premiums (46,661 ) 707 Net premiums earned 140,039 146,094 Other underwriting income (loss) 133 592 Interest income 37,824 43,141 Investment management fees - related parties (4,352 ) (4,409 ) Borrowing and miscellaneous other investment expenses (5,669 ) (8,298 ) Net interest income 27,803 30,434 Realized and unrealized gains (losses) on investments (290,502 ) 33,720 Investment performance fees - related parties — (5,800 ) Net investment income (loss) (262,699 ) 58,354 Total revenues (122,527 ) 205,040 Expenses Loss and loss adjustment expenses (110,676 ) (110,850 ) Acquisition expenses (28,367 ) (33,974 ) General and administrative expenses (7,139 ) (7,240 ) Interest expense (2,912 ) — Net foreign exchange gains (losses) 5,013 (437 ) Total expenses (144,081 ) (152,501 ) Income (loss) before income taxes (266,608 ) 52,539 Income tax expense — — Net income (loss) before preference dividends (266,608 ) 52,539 Preference dividends (1,171 ) (4,907 ) Net income (loss) available to common shareholders $ (267,779 ) $ 47,632 Other comprehensive income (loss) net of income tax: Available-for-sale investments: Unrealized holding gains (losses) arising during the period $ (28,431 ) $ 3,915 Unrealized foreign currency gains (losses) arising during the period (7,699 ) 1,130 Credit loss recognized in net income (loss) 563 — Reclassification of net realized (gains) losses, net of income taxes, included in net income (loss) (2,405 ) (229 ) Unrealized holding gains (losses) of available for sale investments (37,972 ) 4,816 Foreign currency translation adjustments 137 (165 ) Other comprehensive income (loss) net of income tax (37,835 ) 4,651 Comprehensive income (loss) $ (305,614 ) $ 52,283 Earnings (loss) per share: Basic and diluted $ (13.42 ) $ 2.10 Weighted average number of ordinary shares used in the determination of earnings (loss) per share: Basic and diluted 19,951,932 22,682,875
100%; border-collapse:collapse !important;"> Three Months Ended March 31, 68%; width:68% ; min-width:68% ;"> 2%; width:2% ; min-width:2% ;"> 11%; width:11% ; min-width:11% ;">2020 2%; width:2% ; min-width:2% ;"> 2%; width:2% ; min-width:2% ;"> 2%; width:2% ; min-width:2% ;"> 11%; width:11% ; min-width:11% ;">2019 2%; width:2% ; min-width:2% ;"> Numerator: ($ in thousands except share and per share data) Net income (loss) before preference dividends $ (266,608 ) $ 52,539 Preference dividends (1,171 ) (4,907 ) Net income (loss) available to common shareholders $ (267,779 ) $ 47,632 Denominator: Weighted average common shares outstanding - basic and diluted (1) 19,951,932 22,682,875 Earnings (loss) per common share: Basic and diluted $ (13.42 ) $ 2.10
(1) The weighted average non-vested restricted share units are excluded from the calculation of diluted weighted average common shares outstanding for the three months ended March 31, 2020, due to a net loss reported.
100%; border-collapse:collapse !important;"> March 31, December 31, September 30, June 30, March 31, 36%; min-width:36% ;"> 1%; min-width:1% ;"> 2020 1%; min-width:1% ;"> 1%; min-width:1% ;"> 2019 1%; min-width:1% ;"> 1%; min-width:1% ;"> 2019 1%; min-width:1% ;"> 1%; min-width:1% ;"> 2019 1%; min-width:1% ;"> 1%; min-width:1% ;"> 2019 Numerator: ($ in thousands except share and per share data) 36%; width:36% ; min-width:36% ;">Total shareholders’ equity 1%; width:1% ; min-width:1% ;">$ 11%; width:11% ; min-width:11% ;">564,054 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 11%; width:11% ; min-width:11% ;">872,353 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 11%; width:11% ; min-width:11% ;">960,773 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 11%; width:11% ; min-width:11% ;">961,296 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 11%; width:11% ; min-width:11% ;">941,891 Denominator: Common shares outstanding - basic 19,863,328 19,976,397 22,765,802 22,765,802 22,682,875 Effect of dilutive common share equivalents: Non-vested restricted share units (1) 131,277 82,360 82,360 82,360 — Common shares outstanding - diluted 19,994,605 20,058,757 22,848,162 22,848,162 22,682,875 Book value per common share $ 28.40 $ 43.67 $ 42.20 $ 42.23 $ 41.52 Book value per diluted common share $ 28.21 $ 43.49 $ 42.05 $ 42.07 $ 41.52
(1) During the first quarter of 2020, the Company granted 63,591 restricted share units and common shares to certain employees and directors, 48,917 of which are non-vested as of March 31, 2020. During the second quarter of 2019, the Company granted 165,287 restricted share units and common shares to certain employees and directors, 82,360 of which are non-vested as of March 31, 2020.
