Watford Reports 2020 Third Quarter Results

Nachrichtenquelle: Business Wire (engl.)
29.10.2020, 21:34  |  107   |   |   

WATFORD HOLDINGS LTD. (“Watford” or the “Company”) (NASDAQ: WTRE) today reported net income of $78.1 million, after $1.1 million of preference dividends, for the three months ended September 30, 2020, compared to net income of $0.2 million, after payment of $2.6 million of preference dividends and $4.2 million of accelerated amortization costs related to the redemption of preference shares, for the same period in 2019. Book value per diluted common share was $43.36 at September 30, 2020, an increase of 11.7% from June 30, 2020. The quarterly results include:

  • Net income available to common shareholders of $78.1 million, or $3.92 per diluted common share, or a 9.5% return on average equity, compared to net income of $0.2 million, or $0.01 per diluted common share, for the 2019 third quarter;
  • Combined ratio of 105.6%, comprised of a 79.3% loss ratio, a 21.3% acquisition expense ratio and a 5.0% general and administrative expense ratio, compared to a combined ratio of 104.0% for the prior year third quarter, comprised of a 76.5% loss ratio, a 21.9% acquisition expense ratio and a 5.6% general and administrative expense ratio;
  • Net interest income of $26.5 million, a 1.2% yield on average net assets, for the 2020 third quarter, compared to net interest income of $29.5 million and a 1.4% yield on average net assets for the 2019 third quarter; and
  • Net investment income of $92.8 million, a 4.3% return on average net assets for the 2020 third quarter, compared to net investment income of $14.0 million and a 0.6% return on average net assets for the 2019 third quarter.

There continues to be significant uncertainties surrounding the ultimate number of insurance claims and scope of damage resulting from the continuing novel coronavirus (COVID-19) 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 September 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 third quarter financial results, Jon Levy, CEO of Watford, said:

“We again express our gratitude to all individuals and their families who provide support to those affected by both the COVID-19 global pandemic as well as the natural catastrophe events which have occurred this year.

Watford continues to demonstrate our durability in the current economic environment, and we delivered strong financial results for the quarter. Our net income was $78.1 million, driven by net investment income of $92.8 million.

We are pleased to report that our net investment income is positive for the year, reversing the deficit driven by March’s COVID-19 market turmoil. The recovery over the last two quarters demonstrates the resilience of our strategy. This was achieved as we simultaneously upgraded the asset quality and made significant withdrawals from our non-investment grade portfolio.

Our combined ratio for the quarter was 105.6%, and 103.5% when adjusted for other underwriting income and certain corporate expenses. This was an active property catastrophe quarter for the industry, and our current year property catastrophe losses added $6.4 million or 4.4 points to our quarterly combined ratio.

Market conditions improved further in the quarter, with rates moving positively particularly in our insurance platforms.”

Underwriting

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

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2020

 

2019

 

% Change

 

2020

 

2019

 

% Change

 

($ in thousands)

Gross premiums written

$

197,480

 

 

$

249,960

 

 

(21.0)

%

 

$

590,309

 

 

$

598,627

 

 

(1.4)

%

Net premiums written

147,316

 

 

155,752

 

 

(5.4)

%

 

439,872

 

 

420,509

 

 

4.6

%

Net premiums earned

146,031

 

 

125,832

 

 

16.1

%

 

417,605

 

 

423,244

 

 

(1.3)

%

Underwriting income (loss) (1)

(8,238)

 

 

(5,021)

 

 

(64.1)

%

 

(24,959)

 

 

(16,257)

 

 

(53.5)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Point Change

 

 

 

 

 

% Point Change

Loss ratio

79.3

%

 

76.5

%

 

2.8

%

 

79.3

%

 

75.2

%

 

4.1

%

Acquisition expense ratio

21.3

%

 

21.9

%

 

(0.6)

%

 

21.3

%

 

22.9

%

 

(1.6)

%

General & administrative expense ratio

5.0

%

 

5.6

%

 

(0.6)

%

 

5.4

%

 

5.7

%

 

(0.3)

%

Combined ratio

105.6

%

 

104.0

%

 

1.6

%

 

106.0

%

 

103.8

%

 

2.2

%

Adjusted combined ratio (2)

103.5

%

 

101.8

%

 

1.7

%

 

103.4

%

 

101.3

%

 

2.1

%

(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 September 30,

 

Nine Months Ended September 30,

 

2020

 

2019

 

2020

 

2019

 

($ in thousands)

Gross premiums written:

 

 

 

 

 

 

 

Casualty reinsurance

$

64,860

 

 

$

145,129

 

 

$

173,803

 

 

$

253,287

 

Other specialty reinsurance

31,549

 

 

22,453

 

 

89,509

 

 

84,587

 

Property catastrophe reinsurance

4,680

 

 

3,461

 

 

25,765

 

 

15,382

 

Insurance programs and coinsurance

96,391

 

 

78,917

 

 

301,232

 

 

245,371

 

Total

$

197,480

 

 

$

249,960

 

 

$

590,309

 

 

$

598,627

 

 

 

 

 

 

 

 

 

Net premiums written:

 

 

 

 

 

 

 

Casualty reinsurance

$

63,247

 

 

$

92,084

 

 

$

171,688

 

 

$

199,226

 

Other specialty reinsurance

30,157

 

 

22,093

 

 

85,484

 

 

81,798

 

Property catastrophe reinsurance

4,680

 

 

3,040

 

 

25,018

 

 

14,643

 

Insurance programs and coinsurance

49,232

 

 

38,535

 

