Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 8-K
 
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): July 29, 2019
 
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Watford Holdings Ltd.
(Exact Name of Registrant as Specified in its Charter)
Bermuda
(State or other jurisdiction
of incorporation or organization)
001-38788
(Commission File No.)
98-1155442
(I.R.S. Employer Identification Number)

Waterloo House, 1st Floor
100 Pitts Bay Road, Pembroke HM 08, Bermuda
(Address of principal executive offices)

(441) 278-3455
(Registrant’s telephone number, including area code)

N/A
(Former name or former address, if changed since last report)
 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2 below):

☐    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐    Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐    Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐    Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-(4)(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).
Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒









Item 2.02        Results of Operations and Financial Condition

On July 29, 2019, Watford Holdings Ltd. issued a press release reporting its earnings for the quarter ended June 30, 2019. The press release is attached hereto as Exhibit 99.1.

The information in this Current Report on Form 8-K, including the information set forth in Exhibit 99.1, shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.

Item 9.01        Financial Statements and Exhibits

(d): The following exhibit is being filed herewith.

99.1        Press release dated July 29, 2019

Exhibit
Number
 
Description of Document
99.1
 

2




SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Dated: July 29, 2019

 
WATFORD HOLDINGS LTD.
 
 
By:
/s/ Robert L. Hawley
 
Robert L. Hawley, Chief Financial Officer


3
Exhibit


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WATFORD REPORTS 2019 SECOND QUARTER RESULTS
PEMBROKE, Bermuda, July 29, 2019 -- (GLOBE NEWSWIRE)-- WATFORD HOLDINGS LTD. (“Watford” or the “Company”) (NASDAQ: WTRE) today reported net income of $13.8 million, after payment of $4.9 million of preferred dividends, for the three months ended June 30, 2019, compared to net income of $9.1 million, after payment of $4.9 million of preferred dividends, in the same period in 2018. The results included:
Net income available to common shareholders of $13.8 million, or $0.61 per diluted common share, a 5.8% annualized return on average equity, compared to net income of $9.1 million, or $0.41 per diluted common share, a 3.8% annualized return on average equity for the 2018 second quarter1;
Book value per diluted common share of $42.07 at June 30, 2019, a 1.3% increase from March 31, 2019 and a 7.3% increase from December 31, 2018;
Combined ratio of 103.5%, comprised of a 73.6% loss ratio, a 23.4% acquisition expense ratio and a 6.5% general and administrative expense ratio, compared to a combined ratio of 100.6% for the prior year second quarter, comprised of a 73.4% loss ratio, a 23.8% acquisition expense ratio and a 3.4% general and administrative expense ratio;
Net interest income of $26.4 million, a 1.2% yield on average net assets for the 2019 second quarter, compared to net interest income of $26.0 million and a 1.3% yield on average net assets for the 2018 second quarter; and
Net investment income of $23.8 million, a 1.1% return on average net assets for the 2019 second quarter, compared to net investment income of $13.8 million and a 0.7% return on average net assets for the 2018 second quarter.
In addition, on July 2, 2019, the Company completed an offering of $175.0 million of 6.5% senior notes, with a maturity date of July 2, 2029. The net proceeds from the offering will be used in part to redeem a substantial portion of the Company’s 8.5% cumulative redeemable preference shares on August 1, 2019.
Commenting on the 2019 second quarter financial results, John Rathgeber, CEO of Watford, said:
“We are pleased with our results for the 2019 second quarter. The combined ratio of 103.5% when adjusted for other underwriting income and certain corporate and non-recurring expenses, was 99.9%. Our loss reserves for prior accident years continued to hold up well, with slight net favorable development in the quarter.
Net interest income, at $26.4 million, was strong, while realized and unrealized investment gains were essentially flat.
Through six months, our total shareholders’ equity has increased 8.1% from year-end 2018 and we continue to be optimistic about continued strong book value growth. Insurance and reinsurance market conditions are improving in most lines of business. There is a growing industry consensus
1 Annualized return on average equity represents net income (loss) expressed as a percentage of average common shareholders’ equity during the period. Annualized return on average equity for the three months ended June 30, 2019 and 2018 is calculated by extrapolating the quarterly return on average equity over a twelve-month period. For the three-month period, the average common shareholders’ equity is calculated as the average of the beginning and ending common shareholders’ equity of each quarterly period.

Watford Holdings Ltd.
100 Pitts Bay Road, Pembroke HM08 Bermuda
Tel: 441-278-3454 www.watfordre.com
-1-



that we have entered a new phase of the market cycle, with a noticeably more favorable pricing environment.
During the quarter, the Company’s financial strength ratings of A- (Excellent) and A were reaffirmed by both A.M. Best and Kroll Bond Rating Agency, respectively. The Company also completed a $175.0 million 10-year senior note offering with a coupon of 6.5%. The net proceeds will be used to redeem approximately 75% of our 8.5% cumulative redeemable preference shares, which will result in substantial savings in interest and preferred dividend expense going forward.”
Underwriting
The following table summarizes the Company’s underwriting results on a consolidated basis:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
 
($ in thousands)
Gross premiums written
$
161,978

 
$
175,175

 
(7.5
)%
 
$
348,667

 
$
389,045

 
(10.4
)%
Net premiums written
119,370

 
140,586

 
(15.1
)%
 
264,757

 
320,138

 
(17.3
)%
Net premiums earned
151,318

 
159,518

 
(5.1
)%
 
297,412

 
296,265

 
0.4
 %
Underwriting income (loss) (1)
(5,266
)
 
