WTREP - Watford Reports 2020 Second Quarter Results

July, 29 2020 04:54 PM Watford Holdings Ltd. 8.25% Cumulative Redeemable Preference Shares

PEMBROKE, Bermuda, July 29, 2020 (GLOBE NEWSWIRE) -- WATFORD HOLDINGS LTD. (“Watford” or the “Company”) (NASDAQ: WTRE) today reported net income of $188.8 million, after $1.1 million of preference dividends, for the three months ended June 30, 2020, compared to net income of $13.8 million, after payment of $4.9 million of preference dividends, for the same period in 2019. Book value per diluted common share was $38.82 at June 30, 2020, an increase of 37.6% from March 31, 2020. The quarterly results include:

Net income available to common shareholders of $188.8 million, or $9.51 per diluted common share, or a 28.2% return on average equity, compared to net income of $13.8 million, or $0.61 per diluted common share, or a 1.5% return on average equity for the 2019 second quarter;
Combined ratio of 108.0%, comprised of a 79.7% loss ratio, a 22.4% acquisition expense ratio and a 5.9% general and administrative expense ratio, compared to a combined ratio of 103.5% for the prior year second quarter, comprised of a 73.6% loss ratio, a 23.4% acquisition expense ratio and a 6.5% general and administrative expense ratio;
Net interest income of $27.4 million, a 1.4% yield on average net assets, for the 2020 second quarter, compared to net interest income of $26.4 million and a 1.2% yield on average net assets for the 2019 second quarter; and
Net investment income of $199.5 million, a 10.0% return on average net assets for the 2020 second quarter, compared to net investment income of $23.8 million and a 1.1% return on average net assets for the 2019 second quarter.

Following the first quarter of 2020, the novel coronavirus (COVID-19) pandemic has continued to cause unprecedented economic volatility and disruption globally.

At this time, there continues to be 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 June 30, 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 second quarter financial results, Jon Levy, CEO of Watford, said:

“First, we would like to express our sympathy to all those affected by the COVID-19 global pandemic, as well as our appreciation for those who continue to provide support and care to the individuals who need it most. I’d also like to again thank the Watford employees and broader Watford team who have continued to deliver in this challenging environment.

Despite the backdrop of significant turmoil created by the pandemic, Watford demonstrated its resilience and delivered a strong financial performance. Our net income of $188.8 million for the quarter was driven by $199.5 million of net investment income. Our net interest income remained steady at $27.4 million, representing a quarterly yield on average net assets of 1.4%. Realized and unrealized gains for the quarter totaled $172.1 million, with an additional $23.0 million in other comprehensive income. In aggregate, our book value per diluted common share increased $10.61, or 37.6% from March 31, 2020.

Our combined ratio for the quarter was 108.0%, and 104.7% when adjusted for other underwriting income and certain corporate expenses. The COVID-19 global pandemic has created significant uncertainty for the property and casualty industry, though we believe our mix of business is less exposed to classes likely to be materially affected. Watford recognized a COVID-19 loss provision of $5.2 million, or 4.0 loss ratio points, for the second quarter, almost exclusively arising from business interruption coverage in our property catastrophe reinsurance line of business.

Insurance and reinsurance conditions continue to improve. We believe our insurance and reinsurance platforms are well positioned in the hardening marketplace.”

Underwriting

The following table summarizes the Company’s underwriting results on a consolidated basis:


Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

% Change

2020

2019

% Change



($ in thousands)
Gross premiums written
$
157,927


$
161,978


(2.5
)%

$
392,829


$
348,667


12.7
%
Net premiums written

105,856



119,370


(11.3
)%


292,556



264,757


10.5
%
Net premiums earned

131,535



151,318


(13.1
)%


271,574



297,412


(8.7
)%
Underwriting income (loss) (1)

(10,578
)


(5,266
)

(100.9
)%


(16,721
)


(11,236
)

(48.8
)%

















% Point Change





% Point Change
Loss ratio

79.7
%


73.6
%

6.1
%


79.3
%


74.7
%

4.6
%
Acquisition expense ratio

22.4
%


23.4
%

(1.0
)%


21.3
%


23.3
%

(2.0
)%
General & administrative expense ratio

5.9
%


6.5
%

(0.6
)%


5.6
%


5.8
%

(0.2
)%
Combined ratio

108.0
%


103.5
%

4.5
%


106.2
%


103.8
%

2.4
%
Adjusted combined ratio (2)

104.7
%


99.9
%

4.8
%


103.4
%


101.1
%

2.3
%

(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 June 30,

Six Months Ended June 30,

2020

2019

2020

2019




($ in thousands)