 

157,682

 

 

124,842

 

Total

$

147,316

 

 

$

155,752

 

 

$

439,872

 

 

$

420,509

 

 

 

 

 

 

 

 

 

Net premiums earned:

 

 

 

 

 

 

 

Casualty reinsurance

$

54,566

 

 

$

52,266

 

 

$

155,477

 

 

$

183,085

 

Other specialty reinsurance

32,833

 

 

31,563

 

 

98,073

 

 

118,759

 

Property catastrophe reinsurance

6,589

 

 

3,617

 

 

17,297

 

 

9,707

 

Insurance programs and coinsurance

52,043

 

 

38,386

 

 

146,758

 

 

111,693

 

Total

$

146,031

 

 

$

125,832

 

 

$

417,605

 

 

$

423,244

 

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

 

Three Months Ended September 30,

 

Nine Months Ended September 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

$

116,012

 

 

79.4

%

 

$

96,417

 

 

76.6

%

 

$

331,861

 

 

79.4

%

 

$

318,812

 

 

75.3

%

Prior year development (favorable)/adverse

(199)

 

 

(0.1)

%

 

(203)

 

 

(0.1)

%

 

(586)

 

 

(0.1)

%

 

(332)

 

 

(0.1)

%

Loss and loss adjustment expenses

$

115,813

 

 

79.3

%

 

$

96,214

 

 

76.5

%

 

$

331,275

 

 

79.3

%

 

$

318,480

 

 

75.2

%

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

Gross premiums written in the 2020 third quarter were 21.0% lower than the 2019 third quarter. The decrease in gross premiums written reflected a decrease in casualty reinsurance premiums written, offset in part by an increase in insurance programs and coinsurance, and to a lesser extent, other specialty reinsurance and property catastrophe reinsurance in the 2020 third quarter.

The decrease in casualty reinsurance premiums written primarily related to an $81.1 million, three-year excess of loss contract written in the third quarter of 2019. The premium for this contract was recorded as written in the 2019 third quarter and will be earned over a three-year period. There was no comparable premium written in the 2020 third quarter.

Other specialty gross premiums were up $9.1 million, or 40.5%, to $31.5 million, over the prior year quarter. This increase was primarily attributable to an increase in the Irish motor book, as well as the fact that the prior year quarter was affected by a reduction in the estimated premium of one European motor program. Insurance programs and coinsurance line of business gross premiums written increased $17.5 million, or 22.1%, to $96.4 million. The premium growth was driven by the continued expansion of the U.S. and European insurance programs and coinsurance.

Net premiums written in the 2020 third quarter were 5.4% lower than the 2019 third quarter. The drivers of the decrease in net premiums written are the same as those impacting gross premiums written, as discussed above.

Net premiums earned in the 2020 third quarter were 16.1% higher than the 2019 third quarter. The increase in earned premiums primarily reflected increased writings in the U.S. insurance programs and coinsurance, and, to a lesser extent, greater assumed property catastrophe reinsurance.

The loss ratio was 79.3% in the 2020 third quarter compared to 76.5% in the 2019 third quarter. In the 2020 third quarter, the increase in loss ratio was primarily driven by current year natural catastrophes of $6.4 million, or 4.4 points, as compared to $2.4 million, or 1.9 points, in the 2019 third quarter. The prior year loss reserve development for both the 2020 and 2019 third quarters was essentially flat. The acquisition expense ratio was 21.3% in the 2020 third quarter, compared to 21.9% in the 2019 third quarter. These ratio movements also reflected changes in mix and the type of business.

The general and administrative expense ratio was 5.0% in the 2020 third quarter, compared to 5.6% in the 2019 third quarter. While the ratio decreased slightly, general and administrative expenses increased by $0.3 million in the 2020 third quarter compared to the 2019 third quarter. Removing certain corporate expenses, our adjusted general and administrative expense ratio was 3.3% in the 2020 third quarter, compared to 3.9% in the 2019 third quarter.

Investments

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

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2020

 

2019

 

2020

 

2019

 

($ in thousands)

Interest income

$

34,553

 

 

$

41,376

 

 

$

108,830

 

 

$

123,113

 

Investment management fees - related parties

(4,380)

 

 

(4,606)

 

 

(12,994)

 

 

(13,585)

 

Borrowing and miscellaneous other investment expenses

(3,657)

 

 

(7,234)

 

 

(14,089)

 

 

(23,143)

 

Net interest income

26,516

 

 

29,536

 

 

81,747

 

 

86,385

 

Realized gains (losses) on investments

13,425

 

 

645

 

 

2,378

 

 

2,716

 

Unrealized gains (losses) on investments

54,570

 

 

(15,291)

 

 

(52,822)

 

 

15,422

 

Investment performance fees - related parties

(1,758)

 

 

(850)

 

 

(1,758)

 

 

(8,342)

 

Net investment income (loss)

$

92,753

 

 

$

14,040

 

 

$

29,545

 

 

$

96,181

 

 

 

 

 

 

 

 

 

Unrealized gains on investments (balance sheet)

$

67,746

 

 

$

46,193

 

 

$

67,746

 

 

$

46,193

 

Unrealized losses on investments (balance sheet)

(183,642)

 

 

(140,987)

 

 

(183,642)

 

 

(140,987)

 

Net unrealized gains (losses) on investments (balance sheet)

$

(115,896)

 

 

$

(94,794)

 

 

$

(115,896)

 

 

$

(94,794)

 

 

 

 

 

 

 

 

 

Net interest income yield on average net assets (1)

1.2

%

 

