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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 March 31, 2020
OR

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

Commission file number: 001-38788
https://cdn.kscope.io/ac7598f27437ec341568ea7a76c051e1-watfordmedresa20.jpg
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 May 11, 2020, there were 19,886,979 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 12.6% of our outstanding common shares as of March 31, 2020;
•
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;
•
“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;
•
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;
•
“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 Re” refers to Watford Re Ltd., a Bermuda domiciled insurance company and a wholly-owned subsidiary of our company;
•
“Watford Trust” refers to Watford Asset Trust I, a statutory trust organized under the laws of the State of Delaware;
•
“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, including the recent announcements by A.M. Best Company, or A.M. Best, that it has placed under review with negative implications our financial strength and credit ratings and Kroll Bond Rating Agency, or KBRA, that it has placed on watch our financial strength and credit ratings;
•
our dependence on key executives and inability to attract qualified personnel, or the potential loss of suitably qualified personnel as a result of Bermuda employment and immigration restrictions;
•
our dependence on letter of credit facilities and borrowing 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;

3


•
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;
•
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;
•
our ability to complete acquisitions and integrate businesses successfully;
•
adverse general economic and market conditions, including those caused by pandemics, including the current global pandemic related to the novel coronavirus, or COVID-19, and government actions in response thereto; and
•
the other matters set forth under Item 1A “Risk factors,” Item 7 “Management’s discussion and analysis of financial condition and results of operations,” and other sections of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, Part II Item 1A “Risk factors” and Part I Item 2 “Management’s discussion and analysis of financial condition and results of operations” of this Form 10-Q as well as the other factors set forth in the Company’s other documents on file with the SEC, and management’s response to any of the aforementioned factors.
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
 
March 31, 2020 (unaudited) and December 31, 2019
 
 
 
For the three months ended March 31, 2020 and 2019 (unaudited)
 
 
 
For the three months ended March 31, 2020 and 2019 (unaudited)
 
 
 
For the three months ended March 31, 2020 and 2019 (unaudited)
 
 
 
For the three months ended March 31,2020 and 2019 (unaudited)
 
 
Notes to the Consolidated Financial Statements (unaudited)
 



5

 
WATFORD HOLDINGS LTD.
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
 
(Unaudited)
 
 
 
March 31,
 
December 31,
 
2020
 
2019
Assets
 
 
 
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 (1)
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 (1)
2,512,806

 
2,709,137

Cash and cash equivalents
96,580

 
102,437

Accrued investment income
16,344

 
14,025

Premiums receivable (1)
281,541

 
273,657

Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses (1)
197,458

 
170,974

Prepaid reinsurance premiums (1)
128,570

 
132,577

Deferred acquisition costs, net (1)
71,402

 
64,044

Receivable for securities sold
26,789

 
16,288

Intangible assets
7,650

 
7,650

Funds held by reinsurers (1)
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)
$
1,300,249

 
$
1,263,628

Unearned premiums (1)
478,663

 
438,907

Losses payable (1)
46,424

 
61,314

Reinsurance balances payable (1)
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 (1)
172,486

 
172,418

Amounts due to affiliates (1)
4,168

 
4,467

Investment management and performance fees payable (1)
5,428

 
17,762

Other liabilities (1)
41,552

 
21,912

Total liabilities
$
2,790,565

 
$
2,626,198

Commitments and contingencies

 

Contingently redeemable preference shares (1)
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

(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)
 
Three Months Ended March 31,
 
2020
 
2019
Revenues
 
 
 
Gross premiums written (1)
$
234,902

 
$
186,689

Gross premiums ceded (1)
(48,202
)
 
(41,302
)
Net premiums written
186,700

 
145,387

Change in unearned premiums (1)
(46,661
)
 
707

Net premiums earned (1)
140,039

 
146,094

Other underwriting income (loss)
133

 
592

Interest income
37,824

 
43,141

Investment management fees - related parties (1)
(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 (1)
—

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

Total revenues
(122,527
)
 
205,040

 
 
 
 
Expenses
 
 
 
Loss and loss adjustment expenses (1)
(110,676
)
 
(110,850
)
Acquisition expenses (1)
(28,367
)
 
(33,974
)
General and administrative expenses (1)
(7,139
)
 
(7,240
)
Interest expense (1)
(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)
(1,171
)
 
