Watford Reports 2019 First Quarter Results

April 30, 2019

PEMBROKE, Bermuda, April 30, 2019 (GLOBE NEWSWIRE) -- WATFORD HOLDINGS LTD. (“Watford” or the “Company”) (NASDAQ: WTRE) today reported a net income of $47.6 million after payment of $4.9 million of preferred dividends for the three months ended March 31, 2019, compared to a net income of $12.8 million after payment of $4.9 million of preferred dividends in the same period in 2018. The results included:

  • Net income available to Watford common shareholders of $47.6 million, or $2.10 per share, a 20.8% annualized return on average equity, compared to a net income of $12.8 million, or $0.56 per share, a 5.4% annualized return on average equity for the 2018 first quarter1;
  • Book value per common share of $41.52 at March 31, 2019, a 5.9% increase from December 31, 2018;
  • Combined ratio of 104.1%, comprised of a 75.9% loss ratio, a 23.3% acquisition expense ratio and a 4.9% general and administrative expense ratio, compared to a combined ratio of 101.0% for the prior year first quarter, comprised of a 71.7% loss ratio, a 25.6% acquisition expense ratio and a 3.7% general and administrative expense ratio;
  • Net interest income of $30.4 million, a 1.5% yield on average net assets for the 2019 first quarter, compared to net interest income of $24.1 million and a 1.2% yield on average net assets for the 2018 first quarter; and
  • Net investment income of $58.4 million, a 2.8% return on average net assets for the 2019 first quarter, compared to net investment income of $19.5 million and a 1.0% return on average net assets for the 2018 first quarter.

Commenting on the 2019 first quarter financial results, John Rathgeber, CEO of Watford Holdings Ltd., said:

“We are pleased to be issuing our first earnings release as a public company, marking a major milestone in the evolution of our company. Our first quarter results were quite strong and speak to both the resilience of our business model and our ongoing earnings potential: the annualized return on average equity exceeded 20% and the quarterly growth in book value per share was just under 6.0%.

We continue to expand our insurance writings while trimming some of our casualty reinsurance, which has important ramifications for both our forward-looking combined ratio and our free cash flow. There are signs of improved market conditions in many areas, which should further enhance our prospects going forward.

While a good portion of the positive result was due to unrealized investment gains, it is important to note that our net interest income was up 26% from the first quarter of 2018. Price movements creating unrealized gains and losses in investments may influence our income on a quarterly basis, but net interest income will be the major driver of our long-term book value growth.”

____________
1 Annualized return on average equity represents net income (loss) expressed as a percentage of average common shareholders’ equity during the period. Annualized return on average equity for the three months ended March 31, 2019 and 2018 is calculated by extrapolating the quarterly return on average equity over a twelve month period. For the three month period, the average common shareholders’ equity is calculated as the average of the beginning and ending common shareholders’ equity of each quarterly period.


Underwriting

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

  Three Months Ended March 31,
  2019   2018   % Change
   
  ($ in thousands)
Gross premiums written $ 186,689     $ 213,870     (12.7 )%
Net premiums written 145,387     179,552     (19.0 )%
Net premiums earned 146,094     136,747     6.8 %
Underwriting income (loss) (1) (5,970 )   (1,262 )   (373.1 )%
           
          % Point Change
Loss ratio 75.9 %   71.7 %   4.2 %
Acquisition expense ratio 23.3 %   25.6 %   (2.3 )%
General & administrative expense ratio 4.9 %   3.7 %   1.2 %
Combined ratio 104.1 %   101.0 %   3.1 %
Adjusted combined ratio (2) 102.3 %   99.6 %   2.7 %

(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, as well as related reconciliations of our adjusted loss ratio, adjusted acquisition expense ratio and adjusted general and administrative expense ratio to our loss ratio, acquisition expense ratio and general and administrative expense ratio, respectively.