1.4

%

 

4.0

%

 

4.1

%

Non-investment grade portfolio (1)

1.7

%

 

1.7

%

 

5.2

%

 

5.2

%

Investment grade portfolio (1)

0.3

%

 

0.6

%

 

1.3

%

 

1.8

%

Net investment income return on average net assets (1)

4.3

%

 

0.6

%

 

1.4

%

 

4.5

%

Non-investment grade portfolio (1)

6.3

%

 

0.6

%

 

0.9

%

 

5.1

%

Investment grade portfolio (1)

0.2

%

 

0.8

%

 

2.6

%

 

2.9

%

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

3.5

%

 

0.5

%

 

1.1

%

 

3.5

%

Non-investment grade portfolio (2)

4.9

%

 

0.5

%

 

0.8

%

 

4.3

%

Investment grade portfolio (2)

0.2

%

 

0.8

%

 

2.6

%

 

2.9

%

(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 nine-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 nine-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 September 30, 2020 versus 2019:

Net investment income was $92.8 million for the three months ended September 30, 2020 compared to net investment income of $14.0 million for the three months ended September 30, 2019, an increase of $78.8 million. The 2020 third quarter net investment income return on average net assets was 4.3% as compared to 0.6% for the prior year period.

The 2020 third quarter net investment income return was driven by net unrealized gains of $54.6 million as the credit markets partially recovered through the quarter. Net interest income decreased to $26.5 million from $29.5 million, a decrease of 10.2% quarter over quarter.

The 2020 third quarter non-investment grade portfolio net interest income yield on average net assets was 1.7%, consistent with the third quarter of 2019. The net realized and unrealized gains reported in the 2020 third quarter were $68.7 million, reflective of the credit market recovery discussed above.

The 2020 third quarter investment grade portfolio net interest income yield on average net assets was 0.3%, a decrease from 0.6% in the prior year period. In addition, the investment grade portfolio recognized $0.7 million of net realized and unrealized losses in the quarter as compared to net gains of $1.8 million in the third quarter of 2019.

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

 

September 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

$

893,030

 

 

$

188,791

 

 

$

155,104

 

 

$

154,834

 

 

$

136,778

 

 

$

121,996

 

 

$

27,779

 

 

$

29,779

 

 

$

77,969

 

Corporate bonds

456,655

 

 

44,767

 

 

50,186

 

 

32,676

 

 

95,102

 

 

41,723

 

 

66,282

 

 

36,173

 

 

89,746

 

Equities - sector specific

96,641

 

 

63,740

 

 

21,812

 

 

7,168

 

 

 

 

2,437

 

 

 

 

311

 

 

1,173

 

Short-term investments - sector specific

2,265

 

 

 

 

443

 

 

1,822

 

 

 

 

 

 

 

 

 

 

 

Subtotal

1,448,591

 

 

297,298

 

 

227,545

 

 

196,500

 

 

231,880

 

 

166,156

 

 

94,061

 

 

66,263

 

 

168,888

 

Equities - non-sector specific

17,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments - non-sector specific

250,636

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

164,990

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

8,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Non-Investment Grade Portfolio

$

1,889,956

 

 

$

297,298

 

 

$

227,545

 

 

$

196,500

 

 

$

231,880

 

 

$

166,156

 

 

$

94,061

 

 

$

66,263

 

 

$

168,888

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Grade Portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

193,357

 

 

$

52,606

 

 

$

10,390

 

 

$

18,844

 

 

$

24,440

 

 

$

14,713

 

 

$

42,506

 

 

$

15,221

 

 

$

14,637

 

Short-term investments

97,490

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government agency bonds

203,452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. government and government agency bonds

150,782

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

84,701

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

18,115

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal government and government agency bonds

1,793

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investment Grade Portfolio

$

749,690

 

 

$

52,606

 

 

$

10,390

 

 

$

18,844

 

 

$

24,440

 

 

$

14,713

 

 

$

42,506

 

 

$

15,221

 

 

$

14,637

 

Total Investments

$

2,639,646

 

 

$

349,904

 

 

$

237,935

 

 

$

215,344

 

 

$

256,320

 

 

$

180,869

 

 

$

136,567

 

 

$

81,484

 

 

$

183,525

 

(1) Includes telecommunications, utilities and basic materials.

 

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.

The tables below summarize the credit quality of the Company's non-investment grade and investment grade portfolios as of September 30, 2020 and June 30, 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)

September 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

$

893,030

 

 

$

 

 

$

 

 

$

 

 

$

11,074

 

 

$

27,214

 

 

$

533,876

 

 

$

233,186

 

 

$

8,970

 

 

$

4,469

 

 

$

13,325

 

 

$

60,916

 

Corporate bonds

456,655

 

 

 

 

 

 

 

 

14,037

 

 

68,968

 

 

207,670

 

 

126,388

 

 

6,070

 

 

1,171

 

 

14,415

 

 

17,936

 

Asset-backed securities

164,990

 

 

 

 

 

 

5,989

 

 

88,704

 

 

28,452

 

 

9,277

 

 

8,667

 

 

842

 

 

 

 

 

 

23,059

 

Mortgage-backed securities

8,600

 

 

 

 

 

 

 

 

 

 

1,182

 

 

 

 

 

 

 

 

 

 

3,149

 

 

4,269

 

Short-term investments

252,901

 

 

54,458

 

 

132,306

 

 

63,871

 

 

 

 

 

 

 

 

443

 

 

 

 

 

 

 

 

1,823

 

Total fixed income instruments and short-term investments

1,776,176

 

