Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 

☒    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019
OR

☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 

Commission file number: 001-38788
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13051470&doc=20
Watford Holdings Ltd.
(Exact Name of Registrant as Specified in its Charter)
Bermuda
(State or other jurisdiction
of incorporation or organization)
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)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
Smaller reporting company ☐
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. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Shares
 
WTRE
 
Nasdaq Global Select Market
8½% Cumulative Redeemable Preference Shares
 
WTREP
 
Nasdaq Global Select Market

As of August 8, 2019, there were 22,692,300 common shares, $0.01 par value per share, of the registrant outstanding.




 
Watford Holdings Ltd.
 
Index to Form 10-Q
 
 
 
Page
Part I.
Item 1.
Item 2.
Item 3.
Item 4.
 
 
 
Part II.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 

1



Explanatory note - Certain defined terms
Unless the context suggests otherwise, any reference in this report to:
“ACGL” refers to Arch Capital Group Ltd. and its controlled subsidiaries;
“Arch” refers to any one or more of the following direct or indirect subsidiaries of ACGL, as applicable in the context in which such term appears:
Arch Investment Management Ltd., or AIM, which manages the majority of our investment grade portfolio;
Arch Reinsurance Company, or ARC, which is a party to certain quota share agreements with one or more of our operating subsidiaries and a services agreement with Watford Holdings (U.S.) Inc.;
Arch Reinsurance Ltd., or ARL, which is a party to certain quota share agreements with one or more of our operating subsidiaries and owned approximately 11% of our outstanding common shares as of June 30, 2019;
Arch Underwriters Inc., or AUI, which manages the underwriting business of our U.S. operating subsidiaries;
Arch Underwriters Ltd., or AUL, which manages the underwriting business of our non-U.S. operating subsidiaries, including Watford Re;
our “Investment Managers” refers to AIM, HPS or any other investment managers that manage our investment grade portfolio or our non-investment grade portfolio from time to time;
“HPS” refers to HPS Investment Partners, LLC (formerly known as Highbridge Principal Strategies, LLC), which manages our non-investment grade portfolio, as well as accounts in our investment grade portfolio;
“Watford,” “we,” “us” and “our” refers to Watford Holdings Ltd. and its subsidiaries;
“Watford Holdings” refers to our company, Watford Holdings Ltd., a Bermuda exempted company;
“Watford Trust” refers to Watford Asset Trust I, a statutory trust organized under the laws of the State of Delaware;
“Watford Re” refers to Watford Re Ltd., a Bermuda domiciled insurance company and a wholly-owned subsidiary of our company;
“WIC” refers to Watford Insurance Company, a New Jersey domiciled insurance company and a wholly-owned subsidiary of our company;
“WICE” refers to Watford Insurance Company Europe Limited, a Gibraltar domiciled insurance company and a wholly-owned subsidiary of our company; and
“WSIC” refers to Watford Specialty Insurance Company, a New Jersey domiciled insurance company and a wholly-owned subsidiary of our company.







Part I. Financial information
Cautionary note regarding forward-looking statements
The Private Securities Litigation Reform Act of 1995 (or the PSLRA) provides a “safe harbor” for forward-looking statements. This report contains forward-looking statements that are intended to enhance the reader’s ability to assess our future financial and business performance. These statements are based on the beliefs and assumptions of our management, and are subject to risks and uncertainties. Generally, statements that are not about historical facts, including statements concerning our possible or assumed future actions or results of operations are forward-looking statements. Forward-looking statements include, but are not limited to, statements that represent our beliefs, expectations or estimates concerning future operations, strategies, financial results or performance, financings, investments, acquisitions, expenditures or other developments and anticipated trends and competition in the markets in which we operate. Forward-looking statements, for purposes of the PSLRA or otherwise, can also be identified by the use of forward-looking terminology such as “may,” “believes,” “intends,” “anticipates,” “plans,” “estimates,” “expects,” “should” or similar expressions.
Forward-looking statements involve our 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 report and in our other reports and other documents filed with the Securities and Exchange Commission, or the SEC, and include:
our limited operating history;
fluctuations in the results of our operations;
our ability to compete successfully with more established competitors;
our losses exceeding our reserves;
downgrades, potential downgrades or other negative actions by rating agencies;
our dependence on key executives and inability to attract qualified personnel, or the potential loss of Bermudian personnel as a result of Bermuda employment restrictions;
our dependence on letter of credit facilities that may not be available on commercially acceptable terms;
our potential inability to pay dividends or distributions;
our potential need for additional capital in the future and the potential unavailability of such capital to us on favorable terms or at all;
our dependence on clients’ evaluations of risks associated with such clients’ insurance underwriting;
the suspension or revocation of our subsidiaries’ insurance licenses;
Watford Holdings potentially being deemed an investment company under U.S. federal securities law;
the potential characterization of us and/or any of our subsidiaries as a passive foreign investment company, or PFIC;
our dependence on Arch for services critical to our underwriting operations;

3



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 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, or FATCA, provisions; and
the other risks identified in this report, including, without limitation, those under the sections titled Part II Item 1A “Risk factors” and Part I Item 2 “Management’s discussion and analysis of financial condition and results of operations.”
Consequently, such forward-looking statements should be regarded solely as our current plans, estimates or belief as of the date of this report. All subsequent forward-looking statements attributable to us or persons acting on our 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. We do not intend, and do not undertake, any obligation to update any forward-looking statements to reflect future events or circumstances after the date of this report.


