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Watford Reports 2020 First Quarter Results

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

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

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

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

Commenting on the 2020 first quarter financial results, Jon Levy, CEO of Watford, said:

“First of all, we would like to acknowledge the challenging times that the COVID-19 pandemic has created, and express how grateful we are to those on the frontlines serving their communities.  Watford is also committed to supporting our customers and clients through this stressful period.  I would like to thank the broader Watford team for their efforts to deliver the same level of excellence in operations under these extraordinarily difficult circumstances.

As reported in our press release on April 23, 2020, our results for the first quarter were heavily affected by the investment market volatility caused by the economic shutdown mandated by governments around the world.  The pandemic has had significant impacts across the globe, and Watford took its share of that impact, although not to a greater extent than anticipated for an event of this magnitude.

Our net loss of $267.8 million for the quarter was driven by a $262.7 million net investment loss.  The net investment loss, in turn, was predominantly the result of $285.5 million of unrealized "mark-to-market" losses in our non-investment grade fixed-income portfolio.

Net interest income, a key driver of long-term shareholder value, remained steady and strong at $27.8 million, representing a quarterly yield on net assets of 1.4%.

Our combined ratio for the quarter was 104.4%, and 102.2% when adjusted for other underwriting income and certain corporate and nonrecurring expenses.  While the COVID-19 pandemic has created significant areas of uncertainty for the property and casualty insurance industry, the impact on our first quarter underwriting results was not material, as we believe our mix of business is less exposed to the classes of business likely to be most affected.

Insurance and reinsurance market conditions continue to move in a favorable direction and we remain optimistic about our positioning in the marketplace.”

Underwriting

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

   
  Three Months Ended March 31,
    2020       2019     % Change
   
  ($ in thousands)
Gross premiums written $ 234,902     $ 186,689     25.8%
Net premiums written   186,700       145,387     28.4%
Net premiums earned   140,039       146,094     (4.1)%
Underwriting income (loss) (1)   (6,143 )     (5,970 )   (2.9)%
           
          % Point Change
Loss ratio   79.0 %     75.9 %   3.1%
Acquisition expense ratio   20.3 %     23.3 %   (3.0)%
General & administrative expense ratio   5.1 %     4.9 %   0.2%
Combined ratio   104.4 %     104.1 %   0.3%
Adjusted combined ratio (2)   102.2 %     102.3 %   (0.1)%
           

(1) Underwriting income (loss) is a non-U.S. GAAP financial measure and is calculated as net premiums earned, less loss and loss adjustment expenses, acquisition expenses and general and administrative expenses. See “Comments on Regulation G” for further discussion, including a reconciliation of underwriting income (loss) to net income (loss) available to common shareholders.

(2) Adjusted combined ratio is a non-U.S. GAAP financial measure and is calculated by dividing the sum of loss and loss adjustment expenses, acquisition expenses and general and administrative expenses, less certain corporate expenses, by the sum of net premiums earned and other underwriting income (loss). See “Comments on Regulation G” for further discussion, including a reconciliation of our adjusted combined ratio to our combined ratio.

The following table provides summary information regarding premiums written and earned by line of business:

   
  Three Months Ended March 31,
    2020     2019
   
  ($ in thousands)
Gross premiums written:      
Casualty reinsurance $ 83,818   $ 75,601
Other specialty reinsurance   36,880     24,298
Property catastrophe reinsurance   9,832     5,992
Insurance programs and coinsurance   104,372     80,798
Total $ 234,902   $ 186,689
       
Net premiums written:      
Casualty reinsurance $ 83,667   $ 75,065
Other specialty reinsurance   35,484     23,182
Property catastrophe reinsurance   9,832     5,982
Insurance programs and coinsurance   57,717     41,158
Total $ 186,700   $ 145,387
       
Net premiums earned:      
Casualty reinsurance $ 52,765   $ 63,313
Other specialty reinsurance   35,364     44,561
Property catastrophe reinsurance   4,884     2,971
Insurance programs and coinsurance   47,026     35,249
Total $ 140,039   $ 146,094
           