Gross premiums written:








Casualty reinsurance
$
25,125


$
32,557


$
108,943


$
108,158

Other specialty reinsurance

21,080



37,836



57,960



62,134

Property catastrophe reinsurance

11,253



5,929



21,085



11,921

Insurance programs and coinsurance

100,469



85,656



204,841



166,454

Total
$
157,927


$
161,978


$
392,829


$
348,667










Net premiums written:








Casualty reinsurance
$
24,774


$
32,077


$
108,441


$
107,142

Other specialty reinsurance

19,843



36,523



55,327



59,705

Property catastrophe reinsurance

10,506



5,621



20,338



11,603

Insurance programs and coinsurance

50,733



45,149



108,450



86,307

Total
$
105,856


$
119,370


$
292,556


$
264,757










Net premiums earned:








Casualty reinsurance
$
48,146


$
67,506


$
100,911


$
130,819

Other specialty reinsurance

29,876



42,635



65,240



87,196

Property catastrophe reinsurance

5,824



3,119



10,708



6,090

Insurance programs and coinsurance

47,689



38,058



94,715



73,307

Total
$
131,535


$
151,318


$
271,574


$
297,412

The following table shows the components of our loss and loss adjustment expenses for the three and six months ended June 30, 2020 and 2019:


Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

2020

2019

Loss and Loss Adjustment Expenses

% of Earned Premiums

Loss and Loss Adjustment Expenses

% of Earned Premiums

Loss and Loss Adjustment Expenses

% of Earned Premiums

Loss and Loss Adjustment Expenses

% of Earned Premiums



($ in thousands)
Current year
$
104,993


79.9
%

$
111,494


73.7
%

$
215,849


79.5
%

$
222,395


74.8
%
Prior year development (favorable)/adverse

(207
)

(0.2
)%


(78
)

(0.1
)%


(387
)

(0.2
)%


(129
)

(0.1
)%
Loss and loss adjustment expenses
$
104,786


79.7
%

$
111,416


73.6
%

$
215,462


79.3
%

$
222,266


74.7
%

Results for the three months ended June 30, 2020 versus 2019:

Gross and net premiums written in the 2020 second quarter were 2.5% and 11.3% lower, respectively, than the 2019 second quarter. The decrease in gross and net premiums written reflected a decrease in casualty reinsurance and other specialty reinsurance premiums written, offset in part by an increase in insurance programs and coinsurance and property catastrophe reinsurance in the 2020 second quarter. In addition, a higher portion of insurance programs and coinsurance premiums written were ceded in the 2020 second quarter compared to the 2019 second quarter.

Net premiums earned in the 2020 second quarter were 13.1% lower than the 2019 second quarter. The decrease in earned premiums reflected reduced participations and non-renewals for certain casualty reinsurance deals. In addition, the decrease in other specialty reinsurance premiums was driven by a contract written and earned with no comparable premium this quarter, as well as a reduction in our exposure to U.S. mortgage risk. These decreases were partially offset by increased writings in insurance programs and coinsurance, and, to a lesser extent, greater assumed property catastrophe reinsurance.

The loss ratio was 79.7% in the 2020 second quarter compared to 73.6% in the 2019 second quarter. In the 2020 second quarter, the increase in loss ratio was primarily driven by COVID-19 related losses of $5.2 million, or 4.0 points, which mainly impacted property catastrophe reinsurance business. The prior year loss reserve development for both the 2020 and 2019 second quarters was essentially flat. The acquisition expense ratio was 22.4% in the 2020 second quarter, compared to 23.4% in the 2019 second quarter. These ratio movements also reflect changes in mix and the type of business.

The general and administrative expense ratio was 5.9% in the 2020 second quarter, compared to 6.5% in the 2019 second quarter. The 0.6 point decrease versus the prior year second quarter was primarily attributable to a one-time accelerated long term incentive expense recognized in the 2019 second quarter. Removing certain corporate expenses, our adjusted general and administrative expense ratio was 3.3% in the 2020 second quarter consistent with 3.3% in the 2019 second quarter.

