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): May 4, 2020
 
https://cdn.kscope.io/033643b382fd6e069b285358a2f9765e-watfordmedresa21.jpg
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. ☒

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









Item 2.02        Results of Operations and Financial Condition

On May 4, 2020, Watford Holdings Ltd. issued a press release reporting its earnings for the quarter ended March 31, 2020. 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 May 4, 2020.

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: May 4, 2020

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


3
Exhibit


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WATFORD REPORTS 2020 FIRST QUARTER RESULTS
PEMBROKE, Bermuda, May 4, 2020 -- (GLOBE NEWSWIRE)-- WATFORD HOLDINGS LTD. (“Watford” or the “Company”) (NASDAQ: WTRE) today reported a net loss of $267.8 million, after $1.2 million of preference dividends, for the three months ended March 31, 2020, compared to net income of $47.6 million, after payment of $4.9 million of preference dividends, for the same period in 2019. Book value per diluted common share was $28.21 at March 31, 2020, a decrease of 35.1% from December 31, 2019. The quarterly results include:
Net loss available to common shareholders of $267.8 million, or $(13.42) per diluted common share, compared to net income of $47.6 million, or $2.10 per diluted common share, for the 2019 first quarter;
Combined ratio of 104.4%, comprised of a 79.0% loss ratio, a 20.3% acquisition expense ratio and a 5.1% general and administrative expense ratio, compared to a combined ratio of 104.1% for the prior year first quarter, comprised of a 75.9% loss ratio, a 23.3% acquisition expense ratio and a 4.9% general and administrative expense ratio;
Net interest income of $27.8 million, a 1.4% yield on average net assets, for the 2020 first quarter, compared to net interest income of $30.4 million and a 1.5% yield on average net assets for the 2019 first quarter;
Net investment loss of $262.7 million, a (13.0)% return on average net assets for the 2020 first quarter, compared to net investment income of $58.4 million and a 2.8% return on average net assets for the 2019 first quarter; and
During the quarter, the Company repurchased 127,744 common shares at an average price of $22.42 per share for an aggregate cost of $2.9 million under its previously announced $50 million share repurchase program. As of March 31, 2020, up to approximately $47.1 million of share repurchases were available under this program.
In addition, on March 11, 2020, the World Health Organization declared a pandemic in relation to the outbreak of the novel coronavirus (COVID-19). The pandemic is causing unprecedented social disruption, global economic volatility, reduced liquidity of capital markets and intervention by various governments around the world.
At this time, there are significant uncertainties surrounding the ultimate number of insurance claims and scope of damage resulting from this pandemic. The Company’s estimates across its insurance and reinsurance lines of business are based on currently available information derived from modeling techniques, preliminary claims information obtained from the Company’s clients and brokers, a review of relevant in-force contracts with potential exposure to the pandemic and estimates of reinsurance recoverables. These estimates include losses only related to claims incurred as of March 31, 2020. Actual losses from these events may vary materially from the estimates due to several factors, including the inherent uncertainties in making such determinations and the evolving nature of this pandemic.





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



Commenting on the 2020 first quarter financial results, Jon Levy, CEO of Watford, said:
“First of all, we would like to acknowledge the challenging times that the COVID-19 pandemic has created, and express how grateful we are to those on the frontlines serving their communities. Watford is also committed to supporting our customers and clients through this stressful period. I would like to thank the broader Watford team for their efforts to deliver the same level of excellence in operations under these extraordinarily difficult circumstances.
As reported in our press release on April 23, 2020, our results for the first quarter were heavily affected by the investment market volatility caused by the economic shutdown mandated by governments around the world. The pandemic has had significant impacts across the globe, and Watford took its share of that impact, although not to a greater extent than anticipated for an event of this magnitude.
Our net loss of $267.8 million for the quarter was driven by a $262.7 million net investment loss. The net investment loss, in turn, was predominantly the result of $285.5 million of unrealized "mark-to-market" losses in our non-investment grade fixed-income portfolio.
Net interest income, a key driver of long-term shareholder value, remained steady and strong at $27.8 million, representing a quarterly yield on net assets of 1.4%.
Our combined ratio for the quarter was 104.4%, and 102.2% when adjusted for other underwriting income and certain corporate and nonrecurring expenses. While the COVID-19 pandemic has created significant areas of uncertainty for the property and casualty insurance industry, the impact on our first quarter underwriting results was not material, as we believe our mix of business is less exposed to the classes of business likely to be most affected.
Insurance and reinsurance market conditions continue to move in a favorable direction and we remain optimistic about our positioning in the marketplace.”




