Watford Holdings: Watford Reports 2020 Fourth Quarter Results

The following excerpt is from the company's SEC filing.
PEMBROKE, Bermuda, February 9, 2021 -- (BUSINESS WIRE)-- WATFORD HOLDINGS LTD. (“Watford” or the “Company”) (NASDAQ: WTRE) today reported net income of $61.4 million, after $1.1 million of preference dividends, for the three months ended December 31, 2020, compared to net loss of $16.9 million, after $1.2 million of preference dividends for the same period in 2019. Book value per diluted common share was $47.08 at December 31, 2020, an increase of 8.3% from December 31, 2019. The quarterly results include:
The 2020 fourth quarter net income available to common shareholders was $61.4 million, or $3.08 per diluted c ommon share, a 6.8% return on average equity, compared to net loss of $16.9 million, or $(0.79) per diluted common share, for the 2019 fourth quarter;
The 2020 full year net income available to common shareholders was $60.5 million, or $3.04 per diluted common share, a 7.8% return on average equity, compared to net income of $44.7 million, or $2.00 per diluted common share, a 4.8% return on average equity, for the 2019 full year;
Combined ratio of 106.3%, comprised of a 76.5% loss ratio, a 25.6% acquisition expense ratio and a 4.2% general and administrative expense ratio for the 2020 fourth quarter, compared to a combined ratio of 128.3%, comprised of a 100.9% loss ratio, a 22.3% acquisition expense ratio and a 5.1% general and administrative expense ratio for the 2019 fourth quarter;
Net interest income of $24.6 million, a 1.1% yield on average net assets for the 2020 fourth quarter, compared to net interest income of $29.8 million and a 1.4% yield on average net assets for the 2019 fourth quarter; and
Net investment income of $84.4 million, a 3.8% return on average net assets for the 2020 fourth quarter, compared to net investment income of $32.1 million and a 1.5% return on average net assets for the 2019 fourth quarter.
Commenting on the 2020 fourth quarter financial results, Jon Levy, CEO of Watford, said:
“Watford's fourth quarter results continue to demonstrate the durability in our business model with another strong financial performance. Our net income for the quarter was $61.4 million, a 6.8% return on average equity for the quarter.
We are also pleased to report solid book value growth in 2020. Our ultimate objective is to grow book value per share over time, and despite a tumultuous and challenging environment for underwriting and investments, we have grown our book value per diluted common share by 8.3% in the year.
The quarter's results were driven by strong investment income, which totaled $84.4 million for the last three months of the year. This was achieved while we simultaneously decreased our total invested assets in our non-investment grade portfolio, continuing our efforts to reduce our capital's exposure to mark-to-market volatility.
Our combined ratio for the quarter was 106.3%, and 104.5% when adjusted for other underwriting income and certain corporate expenses.
Watford Holdings Ltd.
100 Pitts Bay Road, Pembroke HM08 Bermuda
Tel: 441-278-3454
www.watfordre.com
Market conditions improved further in the quarter, with rates moving positively particularly in our insurance platforms.”
