WTRE - Watford Reports 2020 First Quarter Results

May, 04 2020 07:17 PM Watford Holdings Ltd.

PEMBROKE, Bermuda, May 04, 2020 (GLOBE NEWSWIRE) -- WATFORD HOLDINGS LTD. (“Watford” or the “Company”) (NASDAQ: WTRE) today reported a net loss of $267.8 million, after $1.2 million of preference dividends, for the three months ended March 31, 2020, compared to net income of $47.6 million, after payment of $4.9 million of preference dividends, for the same period in 2019. Book value per diluted common share was $28.21 at March 31, 2020, a decrease of 35.1% from December 31, 2019. The quarterly results include:

Net loss available to common shareholders of $267.8 million, or $(13.42) per diluted common share, compared to net income of $47.6 million, or $2.10 per diluted common share, for the 2019 first quarter;
Combined ratio of 104.4%, comprised of a 79.0% loss ratio, a 20.3% acquisition expense ratio and a 5.1% general and administrative expense ratio, compared to a combined ratio of 104.1% for the prior year first quarter, comprised of a 75.9% loss ratio, a 23.3% acquisition expense ratio and a 4.9% general and administrative expense ratio;
Net interest income of $27.8 million, a 1.4% yield on average net assets, for the 2020 first quarter, compared to net interest income of $30.4 million and a 1.5% yield on average net assets for the 2019 first quarter;
Net investment loss of $262.7 million, a (13.0)% return on average net assets for the 2020 first quarter, compared to net investment income of $58.4 million and a 2.8% return on average net assets for the 2019 first quarter; and
During the quarter, the Company repurchased 127,744 common shares at an average price of $22.42 per share for an aggregate cost of $2.9 million under its previously announced $50 million share repurchase program. As of March 31, 2020, up to approximately $47.1 million of share repurchases were available under this program.

In addition, on March 11, 2020, the World Health Organization declared a pandemic in relation to the outbreak of the novel coronavirus (COVID-19). The pandemic is causing unprecedented social disruption, global economic volatility, reduced liquidity of capital markets and intervention by various governments around the world.

At this time, there are significant uncertainties surrounding the ultimate number of insurance claims and scope of damage resulting from this pandemic. The Company’s estimates across its insurance and reinsurance lines of business are based on currently available information derived from modeling techniques, preliminary claims information obtained from the Company’s clients and brokers, a review of relevant in-force contracts with potential exposure to the pandemic and estimates of reinsurance recoverables. These estimates include losses only related to claims incurred as of March 31, 2020. Actual losses from these events may vary materially from the estimates due to several factors, including the inherent uncertainties in making such determinations and the evolving nature of this pandemic.

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 Loss Adjustment Expenses

% of Earned Premiums

Loss and Loss Adjustment Expenses

% of Earned Premiums



($ in thousands)
Current year
$
110,856


79.1
%

$
110,901


75.9
%
Prior year development (favorable)/adverse

(180
)

(0.1
)%


(51
)

—
%
Loss and loss adjustment expenses
$
110,676


79.0
%

$
110,850


75.9
%

Results for the three months ended March 31, 2020 versus 2019:

Gross and net premiums written in the 2020 first quarter were 25.8% and 28.4% higher, respectively, than the 2019 first quarter. The increase in gross and net premiums written reflect growth across all lines of business. Casualty reinsurance and other specialty reinsurance premiums increased over the prior year quarter, primarily due to increased personal and commercial auto writings.

Net premiums earned in the 2020 first quarter were 4.1% lower than the 2019 first quarter. The decrease in premiums reflected a non-renewal of one multi-line quota share contract within casualty reinsurance and a non-recurring exposure within other specialty reinsurance earned in the first quarter of 2019. This was partially offset by increased writings in insurance programs and coinsurance, and, to a lesser extent, property catastrophe reinsurance.

The loss ratio was 79.0% in the 2020 first quarter compared to 75.9% in the 2019 first quarter. The acquisition expense ratio was 20.3% in the 2020 first quarter, compared to 23.3% in the 2019 first quarter. In the 2020 first quarter, the increase in loss ratio and corresponding decrease in acquisition expense ratio were driven by losses incurred related to COVID-19 and impacted other specialty reinsurance business. A portion of this increase in losses is offset by loss sensitive commission decreases, which are reflected as benefits to the acquisition ratio. Other movements reflect changes in mix and the type of business. The prior year loss reserve development for both the 2020 and 2019 first quarters was essentially flat.

The general and administrative expense ratio was 5.1% in the 2020 first quarter, compared to 4.9% in the 2019 first quarter. The 0.2 point increase versus the prior year first quarter was attributable to ongoing public company expenses. Removing certain corporate expenses, our adjusted general and administrative expense ratio was 3.0% in the 2020 first quarter compared to 3.5% in the 2019 first quarter.

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

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

As Adjusted

Amount

Adjustment

As Adjusted



($ 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

Investment Grade

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

Company Name:	Watford Holdings Ltd.
Stock Symbol:	WTRE
Market:	NYSE
Website:	www.wisdomtree.com

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