Comments on Regulation G
Throughout this release, the Company presents its operations in the way it believes will be the most meaningful and useful to investors, analysts, rating agencies and others who use the Company’s financial information in evaluating the performance of the Company and that investors and such other persons benefit from having a consistent basis for comparison between quarters and for comparison with other companies within the industry. These measures may not, however, be comparable to similarly titled measures used by companies outside of the insurance industry. Investors are cautioned not to place undue reliance on these non-U.S. GAAP financial measures in assessing the Company’s overall financial performance.
This presentation includes the use of “underwriting income (loss)” (which is defined as net premiums earned less loss and loss adjustment expenses, acquisition expenses and general and administrative expenses), “adjusted underwriting income (loss)” (which is defined as underwriting income (loss) plus other underwriting income (loss) less certain corporate expenses), and “adjusted combined ratio” (which is calculated by dividing the sum of loss and loss adjustment expenses, acquisition expenses and general and administrative expenses, less certain corporate expenses, by the sum of net premiums earned and other underwriting income (loss)). Certain corporate expenses are generally comprised of non-recurring costs of the holding company, such as costs associated with the initial setup of subsidiaries, as well as costs associated with the ongoing operations of the holding company such as compensation of certain executives.
The presentation of underwriting income (loss), adjusted underwriting income (loss) and the adjusted combined ratio are non-U.S. GAAP financial measures as defined in Regulation G. The reconciliation of such measures to net income (loss) available to common shareholders (the most directly comparable U.S. GAAP financial measure) in accordance with Regulation G is included on the following pages of this release.
Underwriting income (loss) is useful in evaluating our underwriting performance, without regard to other underwriting income (losses), net investment income (losses), net foreign exchange gains (losses), interest expense, income tax expenses and preference dividends, and adjusted underwriting income (loss) is useful in evaluating our underwriting performance, without regard to net investment income (losses), net foreign exchange gains (losses), interest expense, income tax expenses, preference dividends and certain corporate expenses, and the adjusted combined ratio is a key indicator of our profitability, without regard to certain corporate expenses. The Company believes that preference dividends, income tax expense, foreign exchange gains (losses), interest expense, net investment income (loss), other underwriting income (loss) and certain corporate expenses in any particular period are not indicative of the performance of, or trends in, the Company’s underwriting performance. Although preference dividends, income tax expense, foreign exchange gains (losses), interest expense, net investment income (loss) and other underwriting income (loss) are an integral part of the Company’s operations, the decision to realize investment gains or losses, the recognition of the change in the carrying value of investments accounted for using the fair value option in net realized gains or losses, and the recognition of foreign exchange gains or losses are independent of the underwriting process and result, in large part, from general economic and financial market conditions. Furthermore, certain users of the Company’s financial information believe that, for many companies, the timing of the realization of investment gains or losses is largely opportunistic. The Company believes that certain corporate expenses, due to their non-recurring nature, are not indicative of the performance of, or trends in, the Company’s business performance. Due to these reasons, the Company excludes preference dividends, income tax expense, foreign exchange gains (losses), interest expense, net investment income (loss), other underwriting income (loss) from the calculation of underwriting income (loss), and excludes preference dividends, income tax expense, foreign exchange gains (losses), interest expense, net investment income (loss) and certain corporate expenses from the calculation of adjusted underwriting income (loss) and the adjusted combined ratio.
The Company believes that showing underwriting income (loss), adjusted underwriting income (loss) and the adjusted combined ratio exclusive of the items referred to above reflects the underlying fundamentals of the Company’s business since the Company evaluates the performance of its business using underwriting income (loss), adjusted underwriting income (loss) and the adjusted combined ratio. The Company believes that this presentation enables investors and other users of the Company’s financial information to analyze the Company’s performance in a manner similar to how the Company’s management analyzes performance. The Company also believes that this measure follows industry practice and, therefore, allows the users of the Company’s financial information to compare the Company’s performance with its industry peer group. The Company believes that the equity analysts and certain rating agencies, which follow the Company and the insurance industry as a whole generally exclude these items from their analysis for the same reasons.