The following table shows the components of our loss and loss adjustment expenses for the three months ended March 31, 2019 and 2018:

  Three Months Ended March 31,
  2019   2018
  Loss and Loss
Adjustment
Expenses
  % of Earned
Premiums
  Loss and Loss
Adjustment
Expenses
  % of Earned
Premiums
   
  ($ in thousands)
Current year $ 110,901     75.9 %   $ 97,386     71.3 %
Prior year development (favorable)/adverse (51 )   %   603     0.4 %
Loss and loss adjustment expenses $ 110,850     75.9 %   $ 97,989     71.7 %


The following table provides summary information regarding premiums written and earned by line of business:

  Three Months Ended March 31,
  2019   2018
   
  ($ in thousands)
Gross premiums written:      
Casualty reinsurance $ 75,601     $ 85,963  
Other specialty reinsurance 24,298     64,499  
Property catastrophe reinsurance 5,992     3,845  
Insurance programs and coinsurance 80,798     59,563  
Total $ 186,689     $ 213,870  
       
Net premiums written:      
Casualty reinsurance $ 75,065     $ 85,695  
Other specialty reinsurance 23,182     57,538  
Property catastrophe reinsurance 5,982     3,834  
Insurance programs and coinsurance 41,158     32,485  
Total $ 145,387     $ 179,552  
       
Net premiums earned:      
Casualty reinsurance $ 63,313     $ 67,741  
Other specialty reinsurance 44,561     37,778  
Property catastrophe reinsurance 2,971     2,636  
Insurance programs and coinsurance 35,249     28,592  
Total $ 146,094     $ 136,747  


Gross and net premiums written in the 2019 first quarter were 12.7% and 19.0% lower, respectively, than the 2018 first quarter. The decrease in gross and net premiums written reflected a reduction in casualty reinsurance and other specialty reinsurance premiums written in the 2019 first quarter. Net premiums earned in the 2019 first quarter were 6.8% higher compared to the 2018 first quarter. The increase in net premiums earned was driven by growth in insurance programs and the continued earning of a higher level of other specialty reinsurance premiums written in previous quarters.

The loss ratio was 75.9% in the first quarter, compared to 71.7% in the 2018 first quarter. The change in the 2019 first quarter loss ratio resulted, in part, from changes in mix of business, as the loss ratio for other specialty reinsurance and insurance programs is slightly higher than the loss ratio for casualty reinsurance, with a correspondingly lower acquisition cost ratio.

The 2019 first quarter loss ratio was impacted by a $1.2 million facultative property per risk loss, as well as $0.8 million of net reserve increases for prior year property catastrophe events driven by Typhoon Jebi. This compares to $0.4 million favorable catastrophe loss development in the 2018 first quarter. Across all lines, however, net loss reserve development was slightly favorable and had a negligible impact on the 2019 first quarter loss ratio. This compares to 0.4 points of net unfavorable loss reserve development in the 2018 first quarter.

The acquisition expense ratio was 23.3% in the first quarter, compared to 25.6% in the 2018 first quarter, reflecting a shift in business mix, as the Company wrote a higher proportion of direct insurance program business.

Investments

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

  Three Months Ended March 31,
  2019   2018
   
  ($ in thousands)
Interest income $ 43,141     $ 34,645  
Investment management fees - related parties (4,409 )   (4,146 )
Borrowing and miscellaneous other investment expenses (8,298 )   (6,360 )
Net interest income 30,434     24,139  
Realized gains (losses) on investments 1,282     (11,641 )
Unrealized gains (losses) on investments 32,438     9,635  
Investment performance fees - related parties (5,800 )   (2,597 )
Net investment income (loss) $ 58,354     $ 19,536  
       
Unrealized gains on investments (balance sheet) $ 32,106     $ 51,592  
Unrealized losses on investments (balance sheet) (111,535 )   (36,194 )
Net unrealized gains (losses) on investments (balance sheet) $ (79,429 )   $ 15,398  
       
Net interest income yield on average net assets (1) 1.5 %   1.2 %
Non-investment grade portfolio (1) 1.9 %   1.6 %
Investment grade portfolio (1) 0.6 %   0.4 %
Net investment income return on average net assets (1) 2.8 %   1.0 %
Non-investment grade portfolio (1) 3.4 %   1.8 %
Investment grade portfolio (1) 1.1 %   (0.6 )%
       