 

54,458

 

 

132,306

 

 

69,860

 

 

113,815

 

 

125,816

 

 

750,823

 

 

368,684

 

 

15,882

 

 

5,640

 

 

30,889

 

 

108,003

 

Equities

113,780

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Non-Investment Grade Portfolio

$

1,889,956

 

 

$

54,458

 

 

$

132,306

 

 

$

69,860

 

 

$

113,815

 

 

$

125,816

 

 

$

750,823

 

 

$

368,684

 

 

$

15,882

 

 

$

5,640

 

 

$

30,889

 

 

$

108,003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Grade Portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

193,357

 

 

$

 

 

$

20,016

 

 

$

87,672

 

 

$

80,678

 

 

$

4,991

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

U.S. government and government agency bonds

203,452

 

 

 

 

203,452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

84,701

 

 

 

 

 

 

16,757

 

 

63,216

 

 

4,728

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

18,115

 

 

 

 

 

 

1,733

 

 

16,382

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. government and government agency bonds

150,782

 

 

 

 

150,782

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal government and government agency bonds

1,793

 

 

784

 

 

595

 

 

414

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

97,490

 

 

5,116

 

 

43,889

 

 

 

 

48,485

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investment Grade Portfolio

$

749,690

 

 

$

5,900

 

 

$

418,734

 

 

$

106,576

 

 

$

208,761

 

 

$

9,719

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Total

$

2,639,646

 

 

$

60,358

 

 

$

551,040

 

 

$

176,436

 

 

$

322,576

 

 

$

135,535

 

 

$

750,823

 

 

$

368,684

 

 

$

15,882

 

 

$

5,640

 

 

$

30,889

 

 

$

108,003

 

(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)

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

 

 

$

28,046

 

 

$

29,317

 

Corporate bonds

378,183

 

 

 

 

 

 

 

 

37,373

 

 

50,125

 

 

152,648

 

 

113,723

 

 

6,268

 

 

5,585

 

 

3,956

 

 

8,505

 

Asset-backed securities

157,925

 

 

 

 

 

 

3,854

 

 

98,827

 

 

23,136

 

 

8,767

 

 

1,663

 

 

 

 

 

 

 

 

21,678

 

Mortgage-backed securities

9,164

 

 

 

 

 

 

 

 

 

 

1,292

 

 

 

 

 

 

 

 

 

 

3,224

 

 

4,648

 

Short-term investments

270,088

 

 

34,859

 

 

172,166

 

 

60,880

 

 

 

 

502

 

 

 

 

 

 

 

 

 

 

 

 

1,681

 

Total fixed income instruments and short-term investments

1,690,920

 

 

34,859

 

 

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

 

 

$

34,859

 

 

$

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

 

 

$

4,941

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

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

 

 

 

 

73,874

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investment Grade Portfolio

$

792,941

 

 

$

5,864

 

 

$

408,459

 

 

$

114,994

 

 

$

258,144

 

 

$

5,480

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

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.

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 and $2.8 million for the three months ended September 30, 2020 and 2019, respectively, 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 $2.6 million for the three months ended September 30, 2020 and 2019, respectively. On August 1, 2019, the Company redeemed 6,919,998 of its preference shares for an aggregate redemption price of approximately $174.4 million. The 2019 third quarter preference dividends of $2.6 million included $1.3 million of dividends paid on the shares that were redeemed. Further, during the 2019 third quarter, the Company incurred an expense of $4.2 million related to the accelerated amortization of issuance and discount costs on the preference shares redeemed.

There were no common share repurchases during the 2020 third quarter. As of September 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 not hold a conference call to discuss its 2020 third quarter results due to the previously announced proposed acquisition of the Company by Arch Capital Group Ltd. (“Arch”) and the unsolicited non-binding proposal from Enstar Group Limited (“Enstar”) to acquire the Company.

About Watford Holdings Ltd.

Watford Holdings Ltd. is a global property and casualty insurance and reinsurance company with approximately $1.1 billion in capital as of September 30, 2020, comprised of: $172.6 million of senior notes, $52.4 million of contingently redeemable preference shares and $866.9 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” with an Outlook of Negative 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)

 

 

 

September 30,

 

December 31,

 

2020

 

2019

Assets

($ in thousands)

Investments:

 

 

 

Term loans, fair value option (Amortized cost: $969,929 and $1,113,212)

$

893,030

 

 

$

1,061,934

 

Fixed maturities, fair value option (Amortized cost: $677,977 and $432,576)

632,664

 

 

416,594

 

Short-term investments, fair value option (Cost: $348,479 and $325,542)

350,391

 

 

329,303

 

Equity securities, fair value option

60,951

 

 

59,799

 

Other investments, fair value option

 

 

30,461

 

Investments, fair value option

1,937,036

 

 

1,898,091

 

Fixed maturities, available for sale (Amortized cost: $645,663 and $739,456)

649,781

 

 

745,708

 

Equity securities, fair value through net income

52,829

 

 

65,338

 

Total investments

2,639,646

 

 

2,709,137

 

Cash and cash equivalents

195,333

 

 

102,437

 

Accrued investment income

16,234

 

 

14,025

 

Premiums receivable

263,748

 

 

273,657

 

Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses

263,293

 

 

170,974

 

Prepaid reinsurance premiums

131,885

 

 

132,577

 

Deferred acquisition costs, net

58,583

 

 

64,044

 

Receivable for securities sold

1,730

 

 

16,288

 

Intangible assets

7,650

 

 

7,650

 

Funds held by reinsurers

46,787

 

