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Watford Reports 2020 Second Quarter Results

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PEMBROKE, Bermuda, July 29, 2020 (GLOBE NEWSWIRE) -- WATFORD HOLDINGS LTD. (“Watford” or the “Company”) (NASDAQ: WTRE) today reported net income of $188.8 million, after $1.1 million of preference dividends, for the three months ended June 30, 2020, compared to net income of $13.8 million, after payment of $4.9 million of preference dividends, for the same period in 2019. Book value per diluted common share was $38.82 at June 30, 2020, an increase of 37.6% from March 31, 2020. The quarterly results include:

  • Net income available to common shareholders of $188.8 million, or $9.51 per diluted common share, or a 28.2% return on average equity, compared to net income of $13.8 million, or $0.61 per diluted common share, or a 1.5% return on average equity for the 2019 second quarter;

  • Combined ratio of 108.0%, comprised of a 79.7% loss ratio, a 22.4% acquisition expense ratio and a 5.9% general and administrative expense ratio, compared to a combined ratio of 103.5% for the prior year second quarter, comprised of a 73.6% loss ratio, a 23.4% acquisition expense ratio and a 6.5% general and administrative expense ratio;

  • Net interest income of $27.4 million, a 1.4% yield on average net assets, for the 2020 second quarter, compared to net interest income of $26.4 million and a 1.2% yield on average net assets for the 2019 second quarter; and

  • Net investment income of $199.5 million, a 10.0% return on average net assets for the 2020 second quarter, compared to net investment income of $23.8 million and a 1.1% return on average net assets for the 2019 second quarter.

Following the first quarter of 2020, the novel coronavirus (COVID-19) pandemic has continued to cause unprecedented economic volatility and disruption globally.

At this time, there continues to be 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 June 30, 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 second quarter financial results, Jon Levy, CEO of Watford, said:

“First, we would like to express our sympathy to all those affected by the COVID-19 global pandemic, as well as our appreciation for those who continue to provide support and care to the individuals who need it most. I’d also like to again thank the Watford employees and broader Watford team who have continued to deliver in this challenging environment.

Despite the backdrop of significant turmoil created by the pandemic, Watford demonstrated its resilience and delivered a strong financial performance. Our net income of $188.8 million for the quarter was driven by $199.5 million of net investment income. Our net interest income remained steady at $27.4 million, representing a quarterly yield on average net assets of 1.4%. Realized and unrealized gains for the quarter totaled $172.1 million, with an additional $23.0 million in other comprehensive income. In aggregate, our book value per diluted common share increased $10.61, or 37.6% from March 31, 2020.

Our combined ratio for the quarter was 108.0%, and 104.7% when adjusted for other underwriting income and certain corporate expenses. The COVID-19 global pandemic has created significant uncertainty for the property and casualty industry, though we believe our mix of business is less exposed to classes likely to be materially affected. Watford recognized a COVID-19 loss provision of $5.2 million, or 4.0 loss ratio points, for the second quarter, almost exclusively arising from business interruption coverage in our property catastrophe reinsurance line of business.

Insurance and reinsurance conditions continue to improve. We believe our insurance and reinsurance platforms are well positioned in the hardening marketplace.”


Underwriting

The following table summarizes the Company’s underwriting results on a consolidated basis:

 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 % Change 2020 2019 % Change
  
 ($ in thousands)
Gross premiums written$157,927  $161,978  (2.5)% $392,829  $348,667  12.7%
Net premiums written 105,856   119,370  (11.3)%  292,556   264,757  10.5%
Net premiums earned 131,535   151,318  (13.1)%  271,574   297,412  (8.7)%
Underwriting income (loss) (1) (10,578)  (5,266) (100.9)%  (16,721)  (11,236) (48.8)%
            
     % Point
Change
     % Point
Change
Loss ratio 79.7%  73.6% 6.1%  79.3%  74.7% 4.6%
Acquisition expense ratio 22.4%  23.4% (1.0)%  21.3%  23.3% (2.0)%
General & administrative expense ratio 5.9%  6.5% (0.6)%  5.6%  5.8% (0.2)%
Combined ratio 108.0%  103.5% 4.5%  106.2%  103.8% 2.4%
Adjusted combined ratio (2) 104.7%  99.9% 4.8%  103.4%  101.1% 2.3%