(1,006
)
 
(423.5
)%
 
(11,236
)
 
(2,268
)
 
(395.4
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
% Point Change
 
 
 
 
 
% Point Change
Loss ratio
73.6
%
 
73.4
%
 
0.2
 %
 
74.7
%
 
72.6
%
 
2.1
 %
Acquisition expense ratio
23.4
%
 
23.8
%
 
(0.4
)%
 
23.3
%
 
24.6
%
 
(1.3
)%
General & administrative expense ratio
6.5
%
 
3.4
%
 
3.1
 %
 
5.8
%
 
3.5
%
 
2.3
 %
Combined ratio
103.5
%
 
100.6
%
 
2.9
 %
 
103.8
%
 
100.7
%
 
3.1
 %
Adjusted combined ratio (2)
99.9
%
 
99.6
%
 
0.3
 %
 
101.1
%
 
99.6
%
 
1.5
 %
(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 shows the components of our loss and loss adjustment expenses for the three and six months ended June 30, 2019 and 2018:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
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
$
111,494

 
73.7
 %
 
$
117,780

 
73.8
 %
 
$
222,395

 
74.8
 %
 
$
215,166

 
72.6
%
Prior year development (favorable)/adverse
(78
)
 
(0.1
)%
 
(639
)
 
(0.4
)%
 
(129
)
 
(0.1
)%
 
(36
)
 
%
Loss and loss adjustment expenses
$
111,416

 
73.6
 %
 
$
117,141

 
73.4
 %
 
$
222,266

 
74.7
 %
 
$
215,130

 
72.6
%

Watford Holdings Ltd.
100 Pitts Bay Road, Pembroke HM08 Bermuda
Tel: 441-278-3454 www.watfordre.com
-2-



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,
 
2019
 
2018
 
2019
 
2018
 
($ in thousands)
Gross premiums written:
 
 
 
 
 
 
 
Casualty reinsurance
$
32,557

 
$
56,399

 
$
108,158

 
$
142,362

Other specialty reinsurance
37,836

 
49,150

 
62,134

 
113,649

Property catastrophe reinsurance
5,929

 
3,542

 
11,921

 
7,387

Insurance programs and coinsurance
85,656

 
66,084

 
166,454

 
125,647

Total
$
161,978

 
$
175,175

 
$
348,667

 
$
389,045

 
 
 
 
 
 
 
 
Net premiums written:
 
 
 
 
 
 
 
Casualty reinsurance
$
32,077

 
$
55,825

 
$
107,142

 
$
141,520

Other specialty reinsurance
36,523

 
45,255

 
59,705

 
102,793

Property catastrophe reinsurance
5,621

 
3,339

 
11,603

 
7,173

Insurance programs and coinsurance
45,149

 
36,167

 
86,307

 
68,652

Total
$
119,370

 
$
140,586

 
$
264,757

 
$
320,138

 
 
 
 
 
 
 
 
Net premiums earned:
 
 
 
 
 
 
 
Casualty reinsurance
$
67,506

 
$
75,499

 
$
130,819

 
$
143,240

Other specialty reinsurance
42,635

 
50,506

 
87,196

 
88,284

Property catastrophe reinsurance
3,119

 
2,326

 
6,090

 
4,962

Insurance programs and coinsurance
38,058

 
31,187

 
73,307

 
59,779

Total
$
151,318

 
$
159,518

 
$
297,412

 
$
296,265

Results for the three months ended June 30, 2019 versus 2018:
Gross and net premiums written and net premiums earned in the 2019 second quarter were 7.5%, 15.1% and 5.1% lower, respectively, than the 2018 second quarter. The decrease in premiums reflected a reduction in casualty reinsurance and other specialty reinsurance premiums written, offset in part by an increase in insurance programs and coinsurance in the 2019 second quarter.
The loss ratio was 73.6% in the 2019 second quarter, in-line with 73.4% in the 2018 second quarter. Across all lines, net loss reserve development was slightly favorable and had a negligible impact on the 2019 second quarter loss ratio. This compares to 0.4 points of net favorable loss reserve development in the 2018 second quarter.
The acquisition expense ratio was 23.4% in the 2019 second quarter, compared to 23.8% in the 2018 second quarter, reflecting changes in the mix and type of business.
The general and administrative expense ratio was 6.5% in the 2019 second quarter, compared to 4.9% in the 2019 first quarter and 3.4% in the second quarter of 2018. The 1.6 point increase this quarter versus the first quarter of 2019 reflected the timing of certain long-term incentive compensation expenses, including a one-time accelerated expense equating to approximately 1.0% of earned premium. The 3.1 point increase versus the prior year second quarter was attributable to ongoing public company expenses, as well as the timing of long-term incentive compensation expenses mentioned above. Removing certain corporate non-operating and non-recurring expenses, our adjusted general and administrative expense ratio was 3.3% in the 2019 second quarter compared to 3.5% in the first quarter of 2019.

