Watford Reports 2020 Second Quarter Results
07/29/2020 - 04:54 PM
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, 2020 Fair 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, 2020 Fair 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