Watford Reports 2020 Fourth Quarter Results

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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 common 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.

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,

2020

2019

% Change

2020

2019

% Change

($ in thousands)

Gross premiums written

$

138,237

$

156,254

(11.5)

%

$

728,546

$

754,881

(3.5)

%

Net premiums written

97,717

112,353

(13.0)

%

537,589

532,862

0.9

%

Net premiums earned

142,746

133,446

7.0

%

560,351

556,690

0.7

%

Underwriting income (loss) (1)

(9,054)

(37,819)

76.1

%

(34,013)

(54,076)

37.1

%

% Point
Change

% Point
Change

Loss ratio

76.5

%

100.9

%

(24.4)

%

78.6

%

81.4

%

(2.8)

%

Acquisition expense ratio

25.6

%

22.3

%

3.3

%

22.4

%

22.8

%

(0.4)

%

General & administrative expense ratio

4.2

%

5.1

%

(0.9)

%

5.1

%

5.5

%

(0.4)

%

Combined ratio

106.3

%

128.3

%

(22.0)

%

106.1

%

109.7

%

(3.6)

%

Adjusted combined ratio (2)

104.5

%

126.4

%

(21.9)

%

103.7

%

107.3

%

(3.6)

%

(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
December 31,

Year Ended
December 31,

2020

2019

2020

2019

($ in thousands)

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

844

27,334

16,226

Insurance programs and coinsurance

94,761

93,799

395,993

339,170

Total

$

138,237

$

156,254

$

728,546

$

754,881

Net premiums written:

Casualty reinsurance

$

14,280

$

26,532

$

185,968

$

225,758

Other specialty reinsurance

26,091

33,078

111,575

114,876

Property catastrophe reinsurance

1,569

874

26,587

15,517

Insurance programs and coinsurance

55,777

51,869

213,459

176,711

Total

$

97,717

$

112,353

$

537,589

$

532,862

Net premiums earned:

Casualty reinsurance

$

49,715

$

55,352

$

205,192

$

238,437

Other specialty reinsurance

33,800

30,929

131,873

149,688

Property catastrophe reinsurance

5,740

3,692

23,037

13,399

Insurance programs and coinsurance

53,491

43,473

200,249

155,166

Total

$

142,746

$

133,446

$

560,351

$

556,690

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:

Three Months Ended December 31,

Year Ended December 31,

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

$

109,314

76.6

%

$

110,510

82.8

%

$

441,175

78.7

%

$

429,322

77.1

%

Prior year development (favorable)/adverse

(107)

(0.1)

%

24,145

18.1

%

(693)

(0.1)

%

23,813

4.3

%

Loss and loss adjustment expenses

$

109,207

76.5

%

$

134,655

100.9

%

$

440,482

78.6

%

$

453,135

81.4

%

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:

Three Months Ended
December 31,

Year Ended
December 31,

2020

2019

2020

2019

($ in thousands)

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)

Net interest income

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

$

81,653

$

47,203

Unrealized losses on investments (balance sheet)

(125,495)

(110,448)

(125,495)

(110,448)

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

$

(43,842)

$

(63,245)

$

(43,842)

$

(63,245)

...

Net interest income yield on average net assets (1)

1.1

%

1.4

%

5.1

%

5.4

%

Non-investment grade portfolio (1)

1.5

%

1.7

%

6.7

%

6.8

%

Investment grade portfolio (1)

0.3

%

0.6

%

1.6

%

2.5

%

Net investment income return on average net assets (1)

3.8

%

1.5

%

5.4

%

6.0

%

Non-investment grade portfolio (1)

5.5

%

1.7

%

6.5

%

6.8

%

Investment grade portfolio (1)

0.4

%

0.9

%

3.0

%

3.9

%

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

3.3

%

1.2

%

4.4

%

4.6

%

Non-investment grade portfolio (2)

4.5

%

1.4

%

5.3

%

5.7

%

Investment grade portfolio (2)

0.4

%

0.9

%

3.0

%

3.9

%

(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 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).

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

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

Total

Financials

Health
Care

Technology

Consumer
Services

Industrials

Consumer
Goods

Oil & Gas

All Other (1)

($ in thousands)

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

479

1,402

Short-term investments - sector specific

12,637

490

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

$

289,747

$

209,137

$

215,964

$

170,428

$

156,541

$

42,838

$

65,113

$

128,492

Investment Grade Portfolio:

Corporate bonds

$

197,247

$

55,430

$

11,190

$

17,863

$

28,002

$

13,989

$

41,543

$

14,473

$

14,757

Short-term investments

117,300

U.S. government and government agency bonds

202,488

Non-U.S. government and government agency bonds

158,839

Asset-backed securities

80,258

Mortgage-backed securities

16,663

Municipal government and government agency bonds

1,788

Total Investment Grade Portfolio

$

774,583

$

55,430

$

11,190

$

17,863

$

28,002

$

13,989

$

41,543

$

14,473

$

14,757

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

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.