(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:

 Three Months Ended June 30, Six Months Ended June 30,
 2020
 2019
 2020
 2019
   
 ($ in thousands) 
Gross premiums written:        
Casualty reinsurance$25,125  $32,557  $108,943  $108,158 
Other specialty reinsurance 21,080   37,836   57,960   62,134 
Property catastrophe reinsurance 11,253   5,929   21,085   11,921 
Insurance programs and coinsurance 100,469   85,656   204,841   166,454 
Total$157,927  $161,978  $392,829  $348,667 
         
Net premiums written:        
Casualty reinsurance$24,774  $32,077  $108,441  $107,142 
Other specialty reinsurance 19,843   36,523   55,327   59,705 
Property catastrophe reinsurance 10,506   5,621   20,338   11,603 
Insurance programs and coinsurance 50,733   45,149   108,450   86,307 
Total$105,856  $119,370  $292,556  $264,757 
         
Net premiums earned:        
Casualty reinsurance$48,146  $67,506  $100,911  $130,819 
Other specialty reinsurance 29,876   42,635   65,240   87,196 
Property catastrophe reinsurance 5,824   3,119   10,708   6,090 
Insurance programs and coinsurance 47,689   38,058   94,715   73,307 
Total$131,535  $151,318  $271,574  $297,412 

The following table shows the components of our loss and loss adjustment expenses for the three and six months ended June 30, 2020 and 2019:

 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
 Loss and Loss
Adjustment
Expenses
 % of Earned
Premiums
 Loss and Loss
Adjustment
Expenses
 % of Earned
Premiums
 Loss and Loss
Adjustment
Expenses
 % of Earned
Premiums
 Loss and Loss
Adjustment
Expenses
 % of Earned
Premiums
  
 ($ in thousands)
Current year$104,993  79.9% $111,494  73.7% $215,849  79.5% $222,395  74.8%
Prior year development (favorable)/adverse (207) (0.2)%  (78) (0.1)%  (387) (0.2)%  (129) (0.1)%
Loss and loss adjustment expenses$104,786  79.7% $111,416  73.6% $215,462  79.3% $222,266  74.7%

Results for the three months ended June 30, 2020 versus 2019:

Gross and net premiums written in the 2020 second quarter were 2.5% and 11.3% lower, respectively, than the 2019 second quarter. The decrease in gross and net premiums written reflected a decrease in casualty reinsurance and other specialty reinsurance premiums written, offset in part by an increase in insurance programs and coinsurance and property catastrophe reinsurance in the 2020 second quarter. In addition, a higher portion of insurance programs and coinsurance premiums written were ceded in the 2020 second quarter compared to the 2019 second quarter.

Net premiums earned in the 2020 second quarter were 13.1% lower than the 2019 second quarter. The decrease in earned premiums reflected reduced participations and non-renewals for certain casualty reinsurance deals. In addition, the decrease in other specialty reinsurance premiums was driven by a contract written and earned with no comparable premium this quarter, as well as a reduction in our exposure to U.S. mortgage risk. These decreases were partially offset by increased writings in insurance programs and coinsurance, and, to a lesser extent, greater assumed property catastrophe reinsurance.

The loss ratio was 79.7% in the 2020 second quarter compared to 73.6% in the 2019 second quarter.  In the 2020 second quarter, the increase in loss ratio was primarily driven by COVID-19 related losses of $5.2 million, or 4.0 points, which mainly impacted property catastrophe reinsurance business. The prior year loss reserve development for both the 2020 and 2019 second quarters was essentially flat. The acquisition expense ratio was 22.4% in the 2020 second quarter, compared to 23.4% in the 2019 second quarter. These ratio movements also reflect changes in mix and the type of business.

The general and administrative expense ratio was 5.9% in the 2020 second quarter, compared to 6.5% in the 2019 second quarter. The 0.6 point decrease versus the prior year second quarter was primarily attributable to a one-time accelerated long term incentive expense recognized in the 2019 second quarter. Removing certain corporate expenses, our adjusted general and administrative expense ratio was 3.3% in the 2020 second quarter consistent with 3.3% in the 2019 second quarter.


