Watford Reports 2020 First Quarter Results

May 4, 2020

PEMBROKE, Bermuda, May 04, 2020 (GLOBE NEWSWIRE) -- WATFORD HOLDINGS LTD. (“Watford” or the “Company”) (NASDAQ: WTRE) today reported a net loss of $267.8 million, after $1.2 million of preference dividends, for the three months ended March 31, 2020, compared to net income of $47.6 million, after payment of $4.9 million of preference dividends, for the same period in 2019. Book value per diluted common share was $28.21 at March 31, 2020, a decrease of 35.1% from December 31, 2019.  The quarterly results include:

  • Net loss available to common shareholders of $267.8 million, or $(13.42) per diluted common share, compared to net income of $47.6 million, or $2.10 per diluted common share, for the 2019 first quarter;
  • Combined ratio of 104.4%, comprised of a 79.0% loss ratio, a 20.3% acquisition expense ratio and a 5.1% general and administrative expense ratio, compared to a combined ratio of 104.1% for the prior year first quarter, comprised of a 75.9% loss ratio, a 23.3% acquisition expense ratio and a 4.9% general and administrative expense ratio;
  • Net interest income of $27.8 million, a 1.4% yield on average net assets, for the 2020 first quarter, compared to net interest income of $30.4 million and a 1.5% yield on average net assets for the 2019 first quarter;
  • Net investment loss of $262.7 million, a (13.0)% return on average net assets for the 2020 first quarter, compared to net investment income of $58.4 million and a 2.8% return on average net assets for the 2019 first quarter; and
  • During the quarter, the Company repurchased 127,744 common shares at an average price of $22.42 per share for an aggregate cost of $2.9 million under its previously announced $50 million share repurchase program. As of March 31, 2020, up to approximately $47.1 million of share repurchases were available under this program.

In addition, on March 11, 2020, the World Health Organization declared a pandemic in relation to the outbreak of the novel coronavirus (COVID-19). The pandemic is causing unprecedented social disruption, global economic volatility, reduced liquidity of capital markets and intervention by various governments around the world.

At this time, there are significant uncertainties surrounding the ultimate number of insurance claims and scope of damage resulting from this pandemic. The Company’s estimates across its insurance and reinsurance lines of business are based on currently available information derived from modeling techniques, preliminary claims information obtained from the Company’s clients and brokers, a review of relevant in-force contracts with potential exposure to the pandemic and estimates of reinsurance recoverables. These estimates include losses only related to claims incurred as of March 31, 2020. Actual losses from these events may vary materially from the estimates due to several factors, including the inherent uncertainties in making such determinations and the evolving nature of this pandemic.

Commenting on the 2020 first quarter financial results, Jon Levy, CEO of Watford, said:

“First of all, we would like to acknowledge the challenging times that the COVID-19 pandemic has created, and express how grateful we are to those on the frontlines serving their communities.  Watford is also committed to supporting our customers and clients through this stressful period.  I would like to thank the broader Watford team for their efforts to deliver the same level of excellence in operations under these extraordinarily difficult circumstances.

As reported in our press release on April 23, 2020, our results for the first quarter were heavily affected by the investment market volatility caused by the economic shutdown mandated by governments around the world.  The pandemic has had significant impacts across the globe, and Watford took its share of that impact, although not to a greater extent than anticipated for an event of this magnitude.

Our net loss of $267.8 million for the quarter was driven by a $262.7 million net investment loss.  The net investment loss, in turn, was predominantly the result of $285.5 million of unrealized "mark-to-market" losses in our non-investment grade fixed-income portfolio.

Net interest income, a key driver of long-term shareholder value, remained steady and strong at $27.8 million, representing a quarterly yield on net assets of 1.4%.

Our combined ratio for the quarter was 104.4%, and 102.2% when adjusted for other underwriting income and certain corporate and nonrecurring expenses.  While the COVID-19 pandemic has created significant areas of uncertainty for the property and casualty insurance industry, the impact on our first quarter underwriting results was not material, as we believe our mix of business is less exposed to the classes of business likely to be most affected.

Insurance and reinsurance market conditions continue to move in a favorable direction and we remain optimistic about our positioning in the marketplace.”

Underwriting

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

   
  Three Months Ended March 31,
    2020       2019     % Change
   
  ($ in thousands)
Gross premiums written $ 234,902     $ 186,689     25.8%
Net premiums written   186,700       145,387     28.4%
Net premiums earned   140,039       146,094     (4.1)%
Underwriting income (loss) (1)   (6,143 )     (5,970 )   (2.9)%
           
          % Point Change
Loss ratio   79.0 %     75.9 %   3.1%
Acquisition expense ratio   20.3 %     23.3 %   (3.0)%
General & administrative expense ratio   5.1 %     4.9 %   0.2%
Combined ratio   104.4 %     104.1 %   0.3%
Adjusted combined ratio (2)   102.2 %     102.3 %   (0.1)%
           

(1) Underwriting income (loss) is a non-U.S. GAAP financial measure and is calculated as net premiums earned, less loss and loss adjustment expenses, acquisition expenses and general and administrative expenses. See “Comments on Regulation G” for further discussion, including a reconciliation of underwriting income (loss) to net income (loss) available to common shareholders.