Underwriting
The following table summarizes the Company’s underwriting results on a consolidated basis:
Three Months Ended December 31,
Year Ended December 31,
% Change
($ in thousands)
Gross premiums written
138,237 
156,254 
(11.5)
728,546 
754,881 
Net premiums written
97,717 
112,353 
(13.0)
537,589 
532,862 
Net premiums earned
142,746 
133,446 
560,351 
556,690 
Underwriting income (loss) (1)
(9,054)
(37,819)
(34,013)
(54,076)
% Point Change
Loss ratio
100.9 
(24.4)
Acquisition expense ratio
General & administrative expense ratio
106.3 
128.3 
(22.0)
106.1 
109.7 
Adjusted combined ratio (2)
104.5 
126.4 
(21.9)
103.7 
107.3 
(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:
Gross premiums written:
Casualty reinsurance
14,239 
26,680 
188,042 
279,967 
Other specialty reinsurance
27,668 
34,931 
117,177 
119,518 
Property catastrophe reinsurance
1,569 
27,334 
16,226 
Insurance programs and coinsurance
94,761 
93,799 
395,993 
339,170 
Total
Net premiums written:
14,280 
26,532 
185,968 
225,758 
26,091 
33,078 
111,575 
114,876 
26,587 
15,517 
55,777 
51,869 
213,459 
176,711 
Net premiums earned:
49,715 
55,352 
205,192 
238,437 
33,800 
30,929 
131,873 
149,688 
5,740 
3,692 
23,037 
13,399 
53,491 
43,473 
200,249 
155,166 
The following table shows the components of our loss and loss adjustment expenses for the three months and years ended December 31, 2020 and 2019:
Loss and Loss Adjustment Expenses
% of Earned Premiums
Current year
109,314 
110,510 
441,175 
429,322 
Prior year development (favorable)/adverse
24,145 
23,813 
Loss and loss adjustment expenses
109,207 
134,655 
440,482 
453,135 
Results for the three months ended December 31, 2020
versus 2019:
Gross premiums written in the 2020 fourth quarter were 11.5% lower than the 2019 fourth quarter. The decrease in gross 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 fourth quarter.
Casualty reinsurance gross premiums decreased $12.4 million, or 46.6%, to $14.2 million, over the prior year quarter. The decrease was driven by non-renewals of certain professional liability, workers' compensation and medical malpractice treaties.
Other specialty gross premiums decreased $7.3 million, or 20.8%, to $27.7 million, over the prior year quarter. The decrease was driven by a reduction in mortgage premiums as well as reduced writings in certain motor reinsurance cessions.
Net premiums written in the 2020 fourth quarter decreased $14.6 million, or 13.0%, to $97.7 million, over the prior year quarter. The drivers of the decrease in net premiums written for casualty and other specialty reinsurance were the same as those impacting gross premiums written, as discussed above. The insurance programs and coinsurance net premiums written increased $3.9 million as a result of an increased net retention on our U.K. motor insurance portfolio.
Net premiums earned in the 2020 fourth quarter increased $9.3 million, or 7.0%, to $142.7 million, over the prior year quarter. The increase in earned premiums primarily reflected increased writings in the U.S. insurance programs and coinsurance, increased European motor writings within other specialty reinsurance and, to a lesser extent, greater assumed property catastrophe reinsurance. This increase was offset in part by decreases in casualty reinsurance driven by reduced professional liability premium, as described above.
The loss ratio was 76.5% in the 2020 fourth quarter compared to 100.9% in the 2019 fourth quarter. In the 2020 fourth quarter, we had losses totaling $1.3 million, or 0.9 points for catastrophe events which occurred during the quarter. The 2019 fourth quarter loss ratio included 18.1 points of prior year and 2.9 points of current year loss strengthening, primarily in the casualty reinsurance line of business. Casualty reinsurance prior year loss reserves were strengthened in the 2019 fourth quarter by $24.0 million, primarily due to a higher than anticipated level of reported losses on one professional lines quota share treaty program and one non-renewed multi-line quota share treaty. In addition, the 2019 fourth quarter experienced $5.0 million, or 3.7 points, of catastrophe losses, primarily due to Typhoon Hagibis in Japan.
The acquisition expense ratio was 25.6% in the 2020 fourth quarter, compared to 22.3% in the 2019 fourth quarter. These ratio movements reflected changes in mix and the type of business.
The general and administrative expense ratio was 4.2% in the 2020 fourth quarter, compared to 5.1% in the 2019 fourth quarter. The 0.9 point decrease versus the prior year quarter was attributable to a reduction in professional fees. Removing certain corporate expenses, our adjusted general and administrative expense ratio was 2.8% in the 2020 fourth quarter, compared to 3.7% in the 2019 fourth quarter.
