Document


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

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

For the quarterly period ended June 30, 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/e9f35f60c6ea386e2db1421cab32c98d-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 August 7, 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 June 30, 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.


2



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 revised the outlook of our financial strength and credit ratings to negative;
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, societal, 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 Quarterly Report on 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
 
June 30, 2020 (unaudited) and December 31, 2019
 
 
 
For the three and six months ended June 30, 2020 and 2019 (unaudited)
 
 
 
For the three and six months ended June 30, 2020 and 2019 (unaudited)
 
 
 
For the three and six months ended June 30, 2020 and 2019 (unaudited)
 
 
 
For the six months ended June 30, 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)
 
June 30,
 
December 31,
 
2020
 
2019
Assets
 
 
 
Investments:
 
 
 
Term loans, fair value option (Amortized cost: $991,130 and $1,113,212)
$
875,560

 
$
1,061,934

Fixed maturities, fair value option (Amortized cost: $611,265 and $432,576)
548,010

 
416,594

Short-term investments, fair value option (Cost: $370,976 and $325,542)
370,066

 
329,303

Equity securities, fair value option
58,898

 
59,799

Other investments, fair value option (1)
34,142

 
30,461

Investments, fair value option
1,886,676

 
1,898,091

Fixed maturities, available for sale (Amortized cost: $698,897 and $739,456)
690,225

 
745,708

Equity securities, fair value through net income
62,444

 
65,338

Total investments (1)
2,639,345

 
2,709,137

Cash and cash equivalents
107,653

 
102,437

Accrued investment income
14,364

 
14,025

Premiums receivable (1)
258,178

 
273,657

Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses (1)
229,746

 
170,974

Prepaid reinsurance premiums (1)
131,919

 
132,577

Deferred acquisition costs, net (1)
64,149

 
64,044

Receivable for securities sold
31,314

 
16,288

Intangible assets
7,650

 
7,650

Funds held by reinsurers (1)
41,112

 
42,505

Other assets
22,328

 
17,562

Total assets
$
3,547,758

 
$
3,550,856

Liabilities
 
 

Reserve for losses and loss adjustment expenses (1)
$
1,353,049

 
$
1,263,628

Unearned premiums (1)
456,170

 
438,907

Losses payable (1)
58,292

 
61,314

Reinsurance balances payable (1)
72,776

 
77,066

Payable for securities purchased
67,272

 
18,180

Payable for securities sold short
29,289

 
66,257

Revolving credit agreement borrowings
472,361

 
484,287

Senior notes (1)
172,554

 
172,418

Amounts due to affiliates (1)
4,542

 
4,467

Investment management and performance fees payable (1)
5,511

 
17,762

Other liabilities (1)
27,440

 
21,912

Total liabilities
$
2,719,256

 
$
2,626,198

Commitments and contingencies

 

Contingently redeemable preference shares (1)
52,351

 
52,305

Shareholders’ equity
 
 
 
Common shares ($0.01 par; shares authorized: 120 million; shares issued: 22,804,128 and 22,692,300)
227

 
227

Additional paid-in capital
898,935

 
898,083

Retained earnings (deficit)
(35,909
)
 
43,470

Accumulated other comprehensive income (loss)
(9,179
)
 
5,629

Common shares held in treasury, at cost (shares: 2,917,149 and 2,789,405)
(77,923
)
 
(75,056
)
Total shareholders’ equity
776,151

 
872,353

Total liabilities, contingently redeemable preference shares and shareholders’ equity
$
3,547,758

 
$
3,550,856

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

6


WATFORD HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(U.S. dollars in thousands, except share and per share data)
 
(Unaudited)
 
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Revenues
 
 
 
 
 
 
 
Gross premiums written (1)
$
157,927

 
$
161,978

 
$
392,829

 
$
348,667

Gross premiums ceded (1)
(52,071
)
 
(42,608
)
 
(100,273
)
 
(83,910
)
Net premiums written
105,856

 
119,370

 
292,556

 
264,757

Change in unearned premiums (1)
25,679

 
31,948

 
(20,982
)
 
