Watford Reports 2020 Fourth Quarter Results

February 9, 2021

PEMBROKE, Bermuda--(BUSINESS WIRE)--Feb. 9, 2021-- WATFORD HOLDINGS LTD. (“Watford” or the “Company”) (NASDAQ: WTRE) today reported net income of $61.4 million, after $1.1 million of preference dividends, for the three months ended December 31, 2020, compared to net loss of $16.9 million, after $1.2 million of preference dividends for the same period in 2019. Book value per diluted common share was $47.08 at December 31, 2020, an increase of 8.3% from December 31, 2019. The quarterly results include:

  • The 2020 fourth quarter net income available to common shareholders was $61.4 million, or $3.08 per diluted common share, a 6.8% return on average equity, compared to net loss of $16.9 million, or $(0.79) per diluted common share, for the 2019 fourth quarter;
  • The 2020 full year net income available to common shareholders was $60.5 million, or $3.04 per diluted common share, a 7.8% return on average equity, compared to net income of $44.7 million, or $2.00 per diluted common share, a 4.8% return on average equity, for the 2019 full year;
  • Combined ratio of 106.3%, comprised of a 76.5% loss ratio, a 25.6% acquisition expense ratio and a 4.2% general and administrative expense ratio for the 2020 fourth quarter, compared to a combined ratio of 128.3%, comprised of a 100.9% loss ratio, a 22.3% acquisition expense ratio and a 5.1% general and administrative expense ratio for the 2019 fourth quarter;
  • Net interest income of $24.6 million, a 1.1% yield on average net assets for the 2020 fourth quarter, compared to net interest income of $29.8 million and a 1.4% yield on average net assets for the 2019 fourth quarter; and
  • Net investment income of $84.4 million, a 3.8% return on average net assets for the 2020 fourth quarter, compared to net investment income of $32.1 million and a 1.5% return on average net assets for the 2019 fourth quarter.

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

“Watford's fourth quarter results continue to demonstrate the durability in our business model with another strong financial performance. Our net income for the quarter was $61.4 million, a 6.8% return on average equity for the quarter.

We are also pleased to report solid book value growth in 2020. Our ultimate objective is to grow book value per share over time, and despite a tumultuous and challenging environment for underwriting and investments, we have grown our book value per diluted common share by 8.3% in the year.

The quarter's results were driven by strong investment income, which totaled $84.4 million for the last three months of the year. This was achieved while we simultaneously decreased our total invested assets in our non-investment grade portfolio, continuing our efforts to reduce our capital's exposure to mark-to-market volatility.

Our combined ratio for the quarter was 106.3%, and 104.5% when adjusted for other underwriting income and certain corporate expenses.

Market conditions improved further in the quarter, with rates moving positively particularly in our insurance platforms.”

Underwriting

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

 

Three Months Ended December 31,

 

Year Ended December 31,

 

2020

 

2019

 

% Change

 

2020

 

2019

 

% Change

 

($ in thousands)

Gross premiums written

$

138,237

 

 

$

156,254

 

 

(11.5)

%

 

$

728,546

 

 

$

754,881

 

 

(3.5)

%

Net premiums written

97,717

 

 

112,353

 

 

(13.0)

%

 

537,589

 

 

532,862

 

 

0.9

%

Net premiums earned

142,746

 

 

133,446

 

 

7.0

%

 

560,351

 

 

556,690

 

 

0.7

%

Underwriting income (loss) (1)

(9,054)

 

 

(37,819)

 

 

76.1

%

 

(34,013)

 

 

(54,076)

 

 

37.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Point
Change

 

 

 

 

 

% Point
Change

Loss ratio

76.5

%

 

100.9

%

 

(24.4)

%

 

78.6

%

 

81.4

%

 

(2.8)

%

Acquisition expense ratio

25.6

%

 

22.3

%

 

3.3

%

 

22.4

%

 

22.8

%

 

(0.4)

%

General & administrative expense ratio

4.2

%

 

5.1

%

 

(0.9)

%

 

5.1

%

 

5.5

%

 

(0.4)

%

Combined ratio

106.3

%

 

128.3

%

 

(22.0)

%

 

106.1

%

 

109.7

%

 

(3.6)

%

Adjusted combined ratio (2)

104.5

%

 

126.4

%

 

(21.9)

%

 

103.7

%

 

107.3

%

 

(3.6)

%

(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
December 31,

 

Year Ended
December 31,

 

2020

 

2019

 

2020

 

2019

 

($ in thousands)

Gross premiums written:

 

 

 

 

 

 

 

Casualty reinsurance

$

14,239

 

 

$

26,680

 

 

$

188,042

 

 

$

279,967

 

Other specialty reinsurance

27,668

 

 

34,931

 

 

117,177

 

 

119,518

 

Property catastrophe reinsurance

1,569

 

 

844

 

 

27,334

 

 

16,226

 

Insurance programs and coinsurance

94,761

 

 

93,799

 

 

395,993

 

 

339,170

 

Total

$

138,237

 

 

$

156,254

 

 

$

728,546

 

 

$

754,881

 

 

 

 

 

 

 

 

 

Net premiums written:

 

 

 

 

 

 

 

Casualty reinsurance

$

14,280

 

 

$

26,532

 

 

$

185,968

 

 

$

225,758

 

Other specialty reinsurance

26,091

 

 

33,078

 

 

111,575

 

 

114,876

 

Property catastrophe reinsurance

1,569

 

 

874

 

 

26,587

 

 

15,517

 

Insurance programs and coinsurance

55,777

 

 

51,869

 

 

213,459

 

 

176,711

 

Total

$

97,717

 

 

$

112,353

 

 

$

537,589

 

 

$

532,862

 

 

 

 

 

 

 

 

 

Net premiums earned:

 

 

 

 

 

 

 

Casualty reinsurance

$

49,715

 

 

$

55,352

 

 

$

205,192

 

 

$

238,437

 

Other specialty reinsurance

33,800

 

 

30,929

 

 

131,873

 

 

149,688

 

Property catastrophe reinsurance

5,740

 

 

3,692

 

 

23,037

 

 

13,399

 

Insurance programs and coinsurance

53,491

 

 

43,473

 

 

200,249

 

 

155,166

 

Total

$

142,746

 

 

$

133,446

 

 

$

560,351

 

 

$

556,690

 

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

 

Three Months Ended December 31,

 

Year Ended December 31,

 

2020

 

2019

 

2020

 

2019

 

Loss and
Loss
Adjustment
Expenses

 

% of
Earned
Premiums

 

Loss and
Loss
Adjustment
Expenses

 

% of
Earned
Premiums

 

Loss and
Loss
Adjustment
Expenses

 

% of
Earned
Premiums

 