(4,907
)
Net income (loss) available to common shareholders
$
(267,779
)
 
$
47,632

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

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

 
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)
 
Three Months Ended March 31,
 
2020
 
2019
Comprehensive income (loss)
 
 
 
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 year
(28,431
)
 
3,915

Unrealized foreign currency gains (losses) arising during the year
(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


See Notes to Consolidated Financial Statements
8

WATFORD HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(U.S. dollars in thousands)
 
(Unaudited)
 
Three Months Ended March 31,
 
2020
 
2019
Common shares
 
 
 
Balance at beginning of period
$
227

 
$
227

Common shares issued
—

 
—

Balance at end of period
227

 
227

 
 
 
 
Additional paid-in capital
 
 
 
Balance at beginning of period
898,083

 
895,386

Common shares issued under share plans
250

 
—

Share-based compensation
360

 
—

Balance at end of period
898,693

 
895,386

 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
Balance at beginning of period
5,629

 
(4,730
)
Unrealized holding gains (losses) of available for sale investments:
 
 
 
Balance at beginning of period
6,252

 
(4,158
)
Unrealized holding gains (losses) of available for sale investments, net of reclassification adjustments
(37,972
)
 
4,816

Balance at end of period
(31,720
)
 
658

Currency translation adjustment:
 
 
 
Balance at beginning of period
(623
)
 
(572
)
Currency translation adjustment
137

 
(165
)
Balance at end of period
(486
)
 
(737
)
Balance at end of period
(32,206
)
 
(79
)
 
 
 
 
Common shares held in treasury, at cost
 
 
 
Balance at beginning of period
(75,056
)
 
—

Shares repurchased for treasury
(2,867
)
 
—

Balance at end of period
(77,923
)
 
—

 
 
 
 
Retained earnings (deficit)
 
 
 
Balance at beginning of period
43,470

 
(1,275
)
Cumulative effect of adoption of updated accounting guidance for credit losses at January 1, 2020
(428
)
 
—

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

Preference share dividends paid and accrued
(1,171
)
 
(4,907
)
Balance at end of period
(224,737
)
 
46,357

Total shareholders’ equity
$
564,054

 
$
941,891


See Notes to Consolidated Financial Statements
9

WATFORD HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
 
(Unaudited)
 
Three Months Ended March 31,
 
2020
 
2019
Operating Activities
 
 
 
Net income (loss) before preference dividends
$
(266,608
)
 
$
52,539

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
Net realized and unrealized (gains) losses on investments
290,502

 
(33,720
)
Amortization of fixed assets
1

 
38

Share-based compensation
610

 
—

Changes in:
 
 
 
Accrued investment income
(2,329
)
 
2,121

Premiums receivable
(16,272
)
 
(22,686
)
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses
(23,069
)
 
(16,703
)
Prepaid reinsurance premiums
4,007

 
(11,374
)
Deferred acquisition costs, net
(7,995
)
 
471

Reserve for losses and loss adjustment expenses
60,178

 
67,964

Unearned premiums
42,654

 
10,667

Reinsurance balances payable
(6,901
)
 
6,069

Funds held with reinsurers
(2,868
)
 
598

Other liabilities
(27,662
)
 
18,353

Other items
(19,673
)
 
(4,031
)
Net Cash Provided By Operating Activities
24,575

 
70,306

Investing Activities
 
 
 
Purchase of term loans
(86,702
)
 
(72,168
)
Purchase of fixed maturity investments
(328,927
)
 
(306,656
)
Purchase of short-term investments with maturities over three months
(36,119
)
 
—

Proceeds from sale, redemptions and maturity of term loans
98,992

 
48,630

Proceeds from sales, redemptions and maturities of fixed maturity investments
215,719

 
303,076

Proceeds from sales, redemptions and maturities of short-term investments with maturities over three months
5,596

 
25,000

Net (purchases) sales of short-term investments with maturities less than three months
22,337

 
504

Purchases of equity securities
(6,388
)
 
(38,399
)
Proceeds from sales of equity securities
1,531

 
7,312

Net settlements of derivative instruments
2,336

 
824

Purchases of furniture, equipment and other assets
(2
)
 
—

Net Cash Provided by (Used For) Investing Activities
(111,627
)
 
(31,877
)
Financing Activities
 
 
 