4


Item 1. Consolidated financial statements
 
Page
 
June 30, 2019 (unaudited) and December 31, 2018
 
 
 
For the three and six months ended June 30, 2019 and 2018 (unaudited)
 
 
 
For the three and six months ended June 30, 2019 and 2018 (unaudited)
 
 
 
For the three and six months ended June 30, 2019 and 2018 (unaudited)
 
 
 
For the six months ended June 30, 2019 and 2018 (unaudited)
 
 
Notes to the Consolidated Financial Statements (unaudited)
 


5



WATFORD HOLDINGS LTD.
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
 
(Unaudited)
 
 
 
June 30,
 
December 31,
 
2019
 
2018
Assets
 
 
 
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 (1)
24,505

 
49,762

Investments, fair value option
1,972,948

 
2,312,003

Fixed maturities, available for sale (Amortized cost: $728,756 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 (1)
228,588

 
227,301

Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses (1)
123,961

 
86,445

Prepaid reinsurance premiums (1)
79,513

 
61,587

Deferred acquisition costs, net (1)
71,557

 
80,858

Receivable for securities sold
29,425

 
24,507

Intangible assets
7,650

 
7,650

Funds held by reinsurers (1)
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)
$
1,126,080

 
$
1,032,760

Unearned premiums (1)
375,323

 
390,114

Losses payable (1)
71,270

 
24,750

Reinsurance balances payable (1)
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 (1)
5,741

 
5,888

Investment management and performance fees payable (1)
12,490

 
3,807

Other liabilities
13,505

 
20,916

Total liabilities
$
2,286,057

 
$
2,262,256

Commitments and contingencies

 

Contingently redeemable preference shares
221,175

 
220,992

Shareholders’ equity
 
 
 
Common shares ($0.01 par; shares authorized: 120 million; shares issued and outstanding: 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 preference shares and shareholders’ equity
$
3,468,528

 
$
3,372,856

(1) See Note 12 - “Transactions with related parties” for disclosure of related party amounts.

6


WATFORD HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(U.S. dollars in thousands, except share and per share data)
 
(Unaudited)
 
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues
 
 
 
 
 
 
 
Gross premiums written (1)
$
161,978

 
$
175,175

 
$
348,667

 
$
389,045

Gross premiums ceded (1)
(42,608
)
 
(34,589
)
 
(83,910
)
 
(68,907
)
Net premiums written (1)
119,370

 
140,586

 
264,757

 
320,138

Change in unearned premiums (1)
31,948

 
18,932

 
32,655

 
(23,873
)
Net premiums earned (1)
151,318

 
159,518

 
297,412

 
296,265

Other underwriting income (loss)
673

 
688

 
1,265

 
1,389

Interest income
38,596

 
36,481

 
81,737

 
71,126

Investment management fees - related parties (1)
(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 and unrealized gains (losses) on investments
(936
)
 
(10,614
)
 
32,784

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

 
13,826

 
82,141

 
33,362

Total revenues
175,778

 
174,032

 
380,818

 
331,016

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Loss and loss adjustment expenses (1)
(111,416
)
 
(117,141
)
 
(222,266
)
 
(215,130
)
Acquisition expenses (1)
(35,417
)
 
(37,967
)
 
(69,391
)
 
(72,930
)
General and administrative expenses (1)
(9,751
)
 
(5,416
)
 
(16,991
)
 
(10,473
)
Net foreign exchange gains (losses)
(441
)
 
548

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

 
14,056

 
71,292

 
31,748

Income tax expense
(20
)
 
(24
)
 
(20
)
 
(27
)
Net income (loss) before preference dividends
18,733

 
14,032

 
71,272

 
31,721

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

 
$
9,124

 
$
61,457

 
$
21,906

 
 
 
 
 
 
 
 
Earnings (loss) per common share:
 
 
 
 
 
 
 
Basic
$
0.61

 
$
0.41

 
$
2.71

 
$
0.97

Diluted
$
0.61

 
$
0.41

 
$
2.71

 
$
0.97

Weighted average number of common 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

(1) See Note 12 - “Transactions with related parties” for disclosure of related party amounts.