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



Underwriting
The following table summarizes the Company’s underwriting results on a consolidated basis:
 
Three Months Ended March 31,
 
2020
 
2019
 
% Change
 
($ in thousands)
Gross premiums written
$
234,902

 
$
186,689

 
25.8
 %
Net premiums written
186,700

 
145,387

 
28.4
 %
Net premiums earned
140,039

 
146,094

 
(4.1
)%
Underwriting income (loss) (1)
(6,143
)
 
(5,970
)
 
(2.9
)%
 
 
 
 
 
 
 
 
 
 
 
% Point Change
Loss ratio
79.0
%
 
75.9
%
 
3.1
 %
Acquisition expense ratio
20.3
%
 
23.3
%
 
(3.0
)%
General & administrative expense ratio
5.1
%
 
4.9
%
 
0.2
 %
Combined ratio
104.4
%
 
104.1
%
 
0.3
 %
Adjusted combined ratio (2)
102.2
%
 
102.3
%
 
(0.1
)%
(1) Underwriting income (loss) is a non-U.S. GAAP financial measure and is calculated as net premiums earned, less loss and loss adjustment expenses, acquisition expenses and general and administrative expenses. See “Comments on Regulation G” for further discussion, including a reconciliation of underwriting income (loss) to net income (loss) available to common shareholders.
(2) Adjusted combined ratio is a non-U.S. GAAP financial measure and is calculated by dividing the sum of loss and loss adjustment expenses, acquisition expenses and general and administrative expenses, less certain corporate expenses, by the sum of net premiums earned and other underwriting income (loss). See “Comments on Regulation G” for further discussion, including a reconciliation of our adjusted combined ratio to our combined ratio.
The following table provides summary information regarding premiums written and earned by line of business:
 
Three Months Ended March 31,
 
2020
 
2019
 
($ in thousands)
Gross premiums written:
 
 
 
Casualty reinsurance
$
83,818

 
$
75,601

Other specialty reinsurance
36,880

 
24,298

Property catastrophe reinsurance
9,832

 
5,992

Insurance programs and coinsurance
104,372

 
80,798

Total
$
234,902

 
$
186,689

 
 
 
 
Net premiums written:
 
 
 
Casualty reinsurance
$
83,667

 
$
75,065

Other specialty reinsurance
35,484

 
23,182

Property catastrophe reinsurance
9,832

 
5,982

Insurance programs and coinsurance
57,717

 
41,158

Total
$
186,700

 
$
145,387

 
 
 
 
Net premiums earned:
 
 
 
Casualty reinsurance
$
52,765

 
$
63,313

Other specialty reinsurance
35,364

 
44,561

Property catastrophe reinsurance
4,884

 
2,971

Insurance programs and coinsurance
47,026

 
35,249

Total
$
140,039

 
$
146,094


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



The following table shows the components of our loss and loss adjustment expenses for the three months ended March 31, 2020 and 2019:
 
Three Months Ended March 31,
 
2020
 
2019
 
Loss and Loss Adjustment Expenses
 
% of Earned Premiums
 
Loss and Loss Adjustment Expenses
 
% of Earned Premiums
 
($ in thousands)
Current year
$
110,856

 
79.1
 %
 
$
110,901

 
75.9
%
Prior year development (favorable)/adverse
(180
)
 
(0.1
)%
 
(51
)
 
%
Loss and loss adjustment expenses
$
110,676

 
79.0
 %
 
$
110,850

 
75.9
%
Results for the three months ended March 31, 2020 versus 2019:
Gross and net premiums written in the 2020 first quarter were 25.8% and 28.4% higher, respectively, than the 2019 first quarter. The increase in gross and net premiums written reflect growth across all lines of business. Casualty reinsurance and other specialty reinsurance premiums increased over the prior year quarter, primarily due to increased personal and commercial auto writings.
Net premiums earned in the 2020 first quarter were 4.1% lower than the 2019 first quarter. The decrease in premiums reflected a non-renewal of one multi-line quota share contract within casualty reinsurance and a non-recurring exposure within other specialty reinsurance earned in the first quarter of 2019. This was partially offset by increased writings in insurance programs and coinsurance, and, to a lesser extent, property catastrophe reinsurance.
The loss ratio was 79.0% in the 2020 first quarter compared to 75.9% in the 2019 first quarter. The acquisition expense ratio was 20.3% in the 2020 first quarter, compared to 23.3% in the 2019 first quarter. In the 2020 first quarter, the increase in loss ratio and corresponding decrease in acquisition expense ratio were driven by losses incurred related to COVID-19 and impacted other specialty reinsurance business.  A portion of this increase in losses is offset by loss sensitive commission decreases, which are reflected as benefits to the acquisition ratio. Other movements reflect changes in mix and the type of business. The prior year loss reserve development for both the 2020 and 2019 first quarters was essentially flat.
The general and administrative expense ratio was 5.1% in the 2020 first quarter, compared to 4.9% in the 2019 first quarter. The 0.2 point increase versus the prior year first quarter was attributable to ongoing public company expenses. Removing certain corporate expenses, our adjusted general and administrative expense ratio was 3.0% in the 2020 first quarter compared to 3.5% in the 2019 first quarter.