32,655

Net premiums earned (1)
131,535

 
151,318

 
271,574

 
297,412

Other underwriting income (loss)
868

 
673

 
1,001

 
1,265

Interest income
36,453

 
38,596

 
74,277

 
81,737

Investment management fees - related parties (1)
(4,262
)
 
(4,570
)
 
(8,614
)
 
(8,979
)
Borrowing and miscellaneous other investment expenses
(4,763
)
 
(7,611
)
 
(10,432
)
 
(15,909
)
Net interest income
27,428

 
26,415

 
55,231

 
56,849

Realized and unrealized gains (losses) on investments
172,063

 
(936
)
 
(118,439
)
 
32,784

Investment performance fees - related parties (1)

 
(1,692
)
 

 
(7,492
)
Net investment income (loss)
199,491

 
23,787

 
(63,208
)
 
82,141

Total revenues
331,894

 
175,778

 
209,367

 
380,818

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Loss and loss adjustment expenses (1)
(104,786
)
 
(111,416
)
 
(215,462
)
 
(222,266
)
Acquisition expenses (1)
(29,486
)
 
(35,417
)
 
(57,853
)
 
(69,391
)
General and administrative expenses (1)
(7,841
)
 
(9,751
)
 
(14,980
)
 
(16,991
)
Interest expense (1)
(2,911
)
 

 
(5,823
)
 

Net foreign exchange gains (losses)
2,665

 
(441
)
 
7,678

 
(878
)
Total expenses
(142,359
)
 
(157,025
)
 
(286,440
)
 
(309,526
)
Income (loss) before income taxes
189,535

 
18,753

 
(77,073
)
 
71,292

Income tax benefit (expense)
402

 
(20
)
 
402

 
(20
)
Net income (loss) before preference dividends
189,937

 
18,733

 
(76,671
)
 
71,272

Preference dividends (1)
(1,109
)
 
(4,908
)
 
(2,280
)
 
(9,815
)
Net income (loss) available to common shareholders
$
188,828

 
$
13,825

 
$
(78,951
)
 
$
61,457

 
 
 
 
 
 
 
 
Earnings (loss) per common share:
 
 
 
 
 
 
 
Basic and diluted
$
9.51

 
$
0.61

 
$
(3.97
)
 
$
2.71

Weighted average number of common shares used in the determination of earnings (loss) per share:
 
 
 
 
 
 
 
Basic
19,863,048

 
22,740,762

 
19,907,490

 
22,711,833

Diluted
19,863,048

 
22,747,033

 
19,907,490

 
22,714,969

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

See Notes to Consolidated Financial Statements
7


WATFORD HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(U.S. dollars in thousands)
 
(Unaudited)
 
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Comprehensive income (loss)
 
 
 
 
 
 
 
Net income (loss) available to common shareholders
$
188,828

 
$
13,825

 
$
(78,951
)
 
$
61,457

Other comprehensive income (loss) net of income tax:
 
 
 
 
 
 
 
Available for sale investments:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
31,240

 
6,532

 
2,809

 
10,613

Unrealized foreign currency gains (losses) arising during the period
279

 
(1,678
)
 
(7,420
)
 
(548
)
Credit loss recognized in net income (loss)
(212
)
 

 
351

 

Reclassification of net realized (gains) losses, included in net income (loss)
(8,331
)
 
(1,816
)
 
(10,736
)
 
(2,211
)
Unrealized holding gains (losses) of available for sale investments
22,976

 
3,038

 
(14,996
)
 
7,854

Foreign currency translation adjustments
51

 
212

 
188

 
47

Other comprehensive income (loss) net of income tax
23,027

 
3,250

 
(14,808
)
 
7,901

Comprehensive income (loss)
$
211,855

 
$
17,075

 
$
(93,759
)
 
$
69,358


See Notes to Consolidated Financial Statements
8


WATFORD HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(U.S. dollars in thousands)
 
(Unaudited)
 
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Common shares
 
 
 
 
 
 
 
Balance at beginning of period
$
227

 
$
227

 
$
227

 
$
227

Common shares issued

 

 

 

Balance at end of period
227

 
227

 
227

 
227

 
 
 
 
 
 
 
 
Additional paid-in capital
 
 
 
 
 
 
 
