WATFORD HOLDINGS LTD. (“Watford” or the “Company”) (NASDAQ: WTRE)
today reported a net loss of $267.8 million, after $1.2 million of
preference dividends, for the three months ended March 31,
2020, compared to net income of $47.6 million, after payment of
$4.9 million of preference dividends, for the same period in 2019.
Book value per diluted common share was $28.21 at March 31,
2020, a decrease of 35.1% from December 31, 2019. The
quarterly results include:
- Net loss available to common shareholders of $267.8 million, or
$(13.42) per diluted common share, compared to net income of $47.6
million, or $2.10 per diluted common share, for the 2019 first
quarter;
- Combined ratio of 104.4%, comprised of a 79.0% loss ratio, a
20.3% acquisition expense ratio and a 5.1% general and
administrative expense ratio, compared to a combined ratio of
104.1% for the prior year first quarter, comprised of a 75.9% loss
ratio, a 23.3% acquisition expense ratio and a 4.9% general and
administrative expense ratio;
- Net interest income of $27.8 million, a 1.4% yield on average
net assets, for the 2020 first quarter, compared to net interest
income of $30.4 million and a 1.5% yield on average net assets for
the 2019 first quarter;
- Net investment loss of $262.7 million, a (13.0)% return on
average net assets for the 2020 first quarter, compared to net
investment income of $58.4 million and a 2.8% return on average net
assets for the 2019 first quarter; and
- During the quarter, the Company repurchased 127,744 common
shares at an average price of $22.42 per share for an aggregate
cost of $2.9 million under its previously announced $50 million
share repurchase program. As of March 31, 2020, up to approximately
$47.1 million of share repurchases were available under this
program.
In addition, on March 11, 2020, the World Health Organization
declared a pandemic in relation to the outbreak of the novel
coronavirus (COVID-19). The pandemic is causing unprecedented
social disruption, global economic volatility, reduced liquidity of
capital markets and intervention by various governments around the
world.
At this time, there are significant uncertainties surrounding
the ultimate number of insurance claims and scope of damage
resulting from this pandemic. The Company’s estimates across its
insurance and reinsurance lines of business are based on currently
available information derived from modeling techniques, preliminary
claims information obtained from the Company’s clients and brokers,
a review of relevant in-force contracts with potential exposure to
the pandemic and estimates of reinsurance recoverables. These
estimates include losses only related to claims incurred as of
March 31, 2020. Actual losses from these events may vary materially
from the estimates due to several factors, including the inherent
uncertainties in making such determinations and the evolving nature
of this pandemic.
Commenting on the 2020 first quarter financial results, Jon
Levy, CEO of Watford, said:
“First of all, we would like to acknowledge the challenging
times that the COVID-19 pandemic has created, and express how
grateful we are to those on the frontlines serving their
communities. Watford is also committed to supporting our
customers and clients through this stressful period. I would
like to thank the broader Watford team for their efforts to deliver
the same level of excellence in operations under these
extraordinarily difficult circumstances.
As reported in our press release on April 23, 2020, our results
for the first quarter were heavily affected by the investment
market volatility caused by the economic shutdown mandated by
governments around the world. The pandemic has had
significant impacts across the globe, and Watford took its share of
that impact, although not to a greater extent than anticipated for
an event of this magnitude.
Our net loss of $267.8 million for the quarter was driven by a
$262.7 million net investment loss. The net investment loss,
in turn, was predominantly the result of $285.5 million of
unrealized "mark-to-market" losses in our non-investment grade
fixed-income portfolio.
Net interest income, a key driver of long-term shareholder
value, remained steady and strong at $27.8 million, representing a
quarterly yield on net assets of 1.4%.
Our combined ratio for the quarter was 104.4%, and 102.2% when
adjusted for other underwriting income and certain corporate and
nonrecurring expenses. While the COVID-19 pandemic has
created significant areas of uncertainty for the property and
casualty insurance industry, the impact on our first quarter
underwriting results was not material, as we believe our mix of
business is less exposed to the classes of business likely to be
most affected.
Insurance and reinsurance market conditions continue to move in
a favorable direction and we remain optimistic about our
positioning in the marketplace.”
Underwriting
The following table summarizes the Company’s underwriting
results on a consolidated basis:
|
|
|
Three Months Ended March 31, |
|
|
2020 |
|
|
|
2019 |
|
|
% Change |
|
|
|
($ in
thousands) |
Gross
premiums written |
$ |
234,902 |
|
|
$ |
186,689 |
|
|
25.8% |
Net premiums
written |
|
186,700 |
|
|
|
145,387 |
|
|
28.4% |
Net premiums
earned |
|
140,039 |
|
|
|
146,094 |
|
|
(4.1)% |
Underwriting
income (loss) (1) |
|
(6,143 |
) |
|
|
(5,970 |
) |
|
(2.9)% |
|
|
|
|
|
|
|
|
|
|
|
% Point Change |
Loss
ratio |
|
79.0 |
% |
|
|
75.9 |
% |
|
3.1% |
Acquisition
expense ratio |
|
20.3 |
% |
|
|
23.3 |
% |
|
(3.0)% |
General
& administrative expense ratio |
|
5.1 |
% |
|
|
4.9 |
% |
|
0.2% |
Combined
ratio |
|
104.4 |
% |
|
|
104.1 |
% |
|
0.3% |
Adjusted combined ratio (2) |
|
102.2 |
% |
|
|
102.3 |
% |
|
(0.1)% |
|
|
|
|
|
|
(1) Underwriting income (loss) is a non-U.S. GAAP financial
measure and is calculated as net premiums earned, less loss and
loss adjustment expenses, acquisition expenses and general and
administrative expenses. See “Comments on Regulation G” for further
discussion, including a reconciliation of underwriting income
(loss) to net income (loss) available to common shareholders.
(2) Adjusted combined ratio is a non-U.S. GAAP financial measure
and is calculated by dividing the sum of loss and loss adjustment
expenses, acquisition expenses and general and administrative
expenses, less certain corporate expenses, by the sum of net
premiums earned and other underwriting income (loss). See “Comments
on Regulation G” for further discussion, including a reconciliation
of our adjusted combined ratio to our combined ratio.
The following table provides summary information regarding
premiums written and earned by line of business:
|
|
|
Three Months Ended March 31, |
|
|
2020 |
|
|
2019 |
|
|
|
($ in
thousands) |
Gross
premiums written: |
|
|
|
Casualty
reinsurance |
$ |
83,818 |
|
$ |
75,601 |
Other
specialty reinsurance |
|
36,880 |
|
|
24,298 |
Property
catastrophe reinsurance |
|
9,832 |
|
|
5,992 |
Insurance
programs and coinsurance |
|
104,372 |
|
|
80,798 |
Total |
$ |
234,902 |
|
$ |
186,689 |
|
|
|
|
Net premiums
written: |
|
|
|
Casualty
reinsurance |
$ |
83,667 |
|
$ |
75,065 |
Other
specialty reinsurance |
|
35,484 |
|
|
23,182 |
Property
catastrophe reinsurance |
|
9,832 |
|
|
5,982 |
Insurance
programs and coinsurance |
|
57,717 |
|
|
41,158 |
Total |
$ |
186,700 |
|
$ |
145,387 |
|
|
|
|
Net premiums
earned: |
|
|
|
Casualty
reinsurance |
$ |
52,765 |
|
$ |
63,313 |
Other
specialty reinsurance |
|
35,364 |
|
|
44,561 |
Property
catastrophe reinsurance |
|
4,884 |
|
|
2,971 |
Insurance
programs and coinsurance |
|
47,026 |
|
|
35,249 |
Total |
$ |
140,039 |
|
$ |
146,094 |
|
|
|
|
|
|
The following table shows the components of our loss and loss
adjustment expenses for the three months ended March 31, 2020
and 2019:
|
|
|
Three Months Ended March 31, |
|
|
2020 |
|
|
|
2019 |
|
|
Loss and LossAdjustmentExpenses |
|
% of EarnedPremiums |
|
Loss and LossAdjustmentExpenses |
|
% of EarnedPremiums |
|
|
|
($ in
thousands) |
Current year |
$ |
110,856 |
|
|
79.1 |
% |
|
$ |
110,901 |
|
|
75.9 |
% |
Prior year
development (favorable)/adverse |
|
(180 |
) |
|
(0.1 |
)% |
|
|
(51 |
) |
|
— |
% |
Loss and loss adjustment expenses |
$ |
110,676 |
|
|
79.0 |
% |
|
$ |
110,850 |
|
|
75.9 |
% |
|
|
|
|
|
|
|
|
Results for the three months ended March 31, 2020 versus
2019:
Gross and net premiums written in the 2020 first quarter were
25.8% and 28.4% higher, respectively, than the 2019 first
quarter. The increase in gross and net premiums written
reflect growth across all lines of business. Casualty reinsurance
and other specialty reinsurance premiums increased over the prior
year quarter, primarily due to increased personal and commercial
auto writings.