This presentation also includes the non-investment grade portfolio and investment grade portfolio components of our investment returns: “net interest income yield on average net assets” (calculated as net interest income divided by average net assets), “net investment income return on average total investments (excluding accrued investment income)” (calculated as net investment income divided by average total investments), and “net investment income return on average net assets” (calculated as net investment income divided by average net assets). Net assets is calculated as the sum of total investments, accrued investment income and receivables for securities sold, less revolving credit agreement borrowings, payable for securities purchased and payables for securities sold short. For the three-month period, average net assets is calculated using the averages of each quarterly period. However, for the investment grade portfolio component of these returns, the impact of the revolving credit agreement borrowings is not subtracted from net interest income, net investment income (loss) or the net assets calculation.
The presentation of the separate components of our investment returns (non-investment grade portfolio and investment grade portfolio) are non-U.S. GAAP financial measures as defined in Regulation G. The reconciliation of such measures to net interest income and net investment income (loss), the most directly comparable U.S. GAAP financial measures, in accordance with Regulation G is included on the following pages of this release.
The non-investment grade portfolio and investment grade portfolio components of our investment returns (net interest income yield on average net assets, net investment income return on average net assets and on average total investments (excluding accrued investment income), respectively) are useful in evaluating our investment performance. The non-investment grade portfolio components of these investment returns reflect the performance of our investment strategy under HPS Investment Partners, LLC (“HPS”), which includes the use of leverage. The investment grade portfolio component of these returns reflects the performance of the investment portfolios that predominantly support our underwriting collateral.
The following tables present a reconciliation of underwriting income (loss) to net income (loss) available to common shareholders, and a reconciliation of adjusted underwriting income (loss) to underwriting income (loss):
100%; border-collapse:collapse !important;"> Three Months Ended March 31, 68%; width:68% ; min-width:68% ;"> 2%; width:2% ; min-width:2% ;"> 11%; width:11% ; min-width:11% ;">2020 2%; width:2% ; min-width:2% ;"> 2%; width:2% ; min-width:2% ;"> 2%; width:2% ; min-width:2% ;"> 11%; width:11% ; min-width:11% ;">2019 2%; width:2% ; min-width:2% ;"> ($ in thousands) Net income (loss) available to common shareholders $ (267,779 ) $ 47,632 Preference dividends 1,171 4,907 Net income (loss) before dividends (266,608 ) 52,539 Income tax expense — — Interest expense 2,912 — Net foreign exchange (gains) losses (5,013 ) 437 Net investment (income) loss 262,699 (58,354 ) Other underwriting (income) loss (133 ) (592 ) Underwriting income (loss) (6,143 ) (5,970 ) Certain corporate expenses 2,996 1,963 Other underwriting income (loss) 133 592 Adjusted underwriting income (loss) $ (3,014 ) $ (3,415 )
The adjusted combined ratio reconciles to the combined ratio for the three months ended March 31, 2020 and 2019 as follows:
100%; border-collapse:collapse !important;"> Three Months Ended March 31, 2020 2019 Amount Adjustment As Amount Adjustment As ($ in thousands) 35%; width:35% ; min-width:35% ;">Losses and loss adjustment expenses 1%; width:1% ; min-width:1% ;">$ 8%; width:8% ; min-width:8% ;">110,676 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 8%; width:8% ; min-width:8% ;">— 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 8%; width:8% ; min-width:8% ;">110,676 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 8%; width:8% ; min-width:8% ;">110,850 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 8%; width:8% ; min-width:8% ;">— 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 8%; width:8% ; min-width:8% ;">110,850 1%; width:1% ; min-width:1% ;"> Acquisition expenses 28,367 — 28,367 33,974 — 33,974 General & administrative expenses (1) 7,139 (2,996 ) 4,143 7,240 (1,963 ) 5,277 Net premiums earned (1) 140,039 133 140,172 146,094 592 146,686 Loss ratio 79.0 % 75.9 % Acquisition expense ratio 20.3 % 23.3 % General & administrative expense ratio (1) 5.1 % 4.9 % Combined ratio 104.4 % 104.1 % Adjusted loss ratio 79.0 % 75.6 % Adjusted acquisition expense ratio 20.2 % 23.2 % Adjusted general & administrative expense ratio 3.0 % 3.5 % Adjusted combined ratio 102.2 % 102.3 %
(1) Adjustments include certain corporate expenses, which are deducted from general and administrative expenses, and other underwriting income (loss), which is added to net premiums earned.