(2) Adjusted combined ratio is a non-U.S. GAAP financial measure and is calculated by dividing the sum of loss and loss adjustment expenses, acquisition expenses and general and administrative expenses, less certain corporate expenses, by the sum of net premiums earned and other underwriting income (loss). See “Comments on Regulation G” for further discussion, including a reconciliation of our adjusted combined ratio to our combined ratio.

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

   
  Three Months Ended March 31,
    2020     2019
   
  ($ in thousands)
Gross premiums written:      
Casualty reinsurance $ 83,818   $ 75,601
Other specialty reinsurance   36,880     24,298
Property catastrophe reinsurance   9,832     5,992
Insurance programs and coinsurance   104,372     80,798
Total $ 234,902   $ 186,689
       
Net premiums written:      
Casualty reinsurance $ 83,667   $ 75,065
Other specialty reinsurance   35,484     23,182
Property catastrophe reinsurance   9,832     5,982
Insurance programs and coinsurance   57,717     41,158
Total $ 186,700   $ 145,387
       
Net premiums earned:      
Casualty reinsurance $ 52,765   $ 63,313
Other specialty reinsurance   35,364     44,561
Property catastrophe reinsurance   4,884     2,971
Insurance programs and coinsurance   47,026     35,249
Total $ 140,039   $ 146,094
           

The following table shows the components of our loss and loss adjustment expenses for the three months ended March 31, 2020 and 2019:

   
  Three Months Ended March 31,
    2020       2019  
  Loss and Loss
Adjustment
Expenses
  % of Earned
Premiums
  Loss and Loss
Adjustment
Expenses
  % of Earned
Premiums
   
  ($ in thousands)
Current year $ 110,856     79.1 %   $ 110,901     75.9 %
Prior year development (favorable)/adverse   (180 )   (0.1 )%     (51 )   %
Loss and loss adjustment expenses $ 110,676     79.0 %   $ 110,850     75.9 %
               

Results for the three months ended March 31, 2020 versus 2019:

Gross and net premiums written in the 2020 first quarter were 25.8% and 28.4% higher, respectively, than the 2019 first quarter.  The increase in gross and net premiums written reflect growth across all lines of business. Casualty reinsurance and other specialty reinsurance premiums increased over the prior year quarter, primarily due to increased personal and commercial auto writings.

Net premiums earned in the 2020 first quarter were 4.1% lower than the 2019 first quarter. The decrease in premiums reflected a non-renewal of one multi-line quota share contract within casualty reinsurance and a non-recurring exposure within other specialty reinsurance earned in the first quarter of 2019. This was partially offset by increased writings in insurance programs and coinsurance, and, to a lesser extent, property catastrophe reinsurance.

The loss ratio was 79.0% in the 2020 first quarter compared to 75.9% in the 2019 first quarter. The acquisition expense ratio was 20.3% in the 2020 first quarter, compared to 23.3% in the 2019 first quarter. In the 2020 first quarter, the increase in loss ratio and corresponding decrease in acquisition expense ratio were driven by losses incurred related to COVID-19 and impacted other specialty reinsurance business.  A portion of this increase in losses is offset by loss sensitive commission decreases, which are reflected as benefits to the acquisition ratio. Other movements reflect changes in mix and the type of business. The prior year loss reserve development for both the 2020 and 2019 first quarters was essentially flat.

The general and administrative expense ratio was 5.1% in the 2020 first quarter, compared to 4.9% in the 2019 first quarter. The 0.2 point increase versus the prior year first quarter was attributable to ongoing public company expenses. Removing certain corporate expenses, our adjusted general and administrative expense ratio was 3.0% in the 2020 first quarter compared to 3.5% in the 2019 first quarter.

Investments

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

   
  Three Months Ended March 31,
    2020       2019  
   
  ($ in thousands)
Interest income $ 37,824     $ 43,141  
Investment management fees - related parties   (4,352 )     (4,409 )
Borrowing and miscellaneous other investment expenses   (5,669 )     (8,298 )
Net interest income   27,803       30,434  
Realized gains (losses) on investments   (5,046 )     1,282  
Unrealized gains (losses) on investments   (285,456 )     32,438  
Investment performance fees - related parties         (5,800 )
Net investment income (loss) $ (262,699 )   $ 58,354  
       
Unrealized gains on investments (balance sheet) $ 40,525     $ 32,106  
Unrealized losses on investments (balance sheet)   (413,791 )     (111,535 )
Net unrealized gains (losses) on investments (balance sheet) $ (373,266 )   $ (79,429 )
       
Net interest income yield on average net assets (1)   1.4 %     1.5 %
Non-investment grade portfolio (1)   1.7 %     1.9 %
Investment grade portfolio (1)   0.5 %     0.6 %
Net investment income return on average net assets (1)   (13.0 )%     2.8 %
Non-investment grade portfolio (1)   (17.4 )%     3.4 %
Investment grade portfolio (1)   0.8 %     1.1 %
Net investment income return on average total investments (excluding accrued investment income) (2)   (10.1 )%     2.1 %
Non-investment grade portfolio (2)   (14.9 )%     2.7 %
Investment grade portfolio (2)   0.8 %     1.1 %
       

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

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

The following tables summarize the composition of the Company's non-investment grade and investment grade portfolios by sector as of March 31, 2020 and December 31, 2019:

   
  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- 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.