Net investment income return on average total investments (2) 2.1 %   0.8 %
Non-investment grade portfolio (2) 2.7 %   1.5 %
Investment grade portfolio (2) 1.1 %   (0.6 )%

(1) Net interest income yield on average net assets and net investment income return on average net assets are calculated by dividing net interest income, and net investment income (loss), respectively, by average net assets. Net assets is calculated as the sum of total investments, accrued investment income and receivables for securities sold, less revolving credit agreement borrowings, payable for securities purchased and payable for securities sold short. For the three month period, average net assets is calculated using the averages of each quarterly period. However, for the investment grade portfolio component of these returns, revolving credit agreement borrowings are not subtracted from the net assets calculation. The separate components of these returns (non-investment grade portfolio and investment grade portfolio) are non-U.S. GAAP financial measures. See “Comments on Regulation G” for further discussion, including a reconciliation of these components of our net interest income yield on average net assets and net investment income return on average net assets.

(2) Net investment income return on average total investments is calculated by dividing net investment income by average total investments per the balance sheet. For the three month period, average total investments is calculated using the averages of each quarterly period. The separate components of these returns (non-investment grade portfolio and investment grade portfolio) are non-U.S. GAAP financial measures. See “Comments on Regulation G” for further discussion, including a reconciliation of these components of our net investment income return on average total investments.


The following chart shows the composition of our non-investment grade and investment grade portfolios as of March 31, 2019:

  As of March 31, 2019
  Non-Investment Grade
  ($ in millions)
Total non-investment grade investments $1,909.1
   
Portfolio allocation by asset class:  
Term loans 53.6%
Corporate bonds 20.2%
Asset-backed securities 9.2%
Short-term investments 7.4%
Equities 6.5%
Other investments 2.7%
Mortgage-backed securities 0.4%
 
 
  As of March 31, 2019
  Investment Grade
  ($ in millions)
Total investment grade investments $921.1
   
Portfolio allocation by asset class:  
U.S. government and government agency bonds 36.7%
Corporate bonds 17.7%
Asset-backed securities 15.4%
Non-U.S. government and government agency bonds 15.2%
Short-term investments 12.4%
Mortgage-backed securities 1.8%
Municipal government and government agency bonds 0.8%

 

 

Corporate Function and Non-Underwriting

The Company has a corporate function that includes general and administrative expenses related to corporate activities, net foreign exchange gains (losses), income tax expense and items related to the Company’s contingently redeemable preferred shares.

Preferred dividends for the 2019 first quarter were $4.9 million, compared to $4.9 million for the 2018 first quarter.

There was a net foreign exchange loss for the 2019 first quarter of $0.4 million, compared to a net foreign exchange loss for the 2018 first quarter of $1.3 million.

Conference Call

The Company will hold a conference call on Wednesday, May 1, 2019 at 1:00 p.m. Eastern time to discuss its 2019 first 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 May 2nd.

About Watford Holdings Ltd.

Watford Holdings Ltd. is a global property and casualty insurance and reinsurance company with approximately $1.2 billion in capital as of March 31, 2019, 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 “KBRA.”


CONSOLIDATED BALANCE SHEETS (UNAUDITED)