Net premiums earned in the 2020 first quarter were 4.1% lower
than the 2019 first quarter. The decrease in premiums reflected a
non-renewal of one multi-line quota share contract within casualty
reinsurance and a non-recurring exposure within other specialty
reinsurance earned in the first quarter of 2019. This was partially
offset by increased writings in insurance programs and coinsurance,
and, to a lesser extent, property catastrophe reinsurance.
The loss ratio was 79.0% in the 2020 first quarter compared to
75.9% in the 2019 first quarter. The acquisition expense ratio was
20.3% in the 2020 first quarter, compared to 23.3% in the 2019
first quarter. In the 2020 first quarter, the increase in loss
ratio and corresponding decrease in acquisition expense ratio were
driven by losses incurred related to COVID-19 and impacted other
specialty reinsurance business. A portion of this increase in
losses is offset by loss sensitive commission decreases, which are
reflected as benefits to the acquisition ratio. Other
movements reflect changes in mix and the type of business. The
prior year loss reserve development for both the 2020 and 2019
first quarters was essentially flat.
The general and administrative expense ratio was 5.1% in the
2020 first quarter, compared to 4.9% in the 2019 first quarter. The
0.2 point increase versus the prior year first quarter was
attributable to ongoing public company expenses. Removing certain
corporate expenses, our adjusted general and administrative expense
ratio was 3.0% in the 2020 first quarter compared to 3.5% in the
2019 first quarter.
Investments
The following table summarizes the Company’s key investment
returns on a consolidated basis:
|
|
|
Three Months Ended March 31, |
|
|
2020 |
|
|
|
2019 |
|
|
|
|
($ in
thousands) |
Interest
income |
$ |
37,824 |
|
|
$ |
43,141 |
|
Investment
management fees - related parties |
|
(4,352 |
) |
|
|
(4,409 |
) |
Borrowing
and miscellaneous other investment expenses |
|
(5,669 |
) |
|
|
(8,298 |
) |
Net interest
income |
|
27,803 |
|
|
|
30,434 |
|
Realized
gains (losses) on investments |
|
(5,046 |
) |
|
|
1,282 |
|
Unrealized
gains (losses) on investments |
|
(285,456 |
) |
|
|
32,438 |
|
Investment
performance fees - related parties |
|
— |
|
|
|
(5,800 |
) |
Net
investment income (loss) |
$ |
(262,699 |
) |
|
$ |
58,354 |
|
|
|
|
|
Unrealized
gains on investments (balance sheet) |
$ |
40,525 |
|
|
$ |
32,106 |
|
Unrealized
losses on investments (balance sheet) |
|
(413,791 |
) |
|
|
(111,535 |
) |
Net
unrealized gains (losses) on investments (balance sheet) |
$ |
(373,266 |
) |
|
$ |
(79,429 |
) |
|
|
|
|
Net interest
income yield on average net assets (1) |
|
1.4 |
% |
|
|
1.5 |
% |
Non-investment grade portfolio (1) |
|
1.7 |
% |
|
|
1.9 |
% |
Investment grade portfolio (1) |
|
0.5 |
% |
|
|
0.6 |
% |
Net
investment income return on average net assets (1) |
|
(13.0 |
)% |
|
|
2.8 |
% |
Non-investment grade portfolio (1) |
|
(17.4 |
)% |
|
|
3.4 |
% |
Investment grade portfolio (1) |
|
0.8 |
% |
|
|
1.1 |
% |
Net
investment income return on average total investments (excluding
accrued investment income) (2) |
|
(10.1 |
)% |
|
|
2.1 |
% |
Non-investment grade portfolio (2) |
|
(14.9 |
)% |
|
|
2.7 |
% |
Investment grade portfolio (2) |
|
0.8 |
% |
|
|
1.1 |
% |
|
|
|
|
(1) Net interest income yield on average net assets and net
investment income return on average net assets are calculated by
dividing net interest income, and net investment income (loss),
respectively, by average net assets. Net assets is calculated as
the sum of total investments, accrued investment income and
receivables for securities sold, less revolving credit agreement
borrowings, payable for securities purchased and payable for
securities sold short. For the three-month period, average net
assets is calculated using the averages of each quarterly period.
However, for the investment grade portfolio component of these
returns, revolving credit agreement borrowings are not subtracted
from the net assets calculation. The separate components of these
returns (non-investment grade portfolio and investment grade
portfolio) are non-U.S. GAAP financial measures. See “Comments on
Regulation G” for further discussion, including a reconciliation of
these components of our net interest income yield on average net
assets and net investment income return on average net assets.
(2) Net investment income return on average total investments
(excluding accrued investment income) is calculated by dividing net
investment income by average total investments. For the three-month
period, average total investments is calculated using the averages
of each quarterly period. The separate components of these returns
(non-investment grade portfolio and investment grade portfolio) are
non-U.S. GAAP financial measures. See “Comments on Regulation G”
for further discussion, including a reconciliation of these
components of our net investment income return on average total
investments (excluding accrued investment income).