See Notes to Consolidated Financial Statements
7


WATFORD HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(U.S. dollars in thousands)
 
(Unaudited)
 
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Comprehensive income (loss)
 
 
 
 
 
 
 
Net income (loss) available to common shareholders
$
13,825

 
$
9,124

 
$
61,457

 
$
21,906

Other comprehensive income (loss) net of income tax:
 
 
 
 
 
 
 
Available for sale investments:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the year
4,854

 
(2,204
)
 
10,065

 
(2,765
)
Reclassification of net realized (gains) losses, net of income taxes, included in net income
(1,816
)
 
502

 
(2,211
)
 
646

Foreign currency translation adjustments
212

 
491

 
47

 
152

Other comprehensive income (loss) net of income tax
3,250

 
(1,211
)
 
7,901

 
(1,967
)
Comprehensive income (loss)
$
17,075

 
$
7,913

 
$
69,358

 
$
19,939


See Notes to Consolidated Financial Statements
8


WATFORD HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(U.S. dollars in thousands)
 
(Unaudited)
 
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Common shares
 
 
 
 
 
 
 
Balance at beginning of period
$
227

 
$
227

 
$
227

 
$
227

Common shares issued

 

 

 

Balance at end of period
227

 
227

 
227

 
227

 
 
 
 
 
 
 
 
Additional paid-in capital
 
 
 
 
 
 
 
Balance at beginning of period
895,386

 
895,386

 
895,386

 
895,386

Common shares issued under share plans
250

 

 
250

 

Share-based compensation
2,080

 

 
2,080

 

Balance at end of period
897,716

 
895,386

 
897,716

 
895,386

 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
 
 
 
 
Balance at beginning of period
(79
)
 
(1,728
)
 
(4,730
)
 
(972
)
Unrealized holding gains (losses) of available for sale investments:
 
 
 
 
 
 
 
Balance at beginning of period
658

 
(417
)
 
(4,158
)
 

Unrealized holding gains (losses) of available for sale investments, net of reclassification adjustment
3,038

 
(1,702
)
 
7,854

 
(2,119
)
Balance at end of period
3,696

 
(2,119
)
 
3,696

 
(2,119
)
Currency translation adjustment:
 
 
 
 
 
 
 
Balance at beginning of period
(737
)
 
(1,311
)
 
(572
)
 
(972
)
Currency translation adjustment
212

 
491

 
47

 
152

Balance at end of period
(525
)
 
(820
)
 
(525
)
 
(820
)
Balance at end of period
3,171

 
(2,939
)
 
3,171

 
(2,939
)
 
 
 
 
 
 
 
 
Retained earnings (deficit)
 
 
 
 
 
 
 
Balance at beginning of period
46,357

 
66,023

 
(1,275
)
 
53,241

Net income (loss) before preference dividends
18,733

 
14,032

 
71,272

 
31,721

Preference share dividends paid and accrued
(4,908
)
 
(4,908
)
 
(9,815
)
 
(9,815
)
Balance at end of period
60,182

 
75,147

 
60,182

 
75,147

Total shareholders’ equity
$
961,296

 
$
967,821

 
$
961,296

 
$
967,821


See Notes to Consolidated Financial Statements
9


WATFORD HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
 
(Unaudited)
 
Six Months Ended June 30,
 
2019
 
2018
Operating Activities
 
 
 
Net income (loss) before preference dividends
$
71,272

 
$
31,721

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
Net realized and unrealized (gains) losses on investments
(32,318
)
 
16,169

Amortization of fixed assets
72

 
82

Share-based compensation
2,330

 

Changes in:
 
 
 
Accrued investment income
2,548

 
147

Premiums receivable
(60
)
 
(60,887
)
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses
(37,611
)
 
(11,197
)
Prepaid reinsurance premiums
(17,926
)
 
(31,091
)
Deferred acquisition costs, net
9,396

 
(2,698
)
Reserve for losses and loss adjustment expenses
93,421

 
111,507

Unearned premiums
(14,729
)
 
54,963

Reinsurance balances payable
2,379

 
23,562

Funds held with reinsurers
(10,890
)
 
(14,288
)
Other liabilities
48,743

 
(19,798
)
Other items
(740
)
 
(5,757
)
Net Cash Provided By Operating Activities
115,887

 
92,435

Investing Activities
 
 
 
Purchase of term loans
(233,730
)
 
(347,868
)
Purchase of fixed maturity investments
(746,930
)
 
(742,491
)
Proceeds from sale, redemptions and maturity of term loans
189,576

 
275,781

Proceeds from sales, redemptions and maturities of fixed maturity investments
778,128

 
594,491

Proceeds from sales, redemptions and maturities of other investments
24,636

 

Proceeds from sales, redemptions and maturities of short-term investments with maturities over three months
21,909

 
131,787

Net (purchases) sales of short-term investments with maturities less than three months
26,694

 
(58
)
Purchases of equity securities
(52,179
)
 
(81,886
)
Proceeds from sales of equity securities
26,421

 
13,305

Net settlements of derivative instruments
619

 

Purchases of furniture, equipment and other assets

 
(21
)
Net Cash Provided by (Used For) Investing Activities
35,144

 
(156,960
)
Financing Activities
 
 
 
Dividends paid on redeemable preference shares
(9,632
)
 
(9,632
)
Repayments on borrowings
(198,426
)
 