Investments

The following table summarizes the Company’s key investment returns on a consolidated basis:


Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

2020

2019



($ in thousands)
Interest income
$
36,453


$
38,596


$
74,277


$
81,737

Investment management fees - related parties

(4,262
)


(4,570
)


(8,614
)


(8,979
)
Borrowing and miscellaneous other investment expenses

(4,763
)


(7,611
)


(10,432
)


(15,909
)
Net interest income

27,428



26,415



55,231



56,849

Realized gains (losses) on investments

(6,001
)


789



(11,047
)


2,071

Unrealized gains (losses) on investments

178,064



(1,725
)


(107,392
)


30,713

Investment performance fees - related parties

—



(1,692
)


—



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


$
23,787


$
(63,208
)

$
82,141









Unrealized gains on investments (balance sheet)
$
59,123


$
35,228


$
59,123


$
35,228

Unrealized losses on investments (balance sheet)

(244,474
)


(113,937
)


(244,474
)


(113,937
)
Net unrealized gains (losses) on investments (balance sheet)
$
(185,351
)

$
(78,709
)

$
(185,351
)

$
(78,709
)








Net interest income yield on average net assets (1)

1.4
%


1.2
%


2.7
%


2.7
%
Non-investment grade portfolio (1)

1.8
%


1.6
%


3.5
%


3.5
%
Investment grade portfolio (1)

0.4
%


0.6
%


1.0
%


1.2
%
Net investment income return on average net assets (1)

10.0
%


1.1
%


(3.1
)%


3.9
%
Non-investment grade portfolio (1)

13.1
%


1.2
%


(5.2
)%


4.6
%
Investment grade portfolio (1)

1.6
%


1.0
%


2.4
%


2.1
%
Net investment income return on average total investments (excluding accrued investment income) (2)

7.7
%


0.8
%


(2.4
)%


2.9
%
Non-investment grade portfolio (2)

10.6
%


1.0
%


(4.3
)%


3.7
%
Investment grade portfolio (2)

1.6
%


1.0
%


2.4
%


2.1
%

(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- and six-month periods, 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- and six-month periods, 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).

Results for the three months ended June 30, 2020 versus 2019:

Net investment income was $199.5 million for the three months ended June 30, 2020 compared to net investment income of $23.8 million for the three months ended June 30, 2019, an increase of $175.7 million. The 2020 second quarter net investment income return on average net assets was 10.0% as compared to 1.1% for the prior year period.

The 2020 second quarter net investment income return was driven by net unrealized gains of $178.1 million as the credit markets partially recovered through the quarter. Net interest income increased to $27.4 million from $26.4 million, an increase of 3.8% quarter over quarter.

The 2020 second quarter non-investment grade portfolio net interest income yield was 1.8%, compared with 1.6% in the second quarter of 2019. The net realized and unrealized gains reported in the 2020 second quarter were $163.1 million, reflective of the credit market recovery discussed above.

The 2020 second quarter investment grade portfolio net interest income yield was 0.4%, a decrease from 0.6% in the prior year period. In addition, the investment grade portfolio recognized $8.9 million of net realized and unrealized gains in the quarter as compared to gains of $3.8 million in the second quarter of 2019.

The following tables summarize the composition of the Company's non-investment grade and investment grade portfolios by sector as of June 30, 2020 and March 31, 2020:


June 30, 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
$
875,560

$
188,970

$
170,442

$
186,367

$
113,733

$
90,250

$
36,455

$
29,573

$
59,770
Corporate bonds

378,183


44,898


26,626


16,720


105,543


33,870


68,314


29,516


52,696
Equities - sector specific

93,872


62,350


22,577


7,266


—


641


—


264


774
Short-term investments - sector specific

2,184


—


—


1,682


—


—


502


—


—
Subtotal

1,349,799


296,218


219,645


212,035


219,276


124,761


105,271


59,353


113,240
Equities - non-sector specific

27,470
















Short-term investments - non-sector specific

267,904
















Asset-backed securities

157,925
















Other investments

34,142
















Mortgage-backed securities

9,164
















Total Non-Investment Grade Portfolio
$
1,846,404

$
296,218

$
219,645

$
212,035

$
219,276

$
124,761

$
105,271

$
59,353

$
113,240


















Investment Grade Portfolio:

















Corporate bonds
$
169,918

$
51,327

$
10,834

$
18,688

$
22,738

$
11,942

$
35,818

$
11,388

$
7,183
Short-term investments

99,978
















U.S. government and government agency bonds

217,459
















Non-U.S. government and government agency bonds

151,124
















Asset-backed securities

130,327
















Mortgage-backed securities

22,018
















Municipal government and government agency bonds

2,117
















Total Investment Grade Portfolio
$
792,941

$
51,327

$
10,834

$
18,688

$
22,738

$
11,942

$
35,818

$
11,388

$
7,183
Total Investments
$
2,639,345

$
347,545

$
230,479

$
230,723

$
242,014

$
136,703

$
141,089

$
70,741

$
120,423

(1) Includes telecommunications, utilities and basic materials.