Dividends paid on redeemable preference shares
(1,148
)
 
(4,816
)
Repayments on borrowings
—

 
(100,102
)
Proceeds from borrowings
92,199

 
59,000

Purchases of common shares under share repurchase program
(2,867
)
 
—

Net Cash Provided By (Used For) Financing Activities
88,184

 
(45,918
)
Effects of exchange rate changes on foreign currency cash
(6,989
)
 
261

Increase (decrease) in cash
(5,857
)
 
(7,228
)
Cash and cash equivalents, beginning of period
102,437

 
63,529

Cash and cash equivalents, end of period
$
96,580

 
$
56,301

Supplementary information
 
 
 
Income taxes paid
$
—

 
$
—

Interest paid
$
5,422

 
$
7,864

Non-cash exchange of investments
$
13,467

 
$
—


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.
In May 2018, WICE formed a branch in Romania and commenced underwriting operations in June 2018. WICE is a wholly-owned subsidiary of Watford Re.
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 months ended March 31, 2020 are not necessarily indicative of the results expected for the full calendar year.

11

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


2. Basis of presentation and 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, 2019 and 2018 and for each of the years in the periods ended December 31, 2019, 2018 and 2017, 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”) on a basis consistent with reporting interim financial information in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities and Exchange Act of 1934, as amended. 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 Company’s audited consolidated financial statements and the accompanying notes for the years ended December 31, 2019, 2018 and 2017.
To facilitate comparison of information across periods, certain reclassifications have been made to prior year amounts to conform to the current year’s presentation.
(b) Recent accounting pronouncements
Issued and effective as of March 31, 2020 - Credit Losses
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
The Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”) which was issued in June 2016. This ASU applies a new credit loss model (current expected credit losses, or “CECL”) for determining credit-related impairments for financial instruments measured at amortized cost (including reinsurance recoverables) and requires an entity to estimate the credit losses expected over the life of an exposure or pool of exposures. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The expected credit losses, and subsequent adjustments to such losses, are recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the Company’s consolidated balance sheet.
This ASU also amends the previous other-than-temporary impairment model for available for sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limiting the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists.
The Company adopted this ASU for the quarter ending March 31, 2020. For available for sale debt securities, the updated guidance was applied prospectively. For financial instruments measured at amortized cost, the updated guidance was applied by recognizing a cumulative effect adjustment

12

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


of $0.4 million, net of tax, to the opening balance of retained earnings as of January 1, 2020, the beginning of the period of adoption. This adjustment is associated with “premiums receivable” and “reinsurance recoverables on unpaid and paid losses and loss adjustment expenses” in the Company’s consolidated balance sheets. The cumulative effect adjustment decreased retained earnings as of January 1, 2020 and increased the allowance for estimated uncollectible reinsurance.
The following accounting policies have been updated to reflect the Company’s adoption of ASU 2016-13, as described above. Results for the reporting periods beginning January 1, 2020 and thereafter are presented under ASC 326, while prior period amounts continue to be reported in accordance with previous applicable GAAP.
Investment Impairments
The Company conducts a periodic review to identify and evaluate invested assets that may have credit impairments.
Credit Impairments of Available For Sale Fixed Maturities
The Company derives estimated credit losses for fixed maturities by comparing expected future cash flows to be collected to the amortized cost of the security. Estimates of expected future cash flows consider among other things, macroeconomic conditions as well as the financial condition, near-term and long-term prospects for the issuer, and the likelihood of the recoverability of principal and interest.
Beginning on January 1, 2020, credit losses are recognized through an allowance account subject to reversal, rather than a reduction in amortized cost. Declines in value attributable to factors other than credit are reported in other comprehensive income while the allowance for credit loss is charged to “realized and unrealized gains (losses) on investments” in the Company’s consolidated statements of income.
For fixed maturity investments the Company intends to sell or for which it is more likely than not that the Company will be required to sell before an anticipated recovery in value, the full amount of the impairment is included in “realized and unrealized gains (losses) on investments” on the Company’s consolidated statements of income (loss). The new cost basis of the investment is the previous amortized cost basis less the impairment recognized in “realized and unrealized gains (losses) on investments.” The new cost basis is not adjusted for any subsequent recoveries in fair value.
The Company reports accrued investment income separately from available for sale fixed maturities, and has elected not to measure an allowance for credit losses for accrued investment income. Uncollectible accrued interest is written off when the Company determines that no additional interest payments will be received.
Reinsurance Recoverables
In the normal course of business, the Company’s subsidiaries cede a portion of their premium and losses through pro rata and excess of loss reinsurance agreements on a treaty or facultative basis. Reinsurance recoverables are recorded as assets, predicated on the reinsurers’ ability to meet their obligations under the reinsurance agreements. In certain instances, the Company obtains collateral, including letters of credit and trust accounts, to further reduce the credit exposure on its reinsurance recoverables. The Company reports its reinsurance recoverables net of an allowance for expected credit loss in the Company’s consolidated balance sheets. The allowance is based upon the Company’s ongoing review of amounts outstanding, the financial condition of its reinsurers, amounts and form of collateral obtained and other relevant factors. A ratings based probability-of-default and loss-given-default methodology is used to estimate the allowance for expected credit loss. Any allowance for credit losses is charged to the Company’s consolidated statement of income