Balance at beginning of period
898,693

 
895,386

 
898,083

 
895,386

Common shares issued under share plans
241

 
250

 
491

 
250

Share-based compensation
1

 
2,080

 
361

 
2,080

Balance at end of period
898,935

 
897,716

 
898,935

 
897,716

 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
 
 
 
 
Balance at beginning of period
(32,206
)
 
(79
)
 
5,629

 
(4,730
)
Unrealized holding gains (losses) of available for sale investments:
 
 
 
 
 
 
 
Balance at beginning of period
(31,720
)
 
658

 
6,252

 
(4,158
)
Unrealized holding gains (losses) of available for sale investments, net of reclassification adjustments
22,976

 
3,038

 
(14,996
)
 
7,854

Balance at end of period
(8,744
)
 
3,696

 
(8,744
)
 
3,696

Currency translation adjustment:
 
 
 
 
 
 
 
Balance at beginning of period
(486
)
 
(737
)
 
(623
)
 
(572
)
Currency translation adjustment
51

 
212

 
188

 
47

Balance at end of period
(435
)
 
(525
)
 
(435
)
 
(525
)
Balance at end of period
(9,179
)
 
3,171

 
(9,179
)
 
3,171

 
 
 
 
 
 
 
 
Common shares held in treasury, at cost
 
 
 
 
 
 
 
Balance at beginning of period
(77,923
)
 

 
(75,056
)
 

Shares repurchased for treasury

 

 
(2,867
)
 

Balance at end of period
(77,923
)
 

 
(77,923
)
 

 
 
 
 
 
 
 
 
Retained earnings (deficit)
 
 
 
 
 
 
 
Balance at beginning of period
(224,737
)
 
46,357

 
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
189,937

 
18,733

 
(76,671
)
 
71,272

Preference share dividends paid and accrued
(1,109
)
 
(4,908
)
 
(2,280
)
 
(9,815
)
Balance at end of period
(35,909
)
 
60,182

 
(35,909
)
 
60,182

Total shareholders’ equity
$
776,151

 
$
961,296

 
$
776,151

 
$
961,296


See Notes to Consolidated Financial Statements
9


WATFORD HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
 
(Unaudited)
 
Six Months Ended June 30,
 
2020
 
2019
Operating Activities
 
 
 
Net income (loss) before preference dividends
$
(76,671
)
 
$
71,272

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
Net realized and unrealized (gains) losses on investments
118,439

 
(32,784
)
Amortization of fixed assets
3

 
72

Share-based compensation
852

 
2,330

Changes in:
 
 
 
Accrued investment income
(349
)
 
2,548

Premiums receivable
8,621

 
(60
)
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses
(54,442
)
 
(37,611
)
Prepaid reinsurance premiums
658

 
(17,926
)
Deferred acquisition costs, net
(2,385
)
 
9,396

Reserve for losses and loss adjustment expenses
110,913

 
93,421

Unearned premiums
20,324

 
(14,729
)
Reinsurance balances payable
(5,530
)
 
2,379

Funds held with reinsurers
(263
)
 
(10,890
)
Other liabilities
(20,087
)
 
48,743

Other items
(12,740
)
 
(274
)
Net Cash Provided By Operating Activities
87,343

 
115,887

Investing Activities
 
 
 
Purchase of term loans
(159,650
)
 
(233,730
)
Purchase of fixed maturity investments
(902,584
)
 
(746,930
)
Purchase of short-term investments with maturities over three months
(7,048
)
 

Proceeds from sale, redemptions and maturity of term loans
267,393

 
189,576

Proceeds from sales, redemptions and maturities of fixed maturity investments
760,494

 
778,128

Proceeds from sales, redemptions and maturities of other investments

 
24,636

Proceeds from sales, redemptions and maturities of short-term investments with maturities over three months
23,202

 
21,909

Net (purchases) sales of short-term investments with maturities less than three months
(45,871
)
 
26,694

Purchases of equity securities
(6,213
)
 
(52,179
)
Proceeds from sales of equity securities
9,118

 
26,421

Net settlements of derivative instruments
2,444

 
619

Purchases of furniture, equipment and other assets
(2
)
 