The following table shows the components of our loss and loss adjustment expenses for the three months ended March 31, 2020 and 2019:

   
  Three Months Ended March 31,
    2020       2019  
  Loss and Loss
Adjustment
Expenses
  % of Earned
Premiums
  Loss and Loss
Adjustment
Expenses
  % of Earned
Premiums
   
  ($ in thousands)
Current year $ 110,856     79.1 %   $ 110,901     75.9 %
Prior year development (favorable)/adverse   (180 )   (0.1 )%     (51 )   %
Loss and loss adjustment expenses $ 110,676     79.0 %   $ 110,850     75.9 %
               

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

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

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

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

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

Investments

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

   
  Three Months Ended March 31,
    2020       2019  
   
  ($ in thousands)
Interest income $ 37,824     $ 43,141  
Investment management fees - related parties   (4,352 )     (4,409 )
Borrowing and miscellaneous other investment expenses   (5,669 )     (8,298 )
Net interest income   27,803       30,434  
Realized gains (losses) on investments   (5,046 )     1,282  
Unrealized gains (losses) on investments   (285,456 )     32,438  
Investment performance fees - related parties         (5,800 )
Net investment income (loss) $ (262,699 )   $ 58,354  
       
Unrealized gains on investments (balance sheet) $ 40,525     $ 32,106  
Unrealized losses on investments (balance sheet)   (413,791 )     (111,535 )
Net unrealized gains (losses) on investments (balance sheet) $ (373,266 )   $ (79,429 )
       
Net interest income yield on average net assets (1)   1.4 %     1.5 %
Non-investment grade portfolio (1)   1.7 %     1.9 %
Investment grade portfolio (1)   0.5 %     0.6 %
Net investment income return on average net assets (1)   (13.0 )%     2.8 %
Non-investment grade portfolio (1)   (17.4 )%     3.4 %
Investment grade portfolio (1)   0.8 %     1.1 %
Net investment income return on average total investments (excluding accrued investment income) (2)   (10.1 )%     2.1 %
Non-investment grade portfolio (2)   (14.9 )%     2.7 %
Investment grade portfolio (2)   0.8 %     1.1 %
       

(1) Net interest income yield on average net assets and net investment income return on average net assets are calculated by dividing net interest income, and net investment income (loss), respectively, by average net assets. Net assets is calculated as the sum of total investments, accrued investment income and receivables for securities sold, less revolving credit agreement borrowings, payable for securities purchased and payable for securities sold short. For the three-month period, average net assets is calculated using the averages of each quarterly period. However, for the investment grade portfolio component of these returns, revolving credit agreement borrowings are not subtracted from the net assets calculation. The separate components of these returns (non-investment grade portfolio and investment grade portfolio) are non-U.S. GAAP financial measures. See “Comments on Regulation G” for further discussion, including a reconciliation of these components of our net interest income yield on average net assets and net investment income return on average net assets.

(2) Net investment income return on average total investments (excluding accrued investment income) is calculated by dividing net investment income by average total investments. For the three-month period, average total investments is calculated using the averages of each quarterly period. The separate components of these returns (non-investment grade portfolio and investment grade portfolio) are non-U.S. GAAP financial measures. See “Comments on Regulation G” for further discussion, including a reconciliation of these components of our net investment income return on average total investments (excluding accrued investment income).

The following tables summarize the composition of the Company's non-investment grade and investment grade portfolios by sector as of March 31, 2020 and December 31, 2019:

   
  March 31, 2020
  Total   Financials   Health Care   Technology   Consumer Services   Industrials   Consumer Goods   Oil & Gas   All Other (1)
   