13

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


(loss) in the period the recoverable is recorded and revised in subsequent periods to reflect changes in the Company’s estimate of expected credit losses.
Premiums receivable and unearned premium reserves
Premiums are recognized as revenues pro rata over the policy period. Unearned premium reserves represent the unexpired portion of policy premiums. Accrued retrospective premiums are included in premiums receivable balances. Premiums receivable balances are reported net of an allowance for expected credit losses. The Company monitors credit risk associated with premiums receivable through its ongoing review of amounts outstanding, aging of the receivable, historical loss data and counterparty financial strength measures. The allowance also includes estimated uncollectible amounts related to dispute risk. Amounts deemed to be uncollectible, are written off against the allowance. In certain instances, credit risk may be reduced by the Company’s right to offset loss obligations or unearned premiums against premiums receivable. Any allowance for credit losses is charged to the Company’s consolidated statements of income (loss) in the period the receivable is recorded and revised in subsequent periods to reflect changes in the Company’s estimate of expected credit losses.
Issued and effective as of March 31, 2020
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements (“ASU 2018-13”). ASU 2018-13 intends to modify the disclosure requirements on fair value measurements. This ASU was adopted on January 1, 2020, and the Company considers the impact to be immaterial to the Company’s consolidated financial statements and disclosures.
In March 2020, the FASB issued ASU 2020-03, Codification Improvements (“ASU 2020-03”), which provide updates to a wide variety of Topics in the Codification. For public business entities, this ASU was effective upon issuance. This ASU was adopted upon issuance, and did not have a material impact on the Company’s consolidated financial statements.
In April 2019, the FASB issued ASU 2019-04, which identified and clarified issues relevant to ASU 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). 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. This ASU was adopted on January 1, 2020 and did not have a material impact on the Company’s consolidated financial statements.
Recently issued accounting standards not yet adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), (“ASU 2020-04”). This ASU provides practical expedients and exceptions for applying GAAP to contracts and transactions affected by reference rate reform if such contracts or transactions reference LIBOR or another reference rate expected to be discontinued. Amendments in this ASU for contract modifications may be applied as of March 12, 2020 through December 31, 2022. Once adopted, this ASU must be applied prospectively for all eligible contract modifications. The Company is currently assessing the impact the implementation of this ASU will have on its consolidated financial statements and disclosures, but does not believe that such impact will be material.
For additional information regarding accounting standards that the Company has not yet adopted, see Note 2, “Basis of presentation and significant accounting policies” in the Company’s audited consolidated financial statements in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ending December 31, 2019.

14

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, interest expense (on its 6.5% senior notes due July 2, 2029), net foreign exchange gains (losses), income tax expense and items related to the Company’s preference shares.
The following table provides summary information regarding premiums written and earned by line of business and net premiums written by underwriting location:
 
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

 
 
 
 
Net premiums written by underwriting location:
 
 
 
United States
$
36,303

 
$
18,402

Europe
21,203

 
23,258

Bermuda
129,194

 
103,727

Total
$
186,700

 
$
145,387


15

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



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 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 March 31,
 
2020
 
2019
 
($ in thousands)
Premiums written
 
 
 
Direct
$
104,372

 
$
80,798

Assumed
130,530

 
105,891

Ceded
(48,202
)
 