March 31, 2020

Total

Financials

Health Care

Technology

Consumer Services

Industrials

Consumer Goods

Oil & Gas

All Other (1)



($ in thousands)
Non-Investment Grade Portfolio:

















Term loan investments
$
906,999

$
190,535

$
195,084

$
199,837

$
98,518

$
89,778

$
40,415

$
32,049

$
60,783
Corporate bonds

240,570


24,927


43,028


15,702


49,761


27,585


19,947


18,522


41,098
Equities - sector specific

95,112


59,714


27,174


5,868


—


1,026


—


242


1,088
Short-term investments - sector specific

47,703


7,703


—


—


—


—


—


40,000


—
Subtotal

1,290,384


282,879


265,286


221,407


148,279


118,389


60,362


90,813


102,969
Equities - non-sector specific

26,148
















Short-term investments - non-sector specific

222,065
















Asset-backed securities

140,613
















Other investments

30,682
















Mortgage-backed securities

8,529
















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

$
282,879

$
265,286

$
221,407

$
148,279

$
118,389

$
60,362

$
90,813

$
102,969


















Investment Grade Portfolio:

















Corporate bonds
$
167,570

$
62,046

$
13,752

$
12,135

$
15,481

$
14,133

$
34,718

$
7,346

$
7,959
Short-term investments

74,093
















U.S. government and government agency bonds

265,423
















Non-U.S. government and government agency bonds

149,858
















Asset-backed securities

113,583
















Mortgage-backed securities

21,785
















Municipal government and government agency bonds

2,073
















Total Investment Grade Portfolio
$
794,385

$
62,046

$
13,752

$
12,135

$
15,481

$
14,133

$
34,718

$
7,346

$
7,959
Total Investments
$
2,512,806

$
344,925

$
279,038

$
233,542

$
163,760

$
132,522

$
95,080

$
98,159

$
110,928

(1) Includes telecommunications, utilities and basic materials.

The table below summarizes the credit quality of the Company's non-investment grade and investment grade portfolios as of June 30, 2020 and March 31, 2020, 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)
June 30, 2020
Fair Value

AAA

AA

A

BBB

BB

B

CCC

CC

C

D

Not Rated



($ in thousands)
Non-Investment Grade Portfolio:























Term loan investments
$
875,560

$
—

$
—

$
—

$
—

$
23,218

$
530,118

$
247,478

$
15,191

$
2,192


28046

$
29,317
Corporate bonds

378,183


—


—


—


37373


50,125


152,648


113,723


6268


5585


3956


8,505
Asset-backed securities

157,925


—


—


3,854


98,827


23,136


8,767


1663


—


—


—


21,678
Mortgage-backed securities

9,164


—


—


—


—


1292


—


—


—


—


3,224


4,648
Short-term investments

270,088


34859


172,166


60,880


—


502


—


—


—


—


—


1,681
Total fixed income instruments and short-term investments

1,690,920


34859


172,166


64,734


136,200


98,273


691,533


362,864


21,459


7,777


35,226


65,829
Other Investments

34,142






















Equities

121,342






















Total Non-Investment Grade Portfolio
$
1,846,404


34859

$
172,166

$
64,734

$
136,200

$
98,273

$
691,533

$
362,864

$
21,459

$
7,777

$
35,226

$
65,829
























Investment Grade Portfolio:























Corporate bonds
$
169,918

$
—

$
16,032

$
90,087

$
58,858


4941

$
—

$
—

$
—

$
—

$
—

$
—
U.S. government and government agency bonds

217,459


—


217,459


—


—


—


—


—


—


—


—


—
Asset-backed securities

130,327


1,377


—


19,621


108,790


539


—


—


—


—


—


—
Mortgage-backed securities

22,018


—


602


4,794


16,622


—


—


—


—


—


—


—
Non-U.S. government and government agency bonds

151,124


—


151,124


—


—


—


—


—


—


—


—


—
Municipal government and government agency bonds

2,117


1,039


586


492


—


—


—


—


—


—


—


—
Short-term investments

99,978


3,448


22,656


0


73,874


—


—


—


—


—


—


—
Total Investment Grade Portfolio
$
792,941

$
5,864

$
408,459

$
114,994

$
258,144


5480

$
—

$
—

$
—

$
—

$
—

$
—
Total
$
2,639,345

$
40,723

$
580,625

$
179,728

$
394,344

$
103,753

$
691,533

$
362,864

$
21,459

$
7,777

$
35,226

$
65,829

(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)
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

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 June 30, 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 $1.1 million and $4.9 million for the three months ended June 30, 2020 and 2019, respectively.