Investments
The following table summarizes the Company’s key investment returns on a consolidated basis:
Interest income
31,560 
40,775 
140,390 
163,888 
Investment management fees - related parties
(4,199)
(4,807)
(17,193)
(18,392)
Borrowing and miscellaneous other investment expenses
(2,718)
(6,142)
(16,807)
(29,285)
24,643 
29,826 
106,390 
116,211 
Realized gains (losses) on investments
9,839 
(10,664)
12,217 
(7,948)
Unrealized gains (losses) on investments
60,234 
16,769 
7,412 
32,191 
Investment performance fees - related parties
(10,279)
(3,849)
(12,037)
(12,191)
Net investment income (loss)
84,437 
32,082 
113,982 
128,263 
Unrealized gains on investments (balance sheet)
81,653 
47,203 
Unrealized losses on investments (balance sheet)
(125,495)
(110,448)
Net unrealized gains (losses) on investments (balance sheet)
(43,842)
(63,245)
Net interest income yield on average net assets (1)
Non-investment grade portfolio (1)
Investment grade portfolio (1)
Net investment income return on average net assets (1)
Net investment income return on average total investments (excluding accrued investment income) (2)
Non-investment grade portfolio (2)
Investment grade portfolio (2)
(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 twelve-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 twelve-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).
Net investment income was $84.4 million for the three months ended December 31, 2020 compared to net investment income of $32.1 million for the three months ended December 31, 2019, an increase of $52.3 million. The 2020 fourth quarter net investment income return on average net assets was 3.8% as compared to 1.5% for the prior year period.
The 2020 fourth quarter net investment income return was driven by net unrealized gains of $60.2 million and net realized gains of $9.8 million, as the non-investment grade credit spreads continued to tighten through the quarter. Net interest income decreased to $24.6 million from $29.8 million, a decrease of 17.4% compared to the prior year quarter.
The 2020 fourth quarter non-investment grade portfolio net interest income yield on average net assets was 1.5%, a decrease from 1.7% in the fourth quarter of 2019. The reduced yield for the 2020 fourth quarter reflected a portfolio shift to higher rated investments and a decrease in LIBOR. The net realized and unrealized gains reported in the 2020 fourth quarter were $69.4 million, reflective of the credit spread recovery discussed above.
The 2020 fourth quarter investment grade portfolio net interest income yield on average net assets was 0.3%, a decrease from 0.6% in the fourth quarter of 2019. The reduced yield for the 2020 fourth quarter reflected a reduction in interest rates. In addition, the investment grade portfolio recognized $0.6 million of net realized and unrealized gains in the quarter, as compared to net realized and unrealized gains of $2.4 million in the fourth quarter of 2019.
The following tables summarize the composition of the Company's non-investment grade and investment grade portfolios by sector as of December 31, 2020 and September 30, 2020:
December 31, 2020
Financials
Health Care
Technology
Consumer Services
Industrials
Consumer Goods
Oil & Gas
All Other (1)
Non-Investment Grade Portfolio:
Term loan investments
851,539 
191,608 
162,255 
159,747 
79,477 
131,820 
24,079 
29,679 
72,874 
Corporate bonds
312,620 
26,565 
23,929 
53,493 
81,990 
21,899 
18,759 
34,955 
51,030 
Equities - sector specific
101,464 
71,574 
22,463 
2,724 
2,822 
1,402 
Short-term investments - sector specific
12,637 
8,961 
3,186 
Subtotal
1,278,260 
289,747 
209,137 
215,964 
170,428 
156,541 
42,838 
65,113 
128,492 
Equities - non-sector specific
16,737 
Short-term investments - non-sector specific
288,753 
Asset-backed securities
140,508 
Total Non-Investment Grade Portfolio
1,724,258 
Corporate bonds
197,247 
55,430 
11,190 
17,863 
28,002 
13,989 
41,543 
14,473 
14,757 
117,300 
U.S. government and government agency bonds
202,488 
Non-U.S. government and government agency bonds
158,839 
80,258 
Mortgage-backed securities
16,663 
Municipal government and government agency bonds
1,788 
Total Investment Grade Portfolio
774,583 
Total Investments
2,498,841 
345,177 
220,327 
233,827 
198,430 
170,530 
84,381 
79,586 
143,249 
(1) Includes telecommunications, utilities and basic materials.