(41,302
)
Net
$
186,700

 
$
145,387

Premiums earned
 
 
 
Direct
$
88,536

 
$
63,517

Assumed
99,529

 
113,481

Ceded
(48,026
)
 
(30,904
)
Net
$
140,039

 
$
146,094

Losses and loss adjustment expenses
 
 
 
Direct
$
88,694

 
$
48,404

Assumed
74,720

 
84,524

Ceded
(52,738
)
 
(22,078
)
Net
$
110,676

 
$
110,850

The Company monitors the financial condition of its reinsurers and attempts to place coverages only with financially sound carriers. At March 31, 2020 and December 31, 2019, approximately 95% and 95%, respectively, were due from carriers which had an A.M. Best rating of “A-” or better, while 5% and 5%, respectively, were due from companies not rated.
At March 31, 2020 and December 31, 2019, approximately 45% and 47%, respectively, 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 three months ended March 31, 2020 and 2019.
 
Three Months Ended March 31,
 
2020
 
2019
 
($ in thousands)
Gross reserve for losses and loss adjustment expenses at beginning of period
$
1,263,628

 
$
1,032,760

Unpaid losses and loss adjustment expenses recoverable
165,549

 
81,267

Net reserve for losses and loss adjustment expenses at beginning of period
1,098,079

 
951,493

 
 
 
 
Net incurred losses and loss adjustment expenses relating to losses occurring in:
 
 
 
Current period
110,856

 
110,901

Prior years
(180
)
 
(51
)
Total net losses and loss adjustment expenses
110,676

 
110,850

 
 
 
 
Foreign exchange (gains) losses
(26,015
)
 
4,163

 
 
 
 
Net paid losses and loss adjustment expenses relating to losses occurring in:
 
 
 
Current period
(10,585
)
 
(6,330
)
Prior years
(62,585
)
 
(54,598
)
Total paid losses and loss adjustment expenses
(73,170
)
 
(60,928
)
 
 
 
 
Net reserve for losses and loss adjustment expenses at end of period
1,109,570

 
1,005,578

Unpaid losses and loss adjustment expenses recoverable
190,679

 
98,954

Gross reserve for losses and loss adjustment expenses at end of period
$
1,300,249

 
$
1,104,532

During the three months ended March 31, 2020, the Company recorded net favorable development on prior year loss reserves of $0.2 million. Net favorable development was experienced on casualty reinsurance losses of $4.0 million, property catastrophe reinsurance losses of $0.5 million, and other specialty reinsurance losses $0.1 million, offset by unfavorable development on insurance losses of $4.4 million.
During the three months ended March 31, 2019, the Company recorded net favorable development on prior year loss reserves of $0.1 million. Net favorable development was experienced on casualty reinsurance losses of $1.8 million, offset by unfavorable development on property catastrophe reinsurance losses of $0.8 million, insurance programs and coinsurance losses of $0.6 million, and other specialty reinsurance losses of $0.4 million.

17

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


6. Allowance for expected credit losses
Premiums Receivable
The following table presents the balances of premiums receivable, net of the allowance for expected credit losses, at January 1, 2020 and March 31, 2020 and changes in the allowance for expected credit losses for the three months ended March 31, 2020.
 
Premiums Receivable, Net of Allowance
 
Allowance for Expected Credit Losses
 
($ in thousands)
Balance at beginning of period
$
273,657

 
$
—

Cumulative effect of adoption of updated accounting guidance for credit losses at January 1, 2020
 
 
156

Current period change for expected credit losses
 
 
—

Write-offs charged against the allowance
 
 
—

Balance at end of period
$
281,541

 
$
156

Reinsurance Recoverables
The following table presents the balances of reinsurance recoverables, net of the allowance for expected credit losses, at January 1, 2020 and March 31, 2020, and changes in the allowance for expected credit losses for the three months ended March 31, 2020.
 
Reinsurance Recoverables, Net of Allowance
 
Allowance for Expected Credit Losses
 
($ in thousands)
Balance at beginning of period
$
170,974

 
$
—

Cumulative effect of adoption of updated accounting guidance for credit losses at January 1, 2020 (1)
 
 
297

Current period change for expected credit losses
 
 
—

Write-offs charged against the allowance
 
 
—

Balance at end of period
$
197,458

 
$
297

(1) The allowance for credit losses is gross of deferred tax of $25 thousand.

