Watford Reports 2020 Second Quarter Results

July 29, 2020

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

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

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

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

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

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

At this time, there continues to be significant uncertainties surrounding the ultimate number of insurance claims and scope of damage resulting from this pandemic. The Company’s estimates across its insurance and reinsurance lines of business are based on currently available information derived from modeling techniques, preliminary claims information obtained from the Company’s clients and brokers, a review of relevant in-force contracts with potential exposure to the pandemic and estimates of reinsurance recoverables. These estimates include losses only related to claims incurred as of June 30, 2020. Actual losses from these events may vary materially from the estimates due to several factors, including the inherent uncertainties in making such determinations and the evolving nature of this pandemic.

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

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

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

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

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


Underwriting

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

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

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

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

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

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

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

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

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

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

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

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

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


Investments

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

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

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

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

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

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

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

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

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

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

  June 30, 2020
  Total   Financials   Health Care   Technology   Consumer Services   Industrials   Consumer Goods   Oil & Gas   All Other (1)
   
  ($ in thousands)
Non-Investment Grade Portfolio:                                  
Term loan investments $ 875,560   $ 188,970   $ 170,442   $ 186,367   $ 113,733   $ 90,250   $ 36,455   $ 29,573   $ 59,770
Corporate bonds   378,183     44,898     26,626     16,720     105,543     33,870     68,314     29,516     52,696
Equities - sector specific   93,872     62,350     22,577     7,266         641         264     774
Short-term investments - sector specific   2,184             1,682             502        
Subtotal   1,349,799     296,218     219,645     212,035     219,276     124,761     105,271     59,353     113,240
Equities - non-sector specific   27,470                                
Short-term investments - non-sector specific   267,904                                
Asset-backed securities   157,925                                
Other investments   34,142                                
Mortgage-backed securities   9,164                                
Total Non-Investment Grade Portfolio $ 1,846,404   $ 296,218   $ 219,645   $ 212,035   $ 219,276   $ 124,761   $ 105,271   $ 59,353   $ 113,240
                                   
Investment Grade Portfolio:                                  
Corporate bonds $ 169,918   $ 51,327   $ 10,834   $ 18,688   $ 22,738   $ 11,942   $ 35,818   $ 11,388   $ 7,183
Short-term investments   99,978                                
U.S. government and government agency bonds   217,459                                
Non-U.S. government and government agency bonds   151,124                                
Asset-backed securities   130,327                                
Mortgage-backed securities   22,018                                
Municipal government and government agency bonds   2,117                                
Total Investment Grade Portfolio $ 792,941   $ 51,327   $ 10,834   $ 18,688   $ 22,738   $ 11,942   $ 35,818   $ 11,388   $ 7,183
Total Investments $ 2,639,345   $ 347,545   $ 230,479   $ 230,723   $ 242,014   $ 136,703   $ 141,089   $ 70,741   $ 120,423

(1) Includes telecommunications, utilities and basic materials.


  March 31, 2020
  Total   Financials   Health Care   Technology   Consumer Services   Industrials   Consumer Goods   Oil & Gas   All Other (1)
   
  ($ in thousands)
Non-Investment Grade Portfolio:                                  
Term loan investments $ 906,999   $ 190,535   $ 195,084   $ 199,837   $ 98,518   $ 89,778   $ 40,415   $ 32,049   $ 60,783
Corporate bonds   240,570     24,927     43,028     15,702     49,761     27,585     19,947     18,522     41,098
Equities - sector specific   95,112     59,714     27,174     5,868         1,026         242     1,088
Short-term investments - sector specific   47,703     7,703                         40,000    
Subtotal   1,290,384     282,879     265,286     221,407     148,279     118,389     60,362     90,813     102,969
Equities - non-sector specific   26,148                                
Short-term investments - non-sector specific   222,065                                
Asset-backed securities   140,613                                
Other investments   30,682                                
Mortgage-backed securities   8,529                                
Total Non-Investment Grade Portfolio $ 1,718,421   $ 282,879   $ 265,286   $ 221,407   $ 148,279   $ 118,389   $ 60,362   $ 90,813   $ 102,969
                                   