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



Investments
The following table summarizes the Company’s key investment returns on a consolidated basis:
 
Three Months Ended March 31,
 
2020
 
2019
 
($ in thousands)
Interest income
$
37,824

 
$
43,141

Investment management fees - related parties
(4,352
)
 
(4,409
)
Borrowing and miscellaneous other investment expenses
(5,669
)
 
(8,298
)
Net interest income
27,803

 
30,434

Realized gains (losses) on investments
(5,046
)
 
1,282

Unrealized gains (losses) on investments
(285,456
)
 
32,438

Investment performance fees - related parties

 
(5,800
)
Net investment income (loss)
$
(262,699
)
 
$
58,354

 
 
 
 
Unrealized gains on investments (balance sheet)
$
40,525

 
$
32,106

Unrealized losses on investments (balance sheet)
(413,791
)
 
(111,535
)
Net unrealized gains (losses) on investments (balance sheet)
$
(373,266
)
 
$
(79,429
)
 
 
 
 
Net interest income yield on average net assets (1)
1.4
 %
 
1.5
%
Non-investment grade portfolio (1)
1.7
 %
 
1.9
%
Investment grade portfolio (1)
0.5
 %
 
0.6
%
Net investment income return on average net assets (1)
(13.0
)%
 
2.8
%
Non-investment grade portfolio (1)
(17.4
)%
 
3.4
%
Investment grade portfolio (1)
0.8
 %
 
1.1
%
Net investment income return on average total investments (excluding accrued investment income) (2)
(10.1
)%
 
2.1
%
Non-investment grade portfolio (2)
(14.9
)%
 
2.7
%
Investment grade portfolio (2)
0.8
 %
 
1.1
%
(1) Net interest income yield on average net assets and net investment income return on average net assets are calculated by dividing net interest income, and net investment income (loss), respectively, by average net assets. Net assets is calculated as the sum of total investments, accrued investment income and receivables for securities sold, less revolving credit agreement borrowings, payable for securities purchased and payable for securities sold short. For the three-month period, average net assets is calculated using the averages of each quarterly period. However, for the investment grade portfolio component of these returns, revolving credit agreement borrowings are not subtracted from the net assets calculation. The separate components of these returns (non-investment grade portfolio and investment grade portfolio) are non-U.S. GAAP financial measures. See “Comments on Regulation G” for further discussion, including a reconciliation of these components of our net interest income yield on average net assets and net investment income return on average net assets.
(2) Net investment income return on average total investments (excluding accrued investment income) is calculated by dividing net investment income by average total investments. For the three-month period, average total investments is calculated using the averages of each quarterly period. The separate components of these returns (non-investment grade portfolio and investment grade portfolio) are non-U.S. GAAP financial measures. See “Comments on Regulation G” for further discussion, including a reconciliation of these components of our net investment income return on average total investments (excluding accrued investment income).



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



The following tables summarize the composition of the Company's non-investment grade and investment grade portfolios by sector as of March 31, 2020 and December 31, 2019:
 
March 31, 2020
 
Total
 
Financials
 
Health Care
 
Technology
 
Consumer Services
 
Industrials
 
Consumer Goods
 
Oil & Gas
 
All Other (1)
 
($ in thousands)
Non-Investment Grade Portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Term loan investments
$
906,999

 
$
190,535

 
$
195,084

 
$
199,837

 
$
98,518

 
$
89,778

 
$
40,415

 
$
32,049

 
$
60,783

Corporate bonds
240,570

 
24,927

 
43,028

 
15,702

 
49,761

 
27,585

 
19,947

 
18,522

 
41,098

Equities - sector specific
95,112

 
59,714

 
27,174

 
5,868

 

 
1,026

 

 
242

 
1,088

Short-term investments - sector specific
47,703

 
7,703

 

 

 

 

 

 
40,000

 

Subtotal
1,290,384

 
282,879

 
265,286

 
221,407

 
148,279

 
118,389

 
60,362

 
90,813

 
102,969

Equities - non-sector specific
26,148

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments - non-sector specific
222,065

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
140,613

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other investments
30,682

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
8,529

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Non-Investment Grade Portfolio
$
1,718,421

 
$
282,879

 
$
265,286

 
$
221,407

 
$
148,279

 
$
118,389

 
$
60,362

 
$
90,813

 
$
102,969

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Grade Portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
167,570