There were no share repurchases during the 2020 second quarter. As of June 30, 2020, approximately $47.1 million of share repurchases were available under the Company’s previously announced $50 million share repurchase program.

Conference Call

The Company will hold a conference call on Thursday, July 30, 2020 at 1:00 p.m. Eastern time to discuss its 2020 second quarter results. 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 July 31, 2020.

About Watford Holdings Ltd.

Watford Holdings Ltd. is a global property and casualty insurance and reinsurance company with approximately $1.0 billion in capital as of June 30, 2020, comprised of: $172.6 million of senior notes, $52.4 million of contingently redeemable preference shares and $776.2 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. In addition, on June 17, 2020, Kroll Bond Rating Agency reaffirmed the “A” insurance financial strength ratings of our operating subsidiaries, and revised the outlook for all of the ratings to negative.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


(Unaudited)



June 30,

December 31,

2020

2019


Assets
($ in thousands, except share data)
Investments:



Term loans, fair value option (Amortized cost: $991,130 and $1,113,212)
$
875,560


$
1,061,934

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

548,010



416,594

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

370,066



329,303

Equity securities, fair value option

58,898



59,799

Other investments, fair value option

34,142



30,461

Investments, fair value option

1,886,676



1,898,091

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

690,225



745,708

Equity securities, fair value through net income

62,444



65,338

Total investments

2,639,345



2,709,137

Cash and cash equivalents

107,653



102,437

Accrued investment income

14,364



14,025

Premiums receivable

258,178



273,657

Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses

229,746



170,974

Prepaid reinsurance premiums

131,919



132,577

Deferred acquisition costs, net

64,149



64,044

Receivable for securities sold

31,314



16,288

Intangible assets

7,650



7,650

Funds held by reinsurers

41,112



42,505

Other assets

22,328



17,562

Total assets
$
3,547,758


$
3,550,856

Liabilities



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


$
1,263,628

Unearned premiums

456,170



438,907

Losses payable

58,292



61,314

Reinsurance balances payable

72,776



77,066

Payable for securities purchased

67,272



18,180

Payable for securities sold short

29,289



66,257

Revolving credit agreement borrowings

472,361



484,287

Senior notes

172,554



172,418

Amounts due to affiliates

4,542



4,467

Investment management and performance fees payable

5,511



17,762

Other liabilities

27,440



21,912

Total liabilities
$
2,719,256


$
2,626,198

Commitments and contingencies



Contingently redeemable preference shares

52,351



52,305

Shareholders’ equity



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

227



227

Additional paid-in capital

898,935



898,083

Retained earnings (deficit)

(35,909
)


43,470

Accumulated other comprehensive income (loss)

(9,179
)


5,629

Common shares held in treasury, at cost (shares: 2,917,149 and 2,789,405)

(77,923
)


(75,056
)
Total shareholders’ equity

776,151



872,353

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


$
3,550,856

CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)


(Unaudited)

(Unaudited)

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

2020

2019


Revenues
($ in thousands except share and per share data)
Gross premiums written
$
157,927


$
161,978


$
392,829


$
348,667

Gross premiums ceded

(52,071
)


(42,608
)


(100,273
)


(83,910
)
Net premiums written

105,856



119,370



292,556



264,757

Change in unearned premiums

25,679



31,948



(20,982
)


32,655

Net premiums earned

131,535



151,318



271,574



297,412

Other underwriting income (loss)

868



673



1,001



1,265

Interest income

36,453



38,596



74,277



81,737

Investment management fees - related parties

(4,262
)


(4,570
)


(8,614
)


(8,979
)
Borrowing and miscellaneous other investment expenses

(4,763
)


(7,611
)


(10,432
)


(15,909
)
Net interest income

27,428



26,415



55,231



56,849

Realized and unrealized gains (losses) on investments

172,063



(936
)


(118,439
)


32,784

Investment performance fees - related parties

—



(1,692
)


—



(7,492
)
Net investment income (loss)

199,491



23,787



(63,208
)


82,141

Total revenues

331,894



175,778



209,367



380,818

Expenses







Loss and loss adjustment expenses

(104,786
)


(111,416
)


(215,462
)


(222,266
)
Acquisition expenses

(29,486
)


(35,417
)


(57,853
)


(69,391
)
General and administrative expenses

(7,841
)


(9,751
)


(14,980
)


(16,991
)
Interest expense

(2,911
)


—



(5,823
)


—

Net foreign exchange gains (losses)

2,665



(441
)