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)

December 31, 2020

Fair Value

AAA

AA

A

BBB

BB

B

CCC

CC

C

Not Rated

($ in thousands)

Non-Investment Grade Portfolio:

Term loan investments

$

851,539

$

$

$

$

11,352

$

19,486

$

588,215

$

185,221

$

7,406

$

2,727

$

37,132

Corporate bonds

312,620

31,089

194,418

59,421

8,280

1,894

17,518

Asset-backed securities

140,508

73,911

26,799

8,385

8,262

837

22,314

Short-term investments

301,390

83,308

124,830

89,577

3,186

489

Total fixed income instruments and short-term investments

1,606,057

83,308

124,830

89,577

85,263

77,374

794,204

253,393

16,523

4,621

76,964

Equities

118,201

Total Non-Investment Grade Portfolio

$

1,724,258

$

83,308

$

124,830

$

89,577

$

85,263

$

77,374

$

794,204

$

253,393

$

16,523

$

4,621

$

76,964

Investment Grade Portfolio:

Corporate bonds

$

197,247

$

$

19,812

$

82,379

$

87,913

$

7,143

$

$

$

$

$

U.S. government and government agency bonds

202,488

202,488

Asset-backed securities

80,258

15,675

59,560

5,023

Mortgage-backed securities

16,663

2,092

14,571

Non-U.S. government and government agency bonds

158,839

158,839

Municipal government and government agency bonds

1,788

783

592

413

Short-term investments

117,300

6,211

43,870

19,328

47,891

Total Investment Grade Portfolio

$

774,583

$

6,994

$

425,601

$

119,887

$

209,935

$

12,166

$

$

$

$

$

Total

$

2,498,841

$

90,302

$

550,431

$

209,464

$

295,198

$

89,540

$

794,204

$

253,393

$

16,523

$

4,621

$

76,964

(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)

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

Other Investments

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.

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)

December 31,

December 31,

2020

2019

Assets

($ in thousands)

Investments:

Term loans, fair value option (Amortized cost: $890,996 and $1,113,212)

$

851,539

$

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

2,498,841

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

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)

228

227

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

$

3,532,060

$

3,550,856

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

(Unaudited)

(Unaudited)

Three Months Ended
December 31,

Year Ended
December 31,

2020

2019

2020

2019

Revenues

($ in thousands except share and per share data)

Gross premiums written

$

138,237

$

156,254

$

728,546

$

754,881

Gross premiums ceded

(40,520)

(43,901)

(190,957)

(222,019)

Net premiums written

97,717

112,353

537,589

532,862

Change in unearned premiums

45,029

21,093

22,762

23,828

Net premiums earned

142,746

133,446

560,351

556,690

Other underwriting income (loss)

498

568

2,045

2,412

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)

Net interest income

24,643

29,826

106,390

116,211

Realized and unrealized gains (losses) on investments

70,073

6,105

19,629

24,243

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

Total revenues

227,681

166,096

676,378

687,365

Expenses

Loss and loss adjustment expenses

(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)

(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

(359)

(26)

(20)

Net income (loss) before preference dividends and redemption costs

62,431

(15,655)

64,914

62,541

Preference dividends

(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)

(213)

197

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

(765)

(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

(531)

(384)

(754)

(51)

Other comprehensive income (loss) net of income tax

12,797

3,317

10,365

10,359

Comprehensive income (loss)

$

74,167

$

(13,547)

$

70,877

$

55,104

Earnings (loss) per share:

Basic

$

3.09

$

(0.79)

$

3.04

$

2.00

Diluted

$

3.08

$

(0.79)

$

3.04

$

2.00

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

Basic

19,890,784

21,277,287

19,899,137

22,366,682

Diluted

19,952,166

21,277,287

19,921,231

22,373,968

Three Months Ended
December 31,

Year Ended
December 31,

2020

2019

2020

2019

Numerator:

($ in thousands except share and per share data)

Net income (loss) before preference dividends and redemption costs

$

62,431

$

(15,655)

$

64,914

$

62,541

Preference dividends

(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

Denominator:

Weighted average common shares outstanding - basic

19,890,784

21,277,287

19,899,137

22,366,682

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

19,952,166

21,277,287

19,921,231

22,373,968

Earnings (loss) per common share:

Basic

$

3.09

$

(0.79)

$

3.04

$

2.00

Diluted

$

3.08

$

(0.79)

$

3.04

$

2.00

(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.

December 31,
2020

September 30,
2020

June 30,
2020 (1)

March 31,
2020 (2)

December 31,
2019

Numerator:

($ in thousands except share and per share data)

Total shareholders’ equity

$

941,344

$

866,899

$

776,151

$

564,054

$

872,353

Denominator:

Common shares outstanding - basic (1)(2)

19,890,784

19,890,784

19,890,784

19,863,328

19,976,397

Effect of dilutive common share equivalents:

Non-vested restricted share units (2)

103,820

103,820

103,820

131,277

82,360

Common shares outstanding - diluted

19,994,604

19,994,604

19,994,604

19,994,605

20,058,757

Book value per common share

$47.33

$43.58

$39.02

$28.40

$43.67

Book value per diluted common share

$47.08

$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.