Watford Holdings Ltd.
100 Pitts Bay Road, Pembroke HM08 Bermuda
Tel: 441-278-3454 www.watfordre.com
-3-



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,
 
2019
 
2018
 
2019
 
2018
 
($ in thousands)
Interest income
$
38,596

 
$
36,481

 
$
81,737

 
$
71,126

Investment management fees - related parties
(4,570
)
 
(4,156
)
 
(8,979
)
 
(8,302
)
Borrowing and miscellaneous other investment expenses
(7,611
)
 
(6,283
)
 
(15,909
)
 
(12,643
)
Net interest income
26,415

 
26,042

 
56,849

 
50,181

Realized gains (losses) on investments
789

 
(1,750
)
 
2,071

 
(13,391
)
Unrealized gains (losses) on investments
(1,725
)
 
(8,864
)
 
30,713

 
771

Investment performance fees - related parties
(1,692
)
 
(1,602
)
 
(7,492
)
 
(4,199
)
Net investment income (loss)
$
23,787

 
$
13,826

 
$
82,141

 
$
33,362

 
 
 
 
 
 
 
 
Unrealized gains on investments (balance sheet)
$
35,228

 
$
43,535

 
$
35,228

 
$
43,535

Unrealized losses on investments (balance sheet)
(113,937
)
 
(48,447
)
 
(113,937
)
 
(48,447
)
Net unrealized gains (losses) on investments (balance sheet)
$
(78,709
)
 
$
(4,912
)
 
$
(78,709
)
 
$
(4,912
)
 
 
 
 
 
 
 
 
Net interest income yield on average net assets (1)
1.2
%
 
1.3
%
 
2.7
%
 
2.6
 %
Non-investment grade portfolio (1)
1.6
%
 
1.7
%
 
3.5
%
 
3.3
 %
Investment grade portfolio (1)
0.6
%
 
0.5
%
 
1.2
%
 
0.9
 %
Net investment income return on average net assets (1)
1.1
%
 
0.7
%
 
3.9
%
 
1.7
 %
Non-investment grade portfolio (1)
1.2
%
 
1.0
%
 
4.6
%
 
2.8
 %
Investment grade portfolio (1)
1.0
%
 
0.2
%
 
2.1
%
 
(0.4
)%
 
 
 
 
 
 
 
 
Net investment income return on average total investments (2)
0.8
%
 
0.5
%
 
2.9
%
 
1.3
 %
Non-investment grade portfolio (2)
1.0
%
 
0.8
%
 
3.7
%
 
2.3
 %
Investment grade portfolio (2)
1.0
%
 
0.2
%
 
2.1
%
 
(0.4
)%
(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 period, average net assets is calculated using the averages of each quarterly period. However, for the investment grade portfolio component of these returns, revolving credit agreement borrowings are not subtracted from the net assets calculation. The separate components of these returns (non-investment grade portfolio and investment grade portfolio) are non-U.S. GAAP financial measures. See “Comments on Regulation G” for further discussion, including a reconciliation of these components of our net interest income yield on average net assets and net investment income return on average net assets.
(2) Net investment income return on average total investments is calculated by dividing net investment income by average total investments. For the three- and six-month period, average total investments is calculated using the averages of each quarterly period. The separate components of these returns (non-investment grade portfolio and investment grade portfolio) are non-U.S. GAAP financial measures. See “Comments on Regulation G” for further discussion, including a reconciliation of these components of our net investment income return on average total investments.

Watford Holdings Ltd.
100 Pitts Bay Road, Pembroke HM08 Bermuda
Tel: 441-278-3454 www.watfordre.com
-4-



The following chart shows the composition of our non-investment grade and investment grade portfolios as of June 30, 2019:
 
As of June 30, 2019
 
Non-Investment Grade
 
($ in millions)
Total non-investment grade investments
$
1,833.5

 
 
Portfolio allocation by asset class:
 
Term loans
57.0
%
Corporate bonds
17.4
%
Asset-backed securities
10.6
%
Short-term investments
6.7
%
Equities
6.6
%
Other investments
1.3
%
Mortgage-backed securities
0.4
%
Total
100.0
%
 
As of June 30, 2019
 
Investment Grade
 
($ in millions)
Total investment grade investments
$
936.6

 
 
Portfolio allocation by asset class:
 
U.S. government and government agency bonds
39.2
%
Corporate bonds
16.2
%
Asset-backed securities
15.7
%
Non-U.S. government and government agency bonds
14.7
%
Short-term investments
11.6
%
Mortgage-backed securities
1.8
%
Municipal government and government agency bonds
0.8
%
Total
100.0
%











Watford Holdings Ltd.
100 Pitts Bay Road, Pembroke HM08 Bermuda
Tel: 441-278-3454 www.watfordre.com
-5-



Corporate Function
The Company has a corporate function that includes general and administrative expenses related to corporate activities, net foreign exchange gains (losses), income tax expense and items related to the Company’s contingently redeemable preferred shares.
There was a net foreign exchange loss for the 2019 second quarter of $0.4 million, compared to net foreign exchange gains for the 2018 second quarter of $0.5 million. There was a net foreign exchange loss for the six months ended June 30, 2019 of $0.9 million, compared to a net foreign exchange loss for the six months ended June 30, 2018 of $0.7 million.
Preferred dividends for the 2019 second quarter were $4.9 million, compared to $4.9 million for the 2018 second quarter. Preferred dividends for the six months ended June 30, 2019 were $9.8 million, in-line with $9.8 million for the six months ended June 30, 2018.
Conference Call
The Company will hold a conference call on Tuesday, July 30, 2019 at 1:00 p.m. Eastern time to discuss its 2019 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 August 1st.
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 June 30, 2019, comprised of $221.2 million of contingently redeemable preference shares and $961.3 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” from Kroll Bond Rating Agency.