Loss and
Loss
Adjustment
Expenses

 

% of
Earned
Premiums

 

($ in thousands)

Current year

$

109,314

 

 

76.6

%

 

$

110,510

 

 

82.8

%

 

$

441,175

 

 

78.7

%

 

$

429,322

 

 

77.1

%

Prior year development (favorable)/adverse

(107)

 

 

(0.1)

%

 

24,145

 

 

18.1

%

 

(693)

 

 

(0.1)

%

 

23,813

 

 

4.3

%

Loss and loss adjustment expenses

$

109,207

 

 

76.5

%

 

$

134,655

 

 

100.9

%

 

$

440,482

 

 

78.6

%

 

$

453,135

 

 

81.4

%

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

Gross premiums written in the 2020 fourth quarter were 11.5% lower than the 2019 fourth quarter. The decrease in gross premiums written reflected a decrease in casualty reinsurance and other specialty reinsurance premiums written, offset in part by an increase in insurance programs and coinsurance and property catastrophe reinsurance in the 2020 fourth quarter.

Casualty reinsurance gross premiums decreased $12.4 million, or 46.6%, to $14.2 million, over the prior year quarter. The decrease was driven by non-renewals of certain professional liability, workers' compensation and medical malpractice treaties.

Other specialty gross premiums decreased $7.3 million, or 20.8%, to $27.7 million, over the prior year quarter. The decrease was driven by a reduction in mortgage premiums as well as reduced writings in certain motor reinsurance cessions.

Net premiums written in the 2020 fourth quarter decreased $14.6 million, or 13.0%, to $97.7 million, over the prior year quarter. The drivers of the decrease in net premiums written for casualty and other specialty reinsurance were the same as those impacting gross premiums written, as discussed above. The insurance programs and coinsurance net premiums written increased $3.9 million as a result of an increased net retention on our U.K. motor insurance portfolio.

Net premiums earned in the 2020 fourth quarter increased $9.3 million, or 7.0%, to $142.7 million, over the prior year quarter. The increase in earned premiums primarily reflected increased writings in the U.S. insurance programs and coinsurance, increased European motor writings within other specialty reinsurance and, to a lesser extent, greater assumed property catastrophe reinsurance. This increase was offset in part by decreases in casualty reinsurance driven by reduced professional liability premium, as described above.

The loss ratio was 76.5% in the 2020 fourth quarter compared to 100.9% in the 2019 fourth quarter. In the 2020 fourth quarter, we had losses totaling $1.3 million, or 0.9 points for catastrophe events which occurred during the quarter. The 2019 fourth quarter loss ratio included 18.1 points of prior year and 2.9 points of current year loss strengthening, primarily in the casualty reinsurance line of business. Casualty reinsurance prior year loss reserves were strengthened in the 2019 fourth quarter by $24.0 million, primarily due to a higher than anticipated level of reported losses on one professional lines quota share treaty program and one non-renewed multi-line quota share treaty. In addition, the 2019 fourth quarter experienced $5.0 million, or 3.7 points, of catastrophe losses, primarily due to Typhoon Hagibis in Japan.

The acquisition expense ratio was 25.6% in the 2020 fourth quarter, compared to 22.3% in the 2019 fourth quarter. These ratio movements reflected changes in mix and the type of business.

The general and administrative expense ratio was 4.2% in the 2020 fourth quarter, compared to 5.1% in the 2019 fourth quarter. The 0.9 point decrease versus the prior year quarter was attributable to a reduction in professional fees. Removing certain corporate expenses, our adjusted general and administrative expense ratio was 2.8% in the 2020 fourth quarter, compared to 3.7% in the 2019 fourth quarter.

Investments

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

 

Three Months Ended
December 31,

 

Year Ended
December 31,

 

2020

 

2019

 

2020

 

2019

 

($ in thousands)

Interest income

$

31,560

 

 

$

40,775

 

 

$

140,390

 

 

$

163,888

 

Investment management fees - related parties

(4,199)

 

 

(4,807)

 

 

(17,193)

 

 

(18,392)

 

Borrowing and miscellaneous other investment expenses

(2,718)

 

 

(6,142)

 

 

(16,807)

 

 

(29,285)

 

Net interest income

24,643

 

 

29,826

 

 

106,390

 

 

116,211

 

Realized gains (losses) on investments

9,839

 

 

(10,664)

 

 

12,217

 

 

(7,948)

 

Unrealized gains (losses) on investments

60,234

 

 

16,769

 

 

7,412

 

 

32,191

 

Investment performance fees - related parties

(10,279)

 

 

(3,849)

 

 

(12,037)

 

 

(12,191)

 

Net investment income (loss)

$

84,437

 

 

$

32,082

 

 

$

113,982

 

 

$

128,263

 

 

 

 

 

 

 

 

 

Unrealized gains on investments (balance sheet)

$

81,653

 

 

$

47,203

 

 

$

81,653

 

 

$

47,203

 

Unrealized losses on investments (balance sheet)

(125,495)

 

 

(110,448)

 

 

(125,495)

 

 

(110,448)

 

Net unrealized gains (losses) on investments (balance sheet)

$

(43,842)

 

 

$

(63,245)

 

 

$

(43,842)

 

 

$

(63,245)

 

 

 

 

 

 

 

 

 

Net interest income yield on average net assets (1)

1.1

%

 

1.4

%

 

5.1

%

 

5.4

%

Non-investment grade portfolio (1)

1.5

%

 

1.7

%

 

6.7

%

 

6.8

%

Investment grade portfolio (1)

0.3

%

 

0.6

%

 

1.6

%

 

2.5

%

Net investment income return on average net assets (1)

3.8

%

 

1.5

%

 

5.4

%

 

6.0

%

Non-investment grade portfolio (1)

5.5

%

 

1.7

%

 

6.5

%

 

6.8

%

Investment grade portfolio (1)

0.4

%

 

0.9

%

 

3.0

%

 

3.9

%

Net investment income return on average total investments (excluding accrued investment income) (2)

3.3

%

 

1.2

%

 

4.4

%

 

4.6

%

Non-investment grade portfolio (2)

4.5

%

 

1.4

%

 

5.3

%

 

5.7

%

Investment grade portfolio (2)

0.4

%

 

0.9

%

 

3.0

%

 

3.9

%

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

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

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

Net investment income was $84.4 million for the three months ended December 31, 2020 compared to net investment income of $32.1 million for the three months ended December 31, 2019, an increase of $52.3 million. The 2020 fourth quarter net investment income return on average net assets was 3.8% as compared to 1.5% for the prior year period.