September 30, 2020
893,030 
188,791 
155,104 
154,834 
136,778 
121,996 
27,779 
29,779 
77,969 
456,655 
44,767 
50,186 
32,676 
95,102 
41,723 
66,282 
36,173 
89,746 
96,641 
63,740 
21,812 
7,168 
2,437 
1,173 
2,265 
1,822 
1,448,591 
297,298 
227,545 
196,500 
231,880 
166,156 
94,061 
66,263 
168,888 
17,139 
250,636 
164,990 
8,600 
1,889,956 
193,357 
52,606 
10,390 
18,844 
24,440 
14,713 
42,506 
15,221 
14,637 
97,490 
203,452 
150,782 
84,701 
18,115 
1,793 
749,690 
2,639,646 
349,904 
237,935 
215,344 
256,320 
180,869 
136,567 
81,484 
183,525 
The tables below summarize the credit quality of the Company's non-investment grade and investment grade portfolios as of December 31, 2020 and September 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)
Fair Value
Not Rated
11,352 
19,486 
588,215 
185,221 
7,406 
2,727 
37,132 
31,089 
194,418 
59,421 
8,280 
1,894 
17,518 
73,911 
26,799 
8,385 
8,262 
22,314 
301,390 
83,308 
124,830 
89,577 
Total fixed income instruments and short-term investments
1,606,057 
85,263 
77,374 
794,204 
253,393 
16,523 
4,621 
76,964 
118,201 
19,812 
82,379 
87,913 
7,143 
15,675 
59,560 
5,023 
2,092 
14,571 
43,870 
19,328 
47,891 
Total Investment Grade Portfolio
6,994 
425,601 
119,887 
209,935 
12,166 
90,302 
550,431 
209,464 
295,198 
89,540 
(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.
11,074 
27,214 
533,876 
233,186 
8,970 
4,469 
13,325 
60,916 
14,037 
68,968 
207,670 
126,388 
6,070 
1,171 
14,415 
17,936 
5,989 
88,704 
28,452 
9,277 
8,667 
23,059 
1,182 
3,149 
4,269 
252,901 
54,458 
132,306 
63,871 
1,823 
1,776,176 
69,860 
113,815 
125,816 
750,823 
368,684 
15,882 
5,640 
30,889 
108,003 
Other Investments
113,780 
20,016 
87,672 
80,678 
4,991 
16,757 
63,216 
4,728 
1,733 
16,382 
5,116 
43,889 
48,485 
5,900 
418,734 
106,576 
208,761 
9,719 
60,358 
551,040 
176,436 
322,576 
135,535 
Corporate Function
The Company has a corporate function that includes general and administrative expenses related to corporate activities, interest expense, transaction costs and other, 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 $3.0 million for the three months ended December 31, 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 $1.2 million for the three months ended December 31, 2020 and 2019, respectively.
During the 2020 fourth quarter, the Company incurred $4.0 million of transaction costs, which included various legal, advisory and other consulting costs associated with the previously announced Merger Agreement between the Company and Arch Capital Group Ltd. (“Arch”).
There were no common share repurchases during the 2020 fourth quarter. As of December 31, 2020, approximately $47.1 million of share repurchases were available under the Company’s previously announced $50 million share repurchase program. The Company does not anticipate making any further repurchases under its current share repurchase program due to its pending acquisition by Greysbridge Holdings Ltd. (“HoldCo”), a newly-formed company organized by Arch.
Conference Call
The Company will not hold a conference call to discuss its 2020 fourth quarter results due to the previously announced Merger Agreement between the Company and Arch.