 
$
62,046

 
$
13,752

 
$
12,135

 
$
15,481

 
$
14,133

 
$
34,718

 
$
7,346

 
$
7,959

Short-term investments
74,093

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

U.S. government and government agency bonds
265,423

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-U.S. government and government agency bonds
149,858

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
113,583

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
21,785

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal government and government agency bonds
2,073

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Investment Grade Portfolio
$
794,385

 
$
62,046

 
$
13,752

 
$
12,135

 
$
15,481

 
$
14,133

 
$
34,718

 
$
7,346

 
$
7,959

Total Investments
$
2,512,806

 
$
344,925

 
$
279,038

 
$
233,542

 
$
163,760

 
$
132,522

 
$
95,080

 
$
98,159

 
$
110,928

(1) Includes telecommunications, utilities and basic materials.



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



 
December 31, 2019
 
Total
 
Financials
 
Health Care
 
Technology
 
Consumer Services
 
Industrials
 
Consumer Goods
 
Oil & Gas
 
All Other (1)
 
($ in thousands)
Non-Investment Grade Portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Term loan investments
$
1,061,934

 
$
212,800

 
$
221,982

 
$
232,659

 
$
121,434

 
$
111,912

 
$
46,827

 
$
52,200

 
$
62,120

Corporate bonds
213,841

 
17,547

 
19,160

 
10,972

 
28,144

 
13,822

 
23,491

 
27,632

 
73,073

Equities - sector specific
101,551

 
55,946

 
30,640

 
11,263

 

 
1,283

 

 
1,040

 
1,379

Short-term investments - sector specific
16,620

 
8,261

 

 
3,030

 

 
5,329

 

 

 

Subtotal
1,393,946

 
294,554

 
271,782

 
257,924

 
149,578

 
132,346

 
70,318

 
80,872

 
136,572

Equities - non-sector specific
23,586

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments - non-sector specific
215,816

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
190,738

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other investments
30,461

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
7,706

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Non-Investment Grade Portfolio
$
1,862,253

 
$
294,554

 
$
271,782

 
$
257,924

 
$
149,578

 
$
132,346

 
$
70,318

 
$
80,872

 
$
136,572

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Grade Portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
158,632

 
$
72,707

 
$
12,087

 
$
8,035

 
$
11,752

 
$
10,548

 
$
32,046

 
$
5,734

 
$
5,723

Short-term investments
96,867

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

U.S. government and government agency bonds
285,609

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-U.S. government and government agency bonds
133,409

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
145,433

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
24,750

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal government and government agency bonds
2,184

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Investment Grade Portfolio
$
846,884

 
$
72,707

 
$
12,087

 
$
8,035

 
$
11,752

 
$
10,548

 
$
32,046

 
$
5,734

 
$
5,723

Total Investments
$
2,709,137

 
$
367,261

 
$
283,869

 
$
265,959

 
$
161,330

 
$
142,894

 
$
102,364

 
$
86,606

 
$
142,295

(1) Includes telecommunications, utilities and basic materials.





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



The table below summarizes the credit quality of the Company's non-investment grade and investment grade portfolios as of March 31, 2020 and December 31, 2019, as rated by Standard & Poor’s Financial Services, LLC, or Standard & Poor’s, Moody’s Investors Service, or Moody’s, Fitch Ratings Inc., or Fitch, Kroll Bond Rating Agency, or KBRA, or DBRS Morningstar, or DBRS, as applicable:
 
Credit Rating (1)
March 31, 2020
Fair Value
 
AAA
 
AA
 
A
 
BBB
 
BB
 
B
 
CCC
 
CC
 
C
 
D
 
Not Rated
 
($ in thousands)
Non-Investment Grade Portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Term loan investments
$
906,999

 
$

 
$

 
$

 
$

 
$
10,277

 
$
650,028

 
$
161,307

 
$
2,823

 
$
1,314

 
$
1,590

 
$
79,660

Corporate bonds
240,570

 

 

 

 
5,933

 
14,447

 
84,955

 
118,847

 
1,872

 

 
3,699

 
10,817

Asset-backed securities
140,613

 

 

 
3,339

 
85,572

 
19,727

 
7,395

 
1,418

 

 

 

 
23,162

Mortgage-backed securities
8,529

 

 

 

 

 
1,190

 

 

 

 

 
2,552

 
4,787

Short-term investments
269,768

 
26,024

 
133,548

 
402

 
62,091

 

 
40,000

 

 

 

 

 
7,703

Total fixed income instruments and short-term investments
1,566,479

 
26,024

 
133,548

 
3,741

 
153,596

 
45,641

 
782,378

 
281,572

 
4,695

 
1,314

 
7,841

 
126,129

Other Investments
30,682

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equities
121,260

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Non-Investment Grade Portfolio
$
1,718,421