Investments

The following table summarizes the Company’s key investment returns on a consolidated basis:

 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
  
 ($ in thousands)
Interest income$36,453  $38,596  $74,277  $81,737 
Investment management fees - related parties (4,262)  (4,570)  (8,614)  (8,979)
Borrowing and miscellaneous other investment expenses (4,763)  (7,611)  (10,432)  (15,909)
Net interest income 27,428   26,415   55,231   56,849 
Realized gains (losses) on investments (6,001)  789   (11,047)  2,071 
Unrealized gains (losses) on investments 178,064   (1,725)  (107,392)  30,713 
Investment performance fees - related parties    (1,692)     (7,492)
Net investment income (loss)$199,491  $23,787  $(63,208) $82,141 
        
Unrealized gains on investments (balance sheet)$59,123  $35,228  $59,123  $35,228 
Unrealized losses on investments (balance sheet) (244,474)  (113,937)  (244,474)  (113,937)
Net unrealized gains (losses) on investments (balance sheet)$(185,351) $(78,709) $(185,351) $(78,709)
        
Net interest income yield on average net assets (1) 1.4%  1.2%  2.7%  2.7%
Non-investment grade portfolio (1) 1.8%  1.6%  3.5%  3.5%
Investment grade portfolio (1) 0.4%  0.6%  1.0%  1.2%
Net investment income return on average net assets (1) 10.0%  1.1%  (3.1)%  3.9%
Non-investment grade portfolio (1) 13.1%  1.2%  (5.2)%  4.6%
Investment grade portfolio (1) 1.6%  1.0%  2.4%  2.1%
Net investment income return on average total investments (excluding accrued investment income) (2) 7.7%  0.8%  (2.4)%  2.9%
Non-investment grade portfolio (2) 10.6%  1.0%  (4.3)%  3.7%
Investment grade portfolio (2) 1.6%  1.0%  2.4%  2.1%

(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- and six-month periods, 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- and six-month periods, 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).

Results for the three months ended June 30, 2020 versus 2019:

Net investment income was $199.5 million for the three months ended June 30, 2020 compared to net investment income of $23.8 million for the three months ended June 30, 2019, an increase of $175.7 million. The 2020 second quarter net investment income return on average net assets was 10.0% as compared to 1.1% for the prior year period.

The 2020 second quarter net investment income return was driven by net unrealized gains of $178.1 million as the credit markets partially recovered through the quarter. Net interest income increased to $27.4 million from $26.4 million, an increase of 3.8% quarter over quarter.

The 2020 second quarter non-investment grade portfolio net interest income yield was 1.8%, compared with 1.6% in the second quarter of 2019. The net realized and unrealized gains reported in the 2020 second quarter were $163.1 million, reflective of the credit market recovery discussed above.

The 2020 second quarter investment grade portfolio net interest income yield was 0.4%, a decrease from 0.6% in the prior year period. In addition, the investment grade portfolio recognized $8.9 million of net realized and unrealized gains in the quarter as compared to gains of $3.8 million in the second quarter of 2019.

The following tables summarize the composition of the Company's non-investment grade and investment grade portfolios by sector as of June 30, 2020 and March 31, 2020:

 June 30, 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$875,560 $188,970 $170,442 $186,367 $113,733 $90,250 $36,455 $29,573 $59,770
Corporate bonds 378,183  44,898  26,626  16,720  105,543  33,870  68,314  29,516  52,696
Equities - sector specific 93,872  62,350  22,577  7,266    641    264  774
Short-term investments - sector specific 2,184      1,682      502    
Subtotal 1,349,799  296,218  219,645  212,035  219,276  124,761  105,271  59,353  113,240
Equities - non-sector specific 27,470                
Short-term investments - non-sector specific 267,904                
Asset-backed securities 157,925                
Other investments 34,142                
Mortgage-backed securities 9,164                
Total Non-Investment Grade Portfolio$1,846,404 $296,218 $219,645 $212,035 $219,276 $124,761 $105,271 $59,353 $113,240
                  