(123,000
)
Proceeds from borrowings
62,800

 
189,705

Net Cash Provided By (Used For) Financing Activities
(145,258
)
 
57,073

Effects of exchange rate changes on foreign currency cash
(325
)
 
(1,407
)
Increase (decrease) in cash
5,448

 
(8,859
)
Cash and cash equivalents, beginning of period
63,529

 
54,503

Cash and cash equivalents, end of period
$
68,977

 
$
45,644

Supplementary information
 
 
 
Income taxes paid
$
20

 
$
27

Interest paid
$
15,103

 
$
10,971


See Notes to Consolidated Financial Statements
10


WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)



1. Organization
Watford Holdings Ltd. (the “Parent”) and its wholly-owned subsidiary, Watford Re Ltd. (“Watford Re”), were incorporated under the laws of Bermuda on July 19, 2013.
As used herein, the terms “Company” or “Companies,” or “we,” “us” and “our,” collectively refer to the Parent and/or, as applicable, its subsidiaries. Watford Re is licensed as a Class 4 multi-line insurer under the Insurance Act 1978 of Bermuda, as amended, and related regulations (the “Insurance Act”) and is licensed to underwrite general business on an insurance and reinsurance basis. Through Watford Re, the Company primarily underwrites reinsurance on exposures worldwide.
On March 28, 2019, the Company completed a direct listing of its common shares on the Nasdaq Global Select Market. On June 28, 2019, the Company completed a direct listing of its 8½% Cumulative Redeemable Preference Shares (the “preference shares”) on the Nasdaq Global Select Market. The Company did not issue any new common shares or preference shares, nor did the Company receive any proceeds from the sale of common shares or preference shares by the selling shareholders.
Watford Re and Watford Insurance Company Europe Limited (“WICE”) have engaged Arch Underwriters Ltd. (“AUL”), a company incorporated in Bermuda and a wholly-owned subsidiary of Arch Capital Group Ltd. (“ACGL”), to act as their insurance and reinsurance manager pursuant to services agreements between AUL and Watford Re and WICE, respectively. AUL manages the day-to-day underwriting activities of Watford Re and WICE, subject to the provisions of the services agreement and the oversight of our board of directors. See Note 12 - “Transactions with related parties” for further details.
Watford Specialty Insurance Company (“WSIC”) and Watford Insurance Company (“WIC”), which are wholly-owned, indirect subsidiaries of Watford Re, have engaged Arch Underwriters Inc. (“AUI”), a company incorporated in Delaware and a wholly-owned subsidiary of ACGL, to act as their insurance and reinsurance manager pursuant to services agreements between AUI and WSIC and WIC, respectively. AUI manages the day-to-day underwriting activities of WSIC and WIC, subject to the provisions of the services agreement and the oversight of our board of directors. See Note 12 - “Transactions with related parties” for further details.
The Company has engaged HPS Investment Partners, LLC (“HPS”), as investment manager of the assets in its non-investment grade portfolio pursuant to various investment management agreements. HPS invests the Company’s non-investment grade assets and a portion of its investment grade assets, subject to the terms of the applicable investment management agreements. See Note 12 - “Transactions with related parties” for further details.
The Company has engaged Arch Investment Management Ltd. (“AIM”), a Bermuda exempted company and a subsidiary of ACGL, as investment manager of assets in its investment grade portfolio pursuant to various investment management agreements. AIM manages the majority of the Company’s investment grade assets pursuant to the terms of the investment management agreements with AIM. See Note 12 - “Transactions with related parties” for further details.
The results for the three and six months ended June 30, 2019 are not necessarily indicative of the results expected for the full calendar year.

2. Significant accounting policies
There has been no material change to the Company’s significant accounting policies as described in its audited consolidated financial statements and the accompanying notes as of December 31, 2018

11


WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


and 2017 and for each of the years in the periods ended December 31, 2018, 2017 and 2016, except as noted below.
(a) Basis of presentation
The unaudited interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany transactions and balances have been eliminated on consolidation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of recurring accruals) necessary for a fair statement of results on an interim basis.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted; however management believes that the disclosures are adequate to make the information presented not misleading. This report should be read in conjunction with the Companys audited consolidated financial statements and the accompanying notes for the years ended December 31, 2018, 2017 and 2016.
(b) Share-based compensation
The Company applies a fair value-based measurement method in accounting for its share-based compensation plans with eligible employees and directors. Compensation expense is estimated based on the fair value of the award at the grant date and is recognized in net income over the requisite service period with a corresponding increase in shareholders’ equity. No value is attributed to awards that employees forfeit because they fail to satisfy vesting conditions. The Company’s time-based awards generally vest over a three-year period with one-third vesting on each of the first, second and third anniversaries of the grant date. The share-based compensation expense associated with awards that have graded vesting features and vest based only on service conditions is calculated on a straight-line basis over the requisite service period for the entire award. Compensation expense recognized in connection with performance awards is based on the achievement of the specified performance and service conditions. The final measure of compensation expense recognized over the requisite service period reflects the final performance outcome. During the recognition period, compensation expense is accrued based on the specified performance conditions that are probable of achievement. For awards granted to retirement-eligible employees where no service is required for the employee to retain the award, the grant date fair value is immediately recognized as compensation expense at the grant date because the employee is able to retain the award without continuing to provide service. For employees near retirement eligibility, the attribution of compensation expense is over the period from the grant date to the retirement eligibility date. The Company accounts for forfeitures of share-based awards as such forfeitures occur. See Note 9, “Share transactions” for information relating to the Company’s share-based compensation.
(c) Recent accounting pronouncements
Recently adopted accounting standards
In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 intends to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. ASU 2017-12 is effective January 1, 2019. This ASU was adopted