Watford Holdings Ltd.
100 Pitts Bay Road, Pembroke HM08 Bermuda
Tel: 441-278-3454 www.watfordre.com
-6-



CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
(Unaudited)
 
 
 
June 30,
 
December 31,
 
2019
 
2018
Assets
($ in thousands)
Investments:
 
 
 
Term loans, fair value option (Amortized cost: $1,099,970 and $1,055,664)
$
1,042,879

 
$
1,000,652

Fixed maturities, fair value option (Amortized cost: $634,920 and $972,653)
616,863

 
922,819

Short-term investments, fair value option (Cost: $232,488 and $281,959)
232,177

 
282,132

Equity securities, fair value option
56,524

 
56,638

Other investments, fair value option
24,505

 
49,762

Investments, fair value option
1,972,948

 
2,312,003

Fixed maturities, available for sale (Amortized cost: $728,757 and $397,509)
732,454

 
393,351

Equity securities, fair value through net income
64,703

 
33,013

Total investments
2,770,105

 
2,738,367

Cash and cash equivalents
68,977

 
63,529

Accrued investment income
16,916

 
19,461

Premiums receivable
228,588

 
227,301

Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses
123,961

 
86,445

Prepaid reinsurance premiums
79,513

 
61,587

Deferred acquisition costs, net
71,557

 
80,858

Receivable for securities sold
29,425

 
24,507

Intangible assets
7,650

 
7,650

Funds held by reinsurers
55,536

 
44,830

Other assets
16,300

 
18,321

Total assets
$
3,468,528

 
$
3,372,856

Liabilities
 
 
 
Reserve for losses and loss adjustment expenses
$
1,126,080

 
$
1,032,760

Unearned premiums
375,323

 
390,114

Losses payable
71,270

 
24,750

Reinsurance balances payable
23,312

 
21,034

Payable for securities purchased
51,216

 
60,142

Payable for securities sold short
48,823

 
8,928

Revolving credit agreement borrowings
558,297

 
693,917

Amounts due to affiliates
5,741

 
5,888

Investment management and performance fees payable
12,490

 
3,807

Other liabilities
13,505

 
20,916

Total liabilities
$
2,286,057

 
$
2,262,256

Commitments and contingencies
 
 
 
Contingently redeemable preferred shares
221,175

 
220,992

Shareholders’ equity

 
 
Common shares ($0.01 par; shares authorized: 120 million; shares issued: 22,692,300 and 22,682,875)
227

 
227

Additional paid-in capital
897,716

 
895,386

Retained earnings (deficit)
60,182

 
(1,275
)
Accumulated other comprehensive income (loss)
3,171

 
(4,730
)
Total shareholders’ equity
961,296

 
889,608

Total liabilities, contingently redeemable preferred shares and shareholders’ equity
$
3,468,528

 
$
3,372,856


Watford Holdings Ltd.
100 Pitts Bay Road, Pembroke HM08 Bermuda
Tel: 441-278-3454 www.watfordre.com
-7-



CONSOLIDATED STATEMENT OF INCOME (LOSS) (UNAUDITED)
 
(Unaudited)
 
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
Change QTR %
 
2019
 
2018
 
Change YTD %
Revenues
($ in thousands except share and per share data)
Gross premiums written
$
161,978

 
$
175,175

 
(8
)%
 
$
348,667

 
$
389,045

 
(10
)%
Gross premiums ceded
(42,608
)
 
(34,589
)
 
23
 %
 
(83,910
)
 
(68,907
)
 
22
 %
Net premiums written
119,370

 
140,586

 
(15
)%
 
264,757

 
320,138

 
(17
)%
Change in unearned premiums
31,948

 
18,932

 
69
 %
 
32,655

 
(23,873
)
 
(237
)%
Net premiums earned
151,318

 
159,518

 
(5
)%
 
297,412

 
296,265

 
 %
Other underwriting income (loss)
673

 
688

 
(2
)%
 
1,265

 
1,389

 
(9
)%
Interest income
38,596

 
36,481

 
6
 %
 
81,737

 
71,126

 
15
 %
Investment management fees - related parties
(4,570
)
 
(4,156
)
 
10
 %
 
(8,979
)
 
(8,302
)
 
8
 %
Borrowing and miscellaneous other investment expenses
(7,611
)
 
(6,283
)
 
21
 %
 
(15,909
)
 
(12,643
)
 
26
 %
Net interest income
26,415

 
26,042

 
1
 %
 
56,849

 
50,181

 
13
 %
Realized and unrealized gains (losses) on investments
(936
)
 
(10,614
)
 
(91
)%
 
32,784

 
(12,620
)
 
(360
)%
Investment performance fees - related parties
(1,692
)
 
(1,602
)
 
6
 %
 
(7,492
)
 
(4,199
)
 
78
 %
Net investment income (loss)
23,787

 
13,826

 
72
 %
 
82,141

 
33,362

 
146
 %
Total revenues
175,778

 
174,032

 
1
 %
 
380,818

 
331,016

 
15
 %
Expenses
 
 
 
 

 
 
 
 
 

Loss and loss adjustment expenses
(111,416
)
 
(117,141
)
 
(5
)%
 
(222,266
)
 
(215,130
)
 
3
 %
Acquisition expenses
(35,417
)
 
(37,967
)
 
(7
)%
 
(69,391
)
 
(72,930
)
 