The 2020 fourth quarter net investment income return was driven by net unrealized gains of $60.2 million and net realized gains of $9.8 million, as the non-investment grade credit spreads continued to tighten through the quarter. Net interest income decreased to $24.6 million from $29.8 million, a decrease of 17.4% compared to the prior year quarter.

The 2020 fourth quarter non-investment grade portfolio net interest income yield on average net assets was 1.5%, a decrease from 1.7% in the fourth quarter of 2019. The reduced yield for the 2020 fourth quarter reflected a portfolio shift to higher rated investments and a decrease in LIBOR. The net realized and unrealized gains reported in the 2020 fourth quarter were $69.4 million, reflective of the credit spread recovery discussed above.

The 2020 fourth quarter investment grade portfolio net interest income yield on average net assets was 0.3%, a decrease from 0.6% in the fourth quarter of 2019. The reduced yield for the 2020 fourth quarter reflected a reduction in interest rates. In addition, the investment grade portfolio recognized $0.6 million of net realized and unrealized gains in the quarter, as compared to net realized and unrealized gains of $2.4 million in the fourth quarter of 2019.

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

 

December 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

$

851,539

 

 

$

191,608

 

 

$

162,255

 

 

$

159,747

 

 

$

79,477

 

 

$

131,820

 

 

$

24,079

 

 

$

29,679

 

 

$

72,874

 

Corporate bonds

312,620

 

 

26,565

 

 

23,929

 

 

53,493

 

 

81,990

 

 

21,899

 

 

18,759

 

 

34,955

 

 

51,030

 

Equities - sector specific

101,464

 

 

71,574

 

 

22,463

 

 

2,724

 

 

 

 

2,822

 

 

 

 

479

 

 

1,402

 

Short-term investments - sector specific

12,637

 

 

 

 

490

 

 

 

 

8,961

 

 

 

 

 

 

 

 

3,186

 

Subtotal

1,278,260

 

 

289,747

 

 

209,137

 

 

215,964

 

 

170,428

 

 

156,541

 

 

42,838

 

 

65,113

 

 

128,492

 

Equities - non-sector specific

16,737

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments - non-sector specific

288,753

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

140,508

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Non-Investment Grade Portfolio

$

1,724,258

 

 

$

289,747

 

 

$

209,137

 

 

$

215,964

 

 

$

170,428

 

 

$

156,541

 

 

$

42,838

 

 

$

65,113

 

 

$

128,492

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Grade Portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

197,247

 

 

$

55,430

 

 

$

11,190

 

 

$

17,863

 

 

$

28,002

 

 

$

13,989

 

 

$

41,543

 

 

$

14,473

 

 

$

14,757

 

Short-term investments

117,300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government agency bonds

202,488

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. government and government agency bonds

158,839

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

80,258

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

16,663

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal government and government agency bonds

1,788

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investment Grade Portfolio

$

774,583

 

 

$

55,430

 

 

$

11,190

 

 

$

17,863

 

 

$

28,002

 

 

$

13,989

 

 

$

41,543

 

 

$

14,473

 

 

$

14,757

 

Total Investments

$

2,498,841

 

 

$

345,177

 

 

$

220,327

 

 

$

233,827

 

 

$

198,430

 

 

$

170,530

 

 

$

84,381

 

 

$

79,586

 

 

$

143,249

 

(1) Includes telecommunications, utilities and basic materials.

 

September 30, 2020

 

Total

 

Financials

 

Health
Care

 

Technology

 

Consumer
Services

 

Industrials

 

Consumer
Goods

 

Oil & Gas

 

All Other (1)

 

($ in thousands)

Non-Investment Grade Portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term loan investments

$

893,030

 

 

$

188,791

 

 

$

155,104

 

 

$

154,834

 

 

$

136,778

 

 

$

121,996

 

 

$

27,779

 

 

$

29,779

 

 

$

77,969

 

Corporate bonds

456,655

 

 

44,767

 

 

50,186

 

 

32,676

 

 

95,102

 

 

41,723

 

 

66,282

 

 

36,173

 

 

89,746

 

Equities - sector specific

96,641

 

 

63,740

 

 

21,812

 

 

7,168

 

 

 

 

2,437

 

 

 

 

311

 

 

1,173

 

Short-term investments - sector specific

2,265

 

 

 

 

443

 

 

1,822

 

 

 

 

 

 

 

 

 

 

 

Subtotal

1,448,591

 

 

297,298

 

 

227,545

 

 

196,500

 

 

231,880

 

 

166,156

 

 

94,061

 

 

66,263

 

 

168,888

 

Equities - non-sector specific

17,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments - non-sector specific

250,636

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

164,990

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

8,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Non-Investment Grade Portfolio

$

1,889,956

 

 

$

297,298

 

 

$

227,545

 

 

$

196,500

 

 

$

231,880

 

 

$

166,156

 

 

$

94,061

 

 

$

66,263

 

 

$

168,888

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Grade Portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

193,357

 

 

$

52,606

 

 

$

10,390

 

 

$

18,844

 

 

$

24,440

 

 

$

14,713

 

 

$

42,506

 

 

$

15,221

 

 

$

14,637

 

Short-term investments

97,490

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government agency bonds

203,452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. government and government agency bonds

150,782

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

84,701

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

18,115

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal government and government agency bonds

1,793

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investment Grade Portfolio

$

749,690

 

 

$

52,606

 

 

$

10,390

 

 

$

18,844

 

 

$

24,440

 

 

$

14,713

 

 

$

42,506

 

 

$

15,221

 

 

$

14,637

 

Total Investments

$

2,639,646

 

 

$

349,904

 

 

$

237,935

 

 

$

215,344

 

 

$

256,320

 

 

$

180,869

 

 

$

136,567

 

 

$

81,484

 

 

$

183,525

 

(1) Includes telecommunications, utilities and basic materials.