12


WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


on January 1, 2019, and did not have a material impact on the Companys consolidated financial statements.
In February 2018, the FASB issued Accounting Standards Update 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). ASU 2018-02 permits companies to reclassify disproportionate tax effects in accumulated other comprehensive income caused by the Tax Cuts and Jobs Act of 2017 to retained earnings. ASU 2018-02 is effective for fiscal years beginning after December 31, 2018 and interim periods within those fiscal years. This ASU was adopted on January 1, 2019, and did not have a material impact on the Companys consolidated financial statements and disclosures.
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases and subsequently issued several improvements to that update (collectively “ASU 2016-02”). The new accounting guidance requires that the lessee recognize an asset and a liability for leases with a lease term greater than 12 months regardless of whether the lease is classified as operating or financing. Under the previous accounting standard, operating leases were not reflected in the balance sheet.
The Company adopted ASU 2016-02 on January 1, 2019. The adoption of the updated guidance resulted in the Company recognizing a right-of-use asset of $1.1 million and a lease liability of $1.1 million in other assets and other liabilities, respectively, in the Company’s consolidated balance sheets. The cumulative effect adjustment to the opening balance of retained earnings was $Nil. The adoption of the updated guidance did not have a material effect on the Company’s results of operations or liquidity.     
Recently issued accounting standards not yet adopted
In April 2019, the FASB issued Accounting Standards Update 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”), which will identify and clarify issues relevant to the implementation of Accounting Standards Update 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) and ASU 2017-12. The Company is assessing the impact the implementation will have on its consolidated financial statements and disclosures but does not believe such impact will be material.
For amendments related to ASU 2016-01, the effective date is for fiscal years and interim periods beginning after December 15, 2019; early adoption in any interim period is permitted.
For amendments related to ASU 2016-13, the effective date is for fiscal years and interim periods beginning after December 15, 2019.
For amendments related to ASU 2017-12, the effective date is as of the beginning of the first annual reporting period beginning after April 25, 2019. As the Company has implemented ASU 2017-12, early adoption in any interim period is permitted.
In May 2019, the FASB issued Accounting Standards Update 2019-05, Financial Instruments - Credit Losses - Targeted Transition Relief (Topic 326) (“ASU 2019-05”), which gives entities the option to irrevocably elect the fair value option on instruments previously measured on an amortized cost basis, selected on an instrument-by-instrument basis. ASU 2019-05 will have the same implementation date as ASU 2016-13, effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Upon adoption, the Company expects the new standard to have an impact on certain types of investment securities and reinsurance recoverables. The Company is currently assessing the impact the implementation of this ASU will have on its consolidated financial statements.

13


WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


3. Segment information
The Company reports results under one segment, referred to as the underwriting segment. The underwriting segment captures the results of the Company’s underwriting lines of business, which are comprised of specialty products on a worldwide basis. Lines of business include: (i) casualty reinsurance; (ii) property catastrophe reinsurance; (iii) other specialty reinsurance; and (iv) insurance programs and coinsurance.
The accounting policies of the underwriting segment are the same as those used for the preparation of the Company’s consolidated financial statements.
The Company has a corporate function that includes certain 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 preference shares.

14


WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


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

 
 
 
 
 
 
 
 
Net premiums written by client location:
 
 
 
 
 
 
 
United States
$
55,759

 
$
71,734

 
$
108,967

 
$
131,861

Bermuda
10,741

 
7,015

 
30,702

 
26,375

Europe
51,048

 
60,472

 
120,195

 
159,986

Asia and Pacific
1,822

 
1,365

 
4,893

 
1,916

Total
$
119,370

 
$
140,586

 
$
264,757

 
$
320,138

 
 
 
 
 
 
 
 
Net premiums written by underwriting location:
 
 
 
 
 
 
 
United States
$
22,385

 
$
14,060

 
$
40,787

 
$
23,842

Europe
23,927

 
22,448

 
47,185

 
45,345

Bermuda
73,058

 
104,078

 
176,785

 
250,951

Total
$
119,370

 
$
140,586

 
$
264,757

 
$
320,138

4. Reinsurance
Through reinsurance agreements with Arch Reinsurance Ltd. (“ARL”) and Arch Reinsurance Company (“ARC”), which are subsidiaries of ACGL, as well as through other third-party reinsurance