(5
)%
General and administrative expenses
(9,751
)
 
(5,416
)
 
80
 %
 
(16,991
)
 
(10,473
)
 
62
 %
Net foreign exchange gains (losses)
(441
)
 
548

 
(180
)%
 
(878
)
 
(735
)
 
19
 %
Total expenses
(157,025
)
 
(159,976
)
 
(2
)%
 
(309,526
)
 
(299,268
)
 
3
 %
Income (loss) before income taxes
18,753

 
14,056

 
33
 %
 
71,292

 
31,748

 
125
 %
Income tax expense
(20
)
 
(24
)
 
(17
)%
 
(20
)
 
(27
)
 
(26
)%
Net income (loss) before preferred dividends
18,733

 
14,032

 
34
 %
 
71,272

 
31,721

 
125
 %
Preferred dividends
(4,908
)
 
(4,908
)
 
 %
 
(9,815
)
 
(9,815
)
 
 %
Net income (loss) available to common shareholders
$
13,825

 
$
9,124

 
52
 %
 
$
61,457

 
$
21,906

 
181
 %
Earnings (loss) per share:
 
 
 
 

 
 
 
 
 

Basic
$
0.61

 
$
0.41

 
49
 %
 
$
2.71

 
$
0.97

 
179
 %
Diluted
$
0.61

 
$
0.41

 
49
 %
 
$
2.71

 
$
0.97

 
179
 %
Weighted average number of ordinary shares used in the determination of earnings (loss) per share:
 
 
 
 

 
 
 
 
 

Basic
22,740,762

 
22,682,875

 
 %
 
22,711,833

 
22,682,875

 
 %
Diluted
22,747,033

 
22,682,875

 
 %
 
22,714,969

 
22,682,875

 
 %


Watford Holdings Ltd.
100 Pitts Bay Road, Pembroke HM08 Bermuda
Tel: 441-278-3454 www.watfordre.com
-8-



 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Numerator:
($ in thousands except share and per share data)
Net income (loss) before preferred dividends
$
18,733

 
$
14,032

 
$
71,272

 
$
31,721

Preferred dividends
(4,908
)
 
(4,908
)
 
(9,815
)
 
(9,815
)
Net income (loss) available to common shareholders
$
13,825

 
$
9,124

 
$
61,457

 
$
21,906

Denominator:

 
 
 

 
 
Weighted average common shares outstanding - basic
22,740,762

 
22,682,875

 
22,711,833

 
22,682,875

Effect of dilutive common share equivalents:
 
 
 
 
 
 
 
Weighted average non-vested restricted share units (1)
6,271

 

 
3,136

 

Weighted average common shares outstanding - diluted
22,747,033

 
22,682,875

 
22,714,969

 
22,682,875

Earnings (loss) per common share:
 
 
 
 
 
 
 
Basic
$0.61
 
$0.41
 
$2.71
 
$0.97
Diluted
$0.61
 
$0.41
 
$2.71
 
$0.97
(1) During the second quarter of 2019, the Company granted 165,287 restricted share units and common shares to certain employees and directors, 82,360 of which are non-vested as of June 30, 2019.
 
June 30,
 
March 31,
 
December 31,
 
2019
 
2019
 
2018
Numerator:
($ in thousands except share and per share data)
Total shareholders’ equity
$
961,296

 
$
941,891

 
$
889,608

Denominator:
 
 
 
 
 
Common shares outstanding - basic
22,765,802

 
22,682,875

 
22,682,875

Effect of dilutive common share equivalents:
 
 
 
 
 
Non-vested restricted share units (1)
82,360

 

 

Common shares outstanding - diluted
22,848,162

 
22,682,875

 
22,682,875

 

 

 

Book value per basic common share
$42.23
 
$41.52
 
$39.22
Book value per diluted common share
$42.07
 
$41.52
 
$39.22
(1) During the second quarter of 2019, the Company granted 165,287 restricted share units and common shares to certain employees and directors, 82,360 of which are non-vested as of June 30, 2019.
Comments on Regulation G
Throughout this release, the Company presents its operations in the way it believes will be the most meaningful and useful to investors, analysts, rating agencies and others who use the Company’s financial information in evaluating the performance of the Company and that investors and such other persons benefit from having a consistent basis for comparison between quarters and for comparison with other companies within the industry. These measures may not, however, be comparable to similarly titled measures used by companies outside of the insurance industry. Investors are cautioned not to place undue reliance on these non-GAAP financial measures in assessing the Company’s overall financial performance.
This presentation includes the use of “underwriting income (loss)” (which is defined as net premiums earned less loss and loss adjustment expenses, acquisition expenses and general and administrative expenses), “adjusted underwriting income (loss)” (which is defined as underwriting income (loss) plus other underwriting income (loss) less certain corporate expenses), and “adjusted