 

42,505

 

Other assets

28,331

 

 

17,562

 

Total assets

$

3,653,220

 

 

$

3,550,856

 

Liabilities

 

 

 

Reserve for losses and loss adjustment expenses

$

1,429,656

 

 

$

1,263,628

 

Unearned premiums

459,476

 

 

438,907

 

Losses payable

78,537

 

 

61,314

 

Reinsurance balances payable

68,339

 

 

77,066

 

Payable for securities purchased

67,602

 

 

18,180

 

Payable for securities sold short

24,909

 

 

66,257

 

Revolving credit agreement borrowings

390,195

 

 

484,287

 

Senior notes

172,621

 

 

172,418

 

Amounts due to affiliates

5,060

 

 

4,467

 

Investment management and performance fees payable

7,539

 

 

17,762

 

Other liabilities

30,012

 

 

21,912

 

Total liabilities

$

2,733,946

 

 

$

2,626,198

 

Commitments and contingencies

 

 

 

Contingently redeemable preference shares

52,375

 

 

52,305

 

Shareholders’ equity

 

 

 

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

228

 

 

227

 

Additional paid-in capital

899,213

 

 

898,083

 

Retained earnings (deficit)

42,184

 

 

43,470

 

Accumulated other comprehensive income (loss)

3,197

 

 

5,629

 

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

(77,923)

 

 

(75,056)

 

Total shareholders’ equity

866,899

 

 

872,353

 

Total liabilities, contingently redeemable preference shares and shareholders’ equity

$

3,653,220

 

 

$

3,550,856

 

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

 

(Unaudited)

 

(Unaudited)

 

Three Months Ended September 30,

Nine Months Ended September 30,

 

2020

 

2019

 

2020

 

2019

Revenues

($ in thousands except share and per share data)

Gross premiums written

$

197,480

 

 

$

249,960

 

 

$

590,309

 

 

$

598,627

 

Gross premiums ceded

(50,164)

 

 

(94,208)

 

 

(150,437)

 

 

(178,118)

 

Net premiums written

147,316

 

 

155,752

 

 

439,872

 

 

420,509

 

Change in unearned premiums

(1,285)

 

 

(29,920)

 

 

(22,267)

 

 

2,735

 

Net premiums earned

146,031

 

 

125,832

 

 

417,605

 

 

423,244

 

Other underwriting income (loss)

546

 

 

579

 

 

1,547

 

 

1,844

 

Interest income

34,553

 

 

41,376

 

 

108,830

 

 

123,113

 

Investment management fees - related parties

(4,380)

 

 

(4,606)

 

 

(12,994)

 

 

(13,585)

 

Borrowing and miscellaneous other investment expenses

(3,657)

 

 

(7,234)

 

 

(14,089)

 

 

(23,143)

 

Net interest income

26,516

 

 

29,536

 

 

81,747

 

 

86,385

 

Realized and unrealized gains (losses) on investments

67,995

 

 

(14,646)

 

 

(50,444)

 

 

18,138

 

Investment performance fees - related parties

(1,758)

 

 

(850)

 

 

(1,758)

 

 

(8,342)

 

Net investment income (loss)

92,753

 

 

14,040

 

 

29,545

 

 

96,181

 

Total revenues

239,330

 

 

140,451

 

 

448,697

 

 

521,269

 

Expenses

 

 

 

 

 

 

 

Loss and loss adjustment expenses

(115,813)

 

 

(96,214)

 

 

(331,275)

 

 

(318,480)

 

Acquisition expenses

(31,110)

 

 

(27,612)

 

 

(88,963)

 

 

(97,003)

 

General and administrative expenses

(7,346)

 

 

(7,027)

 

 

(22,326)

 

 

(24,018)

 

Interest expense

(2,912)

 

 

(2,841)

 

 

(8,735)

 

 

(2,841)

 

Net foreign exchange gains (losses)

(2,926)

 

 

167

 

 

4,752

 

 

(711)

 

Total expenses

(160,107)

 

 

(133,527)

 

 

(446,547)

 

 

(443,053)

 

Income (loss) before income taxes

79,223

 

 

6,924

 

 

2,150

 

 

78,216

 

Income tax expense

(69)

 

 

 

 

333

 

 

(20)

 

Net income (loss) before preference dividends and redemption costs

79,154

 

 

6,924

 

 

2,483

 

 

78,196

 

Preference dividends

(1,061)

 

 

(2,608)

 

 

(3,341)

 

 

(12,423)

 

Accelerated amortization of costs related to the redemption of preference shares

 

 

(4,164)

 

 

 

 

(4,164)

 

Net income (loss) available to common shareholders

$

78,093

 

 

$

152

 

 

$

(858)

 

 

$

61,609

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) net of income tax:

 

 

 

 

 

 

 

Available-for-sale investments:

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

$

6,631

 

 

$

3,785

 

 

$

9,440

 

 

$

14,398

 

Unrealized foreign currency gains (losses) arising during the period

5,729

 

 

(3,676)

 

 

(1,691)

 

 

(4,224)

 

Credit loss recognized in net income (loss)

59

 

 

 

 

410

 

 

 

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

368

 

 

(1,254)

 

 

(10,368)

 

 

(3,465)

 

Unrealized holding gains (losses) of available for sale investments

12,787

 

 

(1,145)

 

 

(2,209)

 

 

6,709

 

Foreign currency translation adjustments

(411)

 

 

286

 

 

(223)

 

 

333

 

Other comprehensive income (loss) net of income tax

12,376

 

 

(859)

 

 