 
$
26,024

 
$
133,548

 
$
3,741

 
$
153,596

 
$
45,641

 
$
782,378

 
$
281,572

 
$
4,695

 
$
1,314

 
$
7,841

 
$
126,129

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Grade Portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
167,570

 
$

 
$
34,647

 
$
76,063

 
$
52,085

 
$
4,775

 
$

 
$

 
$

 
$

 
$

 
$

U.S. government and government agency bonds
265,423

 

 
265,423

 

 

 

 

 

 

 

 

 

Asset-backed securities
113,583

 
1,628

 

 
15,980

 
95,975

 

 

 

 

 

 

 

Mortgage-backed securities
21,785

 

 

 
4,600

 
17,185

 

 

 

 

 

 

 

Non-U.S. government and government agency bonds
149,858

 

 
149,858

 

 

 

 

 

 

 

 

 

Municipal government and government agency bonds
2,073

 
1,023

 
570

 
480

 

 

 

 

 

 

 

 

Short-term investments
74,093

 
4,150

 
21,239

 

 
48,704

 

 

 

 

 

 

 

Total Investment Grade Portfolio
$
794,385

 
$
6,801

 
$
471,737

 
$
97,123

 
$
213,949

 
$
4,775

 
$

 
$

 
$

 
$

 
$

 
$

Total
$
2,512,806

 
$
32,825

 
$
605,285

 
$
100,864

 
$
367,545

 
$
50,416

 
$
782,378

 
$
281,572

 
$
4,695

 
$
1,314

 
$
7,841

 
$
126,129

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


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



 
Credit Rating (1)
December 31, 2019
Fair Value
 
AAA
 
AA
 
A
 
BBB
 
BB
 
B
 
CCC
 
CC
 
C
 
D
 
Not Rated
 
($ in thousands)
Non-Investment Grade Portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Term loan investments
$
1,061,934

 
$

 
$

 
$

 
$

 
$
9,617

 
$
761,168

 
$
215,909

 
$
6,823

 
$
2,119

 
$

 
$
66,298

Corporate bonds
213,841

 

 

 

 

 
9,003

 
58,345

 
135,613

 

 

 

 
10,880

Asset-backed securities
190,738

 

 

 
4,002

 
105,706

 
29,695

 
18,381

 

 

 

 

 
32,954

Mortgage-backed securities
7,706

 

 

 

 

 
976

 

 

 

 

 
2,497

 
4,233

Short-term investments
232,436

 

 
116,805

 
34,903

 
64,108

 

 

 
8,359

 

 

 

 
8,261

Total fixed income instruments and short-term investments
1,706,655

 

 
116,805

 
38,905

 
169,814

 
49,291

 
837,894

 
359,881

 
6,823

 
2,119

 
2,497

 
122,626

Other Investments
30,461

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equities
125,137

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Non-Investment Grade Portfolio
$
1,862,253

 
$

 
$
116,805

 
$
38,905

 
$
169,814

 
$
49,291

 
$
837,894

 
$
359,881

 
$
6,823

 
$
2,119

 
$
2,497

 
$
122,626

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Grade Portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
158,632

 
$

 
$
36,128

 
$
81,401

 
$
41,103

 
$

 
$

 
$

 
$

 
$

 
$

 
$

U.S. government and government agency bonds
285,609

 

 
285,609

 

 

 

 

 

 

 

 

 

Asset-backed securities
145,433

 
2,006

 

 
25,177

 
118,250

 

 

 

 

 

 

 

Mortgage-backed securities
24,750

 

 

 
1,100

 
23,650

 

 

 

 

 

 

 

Non-U.S. government and government agency bonds
133,409

 

 
132,460

 

 
949

 

 

 

 

 

 

 

Municipal government and government agency bonds
2,184

 
1,135

 
573

 
476

 

 

 

 

 

 

 

 

Short-term investments
96,867

 
25,783

 
20,037

 

 
51,047

 

 

 

 

 

 

 