The following tables summarize the components of our total investment return for the three months ended March 31, 2020 and 2019:
100%; border-collapse:collapse !important;"> Three Months Ended March 31, 2020 Three Months Ended March 31, 2019 Non-Investment Grade Investment Grade Cost of U/W Collateral (4) Total Non-Investment Grade Investment Grade Cost of U/W Collateral (4) Total ($ in thousands) 21%; width:21% ; min-width:21% ;">Interest income 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">32,764 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">5,060 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">— 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">37,824 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">37,339 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">5,802 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">— 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">43,141 1%; width:1% ; min-width:1% ;"> Investment management fees - related parties (3,973 ) (379 ) — (4,352 ) (4,071 ) (338 ) — (4,409 ) Borrowing and miscellaneous other investment expenses (2,591 ) (225 ) (2,853 ) (5,669 ) (4,858 ) (204 ) (3,236 ) (8,298 ) Net interest income 26,200 4,456 (2,853 ) 27,803 28,410 5,260 (3,236 ) 30,434 Net realized gains (losses) on investments (7,225 ) 2,179 — (5,046 ) 1,319 (37 ) — 1,282 Net unrealized gains (losses) on investments (1) (285,493 ) 37 — (285,456 ) 27,625 4,813 — 32,438 Investment performance fees - related parties — — — — (5,800 ) — — (5,800 ) Net investment income (loss) $ (266,518 ) $ 6,672 $ (2,853 ) $ (262,699 ) $ 51,554 $ 10,036 $ (3,236 ) $ 58,354 Average total investments (2) $ 1,790,337 $ 820,635 $ — $ 2,610,972 $ 1,895,843 $ 888,424 $— $ 2,784,267 Average net assets (3) $ 1,530,825 $ 826,062 $ (328,750 ) $ 2,028,137 $ 1,506,245 $ 886,927 $ (316,987 ) $ 2,076,185 Net interest income yield on average net assets (3) 1.7 % 0.5 % 1.4 % 1.9 % 0.6 % 1.5 % Net investment income return on average total investments (excluding accrued investment income) (2) (14.9 )% 0.8 % (10.1 )% 2.7 % 1.1 % 2.1 % Net investment income return on average net assets (3) (17.4 )% 0.8 % (0.9 )% (13.0 )% 3.4 % 1.1 % (1.0 )% 2.8 %
(1) Net unrealized gains (losses) on investments excludes unrealized gains and losses from the available for sale portfolios, which are recorded in other comprehensive income.
(2) Net investment income return on average total investments (excluding accrued investment income) is calculated by dividing net investment income by average total investments. For the three-month period, average total investments is calculated using the average of the beginning and ending balance of each quarterly period. However, for the investment grade portfolio component of these returns, the impact of revolving credit agreement borrowings is not subtracted from net investment income.
(3) Net interest income yield on average net assets and net investment income return on average net assets are calculated by dividing net interest income, and net investment income (loss), respectively, by average net assets. For the non-investment grade component of investment returns and total investment returns, net assets is calculated as the sum of total investments, accrued investment income and receivables for securities sold, less total revolving credit agreement borrowings, payable for securities purchased and payable for securities sold short. However, for the investment grade portfolio component of these returns, the impact of the revolving credit agreement borrowings is not subtracted from net interest income, net investment income (loss), or the net assets calculation.
(4) The cost of underwriting collateral is calculated as the revolving credit agreement expenses for the investment grade portfolios divided by the average total revolving credit agreement borrowings for the investment grade portfolios during the period.