The tables below summarize the credit quality of the Company's non-investment grade and investment grade portfolios as of December 31, 2020 and September 30, 2020, as rated by Standard & Poor’s Financial Services, LLC, or Standard & Poor’s, Moody’s Investors Service, or Moody’s, Fitch Ratings Inc., or Fitch, Kroll Bond Rating Agency, or KBRA, or DBRS Morningstar, or DBRS, as applicable:

 

Credit Rating (1)

December 31, 2020

Fair Value

 

AAA

 

AA

 

A

 

BBB

 

BB

 

B

 

CCC

 

CC

 

C

 

Not Rated

 

($ in thousands)

Non-Investment Grade Portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term loan investments

$

851,539

 

 

$

 

 

$

 

 

$

 

 

$

11,352

 

 

$

19,486

 

 

$

588,215

 

 

$

185,221

 

 

$

7,406

 

 

$

2,727

 

 

$

37,132

 

Corporate bonds

312,620

 

 

 

 

 

 

 

 

 

 

31,089

 

 

194,418

 

 

59,421

 

 

8,280

 

 

1,894

 

 

17,518

 

Asset-backed securities

140,508

 

 

 

 

 

 

 

 

73,911

 

 

26,799

 

 

8,385

 

 

8,262

 

 

837

 

 

 

 

22,314

 

Short-term investments

301,390

 

 

83,308

 

 

124,830

 

 

89,577

 

 

 

 

 

 

3,186

 

 

489

 

 

 

 

 

 

 

Total fixed income instruments and short-term investments

1,606,057

 

 

83,308

 

 

124,830

 

 

89,577

 

 

85,263

 

 

77,374

 

 

794,204

 

 

253,393

 

 

16,523

 

 

4,621

 

 

76,964

 

Equities

118,201

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Non-Investment Grade Portfolio

$

1,724,258

 

 

$

83,308

 

 

$

124,830

 

 

$

89,577

 

 

$

85,263

 

 

$

77,374

 

 

$

794,204

 

 

$

253,393

 

 

$

16,523

 

 

$

4,621

 

 

$

76,964

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Grade Portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

197,247

 

 

$

 

 

$

19,812

 

 

$

82,379

 

 

$

87,913

 

 

$

7,143

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

U.S. government and government agency bonds

202,488

 

 

 

 

202,488

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

80,258

 

 

 

 

 

 

15,675

 

 

59,560

 

 

5,023

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

16,663

 

 

 

 

 

 

2,092

 

 

14,571

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. government and government agency bonds

158,839

 

 

 

 

158,839

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal government and government agency bonds

1,788

 

 

783

 

 

592

 

 

413

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

117,300

 

 

6,211

 

 

43,870

 

 

19,328

 

 

47,891

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investment Grade Portfolio

$

774,583

 

 

$

6,994

 

 

$

425,601

 

 

$

119,887

 

 

$

209,935

 

 

$

12,166

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Total

$

2,498,841

 

 

$

90,302

 

 

$

550,431

 

 

$

209,464

 

 

$

295,198

 

 

$

89,540

 

 

$

794,204

 

 

$

253,393

 

 

$

16,523

 

 

$

4,621

 

 

$

76,964

 

(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)

September 30, 2020

Fair Value

 

AAA

 

AA

 

A

 

BBB

 

BB

 

B

 

CCC

 

CC

 

C

 

D

 

Not Rated

 

($ in thousands)

Non-Investment Grade Portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term loan investments

$

893,030

 

 

$

 

 

$

 

 

$

 

 

$

11,074

 

 

$

27,214

 

 

$

533,876

 

 

$

233,186

 

 

$

8,970

 

 

$

4,469

 

 

$

13,325

 

 

$

60,916

 

Corporate bonds

456,655

 

 

 

 

 

 

 

 

14,037

 

 

68,968

 

 

207,670

 

 

126,388

 

 

6,070

 

 

1,171

 

 

14,415

 

 

17,936

 

Asset-backed securities

164,990

 

 

 

 

 

 

5,989

 

 

88,704

 

 

28,452

 

 

9,277

 

 

8,667

 

 

842

 

 

 

 

 

 

23,059

 

Mortgage-backed securities

8,600

 

 

 

 

 

 

 

 

 

 

1,182

 

 

 

 

 

 

 

 

 

 

3,149

 

 

4,269

 

Short-term investments

252,901

 

 

54,458

 

 

132,306

 

 

63,871

 

 

 

 

 

 

 

 

443

 

 

 

 

 

 

 

 

1,823

 

Total fixed income instruments and short-term investments

1,776,176

 

 

54,458

 

 

132,306

 

 

69,860

 

 

113,815

 

 

125,816

 

 

750,823

 

 

368,684

 

 

15,882

 

 

5,640

 

 

30,889

 

 

108,003

 

Other Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equities

113,780

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Non-Investment Grade Portfolio

$

1,889,956

 

 

$

54,458

 

 

$

132,306

 

 

$

69,860

 

 

$

113,815

 

 

$

125,816

 

 

$

750,823

 

 

$

368,684

 

 

$

15,882

 

 

$

5,640

 

 

$

30,889

 

 

$

108,003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Grade Portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

193,357

 

 

$

 

 

$

20,016

 

 

$

87,672

 

 

$

80,678

 

 

$

4,991

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

U.S. government and government agency bonds

203,452

 

 

 

 

203,452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

84,701

 

 

 

 

 

 

16,757

 

 

63,216

 

 

4,728

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

18,115

 

 

 

 

 

 

1,733

 

 

16,382

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. government and government agency bonds

150,782

 

 

 

 

150,782

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal government and government agency bonds

1,793

 

 

784

 

 

595

 

 

414

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

97,490

 

 

5,116

 

 

43,889

 

 

 

 

48,485

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investment Grade Portfolio

$

749,690

 

 

$

5,900

 

 

$

418,734

 

 

$

106,576

 

 

$

208,761

 

 

$

9,719

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Total

$

2,639,646

 

 

$

60,358

 

 

$

551,040

 

 

$

176,436

 

 

$

322,576

 

 

$

135,535

 

 

$

750,823

 

 

$

368,684

 

 

$

15,882

 

 

$

5,640

 

 

$

30,889

 

 

$

108,003

 

(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, transaction costs and other, 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 and $3.0 million for the three months ended December 31, 2020 and 2019, respectively, in relation to the Company’s 6.5% senior notes issued on July 2, 2019. Interest is paid semi-annually in arrears on January 2 and July 2.

Preference dividends were $1.1 million and $1.2 million for the three months ended December 31, 2020 and 2019, respectively.

During the 2020 fourth quarter, the Company incurred $4.0 million of transaction costs, which included various legal, advisory and other consulting costs associated with the previously announced Merger Agreement between the Company and Arch Capital Group Ltd. (“Arch”).

There were no common share repurchases during the 2020 fourth quarter. As of December 31, 2020, approximately $47.1 million of share repurchases were available under the Company’s previously announced $50 million share repurchase program. The Company does not anticipate making any further repurchases under its current share repurchase program due to its pending acquisition by Greysbridge Holdings Ltd. (“HoldCo”), a newly-formed company organized by Arch.

Conference Call

The Company will not hold a conference call to discuss its 2020 fourth quarter results due to the previously announced Merger Agreement between the Company and Arch.