Investment Grade Portfolio:                                  
Corporate bonds $ 167,570   $ 62,046   $ 13,752   $ 12,135   $ 15,481   $ 14,133   $ 34,718   $ 7,346   $ 7,959
Short-term investments   74,093                                
U.S. government and government agency bonds   265,423                                
Non-U.S. government and government agency bonds   149,858                                
Asset-backed securities   113,583                                
Mortgage-backed securities   21,785                                
Municipal government and government agency bonds   2,073                                
Total Investment Grade Portfolio $ 794,385   $ 62,046   $ 13,752   $ 12,135   $ 15,481   $ 14,133   $ 34,718   $ 7,346   $ 7,959
Total Investments $ 2,512,806   $ 344,925   $ 279,038   $ 233,542   $ 163,760   $ 132,522   $ 95,080   $ 98,159   $ 110,928

(1) Includes telecommunications, utilities and basic materials.


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

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

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


  Credit Rating (1)
March 31, 2020 Fair Value   AAA   AA   A   BBB   BB   B   CCC   CC   C   D   Not Rated
   
  ($ in thousands)
Non-Investment Grade Portfolio:                                              
Term loan investments $ 906,999   $   $   $   $   $ 10,277   $ 650,028   $ 161,307   $ 2,823   $ 1,314   $ 1,590   $ 79,660
Corporate bonds   240,570                 5,933     14,447     84,955     118,847     1,872         3,699     10,817
Asset-backed securities   140,613             3,339     85,572     19,727     7,395     1,418                 23,162
Mortgage-backed securities   8,529                     1,190                     2,552     4,787
Short-term investments   269,768     26,024     133,548     402     62,091         40,000                     7,703
Total fixed income instruments and short-term investments   1,566,479     26,024     133,548     3,741     153,596     45,641     782,378     281,572     4,695     1,314     7,841     126,129
Other Investments   30,682                                            
Equities   121,260                                            
Total Non-Investment Grade Portfolio $ 1,718,421   $ 26,024   $ 133,548   $ 3,741   $ 153,596   $ 45,641   $ 782,378   $ 281,572   $ 4,695   $ 1,314   $ 7,841   $ 126,129
                                               
Investment Grade Portfolio:                                              
Corporate bonds $ 167,570   $   $ 34,647   $ 76,063   $ 52,085   $ 4,775   $   $   $   $   $   $
U.S. government and government agency bonds   265,423         265,423                                    
Asset-backed securities   113,583     1,628         15,980     95,975                            
Mortgage-backed securities   21,785             4,600     17,185                            
Non-U.S. government and government agency bonds   149,858         149,858                                    
Municipal government and government agency bonds   2,073     1,023     570     480                                
Short-term investments   74,093     4,150     21,239         48,704                            
Total Investment Grade Portfolio $ 794,385   $ 6,801   $ 471,737   $ 97,123   $ 213,949   $ 4,775   $   $   $   $   $   $
Total $ 2,512,806   $ 32,825   $ 605,285   $ 100,864   $ 367,545   $ 50,416   $ 782,378   $ 281,572   $ 4,695   $ 1,314   $ 7,841   $ 126,129

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


Corporate Function

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

The Company incurred an interest expense of $2.9 million for the three months ended June 30, 2020, in relation to the Company’s 6.5% senior notes issued on July 2, 2019. Interest is paid semi-annually in arrears on January 2 and July 2.

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

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

Conference Call

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

About Watford Holdings Ltd.