   
  December 31, 2019
  Total   Financials   Health Care   Technology   Consumer Services   Industrials   Consumer Goods   Oil & Gas   All Other (1)
   
  ($ in thousands)
Non-Investment Grade Portfolio:                                  
Term loan investments $ 1,061,934   $ 212,800   $ 221,982   $ 232,659   $ 121,434   $ 111,912   $ 46,827   $ 52,200   $ 62,120
Corporate bonds   213,841     17,547     19,160     10,972     28,144     13,822     23,491     27,632     73,073
Equities - sector specific   101,551     55,946     30,640     11,263         1,283         1,040     1,379
Short-term investments - sector specific   16,620     8,261         3,030         5,329            
Subtotal   1,393,946     294,554     271,782     257,924     149,578     132,346     70,318     80,872     136,572
Equities - sector specific   23,586                                                
Short-term investments - non-sector specific   215,816                                
Asset-backed securities   190,738                                
Other investments   30,461                                
Mortgage-backed securities   7,706                                
Total Non-Investment Grade Portfolio $ 1,862,253   $ 294,554   $ 271,782   $ 257,924   $ 149,578   $ 132,346   $ 70,318   $ 80,872   $ 136,572
                                   
Investment Grade Portfolio:                                  
Corporate bonds $ 158,632   $ 72,707   $ 12,087   $ 8,035   $ 11,752   $ 10,548   $ 32,046   $ 5,734   $ 5,723
Short-term investments   96,867                                
U.S. government and government agency bonds   285,609                                
Non-U.S. government and government agency bonds   133,409                                
Asset-backed securities   145,433                                
Mortgage-backed securities   24,750                                
Municipal government and government agency bonds   2,184                                
Total Investment Grade Portfolio $ 846,884   $ 72,707   $ 12,087   $ 8,035   $ 11,752   $ 10,548   $ 32,046   $ 5,734   $ 5,723
Total Investments $ 2,709,137   $ 367,261   $ 283,869   $ 265,959   $ 161,330   $ 142,894   $ 102,364   $ 86,606   $ 142,295
                                   

(1) Includes telecommunications, utilities and basic materials.

The table below summarizes the credit quality of the Company's non-investment grade and investment grade portfolios as of March 31, 2020 and December 31, 2019, as rated by Standard & Poor’s Financial Services, LLC, or Standard & Poor’s, Moody’s Investors Service, or Moody’s, Fitch Ratings Inc., or Fitch, Kroll Bond Rating Agency, or KBRA, or DBRS Morningstar, or DBRS, as applicable:

   
  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.

   
  Credit Rating (1)
December 31, 2019 Fair Value   AAA   AA   A   BBB   BB   B   CCC   CC   C   D   Not Rated
   
  ($ in thousands)
Non-Investment Grade Portfolio:                                              
Term loan investments $ 1,061,934   $   $   $   $   $ 9,617   $ 761,168   $ 215,909   $ 6,823   $ 2,119   $   $ 66,298
Corporate bonds   213,841                     9,003     58,345     135,613                 10,880
Asset-backed securities   190,738             4,002     105,706     29,695     18,381                     32,954
Mortgage-backed securities   7,706                     976                     2,497     4,233
Short-term investments   232,436         116,805     34,903     64,108             8,359                 8,261
Total fixed income instruments and short-term investments   1,706,655         116,805     38,905     169,814     49,291     837,894     359,881     6,823     2,119     2,497     122,626
Other Investments   30,461                                            
Equities   125,137                                            
Total Non-Investment Grade Portfolio $ 1,862,253   $   $ 116,805   $ 38,905   $ 169,814   $ 49,291   $ 837,894   $ 359,881   $ 6,823   $ 2,119   $ 2,497   $ 122,626
                                               
Investment Grade Portfolio:                                              
Corporate bonds $ 158,632   $   $ 36,128   $ 81,401   $ 41,103   $   $   $   $   $   $   $
U.S. government and government agency bonds   285,609         285,609                                    
Asset-backed securities   145,433     2,006         25,177     118,250                            
Mortgage-backed securities   24,750             1,100     23,650                            
Non-U.S. government and government agency bonds   133,409         132,460         949                            
Municipal government and government agency bonds   2,184     1,135     573     476                                
Short-term investments   96,867     25,783     20,037         51,047                            
Total Investment Grade Portfolio $ 846,884   $ 28,924   $ 474,807   $ 108,154   $ 234,999   $   $   $   $   $   $   $
Total $ 2,709,137   $ 28,924   $ 591,612   $ 147,059   $ 404,813   $ 49,291   $ 837,894   $ 359,881   $ 6,823   $ 2,119   $ 2,497   $ 122,626
                                                                       

(1) For individual fixed maturity investments, Standard & Poor’s ratings are used. In the absence of a Standard & Poor’s rating, ratings from Moody’s are used, followed by ratings from Fitch, followed by ratings from KBRA, followed by ratings from DBRS.

