~~(1) Loss ratio is calculated by dividing loss and loss adjustment expenses by net premiums earned.~~

~~(2) Acquisition expense ratio is calculated by dividing acquisition expenses by net premiums earned.~~

~~(3) General and administrative expense ratio is calculated by dividing general and administrative expenses by net premiums earned.~~

(4) Combined ratio is calculated by dividing the sum of loss and loss adjustment expenses, acquisition expenses and general and administrative expenses by net premiums earned, or equivalently, by adding the loss ratio, acquisition expense ratio and general and administrative expense ratio.

(5) 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, excluding the effects of certain corporate expenses, by the sum of net premiums earned and other underwriting income (loss). Adjusted loss ratio, adjusted acquisition expense ratio and adjusted general and administrative expense ratio are components of our adjusted combined ratio. Adjusted loss ratio is calculated by dividing loss and loss adjustment expenses by the sum of net premiums earned and other underwriting income (loss). Adjusted acquisition expense ratio is calculated by dividing acquisition expenses by the sum of net premiums earned and other underwriting income (loss). Adjusted general and administrative expense ratio is calculated by dividing general and administrative expenses, excluding the effects of certain corporate expenses, by the sum of net premiums earned and other underwriting income (loss). Refer to Part II, Item 7 “Management’s discussion and analysis of financial condition and results of operations-Reconciliation of non-U.S. GAAP financial measures” for a reconciliation of our adjusted combined ratio to our combined ratio, as well as related reconciliations of our adjusted loss ratio, adjusted acquisition expense ratio and adjusted general and administrative expense ratio to our loss ratio, acquisition expense ratio and general and administrative expense ratio, respectively.

Item 7. Management’s discussion and analysis of financial condition and results of operations

The following discussion and analysis of our financial condition and results of operations contains forward-looking statements, which involve inherent risks and uncertainties. All statements other than statements of historical fact are forward-looking statements. These statements are based on our current assessment of risks and uncertainties. Actual results may differ materially from those expressed or implied in these statements and, therefore, undue reliance should not be placed on them. Important factors that could cause actual events or results to differ materially from those indicated in such statements are discussed elsewhere in this report, including the sections entitled “Cautionary note regarding forward-looking statements” and Part I Item 1A “Risk factors.”

This discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto included in Part II Item 8 “Consolidated financial statements” of this report. Tabular amounts are in U.S. dollars in thousands, except share amounts, unless otherwise noted.

Overview

We are a global property and casualty, or P&C, insurance and reinsurance company with approximately ~~$1.1~~$1.2 billion in capital as of December 31, ~~2019,~~2020, comprised of ~~$172.4~~$172.7 million of senior notes, ~~$52.3~~$52.4 million of contingently redeemable preference shares and ~~$872.4~~$941.3 million of common shareholders’ equity. Through operations in Bermuda, the United States and Europe, we write insurance and reinsurance on a worldwide basis. Our objective is to deliver attractive returns to shareholders by combining disciplined underwriting with superior investment management. Our strategy combines a diversified, casualty-focused underwriting portfolio, accessed through our multi-year, renewable strategic underwriting management relationship with Arch, with a disciplined investment strategy comprised primarily of non-investment grade corporate credit assets, managed by HPS. In addition, we have a services arrangement with AIM and other ~~investment managers~~Investment Managers to manage our investment grade portfolio.

While we are positioned to provide a full range of P&C lines, we focus on writing specialty lines of business. We believe that our experienced management team, our relationship with Arch and our strong capital base have enabled us to successfully compete and establish a meaningful presence in the insurance and reinsurance markets in which we participate.

We seek to generate an attractive return on average equity across the relevant insurance and investment cycles. We opportunistically seek to underwrite new lines that fit our return profile while maintaining a disciplined underwriting approach.

Proposed merger

On October 9, 2020, we entered into an Agreement and Plan of Merger with Arch and Greysbridge Ltd., or Merger Sub, pursuant to which, among other things, Merger Sub will merge with and into our company. Further, on November 2, 2020, we entered into Amendment No. 1 to the Agreement and Plan of Merger with Arch and Merger Sub, and Arch assigned its interests and obligations under the Merger Agreement to Greysbridge Holdings Ltd., a newly formed entity, or HoldCo, of which Arch will own approximately 40%, and funds managed by Warburg Pincus LLC and Kelso & Company will each own approximately 30%. Arch remains contractually responsible for the performance of its obligations under the Merger Agreement.

In this report, we refer to the Agreement and Plan of Merger, as amended, as the “Merger Agreement,” and we refer to the merger of Merger Sub with and into Watford pursuant to the Merger Agreement, with Watford surviving as a wholly-owned subsidiary of HoldCo, as the “Merger.”