The following tables summarize the composition of the Company's
non-investment grade and investment grade portfolios by sector as
of March 31, 2020 and December 31, 2019:
|
|
|
March 31, 2020 |
|
Total |
|
Financials |
|
Health Care |
|
Technology |
|
Consumer Services |
|
Industrials |
|
Consumer Goods |
|
Oil & Gas |
|
All Other (1) |
|
|
|
($ in
thousands) |
Non-Investment Grade Portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan investments |
$ |
906,999 |
|
$ |
190,535 |
|
$ |
195,084 |
|
$ |
199,837 |
|
$ |
98,518 |
|
$ |
89,778 |
|
$ |
40,415 |
|
$ |
32,049 |
|
$ |
60,783 |
Corporate bonds |
|
240,570 |
|
|
24,927 |
|
|
43,028 |
|
|
15,702 |
|
|
49,761 |
|
|
27,585 |
|
|
19,947 |
|
|
18,522 |
|
|
41,098 |
Equities- sector specific |
|
95,112 |
|
|
59,714 |
|
|
27,174 |
|
|
5,868 |
|
|
— |
|
|
1,026 |
|
|
— |
|
|
242 |
|
|
1,088 |
Short-term investments - sector specific |
|
47,703 |
|
|
7,703 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
40,000 |
|
|
— |
Subtotal |
|
1,290,384 |
|
|
282,879 |
|
|
265,286 |
|
|
221,407 |
|
|
148,279 |
|
|
118,389 |
|
|
60,362 |
|
|
90,813 |
|
|
102,969 |
Equities- sector specific |
|
26,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments - non-sector specific |
|
222,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
140,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments |
|
30,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
8,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-Investment Grade Portfolio |
$ |
1,718,421 |
|
$ |
282,879 |
|
$ |
265,286 |
|
$ |
221,407 |
|
$ |
148,279 |
|
$ |
118,389 |
|
$ |
60,362 |
|
$ |
90,813 |
|
$ |
102,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Grade Portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
$ |
167,570 |
|
$ |
62,046 |
|
$ |
13,752 |
|
$ |
12,135 |
|
$ |
15,481 |
|
$ |
14,133 |
|
$ |
34,718 |
|
$ |
7,346 |
|
$ |
7,959 |
Short-term investments |
|
74,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agency bonds |
|
265,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. government and government agency bonds |
|
149,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
113,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
21,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal government and government agency bonds |
|
2,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Grade Portfolio |
$ |
794,385 |
|
$ |
62,046 |
|
$ |
13,752 |
|
$ |
12,135 |
|
$ |
15,481 |
|
$ |
14,133 |
|
$ |
34,718 |
|
$ |
7,346 |
|
$ |
7,959 |
Total Investments |
$ |
2,512,806 |
|
$ |
344,925 |
|
$ |
279,038 |
|
$ |
233,542 |
|
$ |
163,760 |
|
$ |
132,522 |
|
$ |
95,080 |
|
$ |
98,159 |
|
$ |
110,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes telecommunications, utilities and basic
materials.
|
|
|
December 31, 2019 |
|
Total |
|
Financials |
|
Health Care |
|
Technology |
|
Consumer Services |
|
Industrials |
|
Consumer Goods |
|
Oil & Gas |
|
All Other (1) |
|
|
|
($ in
thousands) |
Non-Investment Grade Portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan investments |
$ |
1,061,934 |
|
$ |
212,800 |
|
$ |
221,982 |
|
$ |
232,659 |
|
$ |
121,434 |
|
$ |
111,912 |
|
$ |
46,827 |
|
$ |
52,200 |
|
$ |
62,120 |
Corporate bonds |
|
213,841 |
|
|
17,547 |
|
|
19,160 |
|
|
10,972 |
|
|
28,144 |
|
|
13,822 |
|
|
23,491 |
|
|
27,632 |
|
|
73,073 |
Equities - sector specific |
|
101,551 |
|
|
55,946 |
|
|
30,640 |
|
|
11,263 |
|
|
— |
|
|
1,283 |
|
|
— |
|
|
1,040 |
|
|
1,379 |
Short-term investments - sector specific |
|
16,620 |
|
|
8,261 |
|
|
— |
|
|
3,030 |
|
|
— |
|
|
5,329 |
|
|
— |
|
|
— |
|
|
— |
Subtotal |
|
1,393,946 |
|
|
294,554 |
|
|
271,782 |
|
|
257,924 |
|
|
149,578 |
|
|
132,346 |
|
|
70,318 |
|
|
80,872 |
|
|
136,572 |
Equities - sector specific |
|
23,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments - non-sector specific |
|
215,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
190,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments |
|
30,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
7,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-Investment Grade Portfolio |
$ |
1,862,253 |
|
$ |
294,554 |
|
$ |
271,782 |
|
$ |
257,924 |
|
$ |
149,578 |
|
$ |
132,346 |
|
$ |
70,318 |
|
$ |
80,872 |
|
$ |
136,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Grade Portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
$ |
158,632 |
|
$ |
72,707 |
|
$ |
12,087 |
|
$ |
8,035 |
|
$ |
11,752 |
|
$ |
10,548 |
|
$ |
32,046 |
|
$ |
5,734 |
|
$ |
5,723 |
Short-term investments |
|
96,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agency bonds |
|
285,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. government and government agency bonds |
|
133,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
145,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
24,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal government and government agency bonds |
|
2,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investment Grade Portfolio |
$ |
846,884 |
|
$ |
72,707 |
|
$ |
12,087 |
|
$ |
8,035 |
|
$ |
11,752 |
|
$ |
10,548 |
|
$ |
32,046 |
|
$ |
5,734 |
|
$ |
5,723 |
Total Investments |
$ |
2,709,137 |
|
$ |
367,261 |
|
$ |
283,869 |
|
$ |
265,959 |
|
$ |
161,330 |
|
$ |
142,894 |
|
$ |
102,364 |
|
$ |
86,606 |
|
$ |
142,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes telecommunications, utilities and basic
materials.
The table below summarizes the credit quality of the Company's
non-investment grade and investment grade portfolios as of
March 31, 2020 and December 31, 2019, as rated by
Standard & Poor’s Financial Services, LLC, or Standard &
Poor’s, Moody’s Investors Service, or Moody’s, Fitch Ratings Inc.,
or Fitch, Kroll Bond Rating Agency, or KBRA, or DBRS Morningstar,
or DBRS, as applicable:
|
|
|
Credit Rating (1) |
March 31, 2020 |
Fair Value |
|
AAA |
|
AA |
|
A |
|
BBB |
|
BB |
|
B |
|
CCC |
|
CC |
|
C |
|
D |
|
Not Rated |
|
|
|
($ in
thousands) |
Non-Investment Grade Portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan investments |
$ |
906,999 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
10,277 |
|
$ |
650,028 |
|
$ |
161,307 |
|
$ |
2,823 |
|
$ |
1,314 |
|
$ |
1,590 |
|
$ |
79,660 |
Corporate bonds |
|
240,570 |
|
|
— |
|
|
— |
|
|
— |
|
|
5,933 |
|
|
14,447 |
|
|
84,955 |
|
|
118,847 |
|
|
1,872 |
|
|
— |
|
|
3,699 |
|
|
10,817 |
Asset-backed securities |
|
140,613 |
|
|
— |
|
|
— |
|
|
3,339 |
|
|
85,572 |
|
|
19,727 |
|
|
7,395 |
|
|
1,418 |
|
|
— |
|
|
— |
|
|
— |
|
|
23,162 |
Mortgage-backed securities |
|
8,529 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1,190 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2,552 |
|
|
4,787 |
Short-term investments |
|
269,768 |
|
|
26,024 |
|
|
133,548 |
|
|
402 |
|
|
62,091 |
|
|
— |
|
|
40,000 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
7,703 |
Total fixed
income instruments and short-term investments |
|
1,566,479 |
|
|
26,024 |
|
|
133,548 |
|
|
3,741 |
|
|
153,596 |
|
|
45,641 |
|
|
782,378 |
|
|
281,572 |
|
|
4,695 |
|
|
1,314 |
|
|
7,841 |
|
|
126,129 |
Other Investments |
|
30,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities |
|
121,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-Investment Grade Portfolio |
$ |
1,718,421 |
|
$ |
26,024 |
|
$ |
133,548 |
|
$ |
3,741 |
|
$ |
153,596 |
|
$ |
45,641 |
|
$ |
782,378 |
|
$ |
281,572 |
|
$ |
4,695 |
|
$ |
1,314 |
|
$ |
7,841 |
|
$ |
126,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Grade Portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
$ |
167,570 |
|
$ |
— |
|
$ |
34,647 |
|
$ |
76,063 |
|
$ |
52,085 |
|
$ |
4,775 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
U.S. government and government agency bonds |
|
265,423 |
|
|
— |
|
|
265,423 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Asset-backed securities |
|
113,583 |
|
|
1,628 |
|
|
— |
|
|
15,980 |
|
|
95,975 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Mortgage-backed securities |
|
21,785 |
|
|
— |
|
|
— |
|
|
4,600 |
|
|
17,185 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Non-U.S. government and government agency bonds |
|
149,858 |
|
|
— |
|
|
149,858 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Municipal government and government agency bonds |
|
2,073 |
|
|
1,023 |
|
|
570 |
|
|
480 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Short-term investments |
|
74,093 |
|
|
4,150 |
|
|
21,239 |
|
|
— |
|
|
48,704 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Total
Investment Grade Portfolio |
$ |
794,385 |
|
$ |
6,801 |
|
$ |
471,737 |
|
$ |
97,123 |
|
$ |
213,949 |
|
$ |
4,775 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
Total |
$ |
2,512,806 |
|
$ |
32,825 |
|
$ |
605,285 |
|
$ |
100,864 |
|
$ |
367,545 |
|
$ |
50,416 |
|
$ |
782,378 |
|
$ |
281,572 |
|
$ |
4,695 |
|
$ |
1,314 |
|
$ |
7,841 |
|
$ |
126,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) For individual fixed maturity investments, Standard &
Poor’s ratings are used. In the absence of a Standard & Poor’s
rating, ratings from Moody’s are used, followed by ratings from
Fitch, followed by ratings from KBRA, followed by ratings from
DBRS.