Watford Holdings Ltd.
100 Pitts Bay Road, Pembroke HM08 Bermuda
Tel: 441-278-3454 www.watfordre.com
-9-



combined ratio” (which is calculated by dividing the sum of loss and loss adjustment expenses, acquisition expenses and general and administrative expenses, less certain corporate expenses, by the sum of net premiums earned and other underwriting income (loss)). Certain corporate expenses are generally comprised of non-recurring costs of the holding company, such as costs associated with the initial setup of subsidiaries, as well as costs associated with the ongoing operations of the holding company such as compensation of certain executives.
The presentation of underwriting income (loss), adjusted underwriting income (loss) and the adjusted combined ratio are non-GAAP financial measures as defined in Regulation G. The reconciliation of such measures to net income (loss) available to common shareholders (the most directly comparable GAAP financial measure) in accordance with Regulation G is included on the following pages of this release.
Underwriting income (loss) is useful in evaluating our underwriting performance, without regard to other underwriting income (losses), net investment income (losses), net foreign exchange gains (losses), income tax expenses and preferred dividends, and adjusted underwriting income (loss) is useful in evaluating our underwriting performance, without regard to net investment income (losses), net foreign exchange gains (losses), income tax expenses, preferred dividends and certain corporate expenses, and the adjusted combined ratio is a key indicator of our profitability, without regard to certain corporate expenses.  The Company believes that preferred dividends, income tax expense, foreign exchange gains (losses), net investment income (loss), other underwriting income (loss) and certain corporate expenses in any particular period are not indicative of the performance of, or trends in, the Company’s underwriting performance. Although preferred dividends, income tax expense, foreign exchange gains (losses), net investment income (loss) and other underwriting income (loss) are an integral part of the Company’s operations, the decision to realize investment gains or losses, the recognition of the change in the carrying value of investments accounted for using the fair value option in net realized gains or losses, and the recognition of foreign exchange gains or losses are independent of the underwriting process and result, in large part, from general economic and financial market conditions. Furthermore, certain users of the Company’s financial information believe that, for many companies, the timing of the realization of investment gains or losses is largely opportunistic. The Company believes that certain corporate expenses, due to their non-recurring nature, are not indicative of the performance of, or trends in, the Company’s business performance. Due to these reasons, the Company excludes preferred dividends, income tax expense, foreign exchange gains (losses), net investment income (loss), other underwriting income (loss) from the calculation of underwriting income (loss), and excludes preferred dividends, income tax expense, foreign exchange gains (losses), net investment income (loss) and certain corporate expenses from the calculation of adjusted underwriting income (loss) and the adjusted combined ratio.
The Company believes that showing underwriting income (loss), adjusted underwriting income (loss) and the adjusted combined ratio exclusive of the items referred to above reflects the underlying fundamentals of the Company’s business since the Company evaluates the performance of its business using underwriting income (loss), adjusted underwriting income (loss) and the adjusted combined ratio. The Company believes that this presentation enables investors and other users of the Company’s financial information to analyze the Company’s performance in a manner similar to how the Company’s management analyzes performance. The Company also believes that this measure follows industry practice and, therefore, allows the users of the Company’s financial information to compare the Company’s performance with its industry peer group. The Company believes that the equity analysts and certain rating agencies, which follow the Company and the insurance industry as a whole generally exclude these items from their analysis for the same reasons.
This presentation also includes the non-investment grade portfolio and investment grade portfolio components of our investment returns: “net interest income yield on average net assets” (calculated as net interest income divided by average net assets), “net investment income return on average

Watford Holdings Ltd.
100 Pitts Bay Road, Pembroke HM08 Bermuda
Tel: 441-278-3454 www.watfordre.com
-10-



total investments” (calculated as net investment income divided by average total investments), and “net investment income return on average net assets” (calculated as net investment income divided by average net assets). Net assets is calculated as the sum of total investments, accrued investment income and receivables for securities sold, less revolving credit agreement borrowings, payable for securities purchased and payables for securities sold short. For the three-month periods, average net assets is calculated using the averages of each quarterly period. However, for the investment grade portfolio component of these returns, the impact of the revolving credit agreement borrowings is not subtracted from net interest income, net investment income (loss) or the net assets calculation.
The presentation of the separate components of our investment returns (non-investment grade portfolio and investment grade portfolio) are non-GAAP financial measures as defined in Regulation G. The reconciliation of such measures to net interest income and net investment income (loss), the most directly comparable GAAP financial measures, in accordance with Regulation G is included on the following pages of this release.
The non-investment grade portfolio and investment grade portfolio components of our investment returns (net interest income yield on average net assets, net investment income return on average net assets and on average total investments, respectively) are useful in evaluating our investment performance. The non-investment grade portfolio components of these investment returns reflect the performance of our investment strategy under HPS Investment Partners, LLC (“HPS”), which includes the use of leverage. The investment grade portfolio component of these returns reflect the performance of the investment portfolios that predominantly support our underwriting collateral.
The following tables presents a reconciliation of underwriting income (loss) to net income (loss) available to common shareholders, and a reconciliation of adjusted underwriting income (loss) to underwriting income (loss):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
($ in thousands)
Net income (loss) available to common shareholders
$
13,825

 
$
9,124

 
$
61,457

 
$
21,906

Preferred dividends
4,908

 
4,908

 
9,815

 
9,815

Net income (loss) before dividends
18,733

 
14,032

 
71,272

 
31,721

Income tax expense
20

 
24

 
20

 
27

Net foreign exchange (gains) losses
441

 
(548
)
 
878

 
735

Net investment (income) loss
(23,787
)
 
(13,826
)
 
(82,141
)
 
(33,362
)
Other underwriting (income) loss
(673
)
 
(688
)
 
(1,265
)
 
(1,389
)
Underwriting income (loss)
(5,266
)
 
(1,006
)
 
(11,236
)
 
(2,268
)
Certain corporate expenses
4,795

 
1,010

 
6,758

 
2,153

Other underwriting income (loss)
673

 
688

 
1,265

 
1,389

Adjusted underwriting income (loss)
$
202

 
$
692

 
$
(3,213
)
 