Net Cash Provided by (Used For) Investing Activities
(58,717
)
 
35,144

Financing Activities
 
 
 
Dividends paid on redeemable preference shares
(2,233
)
 
(9,632
)
Repayments on borrowings
(165,000
)
 
(198,426
)
Proceeds from borrowings
153,048

 
62,800

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

Net Cash Provided By (Used For) Financing Activities
(17,052
)
 
(145,258
)
Effects of exchange rate changes on foreign currency cash
(6,358
)
 
(325
)
Increase (decrease) in cash
5,216

 
5,448

Cash and cash equivalents, beginning of period
102,437

 
63,529

Cash and cash equivalents, end of period
$
107,653

 
$
68,977

Supplementary information
 
 
 
Income taxes paid
$

 
$
20

Interest paid
$
9,579

 
$
15,103

Non-cash exchange of investments
$
33,236

 
$


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 and six months ended June 30, 2020 are not necessarily indicative of the results expected for the full calendar year, especially when considering the risks and uncertainties associated with the COVID-19 global pandemic and the impact it may have on our business, results of operations and financial condition.

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. These unaudited interim financial statements should be read in conjunction with the Companys 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 June 30, 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 Companys 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 as of January 1, 2020. For available for sale debt securities, the updated guidance was applied prospectively. For financial instruments measured at amortized cost,

12


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


the updated guidance was applied by recognizing a cumulative effect adjustment 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 of the 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 Companys 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 of the issuer, 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 (loss).
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 statements 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 June 30, 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 modifies 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 provides 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 ended 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 June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
 
($ in thousands)
Gross premiums written:
 
 
 
 
 
 
 
Casualty reinsurance
$
25,125

 
$
32,557

 
$
108,943

 
$
108,158

Other specialty reinsurance
21,080

 
37,836

 
57,960

 
62,134

Property catastrophe reinsurance
11,253

 
5,929

 
21,085

 
11,921

Insurance programs and coinsurance
100,469

 
85,656

 
204,841

 
166,454

Total
$
157,927

 
$
161,978

 
$
392,829

 
$
348,667

 
 
 
 
 
 
 
 
Net premiums written:
 
 
 
 
 
 
 
Casualty reinsurance
$
24,774

 
$
32,077

 
$
108,441

 
$
107,142

Other specialty reinsurance
19,843

 
36,523

 
55,327

 
59,705

Property catastrophe reinsurance
10,506

 
5,621

 
20,338

 
11,603

Insurance programs and coinsurance
50,733

 
45,149

 
108,450

 
86,307

Total
$
105,856

 
$
119,370

 
$
292,556

 
$
264,757

 
 
 
 
 
 
 
 
Net premiums earned:
 
 
 
 
 
 
 
Casualty reinsurance
$
48,146

 
$
67,506

 
$
100,911

 
$
130,819

Other specialty reinsurance
29,876

 
42,635

 
65,240

 
87,196

Property catastrophe reinsurance
5,824

 
3,119

 
10,708

 
6,090

Insurance programs and coinsurance
47,689

 
38,058

 
94,715

 
73,307

Total
$
131,535

 
$
151,318

 
$
271,574

 
$
297,412

 
 
 
 
 
 
 
 
Net premiums written by underwriting location:
 
 
 
 
 
 
 
United States
$
27,798

 
$
22,385

 
$
64,101

 
$
40,787

Europe
22,921

 
23,927

 
44,124

 
47,185

Bermuda
55,137

 
73,058

 
184,331

 
176,785

Total
$
105,856

 
$
119,370

 
$
292,556

 
$
264,757


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 June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
 
($ in thousands)
Premiums written
 
 
 
 
 
 
 
Direct
$
100,469

 
$
85,656

 
$
204,841

 
$
166,454

Assumed
57,458

 
76,322

 
187,988

 
182,213

Ceded
(52,071
)
 
(42,608
)
 
(100,273
)
 
(83,910
)
Net
$
105,856

 
$
119,370

 
$
292,556

 
$
264,757

Premiums earned
 
 
 
 
 
 
 
Direct
$
89,553

 
$
70,445

 
$
178,089

 
$
133,962

Assumed
90,447

 
115,622

 
189,976

 
229,103

Ceded
(48,465
)
 