Total Investment Grade Portfolio
$
846,884

 
$
28,924

 
$
474,807

 
$
108,154

 
$
234,999

 
$

 
$

 
$

 
$

 
$

 
$

 
$

Total
$
2,709,137

 
$
28,924

 
$
591,612

 
$
147,059

 
$
404,813

 
$
49,291

 
$
837,894

 
$
359,881

 
$
6,823

 
$
2,119

 
$
2,497

 
$
122,626

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


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



Corporate Function
The Company has a corporate function that includes general and administrative expenses related to corporate activities, interest expense, net foreign exchange gains (losses), income tax expense and items related to the Company’s contingently redeemable preference shares.
The Company incurred an interest expense of $2.9 million for the three months ended March 31, 2020, in relation to the Company’s 6.5% senior notes issued on July 2, 2019. Interest is paid semi-annually in arrears on January 2 and July 2.
Preference dividends were $1.2 million and $4.9 million for the three months ended March 31, 2020 and 2019, respectively.
During the quarter, the Company repurchased 127,744 common shares at an average price of $22.42 per share for an aggregate cost of $2.9 million. As of March 31, 2020, up to approximately $47.1 million of share repurchases were available under the program. In light of COVID-19 and the uncertain economic outlook, the Company has temporarily halted repurchases under the program.
Conference Call
The Company will hold a conference call on Tuesday, May 5, 2020 at 1:00 p.m. Eastern time to discuss its 2020 first quarter results. The Company also plans to discuss how the COVID-19 pandemic could impact its underwriting and investment portfolios in future periods and certain actions the Company has taken in response to the crisis. A live webcast of this call will be available via the Investors section of the Company’s website at http://investors.watfordre.com. A replay of the conference call will also be available via the Investors section of the Company’s website beginning on May 6, 2020.
About Watford Holdings Ltd.
Watford Holdings Ltd. is a global property and casualty insurance and reinsurance company with approximately $788.9 million in capital as of March 31, 2020, comprised of: $172.5 million of senior notes, $52.3 million of contingently redeemable preference shares and $564.1 million of common shareholders’ equity, with operations in Bermuda, the United States and Europe. Its operating subsidiaries have been assigned financial strength ratings of “A-” (Excellent) from A.M. Best and “A” from Kroll Bond Rating Agency. On May 1, 2020, A.M. Best announced that it had placed under review with negative implications the financial strength ratings of our operating subsidiaries.

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



CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
(Unaudited)
 
 
 
March 31,
 
December 31,
 
2020
 
2019
Assets
($ in thousands)
Investments:
 
 
 
Term loans, fair value option (Amortized cost: $1,113,510 and $1,113,212)
$
906,999

 
$
1,061,934

Fixed maturities, fair value option (Amortized cost: $504,750 and $432,576)
392,452

 
416,594

Short-term investments, fair value option (Cost: $348,059 and $325,542)
343,861

 
329,303

Equity securities, fair value option
58,091

 
59,799

Other investments, fair value option
30,682

 
30,461

Investments, fair value option
1,732,085

 
1,898,091

Fixed maturities, available for sale (Amortized cost: $749,835 and $739,456)
717,552

 
745,708

Equity securities, fair value through net income
63,169

 
65,338

Total investments
2,512,806

 
2,709,137

Cash and cash equivalents
96,580

 
102,437

Accrued investment income
16,344

 
14,025

Premiums receivable
281,541

 
273,657

Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses
197,458

 
170,974

Prepaid reinsurance premiums
128,570

 
132,577

Deferred acquisition costs, net
71,402

 
64,044

Receivable for securities sold
26,789

 
16,288

Intangible assets
7,650

 
7,650

Funds held by reinsurers
40,520

 
42,505

Other assets
27,287

 
17,562

Total assets
$
3,406,947

 
$
3,550,856

Liabilities
 
 
 
Reserve for losses and loss adjustment expenses
$
1,300,249

 
$
1,263,628

Unearned premiums
478,663

 
438,907

Losses payable
46,424

 
61,314

Reinsurance balances payable
71,204

 
77,066

Payable for securities purchased
63,829

 
18,180

Payable for securities sold short
30,076

 
66,257

Revolving credit agreement borrowings
576,486

 
484,287

Senior notes
172,486

 
172,418

Amounts due to affiliates
4,168

 
4,467

Investment management and performance fees payable
5,428

 
17,762

Other liabilities
41,552

 
21,912

Total liabilities
$
2,790,565

 
$
2,626,198

Commitments and contingencies
 
 
 
Contingently redeemable preference shares
52,328

 
52,305

Shareholders’ equity
 
 
 
Common shares ($0.01 par; shares authorized: 120 million; shares issued: 22,703,170 and 22,692,300)
227

 
227

Additional paid-in capital
898,693

 
898,083

Retained earnings (deficit)
(224,737
)
 
43,470

Accumulated other comprehensive income (loss)
(32,206
)
 
5,629

Common shares held in treasury, at cost (shares: 2,917,149 and 2,789,405)
(77,923
)
 
(75,056
)
Total shareholders’ equity
564,054

 
872,353

Total liabilities, contingently redeemable preference shares and shareholders’ equity
$
3,406,947

 
$
3,550,856



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



CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
 
(Unaudited)
 