18

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


7. Investment information
Available for Sale Investments
The following tables summarize the fair value of the Company’s securities classified as available for sale as of March 31, 2020 and December 31, 2019:
 
Cost or Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses (1)
 
Fair Value
 
($ in thousands)
March 31, 2020
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. government and government agency bonds
$
256,191

 
$
8,635

 
$
—

 
$
264,826

Non-U.S. government and government agency bonds
151,000

 
4,040

 
(6,564
)
 
148,476

Corporate bonds
169,735

 
2,296

 
(4,969
)
 
167,062

Asset-backed securities
144,808

 
—

 
(31,225
)
 
113,583

Mortgage-backed securities
26,341

 
—

 
(4,556
)
 
21,785

Municipal government and government agency bonds
1,760

 
60

 
—

 
1,820

Total investments, available for sale
$
749,835

 
$
15,031

 
$
(47,314
)
 
$
717,552

(1) Effective January 1, 2020, the Company adopted ASU 2016-13, and as a result any credit impairment losses on the Company’s available for sale securities are recorded as an allowance, subject to reversal. See Note 2. "Basis of presentation and significant accounting policies-(b) Recent accounting pronouncements-Issued and effective as of March 31, 2020 - Credit Losses" above for more information about ASU 2016-13. Included within the gross unrealized losses for corporate bonds is a credit allowance of $0.6 million for securities with an unrealized loss of $5.7 million as of March 31, 2020.
 
Cost or Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
($ in thousands)
December 31, 2019
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. government and government agency bonds
$
282,076

 
$
1,708

 
$
(137
)
 
$
283,647

Corporate bonds
155,834

 
2,326

 
(41
)
 
158,119

Asset-backed securities
145,555

 
614

 
(735
)
 
145,434

Non-U.S. government and government agency bonds
129,456

 
3,530

 
(1,033
)
 
131,953

Mortgage-backed securities
24,776

 
18

 
(44
)
 
24,750

Municipal government and government agency bonds
1,759

 
46

 
—

 
1,805

Total investments, available for sale
$
739,456

 
$
8,242

 
$
(1,990
)
 
$
745,708








19

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
March 31, 2020
($ in thousands)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
Non-U.S. government and government agency bonds
$
120,115

 
$
(6,564
)
 
$
—

 
$
—

 
$
120,115

 
$
(6,564
)
Corporate bonds
86,724

 
(4,969
)
 
—

 
—

 
86,724

 
(4,969
)
Asset-backed securities
100,514

 
(27,336
)
 
13,069

 
(3,889
)
 
113,583

 
(31,225
)
Mortgage-backed securities
21,784

 
(4,556
)
 
—

 
—

 
21,784

 
(4,556
)
Total
$
329,137

 
$
(43,425
)
 
$
13,069

 
$
(3,889
)
 
$
342,206

 
$
(47,314
)
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and government agency bonds
$
36,540

 
$
(137
)
 
$
—

 
$
—

 
$
36,540

 
$
(137
)
Non-U.S. government and government agency bonds
51,779

 
(1,027
)
 
5,410

 
(6
)
 
57,189

 
(1,033
)
Corporate bonds
9,854

 
(41
)
 
—

 
—

 
9,854

 
(41
)
Asset-backed securities
55,194

 
(504
)
 
19,430

 
(231
)
 
74,624

 
(735
)
Mortgage-backed securities
14,481

 
(44
)
 
—

 
—

 
14,481

 
(44
)
Total
$
167,848

 
$
(1,753
)
 
$
24,840

 
$
(237
)
 
$
192,688

 
$
(1,990
)
At March 31, 2020, 103 positions out of a total of 140 positions were in an unrealized loss position. The unrealized loss position increased during the three-month period from $2.0 million to $47.3 million. The decrease in value can be attributed to the market movements resulting from the COVID-19 global pandemic, which primarily impacted the asset-backed securities, and unfavorable foreign exchange rates impacting the non-U.S. government agency bonds during the period.
At December 31, 2019, 48 positions out of a total of 146 positions were in an unrealized loss position; however, the unrealized loss was less than 10% of the fair value for all 48 positions. The decrease in value can be attributed to movement in foreign exchange rates for the non-U.S. government agency bonds since purchase and the decrease in value for the asset-backed securities, primarily driven by market movements during the period. The Company believes that such securities were temporarily impaired at December 31, 2019.
Allowance for expected credit losses
The Company recognized an allowance for expected credit losses on available for sale securities of $0.6 million for the three months ended March 31, 2020. No credit losses were previously recognized and there were no write-offs charged against the allowance. The allowance is recognized in “realized and unrealized gains (losses) on investments” in the Company’s consolidated statements of income (loss). There were no impairments of securities which the Company intends to sell or more likely than not will be required to sell.