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 December 31, 2020, comprised of: $172.7 million of senior notes, $52.4 million of contingently redeemable preference shares and $941.3 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” with an Outlook of Negative from KBRA. On November 19, 2020, A.M. Best announced that it has maintained its “under review with negative implications” status for the financial strength ratings of our operating subsidiaries.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

(Unaudited)

 

 

 

December 31,

 

December 31,

 

2020

 

2019

Assets

($ in thousands)

Investments:

 

 

 

Term loans, fair value option (Amortized cost: $890,996 and $1,113,212)

$

851,539

 

 

$

1,061,934

 

Fixed maturities, fair value option (Amortized cost: $477,548 and $432,576)

455,162

 

 

416,594

 

Short-term investments, fair value option (Cost: $412,762 and $325,542)

418,690

 

 

329,303

 

Equity securities, fair value option

64,994

 

 

59,799

 

Other investments, fair value option

 

 

30,461

 

Investments, fair value option

1,790,385

 

 

1,898,091

 

Fixed maturities, available for sale (Amortized cost: $638,075 and $739,456)

655,249

 

 

745,708

 

Equity securities, fair value through net income

53,207

 

 

65,338

 

Total investments

2,498,841

 

 

2,709,137

 

Cash and cash equivalents

211,451

 

 

102,437

 

Accrued investment income

14,679

 

 

14,025

 

Premiums receivable

224,377

 

 

273,657

 

Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses

286,590

 

 

170,974

 

Prepaid reinsurance premiums

122,339

 

 

132,577

 

Deferred acquisition costs, net

53,705

 

 

64,044

 

Receivable for securities sold

37,423

 

 

16,288

 

Intangible assets

7,650

 

 

7,650

 

Funds held by reinsurers

45,989

 

 

42,505

 

Other assets

29,016

 

 

17,562

 

Total assets

$

3,532,060

 

 

$

3,550,856

 

Liabilities

 

 

 

Reserve for losses and loss adjustment expenses

$

1,519,583

 

 

$

1,263,628

 

Unearned premiums

407,714

 

 

438,907

 

Losses payable

59,397

 

 

61,314

 

Reinsurance balances payable

63,269

 

 

77,066

 

Payable for securities purchased

16,916

 

 

18,180

 

Payable for securities sold short

21,975

 

 

66,257

 

Revolving credit agreement borrowings

211,640

 

 

484,287

 

Senior notes

172,689

 

 

172,418

 

Amounts due to affiliates

7,708

 

 

4,467

 

Investment management and performance fees payable

21,641

 

 

17,762

 

Other liabilities

35,786

 

 

21,912

 

Total liabilities

$

2,538,318

 

 

$

2,626,198

 

Commitments and contingencies

 

 

 

Contingently redeemable preference shares

52,398

 

 

52,305

 

Shareholders’ equity

 

 

 

Common shares ($0.01 par; shares authorized: 120 million; shares issued: 22,804,128 and 22,692,300)

228

 

 

227

 

Additional paid-in capital

899,491

 

 

898,083

 

Retained earnings (deficit)

103,554

 

 

43,470

 

Accumulated other comprehensive income (loss)

15,994

 

 

5,629

 

Common shares held in treasury, at cost (shares: 2,917,149 and 2,789,405)

(77,923)

 

 

(75,056)

 

Total shareholders’ equity

941,344

 

 

872,353

 

Total liabilities, contingently redeemable preference shares and shareholders’ equity

$

3,532,060

 

 

$

3,550,856

 

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

 

(Unaudited)

 

(Unaudited)

 

Three Months Ended
December 31,

Year Ended
December 31,

 

2020

 

2019

 

2020

 

2019

Revenues

($ in thousands except share and per share data)

Gross premiums written

$

138,237

 

 

$

156,254

 

 

$

728,546

 

 

$

754,881

 

Gross premiums ceded

(40,520)

 

 

(43,901)

 

 

(190,957)

 

 

(222,019)

 

Net premiums written

97,717

 

 

112,353

 

 

537,589

 

 

532,862

 

Change in unearned premiums

45,029

 

 

21,093

 

 

22,762

 

 

23,828

 

Net premiums earned

142,746

 

 

133,446

 

 

560,351

 

 

556,690

 

Other underwriting income (loss)

498

 

 

568

 

 

2,045

 

 

2,412

 

Interest income

31,560

 

 

40,775

 

 

140,390

 

 

163,888

 

Investment management fees - related parties

(4,199)

 

 

(4,807)

 

 

(17,193)

 

 

(18,392)

 

Borrowing and miscellaneous other investment expenses

(2,718)

 

 

(6,142)

 

 

(16,807)

 

 

(29,285)

 

Net interest income

24,643

 

 

29,826

 

 

106,390

 

 

116,211

 

Realized and unrealized gains (losses) on investments

70,073

 

 

6,105

 

 

19,629

 

 

24,243

 

Investment performance fees - related parties

(10,279)

 

 

(3,849)

 

 

(12,037)

 

 

(12,191)

 

Net investment income (loss)

84,437

 

 

32,082

 

 

113,982

 

 

128,263

 

Total revenues

227,681

 

 

166,096

 

 

676,378

 

 

687,365

 

Expenses

 

 

 

 

 

 

 

Loss and loss adjustment expenses

(109,207)

 

 

(134,655)

 

 

(440,482)

 

 

(453,135)

 

Acquisition expenses

(36,578)

 

 

(29,785)

 

 

(125,541)

 

 

(126,788)

 

General and administrative expenses

(6,015)

 

 

(6,825)

 

 

(28,341)

 

 

(30,843)

 

Interest expense

(2,912)

 

 

(2,950)

 

 

(11,647)

 

 

(5,791)

 

Net foreign exchange gains (losses)

(6,139)

 

 

(7,536)

 

 

(1,387)

 

 

(8,247)

 

Transaction costs and other

(4,040)

 

 

 

 

(4,040)

 

 

 

Total expenses

(164,891)

 

 

(181,751)

 

 

(611,438)

 

 

(624,804)

 

Income (loss) before income taxes

62,790

 

 

(15,655)

 

 

64,940

 

 

62,561

 

Income tax expense

(359)

 

 

 

 

(26)

 

 

(20)

 

Net income (loss) before preference dividends and redemption costs

62,431

 

 

(15,655)

 

 

64,914

 

 

62,541

 

Preference dividends

(1,061)

 

 

(1,209)

 

 

(4,402)

 

 

(13,632)

 

Accelerated amortization of costs related to the redemption of preference shares

 

 

 

 

 

 

(4,164)

 

Net income (loss) available to common shareholders

$

61,370

 

 

$

(16,864)

 

 

$

60,512

 

 

$

44,745

 

Other comprehensive income (loss) net of income tax:

 

 

 

 

 

 

 

Available-for-sale investments:

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

$

7,255

 

 

$

(1,749)

 

 

$

16,695

 

 

$

12,649

 

Unrealized foreign currency gains (losses) arising during the period

7,051

 

 

7,596

 

 

5,360

 

 

3,372

 