(34,749
)
 
(96,491
)
 
(65,653
)
Net
$
131,535

 
$
151,318

 
$
271,574

 
$
297,412

Losses and loss adjustment expenses
 
 
 
 
 
 
 
Direct
$
82,291

 
$
62,976

 
$
170,985

 
$
111,380

Assumed
70,337

 
88,651

 
145,057

 
173,175

Ceded
(47,842
)
 
(40,211
)
 
(100,580
)
 
(62,289
)
Net
$
104,786

 
$
111,416

 
$
215,462

 
$
222,266

The Company monitors the financial condition of its reinsurers and attempts to place coverages only with financially sound carriers. At June 30, 2020 and December 31, 2019, approximately 100% of ceded loss and loss adjustment reserves were due from carriers which had an A.M. Best or a Standard & Poor’s rating of “A-” or better.
At June 30, 2020 and December 31, 2019, approximately 44% 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 six months ended June 30, 2020 and 2019.
 
Six Months Ended June 30,
 
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
215,849

 
222,395

Prior years
(387
)
 
(129
)
Total net losses and loss adjustment expenses
215,462

 
222,266

 
 
 
 
Foreign exchange (gains) losses
(23,999
)
 
64

 
 
 
 
Net paid losses and loss adjustment expenses relating to losses occurring in:
 
 
 
Current period
(27,050
)
 
(13,956
)
Prior years
(128,021
)
 
(153,229
)
Total paid losses and loss adjustment expenses
(155,071
)
 
(167,185
)
 
 
 
 
Net reserve for losses and loss adjustment expenses at end of period
1,134,471

 
1,006,638

Unpaid losses and loss adjustment expenses recoverable
218,578

 
119,442

Gross reserve for losses and loss adjustment expenses at end of period
$
1,353,049

 
$
1,126,080

During the six months ended June 30, 2020, the Company recorded net favorable development on prior year loss reserves of $0.4 million. Net favorable development was experienced on other specialty reinsurance losses of $4.1 million, casualty reinsurance losses of $3.7 million and property catastrophe reinsurance losses of $1.0 million, offset by unfavorable development on insurance losses of $8.4 million.
During the six months ended June 30, 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 $2.2 million, offset by unfavorable development on insurance losses of $0.8 million, property catastrophe reinsurance losses of $0.7 million and other specialty reinsurance losses of $0.6 million.

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 June 30, 2020 and changes in the allowance for expected credit losses for the three and six months ended June 30, 2020.
 
At and For the Three Months Ended June 30, 2020
 
At and For the Six Months Ended June 30, 2020
 
Premiums Receivable, Net of Allowance
 
Allowance for Expected Credit Losses
 
Premiums Receivable, Net of Allowance
 
Allowance for Expected Credit Losses
 
($ in thousands)
Balance at beginning of period
$
281,541

 
$
156

 
$
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
$
258,178

 
$
156

 
$
258,178

 
$
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 June 30, 2020, and changes in the allowance for expected credit losses for the three and six months ended June 30, 2020.
 
At and For the Three Months Ended June 30, 2020
 
At and For the Six Months Ended June 30, 2020
 
Reinsurance Recoverables, Net of Allowance
 
Allowance for Expected Credit Losses
 
Reinsurance Recoverables, Net of Allowance
 
Allowance for Expected Credit Losses
 
($ in thousands)
Balance at beginning of period
$
197,458

 
$
297

 
$
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
 
 
(16
)
 
 
 
(16
)
Write-offs charged against the allowance
 
 

 
 
 

Balance at end of period
$
229,746

 
$
281

 
$
229,746

 
$
281

(1) As at June 30, 2020, the allowance for credit losses is gross of deferred tax of $22 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 June 30, 2020 and December 31, 2019:
 
Cost or Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses (1)
 
Fair Value
 
($ in thousands)
June 30, 2020
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. government and government agency bonds
$
215,127

 
$
1,741

 
$
(4
)
 
$
216,864

Non-U.S. government and government agency bonds
151,335

 
4,998

 
(6,591
)
 