(2,432)

 

 

7,042

 

Comprehensive income (loss)

$

90,469

 

 

$

(707)

 

 

$

(3,290)

 

 

$

68,651

 

Earnings (loss) per share:

 

 

 

 

 

 

 

Basic

$

3.93

 

 

$

0.01

 

 

$

(0.04)

 

 

$

2.71

 

Diluted

$

3.92

 

 

$

0.01

 

 

$

(0.04)

 

 

$

2.71

 

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

 

 

 

 

 

 

 

Basic

19,890,784

 

 

22,765,802

 

 

19,901,921

 

 

22,729,848

 

Diluted

19,904,051

 

 

22,776,204

 

 

19,901,921

 

 

22,734,464

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2020

 

2019

 

2020

 

2019

Numerator:

($ in thousands except share and per share data)

Net income (loss) before preference dividends and redemption costs

$

79,154

 

 

$

6,924

 

 

$

2,483

 

 

$

78,196

 

Preference dividends

(1,061)

 

 

(2,608)

 

 

(3,341)

 

 

(12,423)

 

Accelerated amortization of costs related to the redemption of preference shares

 

 

(4,164)

 

 

 

 

(4,164)

 

Net income (loss) available to common shareholders

$

78,093

 

 

$

152

 

 

$

(858)

 

 

$

61,609

 

Denominator:

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

19,890,784

 

 

22,765,802

 

 

19,901,921

 

 

22,729,848

 

Effect of dilutive common share equivalents:

 

 

 

 

 

 

 

Weighted average non-vested restricted share units (1)

13,267

 

 

10,402

 

 

 

 

4,616

 

Weighted average common shares outstanding - diluted

19,904,051

 

 

22,776,204

 

 

19,901,921

 

 

22,734,464

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

Basic

$

3.93

 

 

$

0.01

 

 

$

(0.04)

 

 

$

2.71

 

Diluted

$

3.92

 

 

$

0.01

 

 

$

(0.04)

 

 

$

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 nine months ended September 30, 2020, due to a net loss reported.

 

September 30, 2020

 

June 30,
2020 (1)

 

March 31, 2020 (2)

 

December 31, 2019

 

September 30, 2019

Numerator:

($ in thousands except share and per share data)

Total shareholders’ equity

$

866,899

 

 

$

776,151

 

 

$

564,054

 

 

$

872,353

 

 

$

960,773

 

Denominator:

 

 

 

 

 

 

 

 

 

Common shares outstanding - basic (1)(2)

19,890,784

 

 

19,890,784

 

 

19,863,328

 

 

19,976,397

 

 

22,765,802

 

Effect of dilutive common share equivalents:

 

 

 

 

 

 

 

 

 

Non-vested restricted share units (2)

103,820

 

 

103,820

 

 

131,277

 

 

82,360

 

 

82,360

 

Common shares outstanding - diluted

19,994,604

 

 

19,994,604

 

 

19,994,605

 

 

20,058,757

 

 

22,848,162

 

 

 

 

 

 

 

 

 

 

 

Book value per common share

$43.58

 

$39.02

 

$28.40

 

$43.67

 

$42.20

Book value per diluted common share

$43.36

 

$38.82

 

$28.21

 

$43.49

 

$42.05

(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 September 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 certain non-recurring 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, 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- and nine-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 September 30,

 

Nine Months Ended September 30,

 

2020

 

2019

 

2020

 

2019

 

($ in thousands)

Net income (loss) available to common shareholders

$

78,093

 

 

$

152

 

 

$

(858)

 

 

$

61,609

 

Preference dividends

1,061

 

 

2,608

 

 

3,341

 

 

12,423

 

Accelerated amortization of costs related to the redemption of preference shares

 

 

4,164

 

 

 

 

4,164

 

Net income (loss) before preference dividends and redemption costs

79,154

 

 

6,924

 

 

2,483

 

 

78,196

 

Income tax expense

69

 

 

 

 

(333)

 

 

20

 

Interest expense

2,912

 

 

2,841

 

 

8,735

 

 

2,841

 

Net foreign exchange (gains) losses

2,926

 

 

(167)

 

 

(4,752)

 

 

711

 

Net investment (income) loss

(92,753)

 

 

(14,040)

 

 

(29,545)

 

 

(96,181)

 

Other underwriting (income) loss

(546)

 

 

(579)

 

 

(1,547)

 

 

(1,844)

 

Underwriting income (loss)

(8,238)

 

 

(5,021)

 

 

(24,959)

 

 

(16,257)

 

Certain corporate expenses

2,592

 

 

2,172

 

 

9,031

 

 

8,930

 

Other underwriting income (loss)

546

 

 

579

 

 

1,547

 

 

1,844

 

Adjusted underwriting income (loss)

$

(5,100)

 

 

$

(2,270)

 

 

$

(14,381)

 

 

$

(5,483)

 

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

 

Three Months Ended September 30,

 

2020

 

2019

 

Amount

 

Adjustment

 

As Adjusted

 

Amount

 

Adjustment

 

As Adjusted

 

($ in thousands)

Losses and loss adjustment expenses

$

115,813

 

 

$

 

 

$

115,813

 

 

$

96,214

 

 

$

 

 

$

96,214

 

Acquisition expenses

31,110

 

 

 

 

31,110

 

 

27,612

 

 

 

 

27,612

 

General & administrative expenses (1)

7,346

 

 

(2,592)

 

 

4,754

 

 

7,027

 

 

(2,172)

 

 

4,855

 

Net premiums earned (1)

146,031

 

 