Watford Holdings Ltd. is a global property and casualty insurance and reinsurance company with approximately $1.0 billion in capital as of June 30, 2020, comprised of: $172.6 million of senior notes, $52.4 million of contingently redeemable preference shares and $776.2 million of common shareholders’ equity, with operations in Bermuda, the United States and Europe. Its operating subsidiaries have been assigned financial strength ratings of “A-” (Excellent) from A.M. Best and “A” from Kroll Bond Rating Agency.  On May 1, 2020, A.M. Best announced that it had placed under review with negative implications the financial strength ratings of our operating subsidiaries. In addition, on June 17, 2020, Kroll Bond Rating Agency reaffirmed the “A” insurance financial strength ratings of our operating subsidiaries, and revised the outlook for all of the ratings to negative.



CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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


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

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


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

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



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

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

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

(3) During the second quarter of 2019, the Company granted 165,287 restricted share units and common shares to certain employees and directors, 54,904 of which are non-vested as of June 30, 2020.


Comments on Regulation G

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


The following tables summarize the components of our total investment return for the three and six months ended June 30, 2020 and 2019:

  Three Months Ended June 30, 2020   Three Months Ended June 30, 2019
  Non-
Investment
Grade
  Investment
Grade
  Cost of U/W
Collateral (4)
  Total   Non-
Investment
Grade
  Investment
Grade
  Cost of U/W
Collateral (4)
  Total
   
  ($ in thousands)
Interest income $ 32,410     $ 4,043     $     $ 36,453     $ 32,492     $ 6,104     $     $ 38,596  
Investment management fees - related parties   (3,943 )     (319 )           (4,262 )     (4,171 )     (399 )           (4,570 )
Borrowing and miscellaneous other investment expenses   (2,741 )     (212 )     (1,810 )     (4,763 )     (3,809 )     (238 )     (3,564 )     (7,611 )
Net interest income   25,726       3,512       (1,810 )     27,428       24,512       5,467       (3,564 )     26,415  
Net realized gains (losses) on investments   (14,912 )     8,911             (6,001 )     (177 )     966             789  
Net unrealized gains (losses) on investments (1)   178,050       14             178,064       (4,511 )     2,786             (1,725 )
Investment performance fees - related parties                           (1,692 )                 (1,692 )
Net investment income (loss) $ 188,864     $ 12,437     $ (1,810 )   $ 199,491     $ 18,132     $ 9,219     $ (3,564 )   $ 23,787  
                               
Average total investments (2) $ 1,782,413     $ 793,663     $ 0     $ 2,576,076     $ 1,871,286     $ 928,850     $     $ 2,800,136  
Average net assets (3) $ 1,446,900     $ 800,175     $ (246,250 )   $ 2,000,825     $ 1,548,237     $ 924,948     $ (327,619 )   $ 2,145,566  
                               
Net interest income yield on average net assets (3)   1.8 %     0.4 %         1.4 %     1.6 %     0.6 %         1.2 %
Net investment income return on average total investments (excluding accrued investment income) (2)   10.6 %     1.6 %         7.7 %     1.0 %     1.0 %         0.8 %
Net investment income return on average net assets (3)   13.1 %     1.6 %     (0.7 )%     10.0 %     1.2 %     1.0 %     (1.1 )%     1.1 %

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

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

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

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


  Six Months Ended June 30, 2020   Six Months Ended June 30, 2019
  Non-
Investment
Grade
  Investment
Grade
  Cost of U/W
Collateral (4)
  Total   Non-
Investment
Grade
  Investment
Grade
  Cost of U/W
Collateral (4)
  Total
   