|
|
|
Credit Rating (1) |
December 31, 2019 |
Fair Value |
|
AAA |
|
AA |
|
A |
|
BBB |
|
BB |
|
B |
|
CCC |
|
CC |
|
C |
|
D |
|
Not Rated |
|
|
|
($ in
thousands) |
Non-Investment Grade Portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan investments |
$ |
1,061,934 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
9,617 |
|
$ |
761,168 |
|
$ |
215,909 |
|
$ |
6,823 |
|
$ |
2,119 |
|
$ |
— |
|
$ |
66,298 |
Corporate bonds |
|
213,841 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
9,003 |
|
|
58,345 |
|
|
135,613 |
|
|
— |
|
|
— |
|
|
— |
|
|
10,880 |
Asset-backed securities |
|
190,738 |
|
|
— |
|
|
— |
|
|
4,002 |
|
|
105,706 |
|
|
29,695 |
|
|
18,381 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
32,954 |
Mortgage-backed securities |
|
7,706 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
976 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2,497 |
|
|
4,233 |
Short-term investments |
|
232,436 |
|
|
— |
|
|
116,805 |
|
|
34,903 |
|
|
64,108 |
|
|
— |
|
|
— |
|
|
8,359 |
|
|
— |
|
|
— |
|
|
— |
|
|
8,261 |
Total fixed
income instruments and short-term investments |
|
1,706,655 |
|
|
— |
|
|
116,805 |
|
|
38,905 |
|
|
169,814 |
|
|
49,291 |
|
|
837,894 |
|
|
359,881 |
|
|
6,823 |
|
|
2,119 |
|
|
2,497 |
|
|
122,626 |
Other Investments |
|
30,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities |
|
125,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-Investment Grade Portfolio |
$ |
1,862,253 |
|
$ |
— |
|
$ |
116,805 |
|
$ |
38,905 |
|
$ |
169,814 |
|
$ |
49,291 |
|
$ |
837,894 |
|
$ |
359,881 |
|
$ |
6,823 |
|
$ |
2,119 |
|
$ |
2,497 |
|
$ |
122,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Grade Portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
$ |
158,632 |
|
$ |
— |
|
$ |
36,128 |
|
$ |
81,401 |
|
$ |
41,103 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
U.S. government and government agency bonds |
|
285,609 |
|
|
— |
|
|
285,609 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Asset-backed securities |
|
145,433 |
|
|
2,006 |
|
|
— |
|
|
25,177 |
|
|
118,250 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Mortgage-backed securities |
|
24,750 |
|
|
— |
|
|
— |
|
|
1,100 |
|
|
23,650 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Non-U.S. government and government agency bonds |
|
133,409 |
|
|
— |
|
|
132,460 |
|
|
— |
|
|
949 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Municipal government and government agency bonds |
|
2,184 |
|
|
1,135 |
|
|
573 |
|
|
476 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Short-term investments |
|
96,867 |
|
|
25,783 |
|
|
20,037 |
|
|
— |
|
|
51,047 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Total
Investment Grade Portfolio |
$ |
846,884 |
|
$ |
28,924 |
|
$ |
474,807 |
|
$ |
108,154 |
|
$ |
234,999 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
Total |
$ |
2,709,137 |
|
$ |
28,924 |
|
$ |
591,612 |
|
$ |
147,059 |
|
$ |
404,813 |
|
$ |
49,291 |
|
$ |
837,894 |
|
$ |
359,881 |
|
$ |
6,823 |
|
$ |
2,119 |
|
$ |
2,497 |
|
$ |
122,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) For individual fixed maturity investments, Standard &
Poor’s ratings are used. In the absence of a Standard & Poor’s
rating, ratings from Moody’s are used, followed by ratings from
Fitch, followed by ratings from KBRA, followed by ratings from
DBRS.
Corporate Function
The Company has a corporate function that includes general and
administrative expenses related to corporate activities, interest
expense, net foreign exchange gains (losses), income tax expense
and items related to the Company’s contingently redeemable
preference shares.
The Company incurred an interest expense of $2.9 million for the
three months ended March 31, 2020, in relation to the
Company’s 6.5% senior notes issued on July 2, 2019. Interest is
paid semi-annually in arrears on January 2 and July 2.
Preference dividends were $1.2 million and $4.9 million for the
three months ended March 31, 2020 and 2019, respectively.
During the quarter, the Company repurchased 127,744 common
shares at an average price of $22.42 per share for an aggregate
cost of $2.9 million. As of March 31, 2020, up to approximately
$47.1 million of share repurchases were available under the
program. In light of COVID-19 and the uncertain economic outlook,
the Company has temporarily halted repurchases under the
program.
Conference Call
The Company will hold a conference call on Tuesday, May 5, 2020
at 1:00 p.m. Eastern time to discuss its 2020 first quarter
results. The Company also plans to discuss how the COVID-19
pandemic could impact its underwriting and investment portfolios in
future periods and certain actions the Company has taken in
response to the crisis. A live webcast of this call will be
available via the Investors section of the Company’s website at
http://investors.watfordre.com. A replay of the conference call
will also be available via the Investors section of the Company’s
website beginning on May 6, 2020.
About Watford Holdings Ltd.
Watford Holdings Ltd. is a global property and casualty
insurance and reinsurance company with approximately $788.9 million
in capital as of March 31, 2020, comprised of: $172.5 million
of senior notes, $52.3 million of contingently redeemable
preference shares and $564.1 million of common shareholders’
equity, with operations in Bermuda, the United States and Europe.