Three Months Ended March 31,
 
2020
 
2019
Revenues
($ in thousands except share and per share data)
Gross premiums written
$
234,902

 
$
186,689

Gross premiums ceded
(48,202
)
 
(41,302
)
Net premiums written
186,700

 
145,387

Change in unearned premiums
(46,661
)
 
707

Net premiums earned
140,039

 
146,094

Other underwriting income (loss)
133

 
592

Interest income
37,824

 
43,141

Investment management fees - related parties
(4,352
)
 
(4,409
)
Borrowing and miscellaneous other investment expenses
(5,669
)
 
(8,298
)
Net interest income
27,803

 
30,434

Realized and unrealized gains (losses) on investments
(290,502
)
 
33,720

Investment performance fees - related parties

 
(5,800
)
Net investment income (loss)
(262,699
)
 
58,354

Total revenues
(122,527
)
 
205,040

Expenses
 
 
 
Loss and loss adjustment expenses
(110,676
)
 
(110,850
)
Acquisition expenses
(28,367
)
 
(33,974
)
General and administrative expenses
(7,139
)
 
(7,240
)
Interest expense
(2,912
)
 

Net foreign exchange gains (losses)
5,013

 
(437
)
Total expenses
(144,081
)
 
(152,501
)
Income (loss) before income taxes
(266,608
)
 
52,539

Income tax expense

 

Net income (loss) before preference dividends
(266,608
)
 
52,539

Preference dividends
(1,171
)
 
(4,907
)
Net income (loss) available to common shareholders
$
(267,779
)
 
$
47,632

 
 
 
 
Other comprehensive income (loss) net of income tax:
 
 
 
Available-for-sale investments:
 
 
 
Unrealized holding gains (losses) arising during the period
(28,431
)
 
3,915

Unrealized foreign currency gains (losses) arising during the period
(7,699
)
 
1,130

Credit loss recognized in net income (loss)
563

 

Reclassification of net realized (gains) losses, net of income taxes, included in net income (loss)
(2,405
)
 
(229
)
Unrealized holding gains (losses) of available for sale investments
(37,972
)
 
4,816

Foreign currency translation adjustments
137

 
(165
)
Other comprehensive income (loss) net of income tax
(37,835
)
 
4,651

Comprehensive income (loss)
(305,614
)
 
52,283

Earnings (loss) per share:
 
 
 
Basic and diluted
$
(13.42
)
 
$
2.10

Weighted average number of ordinary shares used in the determination of earnings (loss) per share:
 
 
 
Basic and diluted
19,951,932

 
22,682,875


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



 
Three Months Ended March 31,
 
2020
 
2019
Numerator:
($ in thousands except share and per share data)
Net income (loss) before preference dividends
$
(266,608
)
 
$
52,539

Preference dividends
(1,171
)
 
(4,907
)
Net income (loss) available to common shareholders
$
(267,779
)
 
$
47,632

Denominator:
 
 
 
Weighted average common shares outstanding - basic and diluted (1)
19,951,932

 
22,682,875

Earnings (loss) per common share:
 
 
 
Basic and diluted
$
(13.42
)
 
$
2.10

(1) The weighted average non-vested restricted share units are excluded from the calculation of diluted weighted average common shares outstanding for the three months ended March 31, 2020, due to a net loss reported.
 
March 31, 2020
 
December 31, 2019
 
September 30, 2019
 
June 30, 2019
 
March 31, 2019
Numerator:
($ in thousands except share and per share data)
Total shareholders’ equity
$
564,054

 
$
872,353

 
$
960,773

 
$
961,296

 
$
941,891

Denominator:
 
 
 
 
 
 
 
 
 
Common shares outstanding - basic
19,863,328

 
19,976,397

 
22,765,802

 
22,765,802

 
22,682,875

Effect of dilutive common share equivalents:
 
 
 
 
 
 
 
 
 
Non-vested restricted share units (1)
131,277

 
82,360

 
82,360

 
82,360

 

Common shares outstanding - diluted
19,994,605

 
20,058,757

 
22,848,162

 
22,848,162

 
22,682,875

 
 
 
 
 
 
 
 
 
 
Book value per common share
$28.40
 
$43.67
 
$42.20
 
$42.23
 
$41.52
Book value per diluted common share
$28.21
 
$43.49
 
$42.05
 
$42.07
 
$41.52
(1) During the first quarter of 2020, the Company granted 63,591 restricted share units and common shares to certain employees and directors, 48,917 of which are non-vested as of March 31, 2020. During the second quarter of 2019, the Company granted 165,287 restricted share units and common shares to certain employees and directors, 82,360 of which are non-vested as of March 31, 2020.