20

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 March 31, 2020 and December 31, 2019 are shown in the following tables.
 
March 31, 2020
 
Amortized Cost
 
Estimated Fair Value
 
% of Fair Value
 
($ in thousands)
Due in one year or less
$
15,055

 
$
14,846

 
2.1
%
Due after one year through five years
423,133

 
428,376

 
59.7
%
Due after five years through ten years
127,826

 
127,555

 
17.8
%
Due after ten years
12,672

 
11,407

 
1.6
%
Asset-backed securities
144,808

 
113,583

 
15.8
%
Mortgage-backed securities
26,341

 
21,785

 
3.0
%
Total investments, available for sale
$
749,835

 
$
717,552

 
100.0
%
 
December 31, 2019
 
Amortized Cost
 
Estimated Fair Value
 
% of Fair Value
 
($ in thousands)
Due in one year or less
$
9,235

 
$
9,248

 
1.3
%
Due after one year through five years
414,235

 
417,921

 
56.0
%
Due after five years through ten years
133,822

 
136,329

 
18.3
%
Due after ten years
11,833

 
12,026

 
1.6
%
Asset-backed securities
145,555

 
145,434

 
19.5
%
Mortgage-backed securities
24,776

 
24,750

 
3.3
%
Total investments, available for sale
$
739,456

 
$
745,708

 
100.0
%

21

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 of March 31, 2020 and December 31, 2019, 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
 
($ in thousands)
March 31, 2020
 
 
 
 
 
 
 
Term loan investments
$
1,113,510

 
$
986

 
$
(207,497
)
 
$
906,999

Fixed maturities:
 
 
 
 
 
 
 
Corporate bonds
296,918

 
4,038

 
(59,878
)
 
241,078

U.S. government and government agency bonds
586

 
11

 
—

 
597

Asset-backed securities
198,262

 
2,231

 
(59,880
)
 
140,613

Mortgage-backed securities
7,289

 
1,649

 
(409
)
 
8,529

Non-U.S. government and government agency bonds
1,443

 
42

 
(103
)
 
1,382

Municipal government and government agency bonds
252

 
1

 
—

 
253

Short-term investments
348,059

 
542

 
(4,740
)
 
343,861

Other investments
28,673

 
2,009

 
—

 
30,682

Equities
53,111

 
12,130

 
(7,150
)
 
58,091

Investments, fair value option
$
2,048,103

 
$
23,639

 
$
(339,657
)
 
$
1,732,085

Fair Value Through Net Income:
 
 
 
 
 
 
 
Equities, fair value through net income
$
88,134

 
$
1,855

 
$
(26,820
)
 
$
63,169


22

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


 
Cost or Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
($ in thousands)
December 31, 2019
 
 
 
 
 
 
 
Term loan investments
$
1,113,212

 
$
7,340

 
$
(58,618
)
 
$
1,061,934

Fixed maturities:
 
 
 
 
 
 
 
Corporate bonds
221,024

 
8,430

 
(15,100
)
 
214,354

U.S. government and government agency bonds
1,963

 
1

 
(2
)
 
1,962

Asset-backed securities
200,361

 
3,329

 
(12,953
)
 
190,737

Mortgage-backed securities
7,399

 
712

 
(405
)
 
7,706

Non-U.S. government and government agency bonds
1,449

 
18

 
(11
)
 
1,456

Municipal government and government agency bonds
380

 
—

 
(1
)
 
379

Short-term investments
325,542

 
3,817

 
(56
)
 
329,303

Other investments
28,672

 
2,264

 
(475
)
 
30,461

Equities
54,893

 
10,690

 
(5,784
)
 
59,799

Investments, fair value option
$
1,954,895

 
$
36,601

 
$
(93,405
)
 
$
1,898,091

Fair Value Through Net Income:
 
 
 
 
 
 
 
Equities, fair value through net income
$
78,031

 
$
2,360

 
$
(15,053
)
 
$
65,338



23

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 March 31, 2020 and December 31, 2019 are shown in the following tables.
 