Investment Grade Portfolio:                 
Corporate bonds$169,918 $51,327 $10,834 $18,688 $22,738 $11,942 $35,818 $11,388 $7,183
Short-term investments 99,978                
U.S. government and government agency bonds 217,459                
Non-U.S. government and government agency bonds 151,124                
Asset-backed securities 130,327                
Mortgage-backed securities 22,018                
Municipal government and government agency bonds 2,117                
Total Investment Grade Portfolio$792,941 $51,327 $10,834 $18,688 $22,738 $11,942 $35,818 $11,388 $7,183
Total Investments$2,639,345 $347,545 $230,479 $230,723 $242,014 $136,703 $141,089 $70,741 $120,423

(1) Includes telecommunications, utilities and basic materials.


 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$906,999 $190,535 $195,084 $199,837 $98,518 $89,778 $40,415 $32,049 $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 - non-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.


The table below summarizes the credit quality of the Company's non-investment grade and investment grade portfolios as of June 30, 2020 and March 31, 2020, 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:

 Credit Rating (1)
June 30, 2020Fair Value AAA AA A BBB BB B CCC CC C D Not Rated
  
 ($ in thousands)
Non-Investment Grade Portfolio:                       
Term loan investments$875,560 $ $ $ $ $23,218 $530,118 $247,478 $15,191 $2,192  28046 $29,317
Corporate bonds 378,183        37373  50,125  152,648  113,723  6268  5585  3956  8,505
Asset-backed securities 157,925      3,854  98,827  23,136  8,767  1663        21,678
Mortgage-backed securities 9,164          1292          3,224  4,648
Short-term investments 270,088  34859  172,166  60,880    502            1,681
Total fixed income instruments and short-term investments 1,690,920  34859  172,166  64,734  136,200  98,273  691,533  362,864  21,459  7,777  35,226  65,829
Other Investments 34,142                      
Equities 121,342                      
Total Non-Investment Grade Portfolio$1,846,404  34859 $172,166 $64,734 $136,200 $98,273 $691,533 $362,864 $21,459 $7,777 $35,226 $65,829
                        
Investment Grade Portfolio:                       
Corporate bonds$169,918 $ $16,032 $90,087 $58,858  4941 $ $ $ $ $ $
U.S. government and government agency bonds 217,459    217,459                  
Asset-backed securities 130,327  1,377    19,621  108,790  539            
Mortgage-backed securities 22,018    602  4,794  16,622              
Non-U.S. government and government agency bonds 151,124    151,124                  
Municipal government and government agency bonds 2,117  1,039  586  492                
Short-term investments 99,978  3,448  22,656  0  73,874              
Total Investment Grade Portfolio$792,941 $5,864 $408,459 $114,994 $258,144  5480 $ $ $ $ $ $
Total$2,639,345 $40,723 $580,625 $179,728 $394,344 $103,753 $691,533 $362,864 $21,459 $7,777 $35,226 $65,829

(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.


 Credit Rating (1)
March 31, 2020Fair Value AAA AA A BBB BB B CCC CC C D Not Rated
  
 ($ in thousands)
Non-Investment Grade Portfolio:                       
Term loan investments$906,999 $ $ $ $ $10,277 $650,028 $161,307 $2,823 $1,314 $1,590 $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.


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 June 30, 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 $1.1 million and $4.9 million for the three months ended June 30, 2020 and 2019, respectively.

There were no share repurchases during the 2020 second quarter. As of June 30, 2020, approximately $47.1 million of share repurchases were available under the Company’s previously announced $50 million share repurchase program.

Conference Call

The Company will hold a conference call on Thursday, July 30, 2020 at 1:00 p.m. Eastern time to discuss its 2020 second quarter results. A live webcast of this call will be available via the Investors section of the Company’s website at http://investors.watfordre.com. A replay of the conference call will also be available via the Investors section of the Company’s website beginning on July 31, 2020.

About Watford Holdings Ltd.

Watford Holdings Ltd. is a global property and casualty insurance and reinsurance company with approximately $1.0 billion in capital as of June 30, 2020, comprised of: $172.6 million of senior notes, $52.4 million of contingently redeemable preference shares and $776.2 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. In addition, on June 17, 2020, Kroll Bond Rating Agency reaffirmed the “A” insurance financial strength ratings of our operating subsidiaries, and revised the outlook for all of the ratings to negative.



CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 (Unaudited)  
 June 30, December 31,
 2020 2019
  
Assets($ in thousands, except share data)
Investments:   
Term loans, fair value option (Amortized cost: $991,130 and $1,113,212)$875,560  $1,061,934 
Fixed maturities, fair value option (Amortized cost: $611,265 and $432,576) 548,010   416,594 
Short-term investments, fair value option (Cost: $370,976 and $325,542) 370,066   329,303 
Equity securities, fair value option 58,898   59,799 
Other investments, fair value option 34,142   30,461 
Investments, fair value option 1,886,676   1,898,091 
Fixed maturities, available for sale (Amortized cost: $698,897 and $739,456) 690,225   745,708 
Equity securities, fair value through net income 62,444   65,338 
Total investments 2,639,345   2,709,137 
Cash and cash equivalents 107,653   102,437 
Accrued investment income 14,364   14,025 
Premiums receivable 258,178   273,657 
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses 229,746   170,974 
Prepaid reinsurance premiums 131,919   132,577 
Deferred acquisition costs, net 64,149   64,044 
Receivable for securities sold 31,314   16,288 
Intangible assets 7,650   7,650 
Funds held by reinsurers 41,112   42,505 
Other assets 22,328   17,562 
Total assets$3,547,758  $3,550,856 
Liabilities   
Reserve for losses and loss adjustment expenses$1,353,049  $1,263,628 
Unearned premiums 456,170   438,907 
Losses payable 58,292   61,314 
Reinsurance balances payable 72,776   77,066 
Payable for securities purchased 67,272   18,180 
Payable for securities sold short 29,289   66,257 
Revolving credit agreement borrowings 472,361   484,287 
Senior notes 172,554   172,418 
Amounts due to affiliates 4,542   4,467 
Investment management and performance fees payable 5,511   17,762 
Other liabilities 27,440   21,912 
Total liabilities$2,719,256  $2,626,198 
Commitments and contingencies   
Contingently redeemable preference shares 52,351   52,305 
Shareholders’ equity   
Common shares ($0.01 par; shares authorized: 120 million; shares issued: 22,804,128 and 22,692,300) 227   227 
Additional paid-in capital 898,935   898,083 
Retained earnings (deficit) (35,909)  43,470 
Accumulated other comprehensive income (loss) (9,179)  5,629 
Common shares held in treasury, at cost (shares: 2,917,149 and 2,789,405) (77,923)  (75,056)
Total shareholders’ equity 776,151   872,353 
Total liabilities, contingently redeemable preference shares and shareholders’ equity$3,547,758  $3,550,856 
        
        


CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

 (Unaudited) (Unaudited)
 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
  
Revenues($ in thousands except share and per share data)
Gross premiums written$157,927  $161,978  $392,829  $348,667 
Gross premiums ceded (52,071)  (42,608)  (100,273)  (83,910)
Net premiums written 105,856   119,370   292,556   264,757 
Change in unearned premiums 25,679   31,948   (20,982)  32,655 
Net premiums earned 131,535   151,318   271,574   297,412 
Other underwriting income (loss) 868   673   1,001   1,265 
Interest income 36,453   38,596   74,277   81,737 
Investment management fees - related parties (4,262)  (4,570)  (8,614)  (8,979)
Borrowing and miscellaneous other investment expenses (4,763)  (7,611)  (10,432)  (15,909)
Net interest income 27,428   26,415   55,231   56,849 
Realized and unrealized gains (losses) on investments 172,063   (936)  (118,439)  32,784 
Investment performance fees - related parties    (1,692)     (7,492)
Net investment income (loss) 199,491   23,787   (63,208)  82,141 
Total revenues 331,894   175,778   209,367   380,818 
Expenses       
Loss and loss adjustment expenses (104,786)  (111,416)  (215,462)  (222,266)
Acquisition expenses (29,486)  (35,417)  (57,853)  (69,391)
General and administrative expenses (7,841)  (9,751)  (14,980)  (16,991)
Interest expense (2,911)     (5,823)   
Net foreign exchange gains (losses) 2,665   (441)  7,678   (878)
Total expenses (142,359)  (157,025)  (286,440)  (309,526)
Income (loss) before income taxes 189,535   18,753   (77,073)  71,292 
Income tax expense 402   (20)  402   (20)
Net income (loss) before preference dividends 189,937   18,733   (76,671)  71,272 
Preference dividends (1,109)  (4,908)  (2,280)  (9,815)
Net income (loss) available to common shareholders$188,828  $13,825  $(78,951) $61,457 
        