  ($ in thousands)
Non-Investment Grade Portfolio:                                  
Term loan investments $ 906,999   $ 190,535   $ 195,084   $ 199,837   $ 98,518   $ 89,778   $ 40,415   $ 32,049   $ 60,783
Corporate bonds   240,570     24,927     43,028     15,702     49,761     27,585     19,947     18,522     41,098
Equities- sector specific    95,112
    59,714     27,174     5,868         1,026         242     1,088
Short-term investments - sector specific   47,703     7,703                         40,000    
Subtotal   1,290,384     282,879     265,286     221,407     148,279     118,389     60,362     90,813     102,969
Equities- sector specific    26,148                                
Short-term investments - non-sector specific   222,065                                
Asset-backed securities   140,613                                
Other investments   30,682                                
Mortgage-backed securities   8,529                                
Total Non-Investment Grade Portfolio $ 1,718,421   $ 282,879   $ 265,286   $ 221,407   $ 148,279   $ 118,389   $ 60,362   $ 90,813   $ 102,969
                                   
Investment Grade Portfolio:                                  
Corporate bonds $ 167,570   $ 62,046   $ 13,752   $ 12,135   $ 15,481   $ 14,133   $ 34,718   $ 7,346   $ 7,959
Short-term investments   74,093                                
U.S. government and government agency bonds   265,423                                
Non-U.S. government and government agency bonds   149,858                                
Asset-backed securities   113,583                                
Mortgage-backed securities   21,785                                
Municipal government and government agency bonds   2,073                                
Total Investment Grade Portfolio $ 794,385   $ 62,046   $ 13,752   $ 12,135   $ 15,481   $ 14,133   $ 34,718   $ 7,346   $ 7,959
Total Investments $ 2,512,806   $ 344,925   $ 279,038   $ 233,542   $ 163,760   $ 132,522   $ 95,080   $ 98,159   $ 110,928
                                                     

(1) Includes telecommunications, utilities and basic materials.

   
  December 31, 2019
  Total   Financials   Health Care   Technology   Consumer Services   Industrials   Consumer Goods   Oil & Gas   All Other (1)
   
  ($ in thousands)
Non-Investment Grade Portfolio:                                  
Term loan investments $ 1,061,934   $ 212,800   $ 221,982   $ 232,659   $ 121,434   $ 111,912   $ 46,827   $ 52,200   $ 62,120
Corporate bonds   213,841     17,547     19,160     10,972     28,144     13,822     23,491     27,632     73,073
Equities - sector specific   101,551     55,946     30,640     11,263         1,283         1,040     1,379
Short-term investments - sector specific   16,620     8,261         3,030         5,329            
Subtotal   1,393,946     294,554     271,782     257,924     149,578     132,346     70,318     80,872     136,572
Equities - sector specific   23,586                                                
Short-term investments - non-sector specific   215,816                                
Asset-backed securities   190,738                                
Other investments   30,461                                
Mortgage-backed securities   7,706                                
Total Non-Investment Grade Portfolio $ 1,862,253   $ 294,554   $ 271,782   $ 257,924   $ 149,578   $ 132,346   $ 70,318   $ 80,872   $ 136,572
                                   
Investment Grade Portfolio:                                  
Corporate bonds $ 158,632   $ 72,707   $ 12,087   $ 8,035   $ 11,752   $ 10,548   $ 32,046   $ 5,734   $ 5,723
Short-term investments   96,867                                
U.S. government and government agency bonds   285,609                                
Non-U.S. government and government agency bonds   133,409                                
Asset-backed securities   145,433                                
Mortgage-backed securities   24,750                                
Municipal government and government agency bonds   2,184                                
Total Investment Grade Portfolio $ 846,884   $ 72,707   $ 12,087   $ 8,035   $ 11,752   $ 10,548   $ 32,046   $ 5,734   $ 5,723
Total Investments $ 2,709,137   $ 367,261   $ 283,869   $ 265,959   $ 161,330   $ 142,894   $ 102,364   $ 86,606   $ 142,295
                                   

(1) Includes telecommunications, utilities and basic materials.