7,678



(878
)
Total expenses

(142,359
)


(157,025
)


(286,440
)


(309,526
)
Income (loss) before income taxes

189,535



18,753



(77,073
)


71,292

Income tax expense

402



(20
)


402



(20
)
Net income (loss) before preference dividends

189,937



18,733



(76,671
)


71,272

Preference dividends

(1,109
)


(4,908
)


(2,280
)


(9,815
)
Net income (loss) available to common shareholders
$
188,828


$
13,825


$
(78,951
)

$
61,457









Other comprehensive income (loss) net of income tax:







Available-for-sale investments:







Unrealized holding gains (losses) arising during the period
$
31,240


$
6,532


$
2,809


$
10,613

Unrealized foreign currency gains (losses) arising during the period

279



(1,678
)


(7,420
)


(548
)
Credit loss recognized in net income (loss)

(212
)


—



351



—

Reclassification of net realized (gains) losses, net of income taxes, included in net income (loss)

(8,331
)


(1,816
)


(10,736
)


(2,211
)
Unrealized holding gains (losses) of available for sale investments

22,976



3,038



(14,996
)


7,854

Foreign currency translation adjustments

51



212



188



47

Other comprehensive income (loss) net of income tax

23,027



3,250



(14,808
)


7,901

Comprehensive income (loss)
$
211,855


$
17,075


$
(93,759
)

$
69,358

Earnings (loss) per share:







Basic and diluted
$
9.51


$
0.61


$
(3.97
)

$
2.71

Weighted average number of ordinary shares used in the determination of earnings (loss) per share:







Basic

19,863,048



22,740,762



19,907,490



22,711,833

Diluted

19,863,048



22,747,033



19,907,490



22,714,969


Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

2020

2019


Numerator:
($ in thousands except share and per share data)
Net income (loss) before preference dividends
$
189,937


$
18,733


$
(76,671
)

$
71,272

Preference dividends

(1,109
)


(4,908
)


(2,280
)


(9,815
)
Net income (loss) available to common shareholders
$
188,828


$
13,825


$
(78,951
)

$
61,457

Denominator:







Weighted average common shares outstanding - basic

19,863,048



22,740,762



19,907,490



22,711,833

Effect of dilutive common share equivalents:







Weighted average non-vested restricted share units (1)

—



6,271



—



3,136

Weighted average common shares outstanding - diluted

19,863,048



22,747,033



19,907,490



22,714,969

Earnings (loss) per common share:







Basic and diluted
$
9.51


$
0.61


$
(3.97
)

$
2.71

(1) The weighted average non-vested restricted share units are excluded from the calculation of diluted weighted average common shares outstanding for the six months ended June 30, 2020, due to a net loss reported.


June 30,

March 31,

December 31,

September 30,

June 30,

2020 (1)

2020 (2)


2019


2019

2019 (3)


Numerator:
($ in thousands except share and per share data)
Total shareholders’ equity
$
776,151

$
564,054

$
872,353

$
960,773

$
961,296
Denominator:









Common shares outstanding - basic (1)(2)(3)

19,890,784


19,863,328


19,976,397


22,765,802


22,765,802
Effect of dilutive common share equivalents:









Non-vested restricted share units (2)(3)

103,820


131,277


82,360


82,360


82,360
Common shares outstanding - diluted

19,994,604


19,994,605


20,058,757


22,848,162


22,848,162










Book value per common share
$
39.02

$
28.40

$
43.67

$
42.20

$
42.23
Book value per diluted common share
$
38.82

$
28.21

$
43.49

$
42.05

$
42.07

(1) During the second quarter of 2020, the Company issued 100,958 common shares, related to the restricted share units granted to certain employees and directors in the second quarter of 2019. Of these shares, 27,456 common shares vested in the second quarter of 2020.

(2) During the first quarter of 2020, the Company granted 63,591 restricted share units and common shares to certain employees and directors, 48,916 of which are non-vested as of June 30, 2020.

(3) During the second quarter of 2019, the Company granted 165,287 restricted share units and common shares to certain employees and directors, 54,904 of which are non-vested as of June 30, 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 costs associated with the ongoing operations of the holding company, such as compensation of certain executives and costs associated with the initial setup of subsidiaries.