Corporate Function

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

The Company incurred an interest expense of $2.9 million for the three months ended March 31, 2020, in relation to the Company’s 6.5% senior notes issued on July 2, 2019. Interest is paid semi-annually in arrears on January 2 and July 2.

Preference dividends were $1.2 million and $4.9 million for the three months ended March 31, 2020 and 2019, respectively.

During the quarter, the Company repurchased 127,744 common shares at an average price of $22.42 per share for an aggregate cost of $2.9 million. As of March 31, 2020, up to approximately $47.1 million of share repurchases were available under the program. In light of COVID-19 and the uncertain economic outlook, the Company has temporarily halted repurchases under the program.

Conference Call

The Company will hold a conference call on Tuesday, May 5, 2020 at 1:00 p.m. Eastern time to discuss its 2020 first quarter results. The Company also plans to discuss how the COVID-19 pandemic could impact its underwriting and investment portfolios in future periods and certain actions the Company has taken in response to the crisis. A live webcast of this call will be available via the Investors section of the Company’s website at http://investors.watfordre.com. A replay of the conference call will also be available via the Investors section of the Company’s website beginning on May 6, 2020.

About Watford Holdings Ltd.

Watford Holdings Ltd. is a global property and casualty insurance and reinsurance company with approximately $788.9 million in capital as of March 31, 2020, comprised of: $172.5 million of senior notes, $52.3 million of contingently redeemable preference shares and $564.1 million of common shareholders’ equity, with operations in Bermuda, the United States and Europe. Its operating subsidiaries have been assigned financial strength ratings of “A-” (Excellent) from A.M. Best and “A” from Kroll Bond Rating Agency.  On May 1, 2020, A.M. Best announced that it had placed under review with negative implications the financial strength ratings of our operating subsidiaries.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

       
  (Unaudited)    
  March 31,   December 31,
    2020       2019  
   
Assets ($ in thousands)
Investments:      
Term loans, fair value option (Amortized cost: $1,113,510 and $1,113,212) $ 906,999     $ 1,061,934  
Fixed maturities, fair value option (Amortized cost: $504,750 and $432,576)   392,452       416,594  
Short-term investments, fair value option (Cost: $348,059 and $325,542)   343,861       329,303  
Equity securities, fair value option   58,091       59,799  
Other investments, fair value option   30,682       30,461  
Investments, fair value option   1,732,085       1,898,091  
Fixed maturities, available for sale (Amortized cost: $749,835 and $739,456)   717,552       745,708  
Equity securities, fair value through net income   63,169       65,338  
Total investments   2,512,806       2,709,137  
Cash and cash equivalents   96,580       102,437  
Accrued investment income   16,344       14,025  
Premiums receivable   281,541       273,657  
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses   197,458       170,974  
Prepaid reinsurance premiums   128,570       132,577  
Deferred acquisition costs, net   71,402       64,044  
Receivable for securities sold   26,789       16,288  
Intangible assets   7,650       7,650  
Funds held by reinsurers   40,520       42,505  
Other assets   27,287       17,562  
Total assets $ 3,406,947     $ 3,550,856  
Liabilities      
Reserve for losses and loss adjustment expenses $ 1,300,249     $ 1,263,628  
Unearned premiums   478,663       438,907  
Losses payable   46,424       61,314  
Reinsurance balances payable   71,204       77,066  
Payable for securities purchased   63,829       18,180  
Payable for securities sold short   30,076       66,257  
Revolving credit agreement borrowings   576,486       484,287  
Senior notes   172,486       172,418  
Amounts due to affiliates   4,168       4,467  
Investment management and performance fees payable   5,428       17,762  
Other liabilities   41,552       21,912  
Total liabilities $ 2,790,565     $ 2,626,198  
Commitments and contingencies      
Contingently redeemable preference shares   52,328       52,305  
Shareholders’ equity      
Common shares ($0.01 par; shares authorized: 120 million; shares issued: 22,703,170 and 22,692,300)   227       227  
Additional paid-in capital   898,693       898,083  
Retained earnings (deficit)   (224,737 )     43,470  
Accumulated other comprehensive income (loss)   (32,206 )     5,629  
Common shares held in treasury, at cost (shares: 2,917,149 and 2,789,405)   (77,923 )     (75,056 )
Total shareholders’ equity   564,054       872,353  
Total liabilities, contingently redeemable preference shares and shareholders’ equity $ 3,406,947     $ 3,550,856  
               