Its operating subsidiaries have been assigned financial strength
ratings of “A-” (Excellent) from A.M. Best and “A” from Kroll Bond
Rating Agency. On May 1, 2020, A.M. Best announced that it
had placed under review with negative implications the financial
strength ratings of our operating subsidiaries.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
|
|
|
(Unaudited) |
|
|
|
March
31, |
|
December
31, |
|
|
2020 |
|
|
|
2019 |
|
|
|
Assets |
($ in
thousands) |
Investments: |
|
|
|
Term loans,
fair value option (Amortized cost: $1,113,510 and $1,113,212) |
$ |
906,999 |
|
|
$ |
1,061,934 |
|
Fixed
maturities, fair value option (Amortized cost: $504,750 and
$432,576) |
|
392,452 |
|
|
|
416,594 |
|
Short-term
investments, fair value option (Cost: $348,059 and $325,542) |
|
343,861 |
|
|
|
329,303 |
|
Equity
securities, fair value option |
|
58,091 |
|
|
|
59,799 |
|
Other
investments, fair value option |
|
30,682 |
|
|
|
30,461 |
|
Investments, fair value option |
|
1,732,085 |
|
|
|
1,898,091 |
|
Fixed
maturities, available for sale (Amortized cost: $749,835 and
$739,456) |
|
717,552 |
|
|
|
745,708 |
|
Equity
securities, fair value through net income |
|
63,169 |
|
|
|
65,338 |
|
Total investments |
|
2,512,806 |
|
|
|
2,709,137 |
|
Cash and
cash equivalents |
|
96,580 |
|
|
|
102,437 |
|
Accrued
investment income |
|
16,344 |
|
|
|
14,025 |
|
Premiums
receivable |
|
281,541 |
|
|
|
273,657 |
|
Reinsurance
recoverable on unpaid and paid losses and loss adjustment
expenses |
|
197,458 |
|
|
|
170,974 |
|
Prepaid
reinsurance premiums |
|
128,570 |
|
|
|
132,577 |
|
Deferred
acquisition costs, net |
|
71,402 |
|
|
|
64,044 |
|
Receivable
for securities sold |
|
26,789 |
|
|
|
16,288 |
|
Intangible
assets |
|
7,650 |
|
|
|
7,650 |
|
Funds held
by reinsurers |
|
40,520 |
|
|
|
42,505 |
|
Other
assets |
|
27,287 |
|
|
|
17,562 |
|
Total assets |
$ |
3,406,947 |
|
|
$ |
3,550,856 |
|
Liabilities |
|
|
|
Reserve for
losses and loss adjustment expenses |
$ |
1,300,249 |
|
|
$ |
1,263,628 |
|
Unearned
premiums |
|
478,663 |
|
|
|
438,907 |
|
Losses
payable |
|
46,424 |
|
|
|
61,314 |
|
Reinsurance
balances payable |
|
71,204 |
|
|
|
77,066 |
|
Payable for
securities purchased |
|
63,829 |
|
|
|
18,180 |
|
Payable for
securities sold short |
|
30,076 |
|
|
|
66,257 |
|
Revolving
credit agreement borrowings |
|
576,486 |
|
|
|
484,287 |
|
Senior
notes |
|
172,486 |
|
|
|
172,418 |
|
Amounts due
to affiliates |
|
4,168 |
|
|
|
4,467 |
|
Investment
management and performance fees payable |
|
5,428 |
|
|
|
17,762 |
|
Other
liabilities |
|
41,552 |
|
|
|
21,912 |
|
Total liabilities |
$ |
2,790,565 |
|
|
$ |
2,626,198 |
|
Commitments
and contingencies |
|
|
|
Contingently
redeemable preference shares |
|
52,328 |
|
|
|
52,305 |
|
Shareholders’ equity |
|
|
|
Common
shares ($0.01 par; shares authorized: 120 million; shares issued:
22,703,170 and 22,692,300) |
|
227 |
|
|
|
227 |
|
Additional
paid-in capital |
|
898,693 |
|
|
|
898,083 |
|
Retained
earnings (deficit) |
|
(224,737 |
) |
|
|
43,470 |
|
Accumulated
other comprehensive income (loss) |
|
(32,206 |
) |
|
|
5,629 |
|
Common
shares held in treasury, at cost (shares: 2,917,149 and
2,789,405) |
|
(77,923 |
) |
|
|
(75,056 |
) |
Total shareholders’ equity |
|
564,054 |
|
|
|
872,353 |
|
Total liabilities, contingently redeemable preference shares and
shareholders’ equity |
$ |
3,406,947 |
|
|
$ |
3,550,856 |
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
|
|
|
(Unaudited) |
|
Three Months Ended March 31, |
|
|
2020 |
|
|
|
2019 |
|
|
|
Revenues |
($ in thousands
except share and per share data) |
Gross
premiums written |
$ |
234,902 |
|
|
$ |
186,689 |
|
Gross
premiums ceded |
|
(48,202 |
) |
|
|
(41,302 |
) |
Net premiums
written |
|
186,700 |
|
|
|
145,387 |
|
Change in
unearned premiums |
|
(46,661 |
) |
|
|
707 |
|
Net premiums
earned |
|
140,039 |
|
|
|
146,094 |
|
Other
underwriting income (loss) |
|
133 |
|
|
|
592 |
|
Interest
income |
|
37,824 |
|
|
|
43,141 |
|
Investment
management fees - related parties |
|
(4,352 |
) |
|
|
(4,409 |
) |
Borrowing
and miscellaneous other investment expenses |
|
(5,669 |
) |
|
|
(8,298 |
) |
Net interest
income |
|
27,803 |
|
|
|
30,434 |
|
Realized and
unrealized gains (losses) on investments |
|
(290,502 |
) |
|
|
33,720 |
|
Investment
performance fees - related parties |
|
— |
|
|
|
(5,800 |
) |
Net
investment income (loss) |
|
(262,699 |
) |
|
|
58,354 |
|
Total
revenues |
|
(122,527 |
) |
|
|
205,040 |
|
Expenses |
|
|
|
Loss and
loss adjustment expenses |
|
(110,676 |
) |
|
|
(110,850 |
) |
Acquisition
expenses |
|
(28,367 |
) |
|
|
(33,974 |
) |
General and
administrative expenses |
|
(7,139 |
) |
|
|
(7,240 |
) |
Interest
expense |
|
(2,912 |
) |
|
|
— |
|
Net foreign
exchange gains (losses) |
|
5,013 |
|
|
|
(437 |
) |
Total
expenses |
|
(144,081 |
) |
|
|
(152,501 |
) |
Income
(loss) before income taxes |
|
(266,608 |
) |
|
|
52,539 |
|
Income tax
expense |
|
— |
|
|
|
— |
|
Net income
(loss) before preference dividends |
|
(266,608 |
) |
|
|
52,539 |
|
Preference
dividends |
|
(1,171 |
) |
|
|
(4,907 |
) |
Net income
(loss) available to common shareholders |
$ |
(267,779 |
) |
|
$ |
47,632 |
|
|
|
|
|
Other
comprehensive income (loss) net of income tax: |
|
|
|
Available-for-sale investments: |
|
|
|
Unrealized
holding gains (losses) arising during the period |
$ |
(28,431 |
) |
|
$ |
3,915 |
|
Unrealized
foreign currency gains (losses) arising during the period |
|
(7,699 |
) |
|
|
1,130 |
|
Credit loss
recognized in net income (loss) |
|
563 |
|
|
|
— |
|
Reclassification of net realized (gains) losses, net of income
taxes, included in net income (loss) |
|
(2,405 |
) |
|
|
(229 |
) |
Unrealized
holding gains (losses) of available for sale investments |
|
(37,972 |
) |
|
|
4,816 |
|
Foreign
currency translation adjustments |
|
137 |
|
|
|
(165 |
) |
Other
comprehensive income (loss) net of income tax |
|
(37,835 |
) |
|
|
4,651 |
|
Comprehensive income (loss) |
$ |
(305,614 |
) |
|
$ |
52,283 |
|
Earnings
(loss) per share: |
|
|
|
Basic and
diluted |
$ |
(13.42 |
) |
|
$ |
2.10 |
|
Weighted
average number of ordinary shares used in the determination of
earnings (loss) per share: |
|
|
|
Basic and diluted |
|
19,951,932 |
|
|
|
22,682,875 |
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2020 |
|
|
|
2019 |
|
|
|
Numerator: |
($ in thousands
except share and per share data) |
Net income
(loss) before preference dividends |
$ |
(266,608 |
) |
|
$ |
52,539 |
|
Preference
dividends |
|
(1,171 |
) |
|
|
(4,907 |
) |
Net income
(loss) available to common shareholders |
$ |
(267,779 |
) |
|
$ |
47,632 |
|
Denominator: |
|
|
|
Weighted average common shares outstanding - basic and diluted
(1) |
|
19,951,932 |
|
|
|
22,682,875 |
|
Earnings
(loss) per common share: |
|
|
|
Basic and diluted |
$ |
(13.42 |
) |
|
$ |
2.10 |
|
|
|
|
|
|
|
|
|
(1) The weighted average non-vested restricted share units are
excluded from the calculation of diluted weighted average common
shares outstanding for the three months ended March 31, 2020,
due to a net loss reported.