Other comprehensive income (loss) net of income tax:       
Available-for-sale investments:       
Unrealized holding gains (losses) arising during the period$31,240  $6,532  $2,809  $10,613 
Unrealized foreign currency gains (losses) arising during the period 279   (1,678)  (7,420)  (548)
Credit loss recognized in net income (loss) (212)     351    
Reclassification of net realized (gains) losses, net of income taxes, included in net income (loss) (8,331)  (1,816)  (10,736)  (2,211)
Unrealized holding gains (losses) of available for sale investments 22,976   3,038   (14,996)  7,854 
Foreign currency translation adjustments 51   212   188   47 
Other comprehensive income (loss) net of income tax 23,027   3,250   (14,808)  7,901 
Comprehensive income (loss)$211,855  $17,075  $(93,759) $69,358 
Earnings (loss) per share:       
Basic and diluted$9.51  $0.61  $(3.97) $2.71 
Weighted average number of ordinary shares used in the determination of earnings (loss) per share:       
Basic 19,863,048   22,740,762   19,907,490   22,711,833 
Diluted 19,863,048   22,747,033   19,907,490   22,714,969 
                
                


 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
  
Numerator:($ in thousands except share and per share data)
Net income (loss) before preference dividends$189,937  $18,733  $(76,671) $71,272 
Preference dividends (1,109)  (4,908)  (2,280)  (9,815)
Net income (loss) available to common shareholders$188,828  $13,825  $(78,951) $61,457 
Denominator:       
Weighted average common shares outstanding - basic 19,863,048   22,740,762   19,907,490   22,711,833 
Effect of dilutive common share equivalents:       
Weighted average non-vested restricted share units (1)    6,271      3,136 
Weighted average common shares outstanding - diluted 19,863,048   22,747,033   19,907,490   22,714,969 
Earnings (loss) per common share:       
Basic and diluted$9.51  $0.61  $(3.97) $2.71 

(1) The weighted average non-vested restricted share units are excluded from the calculation of diluted weighted average common shares outstanding for the six months ended June 30, 2020, due to a net loss reported.



 June 30, March 31, December 31, September 30, June 30,
 2020 (1) 2020 (2)  2019  2019 2019 (3)
  
Numerator:($ in thousands except share and per share data)
Total shareholders’ equity$776,151 $564,054 $872,353 $960,773 $961,296
Denominator:         
Common shares outstanding - basic (1)(2)(3) 19,890,784  19,863,328  19,976,397  22,765,802  22,765,802
Effect of dilutive common share equivalents:         
Non-vested restricted share units (2)(3) 103,820  131,277  82,360  82,360  82,360
Common shares outstanding - diluted 19,994,604  19,994,605  20,058,757  22,848,162  22,848,162
          
Book value per common share$39.02 $28.40 $43.67 $42.20 $42.23
Book value per diluted common share$38.82 $28.21 $43.49 $42.05 $42.07

(1) During the second quarter of 2020, the Company issued 100,958 common shares, related to the restricted share units granted to certain employees and directors in the second quarter of 2019. Of these shares, 27,456 common shares vested in the second quarter of 2020.

(2) During the first quarter of 2020, the Company granted 63,591 restricted share units and common shares to certain employees and directors, 48,916 of which are non-vested as of June 30, 2020.

(3) During the second quarter of 2019, the Company granted 165,287 restricted share units and common shares to certain employees and directors, 54,904 of which are non-vested as of June 30, 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 costs associated with the ongoing operations of the holding company, such as compensation of certain executives and costs associated with the initial setup of subsidiaries.