15


WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


agreements, the Company cedes a portion of its premiums. The effects of reinsurance on the Company’s written and earned premiums, losses and loss adjustment expenses were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Premiums written
($ in thousands)
Direct
$
85,656

 
$
66,084

 
$
166,454

 
$
125,647

Assumed
76,322

 
109,091

 
182,213

 
263,398

Ceded
(42,608
)
 
(34,589
)
 
(83,910
)
 
(68,907
)
Net
$
119,370

 
$
140,586

 
$
264,757

 
$
320,138

Premiums earned
 
 
 
 
 
 
 
Direct
$
70,445

 
$
47,698

 
$
133,962

 
$
86,626

Assumed
115,622

 
133,685

 
229,103

 
246,129

Ceded
(34,749
)
 
(21,865
)
 
(65,653
)
 
(36,490
)
Net
$
151,318

 
$
159,518

 
$
297,412

 
$
296,265

Losses and loss adjustment expenses
 
 
 
 
 
 
 
Direct
$
62,976

 
$
34,924

 
$
111,380

 
$
60,361

Assumed
88,651

 
92,895

 
173,175

 
171,355

Ceded
(40,211
)
 
(10,678
)
 
(62,289
)
 
(16,586
)
Net
$
111,416

 
$
117,141

 
$
222,266

 
$
215,130

The Company monitors the financial condition of its reinsurers and attempts to place coverages only with financially sound carriers. At June 30, 2019 and December 31, 2018, a majority of the Company’s reinsurance recoverables on paid and unpaid losses (not including prepaid reinsurance premiums) were due from ARL and ARC, each of which have ratings of “A+” from A.M. Best. Although the Company has not experienced any material credit losses to date, an inability of its reinsurers to meet their obligations to it over the relevant exposure periods for any reason could have a material adverse effect on its financial condition and results of operations.

16


WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


5. Reserve for losses and loss adjustment expenses
The following table represents an analysis of losses and loss adjustment expenses and a reconciliation of the beginning and ending reserve for losses and loss adjustment expenses for the six months ended June 30, 2019 and 2018.
 
Six Months Ended June 30,
 
2019
 
2018
 
($ in thousands)
Gross reserve for losses and loss adjustment expenses at beginning of period
$
1,032,760

 
$
798,262

Unpaid losses and loss adjustment expenses recoverable
81,267

 
39,856

Net reserve for losses and loss adjustment expenses at beginning of period
951,493

 
758,406

 
 
 
 
Net incurred losses and loss adjustment expenses relating to losses occurring in:
 
 
 
Current period
222,395

 
215,166

Prior years
(129
)
 
(36
)
Total net losses and loss adjustment expenses
222,266

 
215,130

 
 
 
 
Foreign exchange gains (losses)
64

 
(9,260
)
 
 
 
 
Net paid losses and loss adjustment expenses relating to losses occurring in:
 
 
 
Current period
(13,956
)
 
(12,344
)
Prior years
(153,229
)
 
(102,267
)
Total paid losses and loss adjustment expenses
(167,185
)
 
(114,611
)
 
 
 
 
Net reserve for losses and loss adjustment expenses at end of period
1,006,638

 
849,665

Unpaid losses and loss adjustment expenses recoverable
119,442

 
49,730

Gross reserve for losses and loss adjustment expenses at end of period
$
1,126,080

 
$
899,395

During the six months ended June 30, 2019, the Company recorded net favorable development on prior year loss reserves of $129.0 thousand. Net favorable development was experienced on casualty reinsurance losses of $2.2 million, offset by unfavorable development on insurance losses of $0.8 million, property catastrophe reinsurance losses of $0.7 million and other specialty reinsurance losses of $0.6 million.
During the six months ended June 30, 2018, the Company recorded net favorable development on prior year loss reserves of $36.0 thousand. This development was attributable to favorable development on property catastrophe reinsurance losses of $3.0 million, and other specialty reinsurance, mainly marine and mortgage losses, of $2.4 million. This favorable development was offset by net adverse development on casualty reinsurance of $3.5 million and adverse development on other specialty reinsurance lines of $1.4 million and $0.7 million on insurance programs.