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



Comments on Regulation G
Throughout this release, the Company presents its operations in the way it believes will be the most meaningful and useful to investors, analysts, rating agencies and others who use the Company’s financial information in evaluating the performance of the Company and that investors and such other persons benefit from having a consistent basis for comparison between quarters and for comparison with other companies within the industry. These measures may not, however, be comparable to similarly titled measures used by companies outside of the insurance industry. Investors are cautioned not to place undue reliance on these non-U.S. GAAP financial measures in assessing the Company’s overall financial performance.
This presentation includes the use of “underwriting income (loss)” (which is defined as net premiums earned less loss and loss adjustment expenses, acquisition expenses and general and administrative expenses), “adjusted underwriting income (loss)” (which is defined as underwriting income (loss) plus other underwriting income (loss) less certain corporate expenses), and “adjusted combined ratio” (which is calculated by dividing the sum of loss and loss adjustment expenses, acquisition expenses and general and administrative expenses, less certain corporate expenses, by the sum of net premiums earned and other underwriting income (loss)). Certain corporate expenses are generally comprised of non-recurring costs of the holding company, such as costs associated with the initial setup of subsidiaries, as well as costs associated with the ongoing operations of the holding company such as compensation of certain executives.
The presentation of underwriting income (loss), adjusted underwriting income (loss) and the adjusted combined ratio are non-U.S. GAAP financial measures as defined in Regulation G. The reconciliation of such measures to net income (loss) available to common shareholders (the most directly comparable U.S. GAAP financial measure) in accordance with Regulation G is included on the following pages of this release.
Underwriting income (loss) is useful in evaluating our underwriting performance, without regard to other underwriting income (losses), net investment income (losses), net foreign exchange gains (losses), interest expense, income tax expenses and preference dividends, and adjusted underwriting income (loss) is useful in evaluating our underwriting performance, without regard to net investment income (losses), net foreign exchange gains (losses), interest expense, income tax expenses, preference dividends and certain corporate expenses, and the adjusted combined ratio is a key indicator of our profitability, without regard to certain corporate expenses.  The Company believes that preference dividends, income tax expense, foreign exchange gains (losses), interest expense, net investment income (loss), other underwriting income (loss) and certain corporate expenses in any particular period are not indicative of the performance of, or trends in, the Company’s underwriting performance. Although preference dividends, income tax expense, foreign exchange gains (losses), interest expense, net investment income (loss) and other underwriting income (loss) are an integral part of the Company’s operations, the decision to realize investment gains or losses, the recognition of the change in the carrying value of investments accounted for using the fair value option in net realized gains or losses, and the recognition of foreign exchange gains or losses are independent of the underwriting process and result, in large part, from general economic and financial market conditions. Furthermore, certain users of the Company’s financial information believe that, for many companies, the timing of the realization of investment gains or losses is largely opportunistic. The Company believes that certain corporate expenses, due to their non-recurring nature, are not indicative of the performance of, or trends in, the Company’s business performance. Due to these reasons, the Company excludes preference dividends, income tax expense, foreign exchange gains (losses), interest expense, net investment income (loss), other underwriting income (loss) from the calculation of underwriting income (loss), and excludes preference dividends, income tax expense, foreign exchange gains (losses), interest expense, net investment income (loss) and certain corporate expenses from the calculation of adjusted underwriting income (loss) and the adjusted combined ratio.

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



The Company believes that showing underwriting income (loss), adjusted underwriting income (loss) and the adjusted combined ratio exclusive of the items referred to above reflects the underlying fundamentals of the Company’s business since the Company evaluates the performance of its business using underwriting income (loss), adjusted underwriting income (loss) and the adjusted combined ratio. The Company believes that this presentation enables investors and other users of the Company’s financial information to analyze the Company’s performance in a manner similar to how the Company’s management analyzes performance. The Company also believes that this measure follows industry practice and, therefore, allows the users of the Company’s financial information to compare the Company’s performance with its industry peer group. The Company believes that the equity analysts and certain rating agencies, which follow the Company and the insurance industry as a whole generally exclude these items from their analysis for the same reasons.
This presentation also includes the non-investment grade portfolio and investment grade portfolio components of our investment returns: “net interest income yield on average net assets” (calculated as net interest income divided by average net assets), “net investment income return on average total investments (excluding accrued investment income)” (calculated as net investment income divided by average total investments), and “net investment income return on average net assets” (calculated as net investment income divided by average net assets). Net assets is calculated as the sum of total investments, accrued investment income and receivables for securities sold, less revolving credit agreement borrowings, payable for securities purchased and payables for securities sold short. For the three-month period, average net assets is calculated using the averages of each quarterly period. However, for the investment grade portfolio component of these returns, the impact of the revolving credit agreement borrowings is no