Credit loss recognized in net income (loss)

(213)

 

 

 

 

197

 

 

 

Reclassification of net realized (gains) losses, net of income taxes, included in net income (loss)

(765)

 

 

(2,146)

 

 

(11,133)

 

 

(5,611)

 

Unrealized holding gains (losses) of available for sale investments

13,328

 

 

3,701

 

 

11,119

 

 

10,410

 

Foreign currency translation adjustments

(531)

 

 

(384)

 

 

(754)

 

 

(51)

 

Other comprehensive income (loss) net of income tax

12,797

 

 

3,317

 

 

10,365

 

 

10,359

 

Comprehensive income (loss)

$

74,167

 

 

$

(13,547)

 

 

$

70,877

 

 

$

55,104

 

Earnings (loss) per share:

 

 

 

 

 

 

 

Basic

$

3.09

 

 

$

(0.79)

 

 

$

3.04

 

 

$

2.00

 

Diluted

$

3.08

 

 

$

(0.79)

 

 

$

3.04

 

 

$

2.00

 

Weighted average number of ordinary shares used in the determination of earnings (loss) per share:

 

 

 

 

 

 

 

Basic

19,890,784

 

 

21,277,287

 

 

19,899,137

 

 

22,366,682

 

Diluted

19,952,166

 

 

21,277,287

 

 

19,921,231

 

 

22,373,968

 

 

Three Months Ended
December 31,

 

Year Ended
December 31,

 

2020

 

2019

 

2020

 

2019

Numerator:

($ in thousands except share and per share data)

Net income (loss) before preference dividends and redemption costs

$

62,431

 

 

$

(15,655)

 

 

$

64,914

 

 

$

62,541

 

Preference dividends

(1,061)

 

 

(1,209)

 

 

(4,402)

 

 

(13,632)

 

Accelerated amortization of costs related to the redemption of preference shares

 

 

 

 

 

 

(4,164)

 

Net income (loss) available to common shareholders

$

61,370

 

 

$

(16,864)

 

 

$

60,512

 

 

$

44,745

 

Denominator:

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

19,890,784

 

 

21,277,287

 

 

19,899,137

 

 

22,366,682

 

Effect of dilutive common share equivalents:

 

 

 

 

 

 

 

Weighted average non-vested restricted share units (1)

61,382

 

 

 

 

22,094

 

 

7,286

 

Weighted average common shares outstanding - diluted

19,952,166

 

 

21,277,287

 

 

19,921,231

 

 

22,373,968

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

Basic

$

3.09

 

 

$

(0.79)

 

 

$

3.04

 

 

$

2.00

 

Diluted

$

3.08

 

 

$

(0.79)

 

 

$

3.04

 

 

$

2.00

 

(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 December 31, 2019, due to a net loss reported.

 

December 31,
2020

 

September 30,
2020

 

June 30,
2020 (1)

 

March 31,
2020 (2)

 

December 31,
2019

Numerator:

($ in thousands except share and per share data)

Total shareholders’ equity

$

941,344

 

 

$

866,899

 

 

$

776,151

 

 

$

564,054

 

 

$

872,353

 

Denominator:

 

 

 

 

 

 

 

 

 

Common shares outstanding - basic (1)(2)

19,890,784

 

 

19,890,784

 

 

19,890,784

 

 

19,863,328

 

 

19,976,397

 

Effect of dilutive common share equivalents:

 

 

 

 

 

 

 

 

 

Non-vested restricted share units (2)

103,820

 

 

103,820

 

 

103,820

 

 

131,277

 

 

82,360

 

Common shares outstanding - diluted

19,994,604

 

 

19,994,604

 

 

19,994,604

 

 

19,994,605

 

 

20,058,757

 

 

 

 

 

 

 

 

 

 

 

Book value per common share

$47.33

 

$43.58

 

$39.02

 

$28.40

 

$43.67

Book value per diluted common share

$47.08

 

$43.36

 

$38.82

 

$28.21

 

$43.49

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

(2) During the first quarter of 2020, the Company granted 63,591 restricted share units and common shares to certain employees and directors, 48,916 of which are non-vested as of December 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 certain non-recurring costs associated with the ongoing operations of the holding company, such as compensation of certain executives and costs associated with the initial setup of subsidiaries.

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

Underwriting income (loss) is useful in evaluating our underwriting performance, without regard to other underwriting income (losses), net investment income (losses), net foreign exchange gains (losses), interest expense, transaction costs and other, 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, transaction costs and other, 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), transaction cost and other, 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), transaction costs and other, 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), transaction costs and other, 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), transaction costs and other, interest expense, net investment income (loss) and certain corporate expenses from the calculation of adjusted underwriting income (loss) and the adjusted combined ratio.

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

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

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

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

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

 

Three Months Ended
December 31,

 

Year Ended
December 31,

 

2020

 

2019

 

2020

 

2019

 

($ in thousands)

Net income (loss) available to common shareholders

$

61,370

 

 

$

(16,864)

 

 

$

60,512

 

 

$

44,745

 

Preference dividends

1,061

 

 

1,209

 

 

4,402

 

 

13,632

 

Accelerated amortization of costs related to the redemption of preference shares

 

 

 

 

 

 

4,164

 

Net income (loss) before preference dividends and redemption costs

62,431

 

 

(15,655)

 

 

64,914

 

 

62,541

 

Income tax expense

359

 

 

 

 

26

 

 

20

 

Interest expense

2,912

 

 

2,950

 

 

11,647

 

 

5,791

 

Transaction costs and other

4,040

 

 

 

.

4,040

 

 

 

Net foreign exchange (gains) losses

6,139

 

 

7,536

 

 

1,387

 

 

8,247

 

Net investment (income) loss

(84,437)

 

 

(32,082)

 

 

(113,982)

 

 

(128,263)

 

Other underwriting (income) loss

(498)

 

 

(568)

 

 

(2,045)

 

 

(2,412)

 

Underwriting income (loss)

(9,054)

 

 

(37,819)

 

 

(34,013)

 

 

(54,076)

 

Certain corporate expenses

2,102

 

 

1,882

 

 

11,133

 

 

10,812

 

Other underwriting income (loss)

498

 

 

568

 

 

2,045

 

 

2,412

 

Adjusted underwriting income (loss)

$

(6,454)

 

 

$

(35,369)

 

 

$

(20,835)

 

 

$

(40,852)

 

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

 

Three Months Ended December 31,

 

2020

 

2019

 

Amount

 

Adjustment

 

As Adjusted

 

Amount

 

Adjustment

 

As Adjusted

 

($ in thousands)

Losses and loss adjustment expenses

$

109,207

 

 

$

 

 

$

109,207

 

 

$

134,655

 

 

$

 

 