  (Unaudited)    
  March 31,   December 31,
  2019   2018
   
Assets ($ in thousands)
Investments:      
Term loans, fair value option (Amortized cost: $1,067,676 and $1,055,664) $ 1,022,238     $ 1,000,652  
Fixed maturities, fair value option (Amortized cost: $854,510 and $972,653) 826,016     922,819  
Short-term investments, fair value option (Cost: $256,065 and $281,959) 256,711     282,132  
Equity securities, fair value option 58,801     56,638  
Other investments, fair value option 51,556     49,762  
Investments, fair value option 2,215,322     2,312,003  
Fixed maturities, available for sale (Amortized cost: $549,176 and $397,509) 549,834     393,351  
Equity securities, fair value through net income 65,010     33,013  
Total investments 2,830,166     2,738,367  
Cash and cash equivalents 56,301     63,529  
Accrued investment income 17,346     19,461  
Premiums receivable 252,850     227,301  
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses 102,817     86,445  
Prepaid reinsurance premiums 72,960     61,587  
Deferred acquisition costs, net 80,664     80,858  
Receivable for securities sold 62,566     24,507  
Intangible assets 7,650     7,650  
Funds held by reinsurers 44,638     44,830  
Other assets 24,911     18,321  
Total assets $ 3,552,869     $ 3,372,856  
Liabilities      
Reserve for losses and loss adjustment expenses $ 1,104,532     $ 1,032,760  
Unearned premiums 401,838     390,114  
Losses payable 42,929     24,750  
Reinsurance balances payable 27,039     21,034  
Payable for securities purchased 95,577     60,142  
Payable for securities sold short 28,737     8,928  
Revolving credit agreement borrowings 652,743     693,917  
Amounts due to affiliates 8,198     5,888  
Investment management and performance fees payable 10,483     3,807  
Other liabilities 17,819     20,916  
Total liabilities $ 2,389,895     $ 2,262,256  
Commitments and contingencies      
Contingently redeemable preferred shares 221,083     220,992  
Shareholders’ equity      
Common shares ($0.01 par; shares authorized: 120 million; shares issued and outstanding: 22,682,875) 227     227  
Additional paid-in capital 895,386     895,386  
Retained earnings (deficit) 46,357     (1,275 )
Accumulated other comprehensive income (loss) (79 )   (4,730 )
Total shareholders’ equity 941,891     889,608  
Total liabilities, contingently redeemable preferred shares and shareholders’ equity $ 3,552,869     $ 3,372,856  


CONSOLIDATED STATEMENT OF INCOME (LOSS) (UNAUDITED)

  (Unaudited)
  Three Months Ended March 31,
  2019   2018   Change QTR %
   
Revenues ($ in thousands)
Gross premiums written $ 186,689     $ 213,870     (13 )%
Gross premiums ceded (41,302 )   (34,318 )   20 %
Net premiums written 145,387     179,552     (19 )%
Change in unearned premiums 707     (42,805 )   (102 )%
Net premiums earned 146,094     136,747     7 %
Other underwriting income (loss) 592     701     (16 )%
Interest income 43,141     34,645     25 %
Investment management fees - related parties (4,409 )   (4,146 )   6 %
Borrowing and miscellaneous other investment expenses (8,298 )   (6,360 )   30 %
Net interest income 30,434     24,139     26 %
Realized and unrealized gains (losses) on investments 33,720     (2,006 )   (1,781 )%
Investment performance fees - related parties (5,800 )   (2,597 )   123 %
Net investment income (loss) 58,354     19,536     199 %
Total revenues 205,040     156,984     31 %
Expenses          
Loss and loss adjustment expenses (110,850 )   (97,989 )   13 %
Acquisition expenses (33,974 )   (34,963 )   (3 )%
General and administrative expenses (7,240 )   (5,057 )   43 %
Net foreign exchange gains (losses) (437 )   (1,283 )   (66 )%
Total expenses (152,501 )   (139,292 )   9 %
Income (loss) before income taxes 52,539     17,692     197 %
Income tax expense     (3 )   (100 )%
Net income (loss) before preferred dividends 52,539     17,689     197 %
Preferred dividends (4,907 )   (4,907 )   %
Net income (loss) available to common shareholders $ 47,632     $ 12,782     273 %
Earnings (loss) per share:          
Basic and diluted $ 2.10     $ 0.56     275 %
Weighted average number of ordinary shares used in the determination of earnings (loss) per share:          
Basic and diluted 22,682,875     22,682,875     %


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-GAAP financial measures in assessing the Company’s overall financial performance.

This presentation includes the use of “underwriting income (loss)” (which is defined as net premiums earned less loss and loss adjustment expenses, acquisition expenses and general and administrative expenses), “adjusted underwriting income (loss)” (which is defined as underwriting income (loss) plus other underwriting income (loss) less certain corporate expenses), and “adjusted combined ratio” (which is calculated by dividing the sum of loss and loss adjustment expenses, acquisition expenses and general and administrative expenses, less certain corporate expenses, by the sum of net premiums earned and other underwriting income (loss)).  Certain corporate expenses are generally comprised of non-recurring costs of the holding company, such as costs associated with the initial setup of subsidiaries, as well as costs associated with the ongoing operations of the holding company such as salaries of certain executives.