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

   
  (Unaudited)
  Three Months Ended March 31,
    2020       2019  
   
Revenues ($ in thousands except share and per share data)
Gross premiums written $ 234,902     $ 186,689  
Gross premiums ceded   (48,202 )     (41,302 )
Net premiums written   186,700       145,387  
Change in unearned premiums   (46,661 )     707  
Net premiums earned   140,039       146,094  
Other underwriting income (loss)   133       592  
Interest income   37,824       43,141  
Investment management fees - related parties   (4,352 )     (4,409 )
Borrowing and miscellaneous other investment expenses   (5,669 )     (8,298 )
Net interest income   27,803       30,434  
Realized and unrealized gains (losses) on investments   (290,502 )     33,720  
Investment performance fees - related parties         (5,800 )
Net investment income (loss)   (262,699 )     58,354  
Total revenues   (122,527 )     205,040  
Expenses      
Loss and loss adjustment expenses   (110,676 )     (110,850 )
Acquisition expenses   (28,367 )     (33,974 )
General and administrative expenses   (7,139 )     (7,240 )
Interest expense   (2,912 )      
Net foreign exchange gains (losses)   5,013       (437 )
Total expenses   (144,081 )     (152,501 )
Income (loss) before income taxes   (266,608 )     52,539  
Income tax expense          
Net income (loss) before preference dividends   (266,608 )     52,539  
Preference dividends   (1,171 )     (4,907 )
Net income (loss) available to common shareholders $ (267,779 )   $ 47,632  
       
Other comprehensive income (loss) net of income tax:      
Available-for-sale investments:      
Unrealized holding gains (losses) arising during the period $ (28,431 )   $ 3,915  
Unrealized foreign currency gains (losses) arising during the period   (7,699 )     1,130  
Credit loss recognized in net income (loss)   563        
Reclassification of net realized (gains) losses, net of income taxes, included in net income (loss)   (2,405 )     (229 )
Unrealized holding gains (losses) of available for sale investments   (37,972 )     4,816  
Foreign currency translation adjustments   137       (165 )
Other comprehensive income (loss) net of income tax   (37,835 )     4,651  
Comprehensive income (loss) $ (305,614 )   $ 52,283  
Earnings (loss) per share:      
Basic and diluted $ (13.42 )   $ 2.10  
Weighted average number of ordinary shares used in the determination of earnings (loss) per share:      
Basic and diluted   19,951,932       22,682,875  
               


   
  Three Months Ended March 31,
    2020       2019  
   
Numerator: ($ in thousands except share and per share data)
Net income (loss) before preference dividends $ (266,608 )   $ 52,539  
Preference dividends   (1,171 )     (4,907 )
Net income (loss) available to common shareholders $ (267,779 )   $ 47,632  
Denominator:      
Weighted average common shares outstanding - basic and diluted (1)   19,951,932       22,682,875  
Earnings (loss) per common share:      
Basic and diluted $ (13.42 )   $ 2.10  
               

(1) The weighted average non-vested restricted share units are excluded from the calculation of diluted weighted average common shares outstanding for the three months ended March 31, 2020, due to a net loss reported.

                   
  March 31,   December 31,   September 30,   June 30,   March 31,
   2020    2019    2019    2019    2019
   
Numerator: ($ in thousands except share and per share data)
Total shareholders’ equity $ 564,054   $ 872,353   $ 960,773   $ 961,296   $ 941,891
Denominator:                  
Common shares outstanding - basic   19,863,328     19,976,397     22,765,802     22,765,802     22,682,875
Effect of dilutive common share equivalents:                  
Non-vested restricted share units (1)   131,277     82,360     82,360     82,360    
Common shares outstanding - diluted   19,994,605     20,058,757     22,848,162     22,848,162     22,682,875
                   
Book value per common share $ 28.40   $ 43.67   $ 42.20   $ 42.23   $ 41.52
Book value per diluted common share $ 28.21   $ 43.49   $ 42.05   $ 42.07   $ 41.52
                             

(1) During the first quarter of 2020, the Company granted 63,591 restricted share units and common shares to certain employees and directors, 48,917 of which are non-vested as of March 31, 2020.  During the second quarter of 2019, the Company granted 165,287 restricted share units and common shares to certain employees and directors, 82,360 of which are non-vested as of March 31, 2020.

Comments on Regulation G

Throughout this release, the Company presents its operations in the way it believes will be the most meaningful and useful to investors, analysts, rating agencies and others who use the Company’s financial information in evaluating the performance of the Company and that investors and such other persons benefit from having a consistent basis for comparison between quarters and for comparison with other companies within the industry. These measures may not, however, be comparable to similarly titled measures used by companies outside of the insurance industry. Investors are cautioned not to place undue reliance on these non-U.S. GAAP financial measures in assessing the Company’s overall financial performance.

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

The presentation of underwriting income (loss), adjusted underwriting income (loss) and the adjusted combined ratio are non-U.S. GAAP financial measures as defined in Regulation G. The reconciliation of such measures to net income (loss) available to common shareholders (the most directly comparable U.S. GAAP financial measure) in accordance with Regulation G is included on the following pages of this release.