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 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- and six-month periods, 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):

 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
  
 ($ in thousands)
Net income (loss) available to common shareholders$188,828  $13,825  $(78,951) $61,457 
Preference dividends 1,109   4,908   2,280   9,815 
Net income (loss) before dividends 189,937   18,733   (76,671)  71,272 
Income tax expense (402)  20   (402)  20 
Interest expense 2,911      5,823    
Net foreign exchange (gains) losses (2,665)  441   (7,678)  878 
Net investment (income) loss (199,491)  (23,787)  63,208   (82,141)
Other underwriting (income) loss (868)  (673)  (1,001)  (1,265)
Underwriting income (loss) (10,578)  (5,266)  (16,721)  (11,236)
Certain corporate expenses 3,443   4,795   6,439   6,758 
Other underwriting income (loss) 868   673   1,001   1,265 
Adjusted underwriting income (loss)$(6,267) $202  $(9,281) $(3,213)

The adjusted combined ratio reconciles to the combined ratio for the three and six months ended June 30, 2020 and 2019 as follows:

 Three Months Ended June 30,
 2020 2019
 Amount Adjustment As Adjusted Amount Adjustment As Adjusted
  
 ($ in thousands)
Losses and loss adjustment expenses$104,786  $  $104,786  $111,416  $  $111,416 
Acquisition expenses 29,486      29,486   35,417      35,417 
General & administrative expenses (1) 7,841   (3,443)  4,398   9,751   (4,795)  4,956 
Net premiums earned (1) 131,535   868   132,403   151,318   673   151,991 
            
Loss ratio 79.7%      73.6%    
Acquisition expense ratio 22.4%      23.4%    
General & administrative expense ratio (1) 5.9%      6.5%    
Combined ratio 108.0%      103.5%    
Adjusted loss ratio     79.1%      73.3%
Adjusted acquisition expense ratio     22.3%      23.3%
Adjusted general & administrative expense ratio     3.3%      3.3%
Adjusted combined ratio     104.7%      99.9%

(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.

 Six Months Ended June 30,
 2020 2019
 Amount Adjustment As Adjusted Amount Adjustment As Adjusted
  
 ($ in thousands)
Losses and loss adjustment expenses$215,462  $  $215,462  $222,266  $  $222,266 
Acquisition expenses 57,853      57,853   69,391      69,391 
General & administrative expenses (1) 14,980   (6,439)  8,541   16,991   (6,758)  10,233 
Net premiums earned (1) 271,574   1,001   272,575   297,412   1,265   298,677 
            
Loss ratio 79.3%      74.7%    
Acquisition expense ratio 21.3%      23.3%    
General & administrative expense ratio (1) 5.6%      5.8%    
Combined ratio 106.2%      103.8%    
Adjusted loss ratio     79.0%      74.4%
Adjusted acquisition expense ratio     21.2%      23.2%
Adjusted general & administrative expense ratio     3.2%      3.5%
Adjusted combined ratio     103.4%      101.1%

(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 and six months ended June 30, 2020 and 2019:

 Three Months Ended June 30, 2020 Three Months Ended June 30, 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)
Interest income$32,410  $4,043  $  $36,453  $32,492  $6,104  $  $38,596 
Investment management fees - related parties (3,943)  (319)     (4,262)  (4,171)  (399)     (4,570)
Borrowing and miscellaneous other investment expenses (2,741)  (212)  (1,810)  (4,763)  (3,809)  (238)  (3,564)  (7,611)
Net interest income 25,726   3,512   (1,810)  27,428   24,512   5,467   (3,564)  26,415 
Net realized gains (losses) on investments (14,912)  8,911      (6,001)  (177)  966      789 
Net unrealized gains (losses) on investments (1) 178,050   14      178,064   (4,511)  2,786      (1,725)
Investment performance fees - related parties             (1,692)        (1,692)
Net investment income (loss)$188,864  $12,437  $(1,810) $199,491  $18,132  $9,219  $(3,564) $23,787 
                
Average total investments (2)$1,782,413  $793,663  $0  $2,576,076  $1,871,286  $928,850  $  $2,800,136 
Average net assets (3)$1,446,900  $800,175  $(246,250) $2,000,825  $1,548,237  $924,948  $(327,619) $2,145,566 
                
Net interest income yield on average net assets (3) 1.8%  0.4%    1.4%  1.6%  0.6%    1.2%
Net investment income return on average total investments (excluding accrued investment income) (2) 10.6%  1.6%    7.7%  1.0%  1.0%    0.8%
Net investment income return on average net assets (3) 13.1%  1.6%  (0.7)%  10.0%  1.2%  1.0%  (1.1)%  1.1%

(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.