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
September 30, |
|
June 30, |
|
March 31, |
|
2020 |
|
2019 |
|
2019 |
|
2019 |
|
2019 |
|
|
Numerator: |
($ in thousands
except share and per share data) |
Total shareholders’ equity |
$ |
564,054 |
|
$ |
872,353 |
|
$ |
960,773 |
|
$ |
961,296 |
|
$ |
941,891 |
Denominator: |
|
|
|
|
|
|
|
|
|
Common
shares outstanding - basic |
|
19,863,328 |
|
|
19,976,397 |
|
|
22,765,802 |
|
|
22,765,802 |
|
|
22,682,875 |
Effect of
dilutive common share equivalents: |
|
|
|
|
|
|
|
|
|
Non-vested
restricted share units (1) |
|
131,277 |
|
|
82,360 |
|
|
82,360 |
|
|
82,360 |
|
|
— |
Common
shares outstanding - diluted |
|
19,994,605 |
|
|
20,058,757 |
|
|
22,848,162 |
|
|
22,848,162 |
|
|
22,682,875 |
|
|
|
|
|
|
|
|
|
|
Book value
per common share |
$ |
28.40 |
|
$ |
43.67 |
|
$ |
42.20 |
|
$ |
42.23 |
|
$ |
41.52 |
Book value per diluted common share |
$ |
28.21 |
|
$ |
43.49 |
|
$ |
42.05 |
|
$ |
42.07 |
|
$ |
41.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) During the first quarter of 2020, the Company granted 63,591
restricted share units and common shares to certain employees and
directors, 48,917 of which are non-vested as of March 31,
2020. During the second quarter of 2019, the Company granted
165,287 restricted share units and common shares to certain
employees and directors, 82,360 of which are non-vested as of
March 31, 2020.
Comments on Regulation G
Throughout this release, the Company presents its operations in
the way it believes will be the most meaningful and useful to
investors, analysts, rating agencies and others who use the
Company’s financial information in evaluating the performance of
the Company and that investors and such other persons benefit from
having a consistent basis for comparison between quarters and for
comparison with other companies within the industry. These measures
may not, however, be comparable to similarly titled measures used
by companies outside of the insurance industry. Investors are
cautioned not to place undue reliance on these non-U.S. GAAP
financial measures in assessing the Company’s overall financial
performance.
This presentation includes the use of “underwriting income
(loss)” (which is defined as net premiums earned less loss and loss
adjustment expenses, acquisition expenses and general and
administrative expenses), “adjusted underwriting income (loss)”
(which is defined as underwriting income (loss) plus other
underwriting income (loss) less certain corporate expenses), and
“adjusted combined ratio” (which is calculated by dividing the sum
of loss and loss adjustment expenses, acquisition expenses and
general and administrative expenses, less certain corporate
expenses, by the sum of net premiums earned and other underwriting
income (loss)). Certain corporate expenses are generally
comprised of non-recurring costs of the holding company, such as
costs associated with the initial setup of subsidiaries, as well as
costs associated with the ongoing operations of the holding company
such as compensation of certain executives.
The presentation of underwriting income (loss), adjusted
underwriting income (loss) and the adjusted combined ratio are
non-U.S. GAAP financial measures as defined in Regulation G. The
reconciliation of such measures to net income (loss) available to
common shareholders (the most directly comparable U.S. GAAP
financial measure) in accordance with Regulation G is included on
the following pages of this release.
Underwriting income (loss) is useful in evaluating our
underwriting performance, without regard to other underwriting
income (losses), net investment income (losses), net foreign
exchange gains (losses), interest expense, income tax expenses and
preference dividends, and adjusted underwriting income (loss) is
useful in evaluating our underwriting performance, without regard
to net investment income (losses), net foreign exchange gains
(losses), interest expense, income tax expenses, preference
dividends and certain corporate expenses, and the adjusted combined
ratio is a key indicator of our profitability, without regard to
certain corporate expenses. The Company believes that
preference dividends, income tax expense, foreign exchange gains
(losses), interest expense, net investment income (loss), other
underwriting income (loss) and certain corporate expenses in any
particular period are not indicative of the performance of, or
trends in, the Company’s underwriting performance. Although
preference dividends, income tax expense, foreign exchange gains
(losses), interest expense, net investment income (loss) and other
underwriting income (loss) are an integral part of the Company’s
operations, the decision to realize investment gains or losses, the
recognition of the change in the carrying value of investments
accounted for using the fair value option in net realized gains or
losses, and the recognition of foreign exchange gains or losses are
independent of the underwriting process and result, in large part,
from general economic and financial market conditions. Furthermore,
certain users of the Company’s financial information believe that,
for many companies, the timing of the realization of investment
gains or losses is largely opportunistic. The Company believes that
certain corporate expenses, due to their non-recurring nature, are
not indicative of the performance of, or trends in, the Company’s
business performance. Due to these reasons, the Company excludes
preference dividends, income tax expense, foreign exchange gains
(losses), interest expense, net investment income (loss), other
underwriting income (loss) from the calculation of underwriting
income (loss), and excludes preference dividends, income tax
expense, foreign exchange gains (losses), interest expense, net
investment income (loss) and certain corporate expenses from the
calculation of adjusted underwriting income (loss) and the adjusted
combined ratio.
The Company believes that showing underwriting income (loss),
adjusted underwriting income (loss) and the adjusted combined ratio
exclusive of the items referred to above reflects the underlying
fundamentals of the Company’s business since the Company evaluates
the performance of its business using underwriting income (loss),
adjusted underwriting income (loss) and the adjusted combined
ratio. The Company believes that this presentation enables
investors and other users of the Company’s financial information to
analyze the Company’s performance in a manner similar to how the
Company’s management analyzes performance. The Company also
believes that this measure follows industry practice and,
therefore, allows the users of the Company’s financial information
to compare the Company’s performance with its industry peer group.
The Company believes that the equity analysts and certain rating
agencies, which follow the Company and the insurance industry as a
whole generally exclude these items from their analysis for the
same reasons.
This presentation also includes the non-investment grade
portfolio and investment grade portfolio components of our
investment returns: “net interest income yield on average net
assets” (calculated as net interest income divided by average net
assets), “net investment income return on average total investments
(excluding accrued investment income)” (calculated as net
investment income divided by average total investments), and “net
investment income return on average net assets” (calculated as net
investment income divided by average net assets). Net assets is
calculated as the sum of total investments, accrued investment
income and receivables for securities sold, less revolving credit
agreement borrowings, payable for securities purchased and payables
for securities sold short. For the three-month period, average net
assets is calculated using the averages of each quarterly period.
However, for the investment grade portfolio component of these
returns, the impact of the revolving credit agreement borrowings is
not subtracted from net interest income, net investment income
(loss) or the net assets calculation.
The presentation of the separate components of our investment
returns (non-investment grade portfolio and investment grade
portfolio) are non-U.S. GAAP financial measures as defined in
Regulation G. The reconciliation of such measures to net interest
income and net investment income (loss), the most directly
comparable U.S. GAAP financial measures, in accordance with
Regulation G is included on the following pages of this
release.