About Watford Holdings Ltd.
Watford Holdings Ltd. is a global property and casualty insurance and reinsurance company with approximately $1.2 billion in capital as of December 31, 2020, comprised of: $172.7 million of senior notes, $52.4 million of contingently redeemable preference shares and $941.3 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 KBRA. On November 19, 2020, A.M. Best announced that it has maintained its “under review with negative implications” status for the financial strength ratings of our operating subsidiaries.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Unaudited)
Assets
Investments:
Term loans, fair value option (Amortized cost: $890,996 and $1,113,212)
1,061,934 
Fixed maturities, fair value option (Amortized cost: $477,548 and $432,576)
455,162 
416,594 
Short-term investments, fair value option (Cost: $412,762 and $325,542)
418,690 
329,303 
Equity securities, fair value option
64,994 
59,799 
Other investments, fair value option
30,461 
Investments, fair value option
1,790,385 
1,898,091 
Fixed maturities, available for sale (Amortized cost: $638,075 and $739,456)
655,249 
745,708 
Equity securities, fair value through net income
53,207 
65,338 
Total investments
2,709,137 
Cash and cash equivalents
211,451 
102,437 
Accrued investment income
14,679 
14,025 
Premiums receivable
224,377 
273,657 
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses
286,590 
170,974 
Prepaid reinsurance premiums
122,339 
132,577 
Deferred acquisition costs, net
53,705 
64,044 
Receivable for securities sold
37,423 
16,288 
Intangible assets
7,650 
Funds held by reinsurers
45,989 
42,505 
Other assets
29,016 
17,562 
Total assets
3,532,060 
3,550,856 
Liabilities
Reserve for losses and loss adjustment expenses
1,519,583 
1,263,628 
Unearned premiums
407,714 
438,907 
Losses payable
59,397 
61,314 
Reinsurance balances payable
63,269 
77,066 
Payable for securities purchased
16,916 
18,180 
Payable for securities sold short
21,975 
66,257 
Revolving credit agreement borrowings
211,640 
484,287 
Senior notes
172,689 
172,418 
Amounts due to affiliates
7,708 
4,467 
Investment management and performance fees payable
21,641 
17,762 
Other liabilities
35,786 
21,912 
Total liabilities
2,538,318 
2,626,198 
Commitments and contingencies
Contingently redeemable preference shares
52,398 
52,305 
Shareholders’ equity
Common shares ($0.01 par; shares authorized: 120 million; shares issued: 22,804,128 and 22,692,300)
Additional paid-in capital
899,491 
898,083 
Retained earnings (deficit)
103,554 
43,470 
Accumulated other comprehensive income (loss)
15,994 
5,629 
Common shares held in treasury, at cost (shares: 2,917,149 and 2,789,405)
(77,923)
(75,056)
Total shareholders’ equity
941,344 
872,353 
Total liabilities, contingently redeemable preference shares and shareholders’ equity
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Revenues
($ in thousands except share and per share data)
Gross premiums ceded
(40,520)
(43,901)
(190,957)
(222,019)
Change in unearned premiums
45,029 
21,093 
22,762 
23,828 
Other underwriting income (loss)
2,045 
2,412 
Realized and unrealized gains (losses) on investments
70,073 
6,105 
19,629 
24,243 
Net investment income (loss)
Total revenues
227,681 
166,096 
676,378 
687,365 
(109,207)
(134,655)
(440,482)
(453,135)
Acquisition expenses
(36,578)
(29,785)
(125,541)
(126,788)
General and administrative expenses
(6,015)
(6,825)
(28,341)
(30,843)
Interest expense
(2,912)
(2,950)
(11,647)
(5,791)
Net foreign exchange gains (losses)
(6,139)
(7,536)
(1,387)
(8,247)
Transaction costs and other
(4,040)
Total expenses
(164,891)
(181,751)
(611,438)
(624,804)