Underwriting income (loss) is useful in evaluating our underwriting performance, without regard to other underwriting income (losses), net investment income (losses), net foreign exchange gains (losses), interest expense, income tax expenses and preference dividends, and adjusted underwriting income (loss) is useful in evaluating our underwriting performance, without regard to net investment income (losses), net foreign exchange gains (losses), interest expense, income tax expenses, preference dividends and certain corporate expenses, and the adjusted combined ratio is a key indicator of our profitability, without regard to certain corporate expenses.  The Company believes that preference dividends, income tax expense, foreign exchange gains (losses), interest expense, net investment income (loss), other underwriting income (loss) and certain corporate expenses in any particular period are not indicative of the performance of, or trends in, the Company’s underwriting performance. Although preference dividends, income tax expense, foreign exchange gains (losses), interest expense, net investment income (loss) and other underwriting income (loss) are an integral part of the Company’s operations, the decision to realize investment gains or losses, the recognition of the change in the carrying value of investments accounted for using the fair value option in net realized gains or losses, and the recognition of foreign exchange gains or losses are independent of the underwriting process and result, in large part, from general economic and financial market conditions. Furthermore, certain users of the Company’s financial information believe that, for many companies, the timing of the realization of investment gains or losses is largely opportunistic. The Company believes that certain corporate expenses, due to their non-recurring nature, are not indicative of the performance of, or trends in, the Company’s business performance. Due to these reasons, the Company excludes preference dividends, income tax expense, foreign exchange gains (losses), interest expense, net investment income (loss), other underwriting income (loss) from the calculation of underwriting income (loss), and excludes preference dividends, income tax expense, foreign exchange gains (losses), interest expense, net investment income (loss) and certain corporate expenses from the calculation of adjusted underwriting income (loss) and the adjusted combined ratio.

The Company believes that showing underwriting income (loss), adjusted underwriting income (loss) and the adjusted combined ratio exclusive of the items referred to above reflects the underlying fundamentals of the Company’s business since the Company evaluates the performance of its business using underwriting income (loss), adjusted underwriting income (loss) and the adjusted combined ratio. The Company believes that this presentation enables investors and other users of the Company’s financial information to analyze the Company’s performance in a manner similar to how the Company’s management analyzes performance. The Company also believes that this measure follows industry practice and, therefore, allows the users of the Company’s financial information to compare the Company’s performance with its industry peer group. The Company believes that the equity analysts and certain rating agencies, which follow the Company and the insurance industry as a whole generally exclude these items from their analysis for the same reasons.

This presentation also includes the non-investment grade portfolio and investment grade portfolio components of our investment returns: “net interest income yield on average net assets” (calculated as net interest income divided by average net assets), “net investment income return on average total investments (excluding accrued investment income)” (calculated as net investment income divided by average total investments), and “net investment income return on average net assets” (calculated as net investment income divided by average net assets). Net assets is calculated as the sum of total investments, accrued investment income and receivables for securities sold, less revolving credit agreement borrowings, payable for securities purchased and payables for securities sold short. For the three-month period, average net assets is calculated using the averages of each quarterly period. However, for the investment grade portfolio component of these returns, the impact of the revolving credit agreement borrowings is not subtracted from net interest income, net investment income (loss) or the net assets calculation.

The presentation of the separate components of our investment returns (non-investment grade portfolio and investment grade portfolio) are non-U.S. GAAP financial measures as defined in Regulation G. The reconciliation of such measures to net interest income and net investment income (loss), the most directly comparable U.S. GAAP financial measures, in accordance with Regulation G is included on the following pages of this release.

The non-investment grade portfolio and investment grade portfolio components of our investment returns (net interest income yield on average net assets, net investment income return on average net assets and on average total investments (excluding accrued investment income), respectively) are useful in evaluating our investment performance. The non-investment grade portfolio components of these investment returns reflect the performance of our investment strategy under HPS Investment Partners, LLC (“HPS”), which includes the use of leverage. The investment grade portfolio component of these returns reflects the performance of the investment portfolios that predominantly support our underwriting collateral.

The following tables present a reconciliation of underwriting income (loss) to net income (loss) available to common shareholders, and a reconciliation of adjusted underwriting income (loss) to underwriting income (loss):

   
  Three Months Ended March 31,
    2020       2019  
   
  ($ in thousands)
Net income (loss) available to common shareholders $ (267,779 )   $ 47,632  
Preference dividends   1,171       4,907  
Net income (loss) before dividends   (266,608 )     52,539  
Income tax expense          
Interest expense   2,912        
Net foreign exchange (gains) losses   (5,013 )     437  
Net investment (income) loss   262,699       (58,354 )
Other underwriting (income) loss   (133 )     (592 )
Underwriting income (loss)   (6,143 )     (5,970 )
Certain corporate expenses   2,996       1,963  
Other underwriting income (loss)   133       592  
Adjusted underwriting income (loss) $ (3,014 )   $ (3,415 )
               

