Watford Reports 2020 Second Quarter Results

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

Net income available to common shareholders of $188.8 million, or $9.51 per diluted common share, or a 28.2% return on average equity, compared to net income of $13.8 million, or $0.61 per diluted common share, or a 1.5% return on average equity for the 2019 second quarter;

Combined ratio of 108.0%, comprised of a 79.7% loss ratio, a 22.4% acquisition expense ratio and a 5.9% general and administrative expense ratio, compared to a combined ratio of 103.5% for the prior year second quarter, comprised of a 73.6% loss ratio, a 23.4% acquisition expense ratio and a 6.5% general and administrative expense ratio;

Net interest income of $27.4 million, a 1.4% yield on average net assets, for the 2020 second quarter, compared to net interest income of $26.4 million and a 1.2% yield on average net assets for the 2019 second quarter; and

Net investment income of $199.5 million, a 10.0% return on average net assets for the 2020 second quarter, compared to net investment income of $23.8 million and a 1.1% return on average net assets for the 2019 second quarter.

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

At this time, there continues to be significant uncertainties surrounding the ultimate number of insurance claims and scope of damage resulting from this pandemic. The Companys 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 Companys clients and brokers, a review of relevant in-force contracts with potential exposure to the pandemic and estimates of reinsurance recoverables. These estimates include losses only related to claims incurred as of June 30, 2020. Actual losses from these events may vary materially from the estimates due to several factors, including the inherent uncertainties in making such determinations and the evolving nature of this pandemic.

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

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

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

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

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

Underwriting

The following table summarizes the Companys underwriting results on a consolidated basis:

(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:

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

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

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

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

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

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

Investments

The following table summarizes the Companys key investment returns on a consolidated basis:

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

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

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

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

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

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

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

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

(1) Includes telecommunications, utilities and basic materials.