Income (loss) before income taxes
62,790 
(15,655)
64,940 
62,561 
Income tax expense
Net income (loss) before preference dividends and redemption costs
62,431 
64,914 
62,541 
(1,061)
(1,209)
(4,402)
(13,632)
Accelerated amortization of costs related to the redemption of preference shares
(4,164)
Net income (loss) available to common shareholders
61,370 
(16,864)
60,512 
44,745 
Other comprehensive income (loss) net of income tax:
Available-for-sale investments:
Unrealized holding gains (losses) arising during the period
7,255 
(1,749)
16,695 
12,649 
Unrealized foreign currency gains (losses) arising during the period
7,051 
7,596 
5,360 
3,372 
Credit loss recognized in net income (loss)
Reclassification of net realized (gains) losses, net of income taxes, included in net income (loss)
(2,146)
(11,133)
(5,611)
Unrealized holding gains (losses) of available for sale investments
13,328 
3,701 
11,119 
10,410 
Foreign currency translation adjustments
12,797 
3,317 
10,365 
10,359 
Comprehensive income (loss)
74,167 
(13,547)
70,877 
Earnings (loss) per share:
Diluted
Weighted average number of ordinary shares used in the determination of earnings (loss) per share:
19,890,784 
21,277,287 
19,899,137 
22,366,682 
19,952,166 
19,921,231 
22,373,968 
Numerator:
Denominator:
Weighted average common shares outstanding - basic
Effect of dilutive common share equivalents:
Weighted average non-vested restricted share units (1)
61,382 
22,094 
7,286 
Weighted average common shares outstanding - diluted
Earnings (loss) per common share:
(1) The weighted average non-vested restricted share units are excluded from the calculation of diluted weighted average common shares outstanding for the three months ended December 31, 2019, due to a net loss reported.
June 30,
2020 (1)
March 31, 2020 (2)
866,899 
776,151 
564,054 
Common shares outstanding - basic (1)(2)
19,863,328 
19,976,397 
Non-vested restricted share units (2)
103,820 
131,277 
82,360 
Common shares outstanding - diluted
19,994,604 
19,994,605 
20,058,757 
Book value per common share
$47.33
$43.58
$39.02
$28.40
$43.67
$43.36
$38.82
$28.21
$43.49
(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 December 31, 2020.
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, transaction costs and other, 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, transaction costs and other, 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), transaction cost and other, 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), transaction costs and other, 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), transaction costs and other, 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), transaction costs and other, 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 twelve-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):
1,061 
1,209 
4,402 
13,632 
4,164 
2,912 
2,950 
11,647 
5,791 
4,040 
Net foreign exchange (gains) losses
6,139 
7,536 
1,387 
8,247 
Net investment (income) loss
(84,437)
(32,082)
(113,982)
(128,263)
Other underwriting (income) loss
(2,045)
(2,412)
2,102 
1,882 
11,133 
10,812 
Other underwriting income (loss)
Adjusted underwriting income (loss)
(6,454)
(35,369)
(20,835)
(40,852)
The adjusted combined ratio reconciles to the combined ratio for the three months and years ended December 31, 2020 and 2019 as follows:
As Adjusted
Losses and loss adjustment expenses
36,578 
29,785 
General & administrative expenses (1)
6,015 
(2,102)
3,913 
6,825 
(1,882)
4,943 
Net premiums earned (1)
143,244 
134,014 
Adjusted loss ratio
100.5 
Adjusted acquisition expense ratio
Adjusted general & administrative expense ratio
(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.