  ($ in thousands)
Interest income $ 65,174     $ 9,103     $     $ 74,277     $ 69,831     $ 11,906     $     $ 81,737  
Investment management fees - related parties   (7,916 )     (698 )           (8,614 )     (8,242 )     (737 )           (8,979 )
Borrowing and miscellaneous other investment expenses   (5,332 )     (437 )     (4,663 )     (10,432 )     (8,667 )     (442 )     (6,800 )     (15,909 )
Net interest income   51,926       7,968       (4,663 )     55,231       52,922       10,727       (6,800 )     56,849  
Net realized gains (losses) on investments   (22,137 )     11,090             (11,047 )     1,142       929             2,071  
Net unrealized gains (losses) on investments (1)   (107,443 )     51             (107,392 )     23,114       7,599             30,713  
Investment performance fees - related parties                           (7,492 )                 (7,492 )
Net investment income (loss) $ (77,654 )   $ 19,109     $ (4,663 )   $ (63,208 )   $ 69,686     $ 19,255     $ (6,800 )   $ 82,141  
                               
Average total investments (2) $ 1,786,375     $ 807,149     $     $ 2,593,524     $ 1,883,565     $ 908,637     $     $ 2,792,202  
Average net assets (3) $ 1,488,863     $ 813,118     $ (287,500 )   $ 2,014,481     $ 1,527,241     $ 905,937     $ (322,303 )   $ 2,110,875  
                               
Net interest income yield on average net assets (3)   3.5 %     1.0 %         2.7 %     3.5 %     1.2 %         2.7 %
Net investment income return on average total investments (excluding accrued investment income) (2)   (4.3 )%     2.4 %         (2.4 )%     3.7 %     2.1 %         2.9 %
Net investment income return on average net assets (3)   (5.2 )%     2.4 %     (1.6 )%     (3.1 )%     4.6 %     2.1 %     (2.1 )%     3.9 %

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

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

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

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


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

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


Cautionary Note Regarding Forward-Looking Statements

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

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

  • our limited operating history;

  • fluctuations in the results of our operations;

  • our ability to compete successfully with more established competitors;

  • our losses exceeding our reserves;

  • downgrades, potential downgrades or other negative actions by rating agencies, including A.M. Best’s recent announcement that it has placed under review with negative implications the financial strength and credit ratings of our operating subsidiaries;

  • our dependence on key executives and inability to attract qualified personnel, or the potential loss of Bermudian personnel as a result of Bermuda employment restrictions;

  • our dependence on letter of credit facilities that may not be available on commercially acceptable terms;

  • our potential inability to pay dividends or distributions;

  • our potential need for additional capital in the future and the potential unavailability of such capital to us on favorable terms or at all;

  • our dependence on clients’ evaluations of risks associated with such clients’ insurance underwriting;

  • the suspension or revocation of our subsidiaries’ insurance licenses;

  • Watford Holdings potentially being deemed an investment company under U.S. federal securities law;

  • the potential characterization of us and/or any of our subsidiaries as a passive foreign investment company (“PFIC”);

  • our dependence on certain subsidiaries of Arch Capital Group Ltd. (“Arch”) for services critical to our underwriting operations;

  • changes to our strategic relationship with Arch or the termination by Arch of any of our services agreements or quota share agreements;

  • our dependence on HPS and Arch Investment Management Ltd. (“AIM”) to implement our investment strategy;

  • the termination by HPS or AIM of any of our investment management agreements;

  • risks associated with our investment strategy being greater than those faced by competitors;

  • changes in the regulatory environment;

  • our potentially becoming subject to U.S. federal income taxation;

  • our potentially becoming subject to U.S. withholding and information reporting requirements under the U.S. Foreign Account Tax Compliance Act (“FATCA”) provisions;

  • our ability to complete acquisitions and integrate businesses successfully;

  • adverse general, societal, economic and market conditions, including those caused by pandemics, including COVID-19, and government actions in response thereto; and

  • the other matters set forth under Item 1A “Risk Factors,” Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other sections of the Company’s Annual Report on Form 10-K, as well as the other factors set forth in the Company’s other documents on file with the SEC, and management’s response to any of the aforementioned factors.

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

Contact

Robert L. Hawley: (441) 278-3456

rhawley@watfordre.com


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Source: Watford Holdings Ltd.