546

 

 

146,577

 

 

125,832

 

 

579

 

 

126,411

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio

79.3

%

 

 

 

 

 

76.5

%

 

 

 

 

Acquisition expense ratio

21.3

%

 

 

 

 

 

21.9

%

 

 

 

 

General & administrative expense ratio

5.0

%

 

 

 

 

 

5.6

%

 

 

 

 

Combined ratio

105.6

%

 

 

 

 

 

104.0

%

 

 

 

 

Adjusted loss ratio

 

 

 

 

79.0

%

 

 

 

 

 

76.1

%

Adjusted acquisition expense ratio

 

 

 

 

21.2

%

 

 

 

 

 

21.8

%

Adjusted general & administrative expense ratio

 

 

 

 

3.3

%

 

 

 

 

 

3.9

%

Adjusted combined ratio

 

 

 

 

103.5

%

 

 

 

 

 

101.8

%

(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.

 

Nine Months Ended September 30,

 

2020

 

2019

 

Amount

 

Adjustment

 

As Adjusted

 

Amount

 

Adjustment

 

As Adjusted

 

($ in thousands)

Losses and loss adjustment expenses

$

331,275

 

 

$

 

 

$

331,275

 

 

$

318,480

 

 

$

 

 

$

318,480

 

Acquisition expenses

88,963

 

 

 

 

88,963

 

 

97,003

 

 

 

 

97,003

 

General & administrative expenses (1)

22,326

 

 

(9,031)

 

 

13,295

 

 

24,018

 

 

(8,930)

 

 

15,088

 

Net premiums earned (1)

417,605

 

 

1,547

 

 

419,152

 

 

423,244

 

 

1,844

 

 

425,088

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio

79.3

%

 

 

 

 

 

75.2

%

 

 

 

 

Acquisition expense ratio

21.3

%

 

 

 

 

 

22.9

%

 

 

 

 

General & administrative expense ratio

5.4

%

 

 

 

 

 

5.7

%

 

 

 

 

Combined ratio

106.0

%

 

 

 

 

 

103.8

%

 

 

 

 

Adjusted loss ratio

 

 

 

 

79.0

%

 

 

 

 

 

74.9

%

Adjusted acquisition expense ratio

 

 

 

 

21.2

%

 

 

 

 

 

22.8

%

Adjusted general & administrative expense ratio

 

 

 

 

3.2

%

 

 

 

 

 

3.6

%

Adjusted combined ratio

 

 

 

 

103.4

%

 

 

 

 

 

101.3

%

(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 and nine months ended September 30, 2020 and 2019:

 

Three Months Ended September 30, 2020

 

Three Months Ended September 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

$

31,473

 

 

$

3,080

 

 

$

 

 

$

34,553

 

 

$

35,014

 

 

$

6,362

 

 

$

 

 

$

41,376

 

Investment management fees - related parties

(4,024)

 

 

(356)

 

 

 

 

(4,380)

 

 

(4,204)

 

 

(402)

 

 

 

 

(4,606)

 

Borrowing and miscellaneous other investment expenses

(2,678)

 

 

(270)

 

 

(709)

 

 

(3,657)

 

 

(3,573)

 

 

(225)

 

 

(3,436)

 

 

(7,234)

 

Net interest income

24,771

 

 

2,454

 

 

(709)

 

 

26,516

 

 

27,237

 

 

5,735

 

 

(3,436)

 

 

29,536

 

Net realized gains (losses) on investments

14,131

 

 

(706)

 

 

 

 

13,425

 

 

(750)

 

 

1,395

 

 

 

 

645

 

Net unrealized gains (losses) on investments (1)

54,574

 

 

(4)

 

 

 

 

54,570

 

 

(15,668)

 

 

377

 

 

 

 

(15,291)

 

Investment performance fees - related parties

(1,758)

 

 

 

 

 

 

(1,758)

 

 

(850)

 

 

 

 

 

 

(850)

 

Net investment income (loss)

$

91,718

 

 

$

1,744

 

 

$

(709)

 

 

$

92,753

 

 

$

9,969

 

 

$

7,507

 

 

$

(3,436)

 

 

$

14,040

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average total investments (2)

$

1,868,180

 

 

$

771,316

 

 

$

 

 

$

2,639,496

 

 

$

1,854,911

 

 

$

915,081

 

 

$

 

 

$

2,769,992

 

Average net assets (3)

$

1,463,905

 

 

$

775,848

 

 

$

(94,250)

 

 

$

2,145,503

 

 

$

1,586,134

 

 

$

915,632

 

 

$

(328,751)

 

 

$

2,173,015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income yield on average net assets (3)

1.7

%

 

0.3

%

 

 

 

1.2

%

 

1.7

%

 

0.6

%

 

 

 

1.4

%

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

4.9

%

 

0.2

%

 

 

 

3.5

%

 

0.5

%

 

0.8

%

 

 

 

0.5

%

Net investment income return on average net assets (3)

6.3

%

 

0.2

%

 

(0.8)

%

 

4.3

%

 

0.6

%

 

0.8

%

 

(1.0)

%

 

0.6

%

(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.