125,541 
126,788 
28,341 
17,208 
30,843 
(10,812)
20,031 
562,396 
559,102 
The following tables summarize the components of our total investment return for the three months and years ended December 31, 2020 and 2019:
Three Months Ended December 31, 2020
Three Months Ended December 31, 2019
Cost of
U/W Collateral (4)
28,857 
2,703 
34,435 
6,340 
(3,877)
(4,431)
(2,280)
(2,807)
(3,019)
22,700 
2,063 
27,197 
5,648 
Net realized gains (losses) on investments
9,196 
(13,539)
2,875 
Net unrealized gains (losses) on investments (1)
60,238 
17,283 
81,855 
2,702 
27,092 
8,009 
Average total investments (2)
1,807,107 
762,137 
2,569,244 
1,869,300 
870,208 
2,739,508 
Average net assets (3)
1,497,478 
764,930 
(24,750)
2,237,658 
1,635,302 
872,771 
(328,750)
2,179,323 
Net interest income yield on average net assets (3)
Net investment income return on average net assets (3)
(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.
Twelve Months Ended December 31, 2020,
Twelve Months Ended December 31, 2019,
U/W Collateral (4)
125,504 
14,886 
139,280 
24,608 
(15,817)
(1,376)
(16,877)
(1,515)
(10,290)
(1,025)
(5,492)
(15,047)
(13,255)
99,397 
12,485 
107,356 
22,110 
11,027 
(13,147)
5,199 
7,369 
24,729 
7,462 
95,919 
23,555 
106,747 
34,771 
$1,812,010
$786,937
$2,598,947
$1,872,835
$900,641
$2,773,476
$1,484,777
$791,754
$(173,500)
$2,103,031
$1,568,980
$900,069
$(325,527)
$2,143,522
(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 twelve-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.
(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 December 31, 2020
As of December 31, 2019
Borrowings for U/W Collateral
Average total investments - QTD
Average total investments - YTD
1,812,010 
786,937 
2,598,947 
1,872,835 
900,641 
2,773,476 
Average net assets - QTD
Average net assets - YTD
1,484,777 
791,754 
2,103,031 
1,568,980 
900,069 
2,143,522 
1,862,253 
846,884 
Accrued investment income
3,039 
4,346 
37,412 
16,275 
Less: Payable for securities purchased
Less: Payable for securities sold short
Less: Revolving credit agreement borrowings
186,890 
24,750 
155,537 
328,750 
1,547,529 
777,633 
2,300,412 
1,648,233 
851,243 
2,170,726 
Non-investment grade borrowing ratio (1)
59,501 
22,152 
38,057 
9,146 
(120,891)
(4,604)
(108,444)
(2,004)
(61,390)
17,548 
(70,387)
7,142 
(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 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 HoldCo;
legal proceedings that have been, and additional proceedings that may be initiated against the Company or its directors related to the proposed transaction with HoldCo;
the business of the Company may suffer as a result of uncertainty surrounding the proposed transaction with HoldCo, and there may be challenges with employee retention as a result of the proposed transaction with HoldCo;
the proposed transaction with HoldCo 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.
There continues to be significant uncertainties surrounding the ultimate number of insurance claims and scope of damage resulting from the COVID-19 global 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, estimates of reinsurance recoverables, and reflects our interpretation of the legal environment. These estimates include losses only related to claims incurred as of December 31, 2020. Actual losses from these events may vary materially from the estimates due to several factors, including the inherent uncertainties in making such determinations and the evolving nature of this pandemic.
We believe that we are relatively less exposed to COVID-19 global pandemic-related underwriting losses than many industry peers. For example, we have either no, or de minimis, premium writings in life, accident and health, event cancellation, trade credit, travel or pandemic specific coverages that respond directly to COVID-19 global pandemic-related losses. With regard to the potential exposure to business interruption losses, we write a limited amount of commercial property exposure, mainly emanating from our property catastrophe line of business, which is consistent with our strategy to target longer duration lines of business. We incurred a loss of $5.5 million in 2020 for COVID-19 related business interruption losses in our property catastrophe lines of business. We continue to monitor our potential COVID-19 exposures.
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

The above information was disclosed in a filing to the SEC. To see the filing, click here.

To receive a free e-mail notification whenever Watford Holdings Ltd. makes a similar move, sign up!

Auto Refresh

Feedback