The adjusted combined ratio reconciles to the combined ratio for the three months ended March 31, 2020 and 2019 as follows:

   
  Three Months Ended March 31,
    2020       2019  
  Amount   Adjustment   As
Adjusted
  Amount   Adjustment   As
Adjusted
   
  ($ in thousands)
Losses and loss adjustment expenses $ 110,676     $     $ 110,676     $ 110,850     $     $ 110,850  
Acquisition expenses   28,367             28,367       33,974             33,974  
General & administrative expenses (1)   7,139       (2,996 )     4,143       7,240       (1,963 )     5,277  
Net premiums earned (1)   140,039       133       140,172       146,094       592       146,686  
                       
Loss ratio   79.0 %             75.9 %        
Acquisition expense ratio   20.3 %             23.3 %        
General & administrative expense ratio (1)   5.1 %             4.9 %        
Combined ratio   104.4 %             104.1 %        
Adjusted loss ratio           79.0 %             75.6 %
Adjusted acquisition expense ratio           20.2 %             23.2 %
Adjusted general & administrative expense ratio           3.0 %             3.5 %
Adjusted combined ratio           102.2 %             102.3 %
                       

(1) Adjustments include certain corporate expenses, which are deducted from general and administrative expenses, and other underwriting income (loss), which is added to net premiums earned.

The following tables summarize the components of our total investment return for the three months ended March 31, 2020 and 2019:

       
  Three Months Ended March 31, 2020   Three Months Ended March 31, 2019
  Non-Investment Grade   Investment Grade   Cost of U/W Collateral (4)   Total   Non-Investment Grade   Investment Grade   Cost of U/W Collateral (4)   Total
   
  ($ in thousands)
Interest income $ 32,764     $ 5,060     $     $ 37,824     $ 37,339     $ 5,802     $     $ 43,141  
Investment management fees - related parties (3,973 )   (379 )       (4,352 )   (4,071 )   (338 )       (4,409 )
Borrowing and miscellaneous other investment expenses (2,591 )   (225 )   (2,853 )   (5,669 )   (4,858 )   (204 )   (3,236 )   (8,298 )
Net interest income 26,200     4,456     (2,853 )   27,803     28,410     5,260     (3,236 )   30,434  
Net realized gains (losses) on investments (7,225 )   2,179         (5,046 )   1,319     (37 )       1,282  
Net unrealized gains (losses) on investments (1) (285,493 )   37         (285,456 )   27,625     4,813         32,438  
Investment performance fees - related parties                 (5,800 )           (5,800 )
Net investment income (loss) $ (266,518 )   $ 6,672     $ (2,853 )   $ (262,699 )   $ 51,554     $ 10,036     $ (3,236 )   $ 58,354  
                               
Average total investments (2) $ 1,790,337     $ 820,635     $     $ 2,610,972     $ 1,895,843     $ 888,424     $—     $ 2,784,267  
Average net assets (3) $ 1,530,825     $ 826,062     $ (328,750 )   $ 2,028,137     $ 1,506,245     $ 886,927     $ (316,987 )   $ 2,076,185  
                               
Net interest income yield on average net assets (3) 1.7 %   0.5 %       1.4 %   1.9 %   0.6 %       1.5 %
Net investment income return on average total investments (excluding accrued investment income) (2) (14.9 )%   0.8 %       (10.1 )%   2.7 %   1.1 %       2.1 %
Net investment income return on average net assets (3) (17.4 )%   0.8 %   (0.9 )%   (13.0 )%   3.4 %   1.1 %   (1.0 )%   2.8 %
                               

(1) Net unrealized gains (losses) on investments excludes unrealized gains and losses from the available for sale portfolios, which are recorded in other comprehensive income.

(2) Net investment income return on average total investments (excluding accrued investment income) is calculated by dividing net investment income by average total investments. For the three-month period, average total investments is calculated using the average of the beginning and ending balance of each quarterly period. However, for the investment grade portfolio component of these returns, the impact of revolving credit agreement borrowings is not subtracted from net investment income.

(3) Net interest income yield on average net assets and net investment income return on average net assets are calculated by dividing net interest income, and net investment income (loss), respectively, by average net assets. For the non-investment grade component of investment returns and total investment returns, net assets is calculated as the sum of total investments, accrued investment income and receivables for securities sold, less total revolving credit agreement borrowings, payable for securities purchased and payable for securities sold short.  However, for the investment grade portfolio component of these returns, the impact of the revolving credit agreement borrowings is not subtracted from net interest income, net investment income (loss), or the net assets calculation.

(4) The cost of underwriting collateral is calculated as the revolving credit agreement expenses for the investment grade portfolios divided by the average total revolving credit agreement borrowings for the investment grade portfolios during the period.