$
1,274


Watford Holdings Ltd.
100 Pitts Bay Road, Pembroke HM08 Bermuda
Tel: 441-278-3454 www.watfordre.com
-11-



The adjusted combined ratio reconciles to the combined ratio for the three and six months ended June 30, 2019 and 2018 as follows:
 
Three Months Ended June 30,
 
2019
 
2018
 
Amount
 
Adjustment
 
As Adjusted
 
Amount
 
Adjustment
 
As Adjusted
 
($ in thousands)
Losses and loss adjustment expenses
$
111,416

 
$

 
$
111,416

 
$
117,141

 
$

 
$
117,141

Acquisition expenses
35,417

 

 
35,417

 
37,967

 

 
37,967

General & administrative expenses (1)
9,751

 
(4,795
)
 
4,956

 
5,416

 
(1,010
)
 
4,406

Net premiums earned (1)
151,318

 
673

 
151,991

 
159,518

 
688

 
160,206

 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
73.6
%
 


 
 
 
73.4
%
 


 
 
Acquisition expense ratio
23.4
%
 


 
 
 
23.8
%
 


 
 
General & administrative expense ratio (1)
6.5
%
 


 
 
 
3.4
%
 


 
 
Combined ratio
103.5
%
 


 


 
100.6
%
 





Adjusted loss ratio
 
 
 
 
73.3
%
 
 
 
 
 
73.1
%
Adjusted acquisition expense ratio
 
 
 
 
23.3
%
 
 
 
 
 
23.7
%
Adjusted general & administrative expense ratio
 
 
 
 
3.3
%
 
 
 
 
 
2.8
%
Adjusted combined ratio
 
 
 
 
99.9
%
 
 
 
 
 
99.6
%
(1) Adjustments include certain corporate expenses, which are deducted from general and administrative expenses, and other underwriting income (loss), which is added to net premiums earned.
 
Six Months Ended June 30,
 
2019
 
2018
 
Amount
 
Adjustment
 
As Adjusted
 
Amount
 
Adjustment
 
As Adjusted
 
($ in thousands)
Losses and loss adjustment expenses
$
222,266

 
$

 
$
222,266

 
$
215,130

 
$

 
$
215,130

Acquisition expenses
69,391

 

 
69,391

 
72,930

 

 
72,930

General & administrative expenses (1)
16,991

 
(6,758
)
 
10,233

 
10,473

 
(2,153
)
 
8,320

Net premiums earned (1)
297,412

 
1,265

 
298,677

 
296,265

 
1,389

 
297,654

 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
74.7
%
 


 
 
 
72.6
%
 


 
 
Acquisition expense ratio
23.3
%
 


 
 
 
24.6
%
 


 
 
General & administrative expense ratio (1)
5.8
%
 


 
 
 
3.5
%
 


 
 
Combined ratio
103.8
%
 


 
 
 
100.7
%
 


 
 
Adjusted loss ratio
 
 
 
 
74.4
%
 
 
 
 
 
72.3
%
Adjusted acquisition expense ratio
 
 
 
 
23.2
%
 
 
 
 
 
24.5
%
Adjusted general & administrative expense ratio
 
 
 
 
3.5
%
 
 
 
 
 
2.8
%
Adjusted combined ratio
 
 
 
 
101.1
%
 
 
 
 
 
99.6
%
(1) Adjustments include certain corporate expenses, which are deducted from general and administrative expenses, and other underwriting income (loss), which is added to net premiums earned.



Watford Holdings Ltd.
100 Pitts Bay Road, Pembroke HM08 Bermuda
Tel: 441-278-3454 www.watfordre.com
-12-



The following tables summarize the components of our total investment return for the three and six months ended June 30, 2019 and 2018:
 
Three Months Ended June 30, 2019
 
Three Months Ended June 30, 2018
 
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
$
32,492

 
$
6,104

 
$

 
$
38,596

 
$
32,378

 
$
4,103

 
$

 
$
36,481

Investment management fees - related parties
(4,171
)
 
(399
)
 

 
(4,570
)
 
(3,868
)
 
(288
)
 

 
(4,156
)
Borrowing and miscellaneous other investment expenses
(3,809
)
 
(238
)
 
(3,564
)
 
(7,611
)
 
(3,579
)
 
(59
)
 
(2,645
)
 
(6,283
)
Net interest income
24,512

 
5,467

 
(3,564
)
 
26,415

 
24,931

 
3,756

 
(2,645
)
 
26,042

Net realized gains (losses) on investments
(177
)
 
966

 

 
789

 
(79
)
 
(1,671
)
 

 
(1,750
)
Net unrealized gains (losses) on investments (1)
(4,511
)
 
2,786

 

 
(1,725
)
 
(8,594
)
 
(270
)
 

 
(8,864
)
Investment performance fees - related parties
(1,692
)
 

 

 
(1,692
)
 
(1,602
)
 

 

 
(1,602
)
Net investment income (loss)
$
18,132

 
$
9,219

 
$
(3,564
)
 
$
23,787

 
$
14,656

 
$
1,815

 
$
(2,645
)
 
$
13,826

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average total investments (2)
$
1,871,286

 
$
928,850

 
$

 
$
2,800,136

 
$
1,830,469

 
$
800,567

 
$

 
$
2,631,036

Average net assets (3)
$
1,548,237

 
$
924,948

 
$
(327,619
)
 
$
2,145,566

 
$
1,460,949

 
$
804,513

 
$
(284,561
)
 
$
1,980,901

 
 
 
 
 
 
 
 
 
 
 


 


 
 
Net interest income yield on average net assets (3)
1.6
%
 
0.6
%
 
 
 
1.2
%
 
1.7
%
 
0.5
%
 
 
 
1.3
%
Net investment income return on average total investments (2)
1.0
%
 
1.0
%
 
 
 
0.8
%
 
0.8
%
 
0.2
%
 
 
 
0.5
%
Net investment income return on average net assets (3)
1.2
%
 
1.0
%
 
(1.1
)%
 
1.1
%
 
1.0
%
 
0.2
%
 
(0.9
)%
 
0.7
%
(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 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.