100%; border-collapse:collapse !important;"> As of March 31, 2020 As of March 31, 2019 Non-Investment Grade Investment Borrowings for U/W Collateral Total Non-Investment Grade Investmen Borrowings for U/W Collateral Total ($ in thousands) 21%; width:21% ; min-width:21% ;">Average total investments - QTD 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">1,790,337 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">820,635 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">— 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">2,610,972 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">1,895,843 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">888,424 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">— 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;"> 1%; width:1% ; min-width:1% ;">$ 7%; width:7% ; min-width:7% ;">2,784,267 1%; width:1% ; min-width:1% ;"> Average net assets - QTD 1,530,825 826,062 (328,750 ) 2,028,137 1,506,245 886,927 (316,987 ) 2,076,185 Total investments $ 1,718,421 $ 794,385 $ — $ 2,512,806 $ 1,909,095 $ 921,071 $ — $ 2,830,166 Accrued Investment Income 12,312 4,032 — 16,344 13,300 4,046 — 17,346 Receivable for Securities Sold 22,329 4,460 — 26,789 62,365 201 — 62,566 Less: Payable for Securities Purchased 61,834 1,995 — 63,829 83,189 12,388 — 95,577 Less: Payable for Securities Sold Short 30,076 — — 30,076 28,737 — — 28,737 Less: Revolving credit agreement borrowings 247,736 — 328,750 576,486 326,256 — 326,487 652,743 Net assets $ 1,413,416 $ 800,882 $ (328,750 ) $ 1,885,548 $ 1,546,578 $ 912,930 $ (326,487 ) $ 2,133,021 Non-investment grade borrowing ratio (1) 17.50 % 21.10 % Unrealized gains on investments $ 25,439 $ 15,086 $ — $ 40,525 $ 28,066 $ 4,040 $ — $ 32,106 Unrealized losses on investments (366,188 ) (47,603 ) — (413,791 ) (104,700 ) (6,835 ) — (111,535 ) Net unrealized gains (losses) on investments $ (340,749 ) $ (32,517 ) $ — $ (373,266 ) $ (76,634 ) $ (2,795 ) $ — $ (79,429 )
(1) The non-investment grade borrowing ratio is calculated as revolving credit agreement borrowings divided by net assets.
Cautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the “PSLRA”) provides a “safe harbor” for forward-looking statements. This release or any other written or oral statements made by or on behalf of the Company may include forward-looking statements, which reflect the Company’s current views with respect to future events and financial performance. All statements other than statements of historical fact included in or incorporated by reference in this release are forward-looking statements. Forward-looking statements, for purposes of the PSLRA or otherwise, can generally be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” and similar statements of a future or forward-looking nature or their negative or variations or similar terminology. These forward-looking statements include statements regarding the Company’s return on equity potential and prospects for further book value growth.
Forward-looking statements involve the Company’s current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. Important factors that could cause actual events or results to differ materially from those indicated in such statements are discussed below and elsewhere in this release and in the Company’s periodic reports filed with the Securities and Exchange Commission (the “SEC”), and include:
our limited operating history; fluctuations in the results of our operations; our ability to compete successfully with more established competitors; our losses exceeding our reserves; downgrades, potential downgrades or other negative actions by rating agencies, including A.M. Best’s recent announcement that it has placed under review with negative implications the financial strength and credit ratings of our operating subsidiaries; our dependence on key executives and inability to attract qualified personnel, or the potential loss of Bermudian personnel as a result of Bermuda employment restrictions; our dependence on letter of credit facilities that may not be available on commercially acceptable terms; our potential inability to pay dividends or distributions; our potential need for additional capital in the future and the potential unavailability of such capital to us on favorable terms or at all; our dependence on clients’ evaluations of risks associated with such clients’ insurance underwriting; the suspension or revocation of our subsidiaries’ insurance licenses; Watford Holdings potentially being deemed an investment company under U.S. federal securities law; the potential characterization of us and/or any of our subsidiaries as a passive foreign investment company (“PFIC”); our dependence on certain subsidiaries of Arch Capital Group Ltd. (“Arch”) for services critical to our underwriting operations; changes to our strategic relationship with Arch or the termination by Arch of any of our services agreements or quota share agreements; our dependence on HPS and Arch Investment Management Ltd. (“AIM”) to implement our investment strategy; the termination by HPS or AIM of any of our investment management agreements; risks associated with our investment strategy being greater than those faced by competitors; changes in the regulatory environment; our potentially becoming subject to U.S. federal income taxation; our potentially becoming subject to U.S. withholding and information reporting requirements under the U.S. Foreign Account Tax Compliance Act (“FATCA”) provisions; our ability to complete acquisitions and integrate businesses successfully; adverse general economic and market conditions, including those caused by pandemics, including COVID-19, and government actions in response thereto; and the other matters set forth under Item 1A “Risk Factors,” Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other sections of the Company’s Annual Report on Form 10-K, as well as the other factors set forth in the Company’s other documents on file with the SEC, and management’s response to any of the aforementioned factors. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Contact
Robert L. Hawley: (441) 278-3456
rhawley@watfordre.com