$

134,655

 

Acquisition expenses

36,578

 

 

 

 

36,578

 

 

29,785

 

 

 

 

29,785

 

General & administrative expenses (1)

6,015

 

 

(2,102)

 

 

3,913

 

 

6,825

 

 

(1,882)

 

 

4,943

 

Net premiums earned (1)

142,746

 

 

498

 

 

143,244

 

 

133,446

 

 

568

 

 

134,014

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio

76.5

%

 

 

 

 

 

100.9

%

 

 

 

 

Acquisition expense ratio

25.6

%

 

 

 

 

 

22.3

%

 

 

 

 

General & administrative expense ratio

4.2

%

 

 

 

 

 

5.1

%

 

 

 

 

Combined ratio

106.3

%

 

 

 

 

 

128.3

%

 

 

 

 

Adjusted loss ratio

 

 

 

 

76.2

%

 

 

 

 

 

100.5

%

Adjusted acquisition expense ratio

 

 

 

 

25.5

%

 

 

 

 

 

22.2

%

Adjusted general & administrative expense ratio

 

 

 

 

2.8

%

 

 

 

 

 

3.7

%

Adjusted combined ratio

 

 

 

 

104.5

%

 

 

 

 

 

126.4

%

(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.

 

Year Ended December 31,

 

2020

 

2019

 

Amount

 

Adjustment

 

As Adjusted

 

Amount

 

Adjustment

 

As Adjusted

 

($ in thousands)

Losses and loss adjustment expenses

$

440,482

 

 

$

 

 

$

440,482

 

 

$

453,135

 

 

$

 

 

$

453,135

 

Acquisition expenses

125,541

 

 

 

 

125,541

 

 

126,788

 

 

 

 

126,788

 

General & administrative expenses (1)

28,341

 

 

(11,133)

 

 

17,208

 

 

30,843

 

 

(10,812)

 

 

20,031

 

Net premiums earned (1)

560,351

 

 

2,045

 

 

562,396

 

 

556,690

 

 

2,412

 

 

559,102

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio

78.6

%

 

 

 

 

 

81.4

%

 

 

 

 

Acquisition expense ratio

22.4

%

 

 

 

 

 

22.8

%

 

 

 

 

General & administrative expense ratio

5.1

%

 

 

 

 

 

5.5

%

 

 

 

 

Combined ratio

106.1

%

 

 

 

 

 

109.7

%

 

 

 

 

Adjusted loss ratio

 

 

 

 

78.3

%

 

 

 

 

 

81.0

%

Adjusted acquisition expense ratio

 

 

 

 

22.3

%

 

 

 

 

 

22.7

%

Adjusted general & administrative expense ratio

 

 

 

 

3.1

%

 

 

 

 

 

3.6

%

Adjusted combined ratio

 

 

 

 

103.7

%

 

 

 

 

 

107.3

%

(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 and years ended December 31, 2020 and 2019:

 

Three Months Ended December 31, 2020

 

Three Months Ended December 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

$

28,857

 

 

$

2,703

 

 

$

 

 

$

31,560

 

 

$

34,435

 

 

$

6,340

 

 

$

 

 

$

40,775

 

Investment management fees - related parties

(3,877)

 

 

(322)

 

 

 

 

(4,199)

 

 

(4,431)

 

 

(376)

 

 

 

 

(4,807)

 

Borrowing and miscellaneous other investment expenses

(2,280)

 

 

(318)

 

 

(120)

 

 

(2,718)

 

 

(2,807)

 

 

(316)

 

 

(3,019)

 

 

(6,142)

 

Net interest income

22,700

 

 

2,063

 

 

(120)

 

 

24,643

 

 

27,197

 

 

5,648

 

 

(3,019)

 

 

29,826

 

Net realized gains (losses) on investments

9,196

 

 

643

 

 

 

 

9,839

 

 

(13,539)

 

 

2,875

 

 

 

 

(10,664)

 

Net unrealized gains (losses) on investments (1)

60,238

 

 

(4)

 

 

 

 

60,234

 

 

17,283

 

 

(514)

 

 

 

 

16,769

 

Investment performance fees - related parties

(10,279)

 

 

 

 

 

 

(10,279)

 

 

(3,849)

 

 

 

 

 

 

(3,849)

 

Net investment income (loss)

$

81,855

 

 

$

2,702

 

 

$

(120)

 

 

$

84,437

 

 

$

27,092

 

 

$

8,009

 

 

$

(3,019)

 

 

$

32,082

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average total investments (2)

$

1,807,107

 

 

$

762,137

 

 

$

 

 

$

2,569,244

 

 

$

1,869,300

 

 

$

870,208

 

 

$

 

 

$

2,739,508

 

Average net assets (3)

$

1,497,478

 

 

$

764,930

 

 

$

(24,750)

 

 

$

2,237,658

 

 

$

1,635,302

 

 

$

872,771

 

 

$

(328,750)

 

 

$

2,179,323

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income yield on average net assets (3)

1.5

%

 

0.3

%

 

 

 

1.1

%

 

1.7

%

 

0.6

%

 

 

 

1.4

%

Net investment income return on average total investments (excluding accrued investment income) (2)

4.5

%

 

0.4

%

 

 

 

3.3

%

 

1.4

%

 

0.9

%

 

 

 

1.2

%

Net investment income return on average net assets (3)

5.5

%

 

0.4

%

 

(0.5)

%

 

3.8

%

 

1.7

%

 

0.9

%

 

(0.9)

%

 

1.5

%

(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.

 

Twelve Months Ended December 31, 2020,

 

Twelve Months Ended December 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

$

125,504

 

 

$

14,886

 

 

$

 

 

$

140,390

 

 

$

139,280

 

 

$

24,608

 

 

$

 

 

$

163,888

 

Investment management fees - related parties

(15,817)

 

 

(1,376)

 

 

 

 

(17,193)

 

 

(16,877)

 

 

(1,515)

 

 

 

 

(18,392)

 

Borrowing and miscellaneous other investment expenses

(10,290)

 

 

(1,025)

 

 

(5,492)

 

 

(16,807)

 

 

(15,047)

 

 

(983)

 

 

(13,255)

 

 

(29,285)

 

Net interest income

99,397

 

 

12,485

 

 

(5,492)

 

 

106,390

 

 

107,356

 

 

22,110

 

 

(13,255)

 

 

116,211

 

Net realized gains (losses) on investments

1,190

 

 

11,027

 

 

 

 

12,217

 

 

(13,147)

 

 

5,199

 

 

 

 

(7,948)

 

Net unrealized gains (losses) on investments (1)

7,369

 

 

43

 

 

 

 

7,412

 

 

24,729

 

 

7,462

 

 

 