The presentation of underwriting income (loss), adjusted underwriting income (loss) and the adjusted combined ratio are non-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 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), income tax expenses and preferred 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), income tax expenses, preferred 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 preferred dividends, income tax expense, foreign exchange gains (losses), 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 preferred dividends, income tax expense, foreign exchange gains (losses), net investment income (loss) and other underwriting income (loss) are an integral part of the Company’s operations, the decision to realize investment gains or losses, the recognition of the change in the carrying value of investments accounted for using the fair value option in net realized gains or losses, and the recognition of foreign exchange gains or losses are independent of the underwriting process and result, in large part, from general economic and financial market conditions. Furthermore, certain users of the Company’s financial information believe that, for many companies, the timing of the realization of investment gains or losses is largely opportunistic. The Company believes that certain corporate expenses, due to their non-recurring nature, are not indicative of the performance of, or trends in, the Company’s business performance. Due to these reasons, the Company excludes preferred dividends, income tax expense, foreign exchange gains (losses), net investment income (loss), other underwriting income (loss) from the calculation of underwriting income (loss), and excludes preferred dividends, income tax expense, foreign exchange gains (losses), 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” (calculated as net investment income divided by average total investments), and “net investment income return on average net assets” (calculated as net investment income divided by average net assets). Net assets is calculated as the sum of total investments, accrued investment income and receivables for securities sold, less revolving credit agreement borrowings, payable for securities purchased and payables for securities sold short. For the three month 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-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 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, 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 reflect the performance of the investment portfolios that predominantly support our underwriting collateral.


The following tables presents 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 March 31,
  2019   2018
   
  ($ in thousands)
Net income (loss) available to common shareholders $ 47,632     $ 12,782  
Preferred dividends 4,907     4,907  
Net income (loss) before dividends 52,539     17,689  
Income tax expense     3  
Net foreign exchange (gains) losses 437     1,283  
Net investment (income) loss (58,354 )   (19,536 )
Other underwriting (income) loss (592 )   (701 )
Underwriting income (loss) (5,970 )   (1,262 )
Certain corporate expenses 1,963     1,143  
Other underwriting income (loss) 592     701  
Adjusted underwriting income (loss) $ (3,415 )   $ 582  


The adjusted combined ratio reconciles to the combined ratio for the three months ended March 31, 2019 and 2018 as follows:

  Three Months Ended March 31,
  2019   2018
  Amount   Adjustment   As
Adjusted
  Amount   Adjustment   As
Adjusted
   
  ($ in thousands)
Losses and loss adjustment expenses $ 110,850     $     $ 110,850     $ 97,989     $     $ 97,989  
Acquisition expenses 33,974         33,974     34,963         34,963  
General & administrative expenses (1) 7,240     (1,963 )   5,277     5,057     (1,143 )   3,914  
Net premiums earned (1)(2) 146,094     592     146,686     136,747     701     137,448  
                       
Loss ratio 75.9 %           71.7 %        
Acquisition expense ratio 23.3 %           25.6 %        
General & administrative expense ratio (1) 4.9 %           3.7 %        
Combined ratio 104.1 %           101.0 %        
Adjusted combined ratio         102.3 %           99.6 %

(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.

(2) The adjustment to net premiums earned relates to “other underwriting income” from underwriting contracts accounted for as derivatives.