 Six Months Ended June 30, 2020 Six Months Ended June 30, 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)
Interest income$65,174  $9,103  $  $74,277  $69,831  $11,906  $  $81,737 
Investment management fees - related parties (7,916)  (698)     (8,614)  (8,242)  (737)     (8,979)
Borrowing and miscellaneous other investment expenses (5,332)  (437)  (4,663)  (10,432)  (8,667)  (442)  (6,800)  (15,909)
Net interest income 51,926   7,968   (4,663)  55,231   52,922   10,727   (6,800)  56,849 
Net realized gains (losses) on investments (22,137)  11,090      (11,047)  1,142   929      2,071 
Net unrealized gains (losses) on investments (1) (107,443)  51      (107,392)  23,114   7,599      30,713 
Investment performance fees - related parties             (7,492)        (7,492)
Net investment income (loss)$(77,654) $19,109  $(4,663) $(63,208) $69,686  $19,255  $(6,800) $82,141 
                
Average total investments (2)$1,786,375  $807,149  $  $2,593,524  $1,883,565  $908,637  $  $2,792,202 
Average net assets (3)$1,488,863  $813,118  $(287,500) $2,014,481  $1,527,241  $905,937  $(322,303) $2,110,875 
                
Net interest income yield on average net assets (3) 3.5%  1.0%    2.7%  3.5%  1.2%    2.7%
Net investment income return on average total investments (excluding accrued investment income) (2) (4.3)%  2.4%    (2.4)%  3.7%  2.1%    2.9%
Net investment income return on average net assets (3) (5.2)%  2.4%  (1.6)%  (3.1)%  4.6%  2.1%  (2.1)%  3.9%

(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 six-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.


 As of June 30, 2020 As of June 30, 2019
 Non-
Investment
Grade
 Investment
Grade
 Borrowings
for U/W
Collateral
 Total Non-
Investment
Grade
 Investment
Grade
 Borrowings
for U/W
Collateral
 Total
  
 ($ in thousands)
Average total investments - QTD$1,782,413  $793,663  $  $2,576,076  $1,871,286  $928,850  $  $2,800,136 
Average total investments - YTD$1,786,375  $807,149     $2,593,524  $1,883,565  $908,637     $2,792,202 
                
Average net assets - QTD 1,446,900   800,175   (246,250)  2,000,825   1,548,237   924,948   (327,619)  2,145,566 
Average net assets - YTD 1,488,863   813,118   (287,500)  2,014,481   1,527,241   905,937   (322,303)  2,110,875 
                
Total investments$1,846,404  $792,941  $  $2,639,345  $1,833,476  $936,629  $  $2,770,105 
Accrued Investment Income 10,853   3,511      14,364   11,834   5,082      16,916 
Receivable for Securities Sold 28,298   3016      31,314   29,367   58      29,425 
Less: Payable for Securities Purchased 67,272         67,272   46,412   4,804      51,216 
Less: Payable for Securities Sold Short 29,289         29,289   48,823         48,823 
Less: Revolving credit agreement borrowings 308,611      163,750   472,361   229,546      328,751   558,297 
Net assets$1,480,383  $799,468  $(163,750) $2,116,101  $1,549,896  $936,965  $(328,751) $2,158,110 
Non-investment grade borrowing ratio (1) 20.80%        14.80%      
                
Unrealized gains on investments$44,845  $14,278  $  $59,123  $27,068  $8,160  $  $35,228 
Unrealized losses on investments (221,353)  (23,121)     (244,474)  (109,200)  (4,737)     (113,937)
Net unrealized gains (losses) on investments$(176,508) $(8,843) $  $(185,351) $(82,132) $3,423  $  $(78,709)

(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, societal, 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


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