 

32,191

 

Investment performance fees - related parties

(12,037)

 

 

 

 

 

 

(12,037)

 

 

(12,191)

 

 

 

 

 

 

(12,191)

 

Net investment income (loss)

$

95,919

 

 

$

23,555

 

 

$

(5,492)

 

 

$

113,982

 

 

$

106,747

 

 

$

34,771

 

 

$

(13,255)

 

 

$

128,263

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average total investments (2)

$1,812,010

 

$786,937

 

$

 

 

$2,598,947

 

$1,872,835

 

$900,641

 

$

 

 

$2,773,476

Average net assets (3)

$1,484,777

 

$791,754

 

$(173,500)

 

$2,103,031

 

$1,568,980

 

$900,069

 

$(325,527)

 

$2,143,522

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income yield on average net assets (3)

6.7

%

 

1.6

%

 

 

 

5.1

%

 

6.8

%

 

2.5

%

 

 

 

5.4

%

Net investment income return on average total investments (excluding accrued investment income) (2)

5.3

%

 

3.0

%

 

 

 

4.4

%

 

5.7

%

 

3.9

%

 

 

 

4.6

%

Net investment income return on average net assets (3)

6.5

%

 

3.0

%

 

(3.2)

%

 

5.4

%

 

6.8

%

 

3.9

%

 

(4.1)

%

 

6.0

%

(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 twelve-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 December 31, 2020

 

As of December 31, 2019

 

Non-
Investment
Grade

 

Investment
Grade

 

Borrowings
for U/W
Collateral

 

Total

 

Non-
Investment
Grade

 

Investment
Grade

 

Borrowings
for U/W
Collateral

 

Total

 

($ in thousands)

Average total investments - QTD

$

1,807,107

 

 

$

762,137

 

 

$

 

 

$

2,569,244

 

 

$

1,869,300

 

 

$

870,208

 

 

$

 

 

$

2,739,508

 

Average total investments - YTD

1,812,010

 

 

786,937

 

 

 

 

2,598,947

 

 

1,872,835

 

 

900,641

 

 

 

 

2,773,476

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average net assets - QTD

1,497,478

 

 

764,930

 

 

(24,750)

 

 

2,237,658

 

 

1,635,302

 

 

872,771

 

 

(328,750)

 

 

2,179,323

 

Average net assets - YTD

1,484,777

 

 

791,754

 

 

(173,500)

 

 

2,103,031

 

 

1,568,980

 

 

900,069

 

 

(325,527)

 

 

2,143,522

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investments

$

1,724,258

 

 

$

774,583

 

 

$

 

 

$

2,498,841

 

 

$

1,862,253

 

 

$

846,884

 

 

$

 

 

$

2,709,137

 

Accrued investment income

11,640

 

 

3,039

 

 

 

 

14,679

 

 

9,679

 

 

4,346

 

 

 

 

14,025

 

Receivable for securities sold

37,412

 

 

11

 

 

 

 

37,423

 

 

16,275

 

 

13

 

 

 

 

16,288

 

Less: Payable for securities purchased

16,916

 

 

 

 

 

 

16,916

 

 

18,180

 

 

 

 

 

 

18,180

 

Less: Payable for securities sold short

21,975

 

 

 

 

 

 

21,975

 

 

66,257

 

 

 

 

 

 

66,257

 

Less: Revolving credit agreement borrowings

186,890

 

 

 

 

24,750

 

 

211,640

 

 

155,537

 

 

 

 

328,750

 

 

484,287

 

Net assets

$

1,547,529

 

 

$

777,633

 

 

$

(24,750)

 

 

$

2,300,412

 

 

$

1,648,233

 

 

$

851,243

 

 

$

(328,750)

 

 

$

2,170,726

 

Non-investment grade borrowing ratio (1)

12.1

%

 

 

 

 

 

 

 

9.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains on investments

$

59,501

 

 

$

22,152

 

 

$

 

 

$

81,653

 

 

$

38,057

 

 

$

9,146

 

 

$

 

 

$

47,203

 

Unrealized losses on investments

(120,891)

 

 

(4,604)

 

 

 

 

(125,495)

 

 

(108,444)

 

 

(2,004)

 

 

 

 

(110,448)

 

Net unrealized gains (losses) on investments

$

(61,390)

 

 

$

17,548

 

 

$

 

 

$

(43,842)

 

 

$

(70,387)

 

 

$

7,142

 

 

$

 

 

$

(63,245)

 

(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 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 for services critical to our underwriting operations;
  • changes to our strategic relationship with Arch or the termination by Arch of any of our services agreements or quota share agreements;
  • our dependence on HPS and Arch Investment Management Ltd. (“AIM”) to implement our investment strategy;
  • the termination by HPS or AIM of any of our investment management agreements;
  • risks associated with our investment strategy being greater than those faced by competitors;
  • changes in the regulatory environment;
  • our potentially becoming subject to U.S. federal income taxation;
  • our potentially becoming subject to U.S. withholding and information reporting requirements under the U.S. Foreign Account Tax Compliance Act (“FATCA”) provisions;
  • our ability to complete acquisitions and integrate businesses successfully;
  • adverse general, societal, economic and market conditions, including those caused by pandemics, including COVID-19, and government actions in response thereto;
  • uncertainties regarding the proposed acquisition of the Company by HoldCo;
  • legal proceedings that have been, and additional proceedings that may be initiated against the Company or its directors related to the proposed transaction with HoldCo;
  • the business of the Company may suffer as a result of uncertainty surrounding the proposed transaction with HoldCo, and there may be challenges with employee retention as a result of the proposed transaction with HoldCo;
  • the proposed transaction with HoldCo may involve unexpected costs, liabilities or delays; 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.
  • There continues to be significant uncertainties surrounding the ultimate number of insurance claims and scope of damage resulting from the COVID-19 global 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, estimates of reinsurance recoverables, and reflects our interpretation of the legal environment. These estimates include losses only related to claims incurred as of December 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.

We believe that we are relatively less exposed to COVID-19 global pandemic-related underwriting losses than many industry peers. For example, we have either no, or de minimis, premium writings in life, accident and health, event cancellation, trade credit, travel or pandemic specific coverages that respond directly to COVID-19 global pandemic-related losses. With regard to the potential exposure to business interruption losses, we write a limited amount of commercial property exposure, mainly emanating from our property catastrophe line of business, which is consistent with our strategy to target longer duration lines of business. We incurred a loss of $5.5 million in 2020 for COVID-19 related business interruption losses in our property catastrophe lines of business. We continue to monitor our potential COVID-19 exposures.

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.

Robert L. Hawley: (441) 278-3456
rhawley@watfordre.com

Source: Watford Holdings Ltd.