The table below summarizes the credit quality of the Company's non-investment grade and investment grade portfolios as of March 31, 2020 and December 31, 2019, as rated by Standard & Poor’s Financial Services, LLC, or Standard & Poor’s, Moody’s Investors Service, or Moody’s, Fitch Ratings Inc., or Fitch, Kroll Bond Rating Agency, or KBRA, or DBRS Morningstar, or DBRS, as applicable:

   
  Credit Rating (1)
March 31, 2020 Fair Value   AAA   AA   A   BBB   BB   B   CCC   CC   C   D   Not Rated
   
  ($ in thousands)
Non-Investment Grade Portfolio:                                              
Term loan investments $ 906,999   $   $   $   $   $ 10,277   $ 650,028   $ 161,307   $ 2,823   $ 1,314   $ 1,590   $ 79,660
Corporate bonds   240,570                 5,933     14,447     84,955     118,847     1,872         3,699     10,817
Asset-backed securities   140,613             3,339     85,572     19,727     7,395     1,418                 23,162
Mortgage-backed securities   8,529                     1,190                     2,552     4,787
Short-term investments   269,768     26,024     133,548     402     62,091         40,000                     7,703
Total fixed income instruments and short-term investments   1,566,479     26,024     133,548     3,741     153,596     45,641     782,378     281,572     4,695     1,314     7,841     126,129
Other Investments   30,682                                            
Equities   121,260                                            
Total Non-Investment Grade Portfolio $ 1,718,421   $ 26,024   $ 133,548   $ 3,741   $ 153,596   $ 45,641   $ 782,378   $ 281,572   $ 4,695   $ 1,314   $ 7,841   $ 126,129
                                               
Investment Grade Portfolio:                                              
Corporate bonds $ 167,570   $   $ 34,647   $ 76,063   $ 52,085   $ 4,775   $   $   $   $   $   $
U.S. government and government agency bonds   265,423         265,423                                    
Asset-backed securities   113,583     1,628         15,980     95,975                            
Mortgage-backed securities   21,785             4,600     17,185                            
Non-U.S. government and government agency bonds   149,858         149,858                                    
Municipal government and government agency bonds   2,073     1,023     570     480                                
Short-term investments   74,093     4,150     21,239         48,704                            
Total Investment Grade Portfolio $ 794,385   $ 6,801   $ 471,737   $ 97,123   $ 213,949   $ 4,775   $   $   $   $   $   $
Total $ 2,512,806   $ 32,825   $ 605,285   $ 100,864   $ 367,545   $ 50,416   $ 782,378   $ 281,572   $ 4,695   $ 1,314   $ 7,841   $ 126,129
                                                                       

(1) For individual fixed maturity investments, Standard & Poor’s ratings are used. In the absence of a Standard & Poor’s rating, ratings from Moody’s are used, followed by ratings from Fitch, followed by ratings from KBRA, followed by ratings from DBRS.

...
   
  Credit Rating (1)
December 31, 2019 Fair Value   AAA   AA   A   BBB   BB   B   CCC   CC   C   D   Not Rated
   
  ($ in thousands)
Non-Investment Grade Portfolio:                                              
Term loan investments $ 1,061,934   $   $   $   $   $ 9,617   $ 761,168   $ 215,909   $ 6,823   $ 2,119   $   $ 66,298
Corporate bonds   213,841                     9,003     58,345     135,613                 10,880
Asset-backed securities   190,738             4,002     105,706     29,695     18,381                     32,954
Mortgage-backed securities   7,706                     976                     2,497     4,233
Short-term investments   232,436         116,805     34,903     64,108             8,359                 8,261
Total fixed income instruments and short-term investments   1,706,655         116,805     38,905     169,814     49,291     837,894     359,881     6,823     2,119     2,497     122,626
Other Investments   30,461                                            
Equities   125,137                                            
Total Non-Investment Grade Portfolio $ 1,862,253   $   $ 116,805   $ 38,905   $ 169,814   $ 49,291   $ 837,894   $ 359,881   $ 6,823   $ 2,119   $ 2,497   $ 122,626
                                               
Investment Grade Portfolio:                                              
Corporate bonds $ 158,632   $   $ 36,128   $ 81,401   $ 41,103   $   $   $   $   $   $   $
U.S. government and government agency bonds   285,609         285,609                                    
Asset-backed securities   145,433     2,006         25,177     118,250                            
Mortgage-backed securities   24,750             1,100