Watford Holdings Ltd.
100 Pitts Bay Road, Pembroke HM08 Bermuda
Tel: 441-278-3454 www.watfordre.com
-13-



 
Six Months Ended June 30, 2019
 
Six Months Ended June 30, 2018
 
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
$
69,831

 
$
11,906

 
$

 
$
81,737

 
$
63,256

 
$
7,870

 
$

 
$
71,126

Investment management fees - related parties
(8,242
)
 
(737
)
 

 
(8,979
)
 
(7,720
)
 
(582
)
 

 
(8,302
)
Borrowing and miscellaneous other investment expenses
(8,667
)
 
(442
)
 
(6,800
)
 
(15,909
)
 
(7,525
)
 
(194
)
 
(4,924
)
 
(12,643
)
Net interest income
52,922

 
10,727

 
(6,800
)
 
56,849

 
48,011

 
7,094

 
(4,924
)
 
50,181

Net realized gains (losses) on investments
1,142

 
929

 

 
2,071

 
(9,325
)
 
(4,066
)
 

 
(13,391
)
Net unrealized gains (losses) on investments (1)
23,114

 
7,599

 

 
30,713

 
6,569

 
(5,798
)
 

 
771

Investment performance fees - related parties
(7,492
)
 

 

 
(7,492
)
 
(4,199
)
 

 

 
(4,199
)
Net investment income (loss)
$
69,686

 
$
19,255

 
$
(6,800
)
 
$
82,141

 
$
41,056

 
$
(2,770
)
 
$
(4,924
)
 
$
33,362

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average total investments (2)
$1,883,565
 
$908,637
 
$

 
$2,792,202
 
$1,788,239
 
$784,975
 
$

 
$2,573,214
Average net assets (3)
$1,527,241
 
$905,937
 
$(322,303)
 
$2,110,875
 
$1,447,414
 
$788,692
 
$(275,463)
 
$1,960,643
 
 
 
 
 


 
 
 

 

 


 


Net interest income yield on average net assets (3)
3.5
%
 
1.2
%
 
 
 
2.7
%
 
3.3
%
 
0.9
 %
 
 
 
2.6
%
Net investment income return on average total investments (2)
3.7
%
 
2.1
%
 
 
 
2.9
%
 
2.3
%
 
(0.4
)%
 
 
 
1.3
%
Net investment income return on average net assets (3)
4.6
%
 
2.1
%
 
(2.1
)%
 
3.9
%
 
2.8
%
 
(0.4
)%
 
(1.8
)%
 
1.7
%
(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 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.


Watford Holdings Ltd.
100 Pitts Bay Road, Pembroke HM08 Bermuda
Tel: 441-278-3454 www.watfordre.com
-14-



 
As of June 30, 2019
 
As of June 30, 2018
 
Non-Investment Grade
 
Investment Grade
 
Borrowings for U/W Collateral
 
Total
 
Non-Investment Grade
 
Investment Grade
 
Borrowings for U/W Collateral
 
Total
 
($ in thousands)
Average total investments - QTD
$
1,871,286

 
$
928,850

 
$

 
$
2,800,136

 
$
1,830,469

 
$
800,567

 
$

 
$
2,631,036

Average total investments - YTD
1,883,565

 
908,637

 

 
2,792,202

 
1,788,239

 
784,975

 

 
2,573,214

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average net assets - QTD
1,548,237

 
924,948

 
(327,619
)
 
2,145,566

 
1,460,949

 
804,513

 
(284,561
)
 
1,980,901

Average net assets - YTD
1,527,241

 
905,937

 
(322,303
)
 
2,110,875

 
1,447,414

 
788,692

 
(275,463
)
 
1,960,643

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investments
$
1,833,476

 
$
936,629

 
$

 
$
2,770,105

 
$
1,920,978

 
$
806,525

 
$

 
$
2,727,503

Accrued Investment Income
11,834

 
5,082

 

 
16,916

 
13,980

 
4,128

 

 
18,108

Receivable for Securities Sold
29,367

 
58

 

 
29,425

 
31,352

 
35

 

 
31,387

Less: Payable for Securities Purchased
46,412

 
4,804

 

 
51,216

 
132,164

 

 

 
132,164

Less: Payable for Securities Sold Short
48,823

 

 

 
48,823

 
24,529

 

 

 
24,529

Less: Revolving credit agreement borrowings
229,546

 

 
328,751

 
558,297

 
324,655

 

 
289,807

 
614,462

Net assets
$
1,549,896

 
$
936,965

 
$
(328,751
)
 
$
2,158,110

 
$
1,484,962

 
$
810,688

 
$
(289,807
)