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 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- and six-month periods, 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 June 30,

Six Months Ended June 30,

2020

2019

2020

2019



($ in thousands)
Net income (loss) available to common shareholders
$
188,828


$
13,825


$
(78,951
)

$
61,457

Preference dividends

1,109



4,908



2,280



9,815

Net income (loss) before dividends

189,937



18,733



(76,671
)


71,272

Income tax expense

(402
)


20



(402
)


20

Interest expense

2,911



—



5,823



—

Net foreign exchange (gains) losses

(2,665
)


441



(7,678
)


878

Net investment (income) loss

(199,491
)


(23,787
)


63,208



(82,141
)
Other underwriting (income) loss

(868
)


(673
)


(1,001
)


(1,265
)
Underwriting income (loss)

(10,578
)


(5,266
)


(16,721
)


(11,236
)
Certain corporate expenses

3,443



4,795



6,439



6,758

Other underwriting income (loss)

868



673



1,001



1,265

Adjusted underwriting income (loss)
$
(6,267
)

$
202


$
(9,281
)

$
(3,213
)

The adjusted combined ratio reconciles to the combined ratio for the three and six months ended June 30, 2020 and 2019 as follows:


Three Months Ended June 30,

2020

2019

Amount

Adjustment

As Adjusted

Amount

Adjustment

As Adjusted



($ in thousands)
Losses and loss adjustment expenses
$
104,786


$
—


$
104,786


$
111,416


$
—


$
111,416

Acquisition expenses

29,486



—



29,486



35,417



—



35,417

General & administrative expenses (1)

7,841



(3,443
)


4,398



9,751



(4,795
)


4,956

Net premiums earned (1)

131,535



868



132,403



151,318



673



151,991













Loss ratio

79.7
%






73.6
%




Acquisition expense ratio

22.4
%






23.4
%




General & administrative expense ratio (1)

5.9
%






6.5
%




Combined ratio

108.0
%






103.5
%




Adjusted loss ratio





79.1
%






73.3
%
Adjusted acquisition expense ratio





22.3
%






23.3
%
Adjusted general & administrative expense ratio





3.3
%






3.3
%
Adjusted combined ratio





104.7
%






99.9
%

(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.


Six Months Ended June 30,

2020

2019

Amount

Adjustment

As Adjusted

Amount

Adjustment

As Adjusted



($ in thousands)
Losses and loss adjustment expenses
$
215,462


$
—


$
215,462


$
222,266


$
—


$
222,266

Acquisition expenses

57,853



—



57,853



69,391



—



69,391

General & administrative expenses (1)

14,980



(6,439
)


8,541



16,991



(6,758
)


10,233

Net premiums earned (1)

271,574



1,001



272,575



297,412



1,265



298,677













Loss ratio

79.3
%






74.7
%




Acquisition expense ratio

21.3
%






23.3
%




General & administrative expense ratio (1)

5.6
%






5.8
%




Combined ratio

106.2
%






103.8
%




Adjusted loss ratio





79.0
%






74.4
%
Adjusted acquisition expense ratio





21.2
%






23.2
%
Adjusted general & administrative expense ratio





3.2
%






3.5
%
Adjusted combined ratio





103.4
%






101.1
%

(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 and six months ended June 30, 2020 and 2019:


Three Months Ended June 30, 2020

Three Months Ended June 30, 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
$
32,410


$
4,043


$
—


$
36,453


$
32,492


$
6,104


$
—


$
38,596

Investment management fees - related parties

(3,943
)


(319
)


—



(4,262
)


(4,171
)


(399
)


—



(4,570
)
Borrowing and miscellaneous other investment expenses

(2,741
)


(212
)


(1,810
)


(4,763
)


(3,809
)


(238
)


(3,564
)


(7,611
)
Net interest income

25,726



3,512



(1,810
)


27,428



24,512



5,467



(3,564
)


26,415

Net realized gains (losses) on investments

(14,912
)


8,911



—



(6,001
)


(177
)


966



—



789

Net unrealized gains (losses) on investments (1)

178,050



14



—



178,064



(4,511
)


2,786



—



(1,725
)
Investment performance fees - related parties

—



—



—



—



(1,692
)


—



—



(1,692
)
Net investment income (loss)
$
188,864


$
12,437


$
(1,810
)

$
199,491


$
18,132


$
9,219


$
(3,564
)

$
23,787

















Average total investments (2)
$
1,782,413


$
793,663


$
0


$
2,576,076


$
1,871,286


$
928,850


$
—


$
2,800,136

Average net assets (3)
$
1,446,900


$
800,175


$
(246,250
)

$
2,000,825


$
1,548,237


$
924,948


$
(327,619
)

$
2,145,566

















Net interest income yield on average net assets (3)

1.8
%


0.4
%




1.4
%


1.6
%


0.6
%




1.2
%
Net investment income return on average total investments (excluding accrued investment income) (2)

10.6
%


1.6
%




7.7
%


1.0
%


1.0
%




0.8
%
Net investment income return on average net assets (3)

13.1
%


1.6
%


(0.7
)%


10.0
%


1.2
%


1.0
%


(1.1
)%


1.1
%

(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.