 

Nine Months Ended September 30, 2020

 

Nine Months Ended September 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

$

96,647

 

 

$

12,183

 

 

$

 

 

$

108,830

 

 

$

104,845

 

 

$

18,268

 

 

$

 

 

$

123,113

 

Investment management fees - related parties

(11,940)

 

 

(1,054)

 

 

 

 

(12,994)

 

 

(12,446)

 

 

(1,139)

 

 

 

 

(13,585)

 

Borrowing and miscellaneous other investment expenses

(8,010)

 

 

(707)

 

 

(5,372)

 

 

(14,089)

 

 

(12,240)

 

 

(667)

 

 

(10,236)

 

 

(23,143)

 

Net interest income

76,697

 

 

10,422

 

 

(5,372)

 

 

81,747

 

 

80,159

 

 

16,462

 

 

(10,236)

 

 

86,385

 

Net realized gains (losses) on investments

(8,006)

 

 

10,384

 

 

 

 

2,378

 

 

392

 

 

2,324

 

 

 

 

2,716

 

Net unrealized gains (losses) on investments (1)

(52,869)

 

 

47

 

 

 

 

(52,822)

 

 

7,446

 

 

7,976

 

 

 

 

15,422

 

Investment performance fees - related parties

(1,758)

 

 

 

 

 

 

(1,758)

 

 

(8,342)

 

 

 

 

 

 

(8,342)

 

Net investment income (loss)

$

14,064

 

 

$

20,853

 

 

$

(5,372)

 

 

$

29,545

 

 

$

79,655

 

 

$

26,762

 

 

$

(10,236)

 

 

$

96,181

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average total investments (2)

$1,813,645

 

$795,203

 

$

 

 

$2,608,848

 

$1,874,014

 

$910,784

 

$

 

 

$2,784,798

Average net assets (3)

$1,480,543

 

$800,695

 

$(223,083)

 

$2,058,155

 

$1,546,871

 

$909,169

 

$(324,452)

 

$2,131,588

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income yield on average net assets (3)

5.2

%

 

1.3

%

 

 

 

4.0

%

 

5.2

%

 

1.8

%

 

 

 

4.1

%

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

0.8

%

 

2.6

%

 

 

 

1.1

%

 

4.3

%

 

2.9

%

 

 

 

3.5

%

Net investment income return on average net assets (3)

0.9

%

 

2.6

%

 

(2.4)

%

 

1.4

%

 

5.1

%

 

2.9

%

 

(3.2)

%

 

4.5

%

(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 nine-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 September 30, 2020

 

As of September 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

$

1,868,180

 

 

$

771,316

 

 

$

 

 

$

2,639,496

 

 

$

1,854,911

 

 

$

915,081

 

 

$

 

 

$

2,769,992

 

Average total investments - YTD

1,813,645

 

 

795,203

 

 

 

 

2,608,848

 

 

1,874,014

 

 

910,784

 

 

 

 

2,784,798

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average net assets - QTD

1,463,905

 

 

775,848

 

 

(94,250)

 

 

2,145,503

 

 

1,586,134

 

 

915,632

 

 

(328,751)

 

 

2,173,015

 

Average net assets - YTD

1,480,543

 

 

800,695

 

 

(223,083)

 

 

2,058,155

 

 

1,546,871

 

 

909,169

 

 

(324,452)

 

 

2,131,588

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investments

$

1,889,956

 

 

$

749,690

 

 

$

 

 

$

2,639,646

 

 

$

1,876,346

 

 

$

893,532

 

 

$

 

 

$

2,769,878

 

Accrued investment income

13,745

 

 

2,489

 

 

 

 

16,234

 

 

13,805

 

 

4,472

 

 

 

 

18,277

 

Receivable for securities sold

1,681

 

 

49

 

 

 

 

1,730

 

 

25,274

 

 

9

 

 

 

 

25,283

 

Less: Payable for securities purchased

67,602

 

 

 

 

 

 

67,602

 

 

36,870

 

 

3,716

 

 

 

 

40,586

 

Less: Payable for securities sold short

24,909

 

 

 

 

 

 

24,909

 

 

65,736

 

 

 

 

 

 

65,736

 

Less: Revolving credit agreement borrowings

365,445

 

 

 

 

24,750

 

 

390,195

 

 

190,447

 

 

 

 

328,750

 

 

519,197

 

Net assets

$

1,447,426

 

 

$

752,228

 

 

$

(24,750)

 

 

$

2,174,904

 

 

$

1,622,372

 

 

$

894,297

 

 

$

(328,750)

 

 

$

2,187,919

 

Non-investment grade borrowing ratio (1)

25.2

%

 

 

 

 

 

 

 

11.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains on investments

$

52,176

 

 

$

15,570

 

 

$

 

 

$

67,746

 

 

$

34,794

 

 

$

11,399

 

 

$

 

 

$

46,193

 

Unrealized losses on investments

(172,198)

 

 

(11,444)

 

 

 

 

(183,642)

 

 

(131,453)

 

 

(9,534)

 

 

 

 

(140,987)

 

Net unrealized gains (losses) on investments

$

(120,022)

 

 

$

4,126

 

 

$

 

 

$

(115,896)

 

 

$

(96,659)

 

 

$

1,865

 

 

$

 

 

$

(94,794)

 

(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 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;
  • uncertainties regarding the proposed acquisition of the Company by Arch and the unsolicited non-binding proposal from Enstar to acquire the Company;
  • legal proceedings may be initiated against the Company or its directors related to the proposed transactions with Arch or Enstar;
  • the business of the Company may suffer as a result of uncertainty surrounding the proposed transactions with Arch or Enstar, and there may be challenges with employee retention as a result of the proposed transactions with Arch or Enstar;
  • the proposed transactions with Arch or Enstar may involve unexpected costs, liabilities or delays; 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.

Watford Holdings Aktie jetzt über den Testsieger (Finanztest 11/2020) handeln, ab 0 € auf Smartbroker.de



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