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, 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):

Three Months Ended
December 31,

Year Ended
December 31,

2020

2019

2020

2019

($ in thousands)

Net income (loss) available to common shareholders

$

61,370

$

(16,864)

$

60,512

$

44,745

Preference dividends

1,061

1,209

4,402

13,632

Accelerated amortization of costs related to the redemption of preference shares

4,164

Net income (loss) before preference dividends and redemption costs

62,431

(15,655)

64,914

62,541

Income tax expense

359

26

20

Interest expense

2,912

2,950

11,647

5,791

Transaction costs and other

4,040

.

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

(498)

(568)

(2,045)

(2,412)

Underwriting income (loss)

(9,054)

(37,819)

(34,013)

(54,076)

Certain corporate expenses

2,102

1,882

11,133

10,812

Other underwriting income (loss)

498

568

2,045

2,412

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:

Three Months Ended December 31,

2020

2019

Amount

Adjustment

As Adjusted

Amount

Adjustment

As Adjusted

($ in thousands)

Losses and loss adjustment expenses

$

109,207

$

$

109,207

$

134,655

$

$

134,655

Acquisition expenses

36,578

36,578

29,785

29,785

General & administrative expenses (1)

6,015

(2,102)

3,913

6,825

(1,882)

4,943

Net premiums earned (1)

142,746

498

143,244

133,446

568

134,014

Loss ratio

76.5

%

100.9

%

Acquisition expense ratio

25.6

%

22.3

%

General & administrative expense ratio

4.2

%

5.1

%

Combined ratio

106.3

%

128.3

%

Adjusted loss ratio

76.2

%

100.5

%

Adjusted acquisition expense ratio

25.5

%

22.2

%

Adjusted general & administrative expense ratio

2.8

%

3.7

%

Adjusted combined ratio

104.5

%

126.4

%

(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.

Year Ended December 31,

2020

2019

Amount

Adjustment

As Adjusted

Amount

Adjustment

As Adjusted

($ in thousands)

Losses and loss adjustment expenses

$

440,482

$

$

440,482

$

453,135

$

$

453,135

Acquisition expenses

125,541

125,541

126,788

126,788

General & administrative expenses (1)

28,341

(11,133)

17,208

30,843

(10,812)

20,031

Net premiums earned (1)

560,351

2,045

562,396

556,690

2,412

559,102

Loss ratio

78.6

%

81.4

%

Acquisition expense ratio

22.4

%

22.8

%

General & administrative expense ratio

5.1

%

5.5

%

Combined ratio

106.1

%

109.7

%

Adjusted loss ratio

78.3

%

81.0

%

Adjusted acquisition expense ratio

22.3

%

22.7

%

Adjusted general & administrative expense ratio

3.1

%

3.6

%

Adjusted combined ratio

103.7

%

107.3

%

(1) Adjustments include certain corporate expenses, which are deducted from general and administrative expenses, and other underwriting income (loss), which is added to net premiums earned.

The following tables summarize the components of our total investment return for the three months and years ended December 31, 2020 and 2019:

Three Months Ended December 31, 2020

Three Months Ended December 31, 2019

Non-
Investment
Grade

Investment
Grade

Cost of
U/W
Collateral (4)

Total

Non-
Investment
Grade

Investment
Grade

Cost of
U/W
Collateral (4)

Total

($ in thousands)

Interest income

$

28,857

$

2,703

$

$

31,560

$

34,435

$

6,340

$

$

40,775

Investment management fees - related parties

(3,877)

(322)

(4,199)

(4,431)

(376)

(4,807)

Borrowing and miscellaneous other investment expenses

(2,280)

(318)

(120)

(2,718)

(2,807)

(316)

(3,019)

(6,142)

Net interest income

22,700

2,063

(120)

24,643

27,197

5,648

(3,019)

29,826

Net realized gains (losses) on investments

9,196

643

9,839

(13,539)

2,875

(10,664)

Net unrealized gains (losses) on investments (1)

60,238

(4)

60,234

17,283

(514)

16,769

Investment performance fees - related parties

(10,279)

(10,279)

(3,849)

(3,849)

Net investment income (loss)

$

81,855

$

2,702

$

(120)

$

84,437

$

27,092

$

8,009

$

(3,019)

$

32,082

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)

1.5

%

0.3

%

1.1

%

1.7

%

0.6

%

1.4

%

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

4.5

%

0.4

%

3.3

%

1.4

%

0.9

%

1.2

%

Net investment income return on average net assets (3)

5.5

%

0.4

%

(0.5)

%

3.8

%

1.7

%

0.9

%

(0.9)

%

1.5

%

(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 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,

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

$

125,504

$

14,886

$

$

140,390

$

139,280

$

24,608

$

$

163,888

Investment management fees - related parties

(15,817)

(1,376)

(17,193)

(16,877)

(1,515)

(18,392)

Borrowing and miscellaneous other investment expenses

(10,290)

(1,025)

(5,492)

(16,807)

(15,047)

(983)

(13,255)

(29,285)

Net interest income

99,397

12,485

(5,492)

106,390

107,356

22,110

(13,255)

116,211

Net realized gains (losses) on investments

1,190

11,027

12,217

(13,147)

5,199

(7,948)

Net unrealized gains (losses) on investments (1)

7,369

43

7,412