Six Months Ended June 30, 2020

Six Months Ended June 30, 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
$
65,174


$
9,103


$
—


$
74,277


$
69,831


$
11,906


$
—


$
81,737

Investment management fees - related parties

(7,916
)


(698
)


—



(8,614
)


(8,242
)


(737
)


—



(8,979
)
Borrowing and miscellaneous other investment expenses

(5,332
)


(437
)


(4,663
)


(10,432
)


(8,667
)


(442
)


(6,800
)


(15,909
)
Net interest income

51,926



7,968



(4,663
)


55,231



52,922



10,727



(6,800
)


56,849

Net realized gains (losses) on investments

(22,137
)


11,090



—



(11,047
)


1,142



929



—



2,071

Net unrealized gains (losses) on investments (1)

(107,443
)


51



—



(107,392
)


23,114



7,599



—



30,713

Investment performance fees - related parties

—



—



—



—



(7,492
)


—



—



(7,492
)
Net investment income (loss)
$
(77,654
)

$
19,109


$
(4,663
)

$
(63,208
)

$
69,686


$
19,255


$
(6,800
)

$
82,141

















Average total investments (2)
$
1,786,375


$
807,149


$
—


$
2,593,524


$
1,883,565


$
908,637


$
—


$
2,792,202

Average net assets (3)
$
1,488,863


$
813,118


$
(287,500
)

$
2,014,481


$
1,527,241


$
905,937


$
(322,303
)

$
2,110,875

















Net interest income yield on average net assets (3)

3.5
%


1.0
%




2.7
%


3.5
%


1.2
%




2.7
%
Net investment income return on average total investments (excluding accrued investment income) (2)

(4.3
)%


2.4
%




(2.4
)%


3.7
%


2.1
%




2.9
%
Net investment income return on average net assets (3)

(5.2
)%


2.4
%


(1.6
)%


(3.1
)%


4.6
%


2.1
%


(2.1
)%


3.9
%

(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 six-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.


As of June 30, 2020

As of June 30, 2019

Non- Investment Grade

Investment Grade

Borrowings for U/W Collateral

Total

Non- Investment Grade

Investment Grade

Borrowings for U/W Collateral

Total



($ in thousands)
Average total investments - QTD
$
1,782,413


$
793,663


$
—


$
2,576,076


$
1,871,286


$
928,850


$
—


$
2,800,136

Average total investments - YTD
$
1,786,375


$
807,149



—


$
2,593,524


$
1,883,565


$
908,637



—


$
2,792,202

















Average net assets - QTD

1,446,900



800,175



(246,250
)


2,000,825



1,548,237



924,948



(327,619
)


2,145,566

Average net assets - YTD

1,488,863



813,118



(287,500
)


2,014,481



1,527,241



905,937



(322,303
)


2,110,875

















Total investments
$
1,846,404


$
792,941


$
—


$
2,639,345


$
1,833,476


$
936,629


$
—


$
2,770,105

Accrued Investment Income

10,853



3,511



—



14,364



11,834



5,082



—



16,916

Receivable for Securities Sold

28,298



3016



—



31,314



29,367



58



—



29,425

Less: Payable for Securities Purchased

67,272



—



—



67,272



46,412



4,804



—



51,216

Less: Payable for Securities Sold Short

29,289



—



—



29,289



48,823



—



—



48,823

Less: Revolving credit agreement borrowings

308,611



—



163,750



472,361



229,546



—



328,751



558,297

Net assets
$
1,480,383


$
799,468


$
(163,750
)

$
2,116,101


$
1,549,896


$
936,965


$
(328,751
)

$
2,158,110

Non-investment grade borrowing ratio (1)

20.80
%








14.80
%






















Unrealized gains on investments
$
44,845


$
14,278


$
—


$
59,123


$
27,068


$
8,160


$
—


$
35,228

Unrealized losses on investments

(221,353
)


(23,121
)


—



(244,474
)


(109,200
)


(4,737
)


—



(113,937
)
Net unrealized gains (losses) on investments
$
(176,508
)

$
(8,843
)

$
—


$
(185,351
)

$
(82,132
)

$
3,423


$
—


$
(78,709
)

(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, societal, 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. 8.25% Cumulative Redeemable Preference Shares
Stock Symbol:	WTREP
Market:	NASDAQ

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