17


WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


6. Investment information
Available for Sale Investments
The following table summarizes the fair value of the Company’s securities classified as available for sale as at June 30, 2019 and December 31, 2018:
 
Cost or Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
June 30, 2019
($ in thousands)
Fixed maturities:
 
 
 
 
 
 
 
U.S. government and government agency bonds
$
358,505

 
$
3,354

 
$
(33
)
 
$
361,826

Non-U.S. government and government agency bonds
129,042

 
2,067

 
(3,373
)
 
127,736

Corporate bonds
80,339

 
1,451

 
(55
)
 
81,735

Asset-backed securities
142,774

 
552

 
(450
)
 
142,876

Mortgage-backed securities
17,022

 
158

 
(18
)
 
17,162

Municipal government and government agency bonds
1,074

 
45

 

 
1,119

Total investments, available for sale
$
728,756

 
$
7,627

 
$
(3,929
)
 
$
732,454

 
Cost or Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
December 31, 2018
($ in thousands)
Fixed maturities:
 
 
 
 
 
 
 
U.S. government and government agency bonds
$
156,884

 
$
672

 
$
(127
)
 
$
157,429

Non-U.S. government and government agency bonds
89,661

 
670

 
(2,859
)
 
87,472

Corporate bonds
77,178

 
19

 
(1,204
)
 
75,993

Asset-backed securities
58,369

 
72

 
(1,351
)
 
57,090

Mortgage-backed securities
14,344

 
17

 
(81
)
 
14,280

Municipal government and government agency bonds
1,073

 
14

 

 
1,087

Total investments, available for sale
$
397,509

 
$
1,464

 
$
(5,622
)
 
$
393,351










18


WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


The following table summarizes, for all available for sale securities in an unrealized loss position, the fair value and gross unrealized losses by length of time the security has been in a continual unrealized loss position:
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
June 30, 2019
($ in thousands)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and government agency bonds
$
35,766

 
$
(33
)
 
$

 
$

 
$
35,766

 
$
(33
)
Non-U.S. government and government agency bonds
100,531

 
(3,361
)
 
5,274

 
(12
)
 
105,805

 
(3,373
)
Corporate bonds
4,945

 
(55
)
 

 

 
4,945

 
(55
)
Asset-backed securities
79,623

 
(450
)
 

 

 
79,623

 
(450
)
Mortgage-backed securities
4,758

 
(18
)
 

 

 
4,758

 
(18
)
Total
$
225,623

 
$
(3,917
)
 
$
5,274

 
$
(12
)
 
$
230,897

 
$
(3,929
)
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and government agency bonds
$
66,422

 
$
(127
)
 
$

 
$

 
$
66,422

 
$
(127
)
Non-U.S. government and government agency bonds
78,084

 
(2,859
)
 

 

 
78,084

 
(2,859
)
Corporate bonds
70,443

 
(1,204
)
 

 

 
70,443

 
(1,204
)
Asset-backed securities
49,400

 
(1,351
)
 

 

 
49,400

 
(1,351
)
Mortgage-backed securities
8,478

 
(81
)
 

 

 
8,478

 
(81
)
Total
$
272,827

 
$
(5,622
)
 
$

 
$

 
$
272,827

 
$
(5,622
)
At June 30, 2019, 37 positions out of a total of 99 positions were in an unrealized loss position; however, the unrealized loss was less than 10% for all 99 positions. The unrealized loss position decreased during the six-month period from $5.6 million to $3.9 million. The Company believes that such securities were temporarily impaired at June 30, 2019.
At December 31, 2018, 60 positions out of a total of 73 positions were in an unrealized loss position; however, the unrealized loss was less than 10% for all 73 positions. The decrease in value can be attributed to an increase in interest rates and unfavorable foreign exchange rates for the non-U.S. government agency bonds during the year ended December 31, 2018. The Company believes that such securities were temporarily impaired at December 31, 2018.

19


WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


The amortized cost and fair value of our fixed maturities classified as available for sale, summarized by contractual maturity as of June 30, 2019 and December 31, 2018 are shown in the following tables.
 
June 30, 2019
 
Amortized Cost
 
Estimated Fair Value
 
% of Fair Value
 
($ in thousands)
Due in one year or less
$
4,480

 
$
4,496

 
0.7
%
Due after one year through five years
456,578

 
460,134

 
62.8
%
Due after five years through ten years
107,903

 
107,786

 
14.7
%
Asset-backed securities
142,774

 
142,876

 
19.5
%
Mortgage-backed securities
17,022

 
17,162

 
2.3
%
Total investments, available for sale
$
728,757

 
$
732,454

 
100.0
%
 
December 31, 2018
 
Amortized Cost
 
Estimated Fair Value
 
% of Fair Value
 
($ in thousands)
Due after one year through five years
$
278,443

 
$
276,706

 
70.4
%
Due after five years through ten years
46,353

 
45,275

 
11.5
%
Asset-backed securities
58,369

 
57,090

 
14.5
%
Mortgage-backed securities
14,344

 
14,280

 
3.6
%
Total investments, available for sale
$
397,509

 
$
393,351

 
100.0
%

20


WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


Fair Value Option and Fair Value Through Net Income
The following table summarizes the fair value of the Company’s securities held as at June 30, 2019 and December 31, 2018, classified as fair value through net income or for which the fair value option was elected:
 
Cost or Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
June 30, 2019
($ in thousands)
Term loan investments
$
1,099,970

 
$
4,634

 
$
(61,725
)
 
$
1,042,879

Fixed maturities:
 
 
 
 
 
 
 
Corporate bonds
405,316

 
8,710

 
(25,145
)
 
388,881

U.S. government and government agency bonds
4,500

 