March 31, 2020
 
Amortized Cost
 
Estimated Fair Value
 
% of Fair Value
 
($ in thousands)
Due in one year or less
$
368,381

 
$
361,088

 
22.0
%
Due after one year through five years
809,886

 
660,746

 
40.2
%
Due after five years through ten years
582,501

 
472,336

 
28.7
%
Asset-backed securities
198,262

 
140,613

 
8.6
%
Mortgage-backed securities
7,289

 
8,529

 
0.5
%
Total
$
1,966,319

 
$
1,643,312

 
100.0
%
 
December 31, 2019
 
Amortized Cost
 
Estimated Fair Value
 
% of Fair Value
 
($ in thousands)
Due in one year or less
$
368,452

 
$
370,479

 
20.5
%
Due after one year through five years
779,643

 
742,960

 
41.1
%
Due after five years through ten years
514,961

 
495,416

 
27.4
%
Due after ten years
514

 
533

 
—
%
Asset-backed securities
200,361

 
190,737

 
10.6
%
Mortgage-backed securities
7,399

 
7,706

 
0.4
%
Total
$
1,871,330

 
$
1,807,831

 
100.0
%
Variable Interest Entities
In the normal course of its investing activities, the Company invests in limited partnerships, limited liability companies and other investment securities. Due to the legal forms of the entities and the fact that the investors lack the ability, through voting rights or similar rights, to make decisions that have a significant effect on the entities, such investments are considered variable interest entities. Since the Company lacks the ability to control the activities that most significantly impact the economic performance of these variable interest entities, the Company is not considered the primary beneficiary and does not consolidate these investments.
The activities of these entities are generally limited to holding and managing the underlying investments. The Company’s maximum exposure to loss with respect to these investments is limited to the investment carrying amounts reported as “other investments” in the Company’s consolidated balance sheet and any unfunded commitments. Realized and unrealized gains and losses from such investments are included in “realized and unrealized gains (losses) on investments” in the Company’s consolidated statements of income (loss).

24

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 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)
Term loan investments
$
906,999

 
$
—

 
$
—

 
$
—

 
$
—

 
$
10,277

 
$
650,028

 
$
161,307

 
$
2,823

 
$
1,314

 
$
1,590

 
$
79,660

Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
408,140

 
—

 
34,647

 
76,063

 
58,018

 
19,222

 
84,955

 
118,847

 
1,872

 
—

 
3,699

 
10,817

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

 
—

 
265,423

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Asset-backed securities
254,196

 
1,628

 
—

 
19,319

 
181,547

 
19,727

 
7,395

 
1,418

 
—

 
—

 
—

 
23,162

Mortgage-backed securities
30,314

 
—

 
—

 
4,600

 
17,185

 
1,190

 
—

 
—

 
—

 
—

 
2,552

 
4,787

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

 
—

 
149,858

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Municipal government and government agency bonds
2,073

 
1,023

 
570

 
480

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total fixed income instruments
2,017,003

 
2,651

 
450,498

 
100,462

 
256,750

 
50,416

 
742,378

 
281,572

 
4,695

 
1,314

 
7,841

 
118,426

Short-term investments
343,861

 
30,174

 
154,787

 
402

 
110,795

 
—

 
40,000

 
—

 
—

 
—

 
—

 
7,703

Total fixed income instruments and short-term investments
2,360,864

 
32,825

 
605,285

 
100,864

 
367,545

 
50,416

 
782,378

 
281,572

 
4,695

 
1,314

 
7,841

 
126,129

Other Investments
30,682

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equities
121,260

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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.

25

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


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

 
$
—

 
$
—

 
$
—

 
$
—

 
$
9,617

 
$
761,168

 
$
215,909

 
$
6,823

 
$
2,119

 
$
—

 
$
66,298

Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
372,473

 
—

 
36,128

 
81,401

 
41,103

 
9,003

 
58,345

 
135,613

 
—

 
—

 
—

 
10,880

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

 
—

 
285,609

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Asset-backed securities
336,171

 
2,006

 
—

 
29,179

 
223,956

 
29,695

 
18,381

 
—

 
—

 
—

 
—