The non-investment grade portfolio and investment grade
portfolio components of our investment returns (net interest income
yield on average net assets, net investment income return on
average net assets and on average total investments (excluding
accrued investment income), respectively) are useful in evaluating
our investment performance. The non-investment grade portfolio
components of these investment returns reflect the performance of
our investment strategy under HPS Investment Partners, LLC (“HPS”),
which includes the use of leverage. The investment grade portfolio
component of these returns reflects the performance of the
investment portfolios that predominantly support our underwriting
collateral.
The following tables present a reconciliation of underwriting
income (loss) to net income (loss) available to common
shareholders, and a reconciliation of adjusted underwriting income
(loss) to underwriting income (loss):
|
|
|
Three Months Ended March 31, |
|
|
2020 |
|
|
|
2019 |
|
|
|
|
($ in
thousands) |
Net income
(loss) available to common shareholders |
$ |
(267,779 |
) |
|
$ |
47,632 |
|
Preference
dividends |
|
1,171 |
|
|
|
4,907 |
|
Net income
(loss) before dividends |
|
(266,608 |
) |
|
|
52,539 |
|
Income tax
expense |
|
— |
|
|
|
— |
|
Interest
expense |
|
2,912 |
|
|
|
— |
|
Net foreign
exchange (gains) losses |
|
(5,013 |
) |
|
|
437 |
|
Net
investment (income) loss |
|
262,699 |
|
|
|
(58,354 |
) |
Other
underwriting (income) loss |
|
(133 |
) |
|
|
(592 |
) |
Underwriting
income (loss) |
|
(6,143 |
) |
|
|
(5,970 |
) |
Certain
corporate expenses |
|
2,996 |
|
|
|
1,963 |
|
Other
underwriting income (loss) |
|
133 |
|
|
|
592 |
|
Adjusted underwriting income (loss) |
$ |
(3,014 |
) |
|
$ |
(3,415 |
) |
|
|
|
|
|
|
|
|
The adjusted combined ratio reconciles to the combined ratio for
the three months ended March 31, 2020 and 2019 as follows:
|
|
|
Three Months Ended March 31, |
|
|
2020 |
|
|
|
2019 |
|
|
Amount |
|
Adjustment |
|
AsAdjusted |
|
Amount |
|
Adjustment |
|
AsAdjusted |
|
|
|
($ in
thousands) |
Losses and loss adjustment expenses |
$ |
110,676 |
|
|
$ |
— |
|
|
$ |
110,676 |
|
|
$ |
110,850 |
|
|
$ |
— |
|
|
$ |
110,850 |
|
Acquisition
expenses |
|
28,367 |
|
|
|
— |
|
|
|
28,367 |
|
|
|
33,974 |
|
|
|
— |
|
|
|
33,974 |
|
General
& administrative expenses (1) |
|
7,139 |
|
|
|
(2,996 |
) |
|
|
4,143 |
|
|
|
7,240 |
|
|
|
(1,963 |
) |
|
|
5,277 |
|
Net premiums
earned (1) |
|
140,039 |
|
|
|
133 |
|
|
|
140,172 |
|
|
|
146,094 |
|
|
|
592 |
|
|
|
146,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
ratio |
|
79.0 |
% |
|
|
|
|
|
|
75.9 |
% |
|
|
|
|
Acquisition
expense ratio |
|
20.3 |
% |
|
|
|
|
|
|
23.3 |
% |
|
|
|
|
General
& administrative expense ratio (1) |
|
5.1 |
% |
|
|
|
|
|
|
4.9 |
% |
|
|
|
|
Combined
ratio |
|
104.4 |
% |
|
|
|
|
|
|
104.1 |
% |
|
|
|
|
Adjusted
loss ratio |
|
|
|
|
|
79.0 |
% |
|
|
|
|
|
|
75.6 |
% |
Adjusted
acquisition expense ratio |
|
|
|
|
|
20.2 |
% |
|
|
|
|
|
|
23.2 |
% |
Adjusted
general & administrative expense ratio |
|
|
|
|
|
3.0 |
% |
|
|
|
|
|
|
3.5 |
% |
Adjusted combined ratio |
|
|
|
|
|
102.2 |
% |
|
|
|
|
|
|
102.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) Adjustments include certain corporate expenses, which are
deducted from general and administrative expenses, and other
underwriting income (loss), which is added to net premiums
earned.
The following tables summarize the components of our total
investment return for the three months ended March 31, 2020
and 2019:
|
|
|
|
|
Three Months Ended March 31, 2020 |
|
Three Months Ended March 31, 2019 |
|
Non-Investment Grade |
|
Investment Grade |
|
Cost of U/W Collateral (4) |
|
Total |
|
Non-Investment Grade |
|
Investment Grade |
|
Cost of U/W Collateral (4) |
|
Total |
|
|
|
($ in
thousands) |
Interest income |
$ |
32,764 |
|
|
$ |
5,060 |
|
|
$ |
— |
|
|
$ |
37,824 |
|
|
$ |
37,339 |
|
|
$ |
5,802 |
|
|
$ |
— |
|
|
$ |
43,141 |
|
Investment
management fees - related parties |
(3,973 |
) |
|
(379 |
) |
|
— |
|
|
(4,352 |
) |
|
(4,071 |
) |
|
(338 |
) |
|
— |
|
|
(4,409 |
) |
Borrowing
and miscellaneous other investment expenses |
(2,591 |
) |
|
(225 |
) |
|
(2,853 |
) |
|
(5,669 |
) |
|
(4,858 |
) |
|
(204 |
) |
|
(3,236 |
) |
|
(8,298 |
) |
Net interest
income |
26,200 |
|
|
4,456 |
|
|
(2,853 |
) |
|
27,803 |
|
|
28,410 |
|
|
5,260 |
|
|
(3,236 |
) |
|
30,434 |
|
Net realized
gains (losses) on investments |
(7,225 |
) |
|
2,179 |
|
|
— |
|
|
(5,046 |
) |
|
1,319 |
|
|
(37 |
) |
|
— |
|
|
1,282 |
|
Net
unrealized gains (losses) on investments (1) |
(285,493 |
) |
|
37 |
|
|
— |
|
|
(285,456 |
) |
|
27,625 |
|
|
4,813 |
|
|
— |
|
|
32,438 |
|
Investment
performance fees - related parties |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(5,800 |
) |
|
— |
|
|
— |
|
|
(5,800 |
) |
Net
investment income (loss) |
$ |
(266,518 |
) |
|
$ |
6,672 |
|
|
$ |
(2,853 |
) |
|
$ |
(262,699 |
) |
|
$ |
51,554 |
|
|
$ |
10,036 |
|
|
$ |
(3,236 |
) |
|
$ |
58,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
total investments (2) |
$ |
1,790,337 |
|
|
$ |
820,635 |
|
|
$ |
— |
|
|
$ |
2,610,972 |
|
|
$ |
1,895,843 |
|
|
$ |
888,424 |
|
|
$— |
|
|
$ |
2,784,267 |
|
Average net
assets (3) |
$ |
1,530,825 |
|
|
$ |
826,062 |
|
|
$ |
(328,750 |
) |
|
$ |
2,028,137 |
|
|
$ |
1,506,245 |
|
|
$ |
886,927 |
|
|
$ |
(316,987 |
) |
|
$ |
2,076,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income yield on average net assets (3) |
1.7 |
% |
|
0.5 |
% |
|
|
|
1.4 |
% |
|
1.9 |
% |
|
0.6 |
% |
|
|
|
1.5 |
% |
Net
investment income return on average total investments (excluding
accrued investment income) (2) |
(14.9 |
)% |
|
0.8 |
% |
|
|
|
(10.1 |
)% |
|
2.7 |
% |
|
1.1 |
% |
|
|
|
2.1 |
% |
Net investment income return on average net assets (3) |
(17.4 |
)% |
|
0.8 |
% |
|
(0.9 |
)% |
|
(13.0 |
)% |
|
3.4 |
% |
|
1.1 |
% |
|
(1.0 |
)% |
|
2.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Net unrealized gains (losses) on investments excludes
unrealized gains and losses from the available for sale portfolios,
which are recorded in other comprehensive income.