 
(12
)
 
4,488

Asset-backed securities
199,166

 
3,962

 
(4,947
)
 
198,181

Mortgage-backed securities
8,431

 
655

 
(913
)
 
8,173

Non-U.S. government and government agency bonds
10,871

 
52

 
(514
)
 
10,409

Municipal government and government agency bonds
6,636

 
97

 
(2
)
 
6,731

Short-term investments
232,488

 
182

 
(493
)
 
232,177

Other investments
25,162

 

 
(657
)
 
24,505

Equities
54,894

 
7,737

 
(6,107
)
 
56,524

Investments, fair value option
$
2,047,434

 
$
26,029

 
$
(100,515
)
 
$
1,972,948

Fair Value Through Net Income:
 
 
 
 
 
 
 
Equities, fair value through net income (1)
72,623

 
1,573

 
(9,493
)
 
64,703

 
Cost or Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
December 31, 2018
($ in thousands)
Term loan investments
$
1,055,664

 
$
767

 
$
(55,779
)
 
$
1,000,652

Fixed maturities:
 
 
 
 
 
 
 
Corporate bonds
617,013

 
6,468

 
(44,867
)
 
578,614

U.S. government and government agency bonds
113,452

 

 
(2,206
)
 
111,246

Asset-backed securities
174,846

 
673

 
(6,626
)
 
168,893

Mortgage-backed securities
9,122

 

 
(1,241
)
 
7,881

Non-U.S. government and government agency bonds
50,914

 
1

 
(1,874
)
 
49,041

Municipal government and government agency bonds
7,306

 

 
(162
)
 
7,144

Short-term investments
281,959

 
570

 
(397
)
 
282,132

Other investments
50,000

 

 
(238
)
 
49,762

Equities
56,609

 
5,136

 
(5,107
)
 
56,638

Investments, fair value option
$
2,416,885

 
$
13,615

 
$
(118,497
)
 
$
2,312,003

Fair Value Through Net Income:
 
 
 
 
 
 
 
Equities, fair value through net income (1)
41,358

 
2,030

 
(10,375
)
 
33,013

(1) Effective January 1, 2018, the Company adopted new accounting guidance for financial instruments. As a result, equity securities acquired after January 1, 2018 are classified as fair value through net income and are shown separately above.

21


WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


The amortized cost and fair value of our term loans, fixed maturities and short-term investments, excluding securities classified as available for sale, summarized by contractual maturity as of June 30, 2019 and December 31, 2018 are shown in the following tables.
 
June 30, 2019
 
Amortized Cost
 
Estimated Fair Value
 
% of Fair Value
 
($ in thousands)
Due in one year or less
$
222,427

 
$
223,905

 
11.8
%
Due after one year through five years
855,660

 
803,720

 
42.5
%
Due after five years through ten years
615,914

 
592,297

 
31.3
%
Due after ten years
65,780

 
65,643

 
3.5
%
Asset-backed securities
199,166

 
198,181

 
10.5
%
Mortgage-backed securities
8,431

 
8,173

 
0.4
%
Total
$
1,967,378

 
$
1,891,919

 
100.0
%
 
December 31, 2018
 
Amortized Cost
 
Estimated Fair Value
 
% of Fair Value
 
($ in thousands)
Due in one year or less
$
300,554

 
$
300,519

 
13.6
%
Due after one year through five years
1,044,539

 
992,834

 
45.0
%
Due after five years through ten years
777,290

 
731,662

 
33.2
%
Due after ten years
3,925

 
3,814

 
0.2
%
Asset-backed securities
174,846

 
168,893

 
7.6
%
Mortgage-backed securities
9,122

 
7,881

 
0.4
%
Total
$
2,310,276

 
$
2,205,603

 
100.0
%




22


WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


The table below summarizes the credit quality of our total investments as of June 30, 2019 and December 31, 2018, 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, or Kroll Bond Rating Agency, or KBRA, as applicable:
 
Credit Rating (1)
June 30, 2019
Fair Value
 
AAA
 
AA
 
A
 
BBB
 
BB
 
B
 
CCC
 
CC
 
D
 
Not Rated
 
($ in thousands)
Term loan investments
$
1,042,879

 
$

 
$

 
$

 
$

 
$
17,628

 
$
699,166

 
$
253,637

 
$
2,846

 
$
7,054

 
$
62,548

Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
470,616

 

 
28,399

 
70,662

 
52,762

 
25,968

 
87,760

 
165,063

 

 
4,303

 
35,699

U.S. government and government agency bonds
366,314

 

 
366,314

 

 

 

 

 

 

 

 

Asset-backed securities
341,057

 
3,466

 
2,673

 
23,506

 
212,648

 
39,873

 
17,779

 

 

 

 
41,112

Mortgage-backed securities
25,335

 

 

 
600

 
16,562

 
990

 

 

 

 
2,478

 
4,705

Non-U.S. government and government agency bonds
138,145

 
2,580

 
135,565

 

 

 

 

 

 

 
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