       
  As of March 31, 2020   As of March 31, 2019
  Non-Investment Grade   Investment
Grade
  Borrowings for U/W Collateral   Total   Non-Investment Grade   Investmen
Grade
  Borrowings for U/W Collateral   Total
   
  ($ in thousands)
Average total investments - QTD $ 1,790,337     $ 820,635     $     $ 2,610,972     $ 1,895,843     $ 888,424     $     $ 2,784,267  
Average net assets - QTD   1,530,825       826,062       (328,750 )     2,028,137       1,506,245       886,927       (316,987 )     2,076,185  
                               
Total investments $ 1,718,421     $ 794,385     $     $ 2,512,806     $ 1,909,095     $ 921,071     $     $ 2,830,166  
Accrued Investment Income   12,312       4,032             16,344       13,300       4,046             17,346  
Receivable for Securities Sold   22,329       4,460             26,789       62,365       201             62,566  
Less: Payable for Securities Purchased   61,834       1,995             63,829       83,189       12,388             95,577  
Less: Payable for Securities Sold Short   30,076                   30,076       28,737                   28,737  
Less: Revolving credit agreement borrowings   247,736             328,750       576,486       326,256             326,487       652,743  
Net assets $ 1,413,416     $ 800,882     $ (328,750 )   $ 1,885,548     $ 1,546,578     $ 912,930     $ (326,487 )   $ 2,133,021  
Non-investment grade borrowing ratio (1)   17.50 %                 21.10 %            
                               
Unrealized gains on investments $ 25,439     $ 15,086     $     $ 40,525     $ 28,066     $ 4,040     $     $ 32,106  
Unrealized losses on investments   (366,188 )     (47,603 )           (413,791 )     (104,700 )     (6,835 )           (111,535 )
Net unrealized gains (losses) on investments $ (340,749 )   $ (32,517 )   $     $ (373,266 )   $ (76,634 )   $ (2,795 )   $     $ (79,429 )
                               

(1) The non-investment grade borrowing ratio is calculated as revolving credit agreement borrowings divided by net assets.

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (the “PSLRA”) provides a “safe harbor” for forward-looking statements. This release or any other written or oral statements made by or on behalf of the Company may include forward-looking statements, which reflect the Company’s current views with respect to future events and financial performance. All statements other than statements of historical fact included in or incorporated by reference in this release are forward-looking statements. Forward-looking statements, for purposes of the PSLRA or otherwise, can generally be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” and similar statements of a future or forward-looking nature or their negative or variations or similar terminology. These forward-looking statements include statements regarding the Company’s return on equity potential and prospects for further book value growth.

Forward-looking statements involve the Company’s current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. Important factors that could cause actual events or results to differ materially from those indicated in such statements are discussed below and elsewhere in this release and in the Company’s periodic reports filed with the Securities and Exchange Commission (the “SEC”), and include:

  • our limited operating history;
  • fluctuations in the results of our operations;
  • our ability to compete successfully with more established competitors;
  • our losses exceeding our reserves;
  • downgrades, potential downgrades or other negative actions by rating agencies, including A.M. Best’s recent announcement that it has placed under review with negative implications the financial strength and credit ratings of our operating subsidiaries;
  • our dependence on key executives and inability to attract qualified personnel, or the potential loss of Bermudian personnel as a result of Bermuda employment restrictions;
  • our dependence on letter of credit facilities that may not be available on commercially acceptable terms;
  • our potential inability to pay dividends or distributions;
  • our potential need for additional capital in the future and the potential unavailability of such capital to us on favorable terms or at all;
  • our dependence on clients’ evaluations of risks associated with such clients’ insurance underwriting;
  • the suspension or revocation of our subsidiaries’ insurance licenses;
  • Watford Holdings potentially being deemed an investment company under U.S. federal securities law;
  • the potential characterization of us and/or any of our subsidiaries as a passive foreign investment company (“PFIC”);
  • our dependence on certain subsidiaries of Arch Capital Group Ltd. (“Arch”) for services critical to our underwriting operations;
  • changes to our strategic relationship with Arch or the termination by Arch of any of our services agreements or quota share agreements;
  • our dependence on HPS and Arch Investment Management Ltd. (“AIM”) to implement our investment strategy;
  • the termination by HPS or AIM of any of our investment management agreements;
  • risks associated with our investment strategy being greater than those faced by competitors;
  • changes in the regulatory environment;
  • our potentially becoming subject to U.S. federal income taxation;
  • our potentially becoming subject to U.S. withholding and information reporting requirements under the U.S. Foreign Account Tax Compliance Act (“FATCA”) provisions;
  • our ability to complete acquisitions and integrate businesses successfully;
  • adverse general economic and market conditions, including those caused by pandemics, including COVID-19, and government actions in response thereto; and
  • the other matters set forth under Item 1A “Risk Factors,” Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other sections of the Company’s Annual Report on Form 10-K, as well as the other factors set forth in the Company’s other documents on file with the SEC, and management’s response to any of the aforementioned factors.

All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Contact

Robert L. Hawley: (441) 278-3456

rhawley@watfordre.com

watford.jpg

Source: Watford Holdings Ltd.