149,742

Corporate bonds
164,417

 
7,215

 
(2,224
)
 
169,408

Asset-backed securities
141,760

 
134

 
(11,567
)
 
130,327

Mortgage-backed securities
24,498

 
17

 
(2,497
)
 
22,018

Municipal government and government agency bonds
1,760

 
106

 

 
1,866

Total investments, available for sale
$
698,897

 
$
14,211

 
$
(22,883
)
 
$
690,225

(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 June 30, 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 $0.4 million for securities with an unrealized loss of $2.6 million as of June 30, 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
 
($ in thousands)
June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and government agency bonds
$
28,550

 
$
(4
)
 
$

 
$

 
$
28,550

 
$
(4
)
Non-U.S. government and government agency bonds
121,648

 
(6,591
)
 

 

 
121,648

 
(6,591
)
Corporate bonds
24,696

 
(2,224
)
 

 

 
24,696

 
(2,224
)
Asset-backed securities
105,868

 
(9,343
)
 
16,135

 
(2,224
)
 
122,003

 
(11,567
)
Mortgage-backed securities
21,415

 
(2,497
)
 

 

 
21,415

 
(2,497
)
Total
$
302,177

 
$
(20,659
)
 
$
16,135

 
$
(2,224
)
 
$
318,312

 
$
(22,883
)
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 June 30, 2020, 72 positions out of a total of 158 positions were in an unrealized loss position. The unrealized loss position increased during the six-month period from $2.0 million to $22.9 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 changes in the allowance for expected credit losses on available for sale securities of $(0.2) million and $0.4 million for the three and six months ended June 30, 2020. The credit allowance as of June 30, 2020 and March 31, 2020 was $0.4 million and $0.6 million, respectively. No credit losses were previously recognized and there were no write-offs charged against the allowance. The change in allowance is recognized in realized and unrealized gains (losses) on investments in the Company’s consolidated statements of income (loss). There were no

20


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


impairments of securities which the Company intends to sell or more likely than not will be required to sell.
The amortized cost and fair value of our fixed maturities classified as available for sale, summarized by contractual maturity as of June 30, 2020 and December 31, 2019 are shown in the following tables.
 
June 30, 2020
 
Amortized Cost
 
Estimated Fair Value
 
% of Fair Value
 
($ in thousands)
Due in one year or less
$
19,500

 
$
19,525

 
2.8
%
Due after one year through five years
345,922

 
349,444

 
50.6
%
Due after five years through ten years
152,830

 
155,652

 
22.6
%
Due after ten years
14,387

 
13,259

 
1.9
%
Asset-backed securities
141,760

 
130,327

 
18.9
%
Mortgage-backed securities
24,498

 
22,018

 
3.2
%
Total investments, available for sale
$
698,897

 
$
690,225

 
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 June 30, 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)
June 30, 2020
 
 
 
 
 
 
 
Term loan investments
$
991,130

 
$
1,959

 
$
(117,529
)
 
$
875,560

Fixed maturities:
 
 
 
 
 
 
 
Corporate bonds
403,424

 
11,858

 
(36,589
)
 
378,693

U.S. government and government agency bonds
584

 
11

 

 
595

Asset-backed securities
198,619

 
2,229

 
(42,923
)
 
157,925

Mortgage-backed securities
6,950

 
2,257

 
(43
)
 
9,164

Non-U.S. government and government agency bonds
1,437

 
52

 
(107
)
 
1,382

Municipal government and government agency bonds
251

 

 

 
251

Short-term investments
370,976

 
597

 
(1,507
)
 
370,066

Other investments
28,673

 
5,469

 

 
34,142

Equities
50,863

 
13,524

 
(5,489
)
 
58,898

Investments, fair value option
$
2,052,907

 
$
37,956

 
$
(204,187
)
 
$
1,886,676

Fair Value Through Net Income:
 
 
 
 
 
 
 
Equities, fair value through net income
$
72,892

 
$
6,956

 
$
(17,404
)
 
$
62,444


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 June 30, 2020 and December 31, 2019 are shown in the following tables.
 
June 30, 2020
 
Amortized Cost
 
Estimated Fair Value
 
% of Fair Value
 
($ in thousands)