The following table summarizes the components of our total investment return for the three months ended March 31, 2019 and 2018:

  Three Months Ended March 31, 2019   Three Months Ended March 31, 2018
  Non-Investment
Grade
  Investment
Grade
  Cost of
U/W Collateral
(3)
  Total   Non-Investment
Grade
  Investment
Grade
  Cost of
U/W Collateral
(3)
  Total
   
  ($ in thousands)
Interest income $ 37,339     $ 5,802     $     $ 43,141     $ 30,878     $ 3,767     $     $ 34,645  
Investment management fees - related parties (4,071 )   (338 )       (4,409 )   (3,852 )   (294 )       (4,146 )
Borrowing and miscellaneous other investment expenses (4,858 )   (204 )   (3,236 )   (8,298 )   (3,946 )   (135 )   (2,279 )   (6,360 )
Net interest income 28,410     5,260     (3,236 )   30,434     23,080     3,338     (2,279 )   24,139  
Net realized gains (losses) on investments 1,319     (37 )       1,282     (9,246 )   (2,395 )       (11,641 )
Net unrealized gains (losses) on investments 27,625     4,813         32,438     15,163     (5,528 )       9,635  
Investment performance fees - related parties (5,800 )           (5,800 )   (2,597 )           (2,597 )
Net investment income (loss) $ 51,554     $ 10,036     $ (3,236 )   $ 58,354     $ 26,400     $ (4,585 )   $ (2,279 )   $ 19,536  
                               
Average total investments (1) $ 1,895,843     $ 888,424     $     $ 2,784,267     $ 1,746,009     $ 769,384     $     $ 2,515,392  
Average net assets (2) $ 1,506,245     $ 886,927     $ (316,987 )   $ 2,076,185     $ 1,433,878     $ 772,872     $ (266,366 )   $ 1,940,384  
                               
Net interest income yield on average net assets (2) 1.9 %   0.6 %       1.5 %   1.6 %   0.4 %       1.2 %
Net investment income return on average total investments (1) 2.7 %   1.1 %       2.1 %   1.5 %   (0.6 )%       0.8 %
Net investment income return on average net assets (2) 3.4 %   1.1 %   (1.0 )%   2.8 %   1.8 %   (0.6 )%   (0.9 )%   1.0 %

(1) Net investment income return on average total investments is calculated by dividing net investment income by average total investments per the balance sheet.

(2) 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.

(3) The cost of underwriting collateral is calculated as the revolving credit agreement borrowing 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 March 31, 2019   As of March 31, 2018
  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 $ 1,895,843     $ 888,424     $     $ 2,784,267     $ 1,746,009     $ 769,384     $     $ 2,515,392  
Average net assets - QTD 1,506,245     886,927     (316,987 )   2,076,185     1,433,878     772,872     (266,366 )   1,940,384  
                               
Total investments $ 1,909,095     $ 921,071     $     $ 2,830,166     $ 1,739,961     $ 794,608     $     $ 2,534,569  
Accrued Investment Income 13,300     4,046         17,346     13,701     3,130         16,831  
Receivable for Securities Sold 62,365     201         62,566     46,968     600         47,568  
Less: Payable for Securities Purchased 83,189     12,388         95,577     79,786             79,786  
Less: Payable for Securities Sold Short 28,737             28,737     63,110             63,110  
Less: Revolving credit agreement borrowings 326,256         326,487     652,743     220,798         279,315     500,113  
Net assets $ 1,546,578     $ 912,930     $ (326,487 )   $ 2,133,021     $ 1,436,936     $ 798,338     $ (279,315 )   $ 1,955,959  
Non-investment grade borrowing ratio (1) 21.1 %               15.4 %            
                               
Unrealized gains on investments 28,066     4,040         32,106     46,105     5,487         51,592  
Unrealized losses on investments (104,700 )   (6,835 )       (111,535 )   (25,573 )   (10,621 )       (36,194 )
Net unrealized gains (losses) on investments (76,634 )   (2,795 )       (79,429 )   20,532     (5,134 )       15,398  

(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.

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, in the Company’s Registration Statement on Form S-1 (File No. 333-230080) (as amended, the “Form S-1”) filed with the Securities and Exchange Commission (the “SEC”), and in the Company’s periodic reports filed with 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;
  • 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; and
  • the other matters set forth under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and other sections of the Company’s Form S-1, 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.

Contacts

Laurence Richardson (Investor Contact): lbr@watfordholdings.com 

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Source: Watford Holdings Ltd.