(2) Net investment income return on average total investments
(excluding accrued investment income) is calculated by dividing net
investment income by average total investments. For the three-month
period, average total investments is calculated using the average
of the beginning and ending balance of each quarterly period.
However, for the investment grade portfolio component of these
returns, the impact of revolving credit agreement borrowings is not
subtracted from net investment income.
(3) Net interest income yield on average net assets and net
investment income return on average net assets are calculated by
dividing net interest income, and net investment income (loss),
respectively, by average net assets. For the non-investment grade
component of investment returns and total investment returns, net
assets is calculated as the sum of total investments, accrued
investment income and receivables for securities sold, less total
revolving credit agreement borrowings, payable for securities
purchased and payable for securities sold short. However, for
the investment grade portfolio component of these returns, the
impact of the revolving credit agreement borrowings is not
subtracted from net interest income, net investment income (loss),
or the net assets calculation.
(4) The cost of underwriting collateral is calculated as the
revolving credit agreement expenses for the investment grade
portfolios divided by the average total revolving credit agreement
borrowings for the investment grade portfolios during the
period.
|
|
|
|
|
As of March 31, 2020 |
|
As of March 31, 2019 |
|
Non-Investment Grade |
|
InvestmentGrade |
|
Borrowings for U/W Collateral |
|
Total |
|
Non-Investment Grade |
|
Investmen Grade |
|
Borrowings for U/W Collateral |
|
Total |
|
|
|
($ in
thousands) |
Average total investments - QTD |
$ |
1,790,337 |
|
|
$ |
820,635 |
|
|
$ |
— |
|
|
$ |
2,610,972 |
|
|
$ |
1,895,843 |
|
|
$ |
888,424 |
|
|
$ |
— |
|
|
$ |
2,784,267 |
|
Average net
assets - QTD |
|
1,530,825 |
|
|
|
826,062 |
|
|
|
(328,750 |
) |
|
|
2,028,137 |
|
|
|
1,506,245 |
|
|
|
886,927 |
|
|
|
(316,987 |
) |
|
|
2,076,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investments |
$ |
1,718,421 |
|
|
$ |
794,385 |
|
|
$ |
— |
|
|
$ |
2,512,806 |
|
|
$ |
1,909,095 |
|
|
$ |
921,071 |
|
|
$ |
— |
|
|
$ |
2,830,166 |
|
Accrued
Investment Income |
|
12,312 |
|
|
|
4,032 |
|
|
|
— |
|
|
|
16,344 |
|
|
|
13,300 |
|
|
|
4,046 |
|
|
|
— |
|
|
|
17,346 |
|
Receivable
for Securities Sold |
|
22,329 |
|
|
|
4,460 |
|
|
|
— |
|
|
|
26,789 |
|
|
|
62,365 |
|
|
|
201 |
|
|
|
— |
|
|
|
62,566 |
|
Less:
Payable for Securities Purchased |
|
61,834 |
|
|
|
1,995 |
|
|
|
— |
|
|
|
63,829 |
|
|
|
83,189 |
|
|
|
12,388 |
|
|
|
— |
|
|
|
95,577 |
|
Less:
Payable for Securities Sold Short |
|
30,076 |
|
|
|
— |
|
|
|
— |
|
|
|
30,076 |
|
|
|
28,737 |
|
|
|
— |
|
|
|
— |
|
|
|
28,737 |
|
Less:
Revolving credit agreement borrowings |
|
247,736 |
|
|
|
— |
|
|
|
328,750 |
|
|
|
576,486 |
|
|
|
326,256 |
|
|
|
— |
|
|
|
326,487 |
|
|
|
652,743 |
|
Net
assets |
$ |
1,413,416 |
|
|
$ |
800,882 |
|
|
$ |
(328,750 |
) |
|
$ |
1,885,548 |
|
|
$ |
1,546,578 |
|
|
$ |
912,930 |
|
|
$ |
(326,487 |
) |
|
$ |
2,133,021 |
|
Non-investment grade borrowing ratio (1) |
|
17.50 |
% |
|
|
|
|
|
|
|
|
21.10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on investments |
$ |
25,439 |
|
|
$ |
15,086 |
|
|
$ |
— |
|
|
$ |
40,525 |
|
|
$ |
28,066 |
|
|
$ |
4,040 |
|
|
$ |
— |
|
|
$ |
32,106 |
|
Unrealized
losses on investments |
|
(366,188 |
) |
|
|
(47,603 |
) |
|
|
— |
|
|
|
(413,791 |
) |
|
|
(104,700 |
) |
|
|
(6,835 |
) |
|
|
— |
|
|
|
(111,535 |
) |
Net
unrealized gains (losses) on investments |
$ |
(340,749 |
) |
|
$ |
(32,517 |
) |
|
$ |
— |
|
|
$ |
(373,266 |
) |
|
$ |
(76,634 |
) |
|
$ |
(2,795 |
) |
|
$ |
— |
|
|
$ |
(79,429 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The non-investment grade borrowing ratio is calculated as
revolving credit agreement borrowings divided by net assets.
Cautionary Note Regarding Forward-Looking
Statements
The Private Securities Litigation Reform Act of 1995 (the
“PSLRA”) provides a “safe harbor” for forward-looking statements.
This release or any other written or oral statements made by or on
behalf of the Company may include forward-looking statements, which
reflect the Company’s current views with respect to future events
and financial performance. All statements other than statements of
historical fact included in or incorporated by reference in this
release are forward-looking statements. Forward-looking statements,
for purposes of the PSLRA or otherwise, can generally be identified
by the use of forward-looking terminology such as “may,” “will,”
“expect,” “intend,” “estimate,” “anticipate,” “believe” or
“continue” and similar statements of a future or forward-looking
nature or their negative or variations or similar terminology.
These forward-looking statements include statements regarding the
Company’s return on equity potential and prospects for further book
value growth.
Forward-looking statements involve the Company’s 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 release and in
the Company’s periodic reports filed with the Securities and
Exchange Commission (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 A.M. Best’s recent announcement that it
has placed under review with negative implications the financial
strength and credit ratings of our operating subsidiaries;
- our dependence on key executives and inability to attract
qualified personnel, or the potential loss of Bermudian personnel
as a result of Bermuda employment restrictions;
- our dependence on letter of credit facilities that may not be
available on commercially acceptable terms;
- our potential inability to pay dividends or distributions;
- our potential need for additional capital in the future and the
potential unavailability of such capital to us on favorable terms
or at all;
- our dependence on clients’ evaluations of risks associated with
such clients’ insurance underwriting;
- the suspension or revocation of our subsidiaries’ insurance
licenses;
- Watford Holdings potentially being deemed an investment company
under U.S. federal securities law;
- the potential characterization of us and/or any of our
subsidiaries as a passive foreign investment company (“PFIC”);
- our dependence on certain subsidiaries of Arch Capital Group
Ltd. (“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 Arch Investment Management Ltd.
(“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 (“FATCA”) provisions;
- our ability to complete acquisitions and integrate businesses
successfully;
- adverse general economic and market conditions, including those
caused by pandemics, including 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, 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.
All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its 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.
The Company undertakes no obligation to publicly update or revise
any forward-looking statement, whether as a result of new
information, future events or otherwise.
Contact
Robert L. Hawley: (441) 278-3456
rhawley@watfordre.com
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