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Pursuant to the Merger Agreement, subject to certain conditions set forth therein, at the effective time of the Merger, each issued and outstanding common share of Watford (other than shares to be canceled pursuant to the Merger Agreement and restricted share units to be canceled and exchanged pursuant to the Merger Agreement), will be converted into the right to receive $35.00 in cash, without interest, and each issued and outstanding 8½% cumulative redeemable preference share of Watford will remain outstanding as a preference share of the surviving company and will be entitled to the same dividend and other relative rights, preferences, limitations and restrictions as are now provided to the preference shares.

The consummation of the Merger is subject to the satisfaction of certain remaining customary closing conditions, including, without limitation, (i) approval of the Merger Agreement and the transactions contemplated thereby by the affirmative votes of not less than 50% of the holders of our outstanding common shares and preference shares voting as a single class at a meeting of our shareholders; (ii) the receipt of certain remaining regulatory approvals without the imposition of a Burdensome Condition (as defined in the Merger Agreement); (iii) the absence of any law, judgment or other legal restraint that prevents, makes illegal or prohibits the consummation of the Merger and the other transactions contemplated by the Merger Agreement; (iv) the accuracy of each party’s representations and warranties (subject to certain qualifications); (v) each party’s performance in all material respects of its obligations contained in the Merger Agreement; and (vi) the absence of a material adverse effect on our company since the date of the Merger Agreement. In addition, HoldCo’s and Arch’s obligation to consummate the Merger is conditioned on our non-investment grade portfolio not suffering a loss of more than $208 million from September 30, 2020, through the date that is two business days prior to the closing of the Merger.

The Merger Agreement includes customary representations, warranties and covenants of Watford, HoldCo, Arch and Merger Sub. Among other things, we have agreed to customary covenants regarding the operation of our business prior to the closing. We are permitted to pay regular quarterly dividends on our preference shares pursuant to the Merger Agreement. We currently anticipate that the Merger will close in the first half of 2021, subject to the satisfaction of the remaining customary closing conditions.

Current outlook

The outbreak of COVID-19 began significantly impacting the U.S. and global markets during the 2020 first quarter and the pandemic has continued to cause unprecedented economic volatility and disruption globally throughout 2020. We remain committed to the safety of our employees, including restricting travel and instituting a work from home policy. These actions have helped prevent a major disruption to our operations or our ability to service our clients.

The impact of the COVID-19 global pandemic on the worldwide economy has changed some aspects of our outlook. There could be elevated claims activity in certain lines of business and growth in written premium may be harder to achieve in a recessionary economy. At this time, there continues to be significant uncertainty surrounding the ultimate number of insurance claims and scope of damage resulting from this pandemic. Our estimates across our insurance and reinsurance lines of business are based on currently available information derived from modeling techniques, preliminary claims information obtained from our 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 related only 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. In spite of these challenges, we will continue to look for opportunities to find acceptable books of business to underwrite without sacrificing underwriting discipline and will continue to focus on writing medium to long tail business. The severity, duration and long-term impacts of the COVID-19 global pandemic are difficult to predict, but we remain committed to our clients and the markets we serve.

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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. We reserved $5.5 million in 2020 for COVID-19 global pandemic related business interruption losses in our property catastrophe lines of business. We continue to monitor our potential COVID-19 global pandemic exposures across all our lines of business.

We believe that mortgage insurance may potentially be affected by the COVID-19 global pandemic. We write U.S. mortgage risk through a government sponsored enterprise (or “GSE”) credit risk transfer program and have international mortgage exposure through certain reinsurance contracts. Most of our exposure is for mortgages that were originated prior to 2018. Based upon an internal actuarial review, we increased our loss provision in 2020 to account for a potential increase in defaults in our mortgage insurance portfolio.

In April 2020, we significantly reduced our exposure to U.S. mortgage risk by transferring part of that risk to other parties. This action bolstered our economic capital position at a time of significant macro-economic uncertainty. While the transferred business had historically been profitable, we believe this was a prudent and responsible course of action given the negative and uncertain economic outlook created by the pandemic.

We believe the casualty lines most likely to be adversely affected by the COVID-19 global pandemic are workers' compensation, professional liability and medical malpractice. In 2020, we recognized a nominal IBNR provision in our loss reserves for COVID-19 global pandemic-related casualty losses occurring prior to December 31, 2020.

Conversely, we believe the insurance and reinsurance market environment is showing signs of noticeable price improvement. Primary rates in most casualty lines, ~~with the exception of workers~~apart from workers’ compensation, continue to be strong, albeit, we believe, partly in response to higher perceived social inflation. Property catastrophe reinsurance rates are up meaningfully, retrocession capacity is shrinking, and ceding commissions have reduced modestly on some proportional casualty treaties. We believe the factors supporting a continued favorable pricing environment include the low interest rate environment, three consecutive years of significant multiple catastrophe events, and signs of weakness in the adequacy of prior period loss reserves for some industry participants.

Against this backdrop and taking into account the planned Merger, we are selectively growing our business in areas that we believe present attractive ~~opportunities. In particular, we~~opportunities and meet our risk and return criteria. We continue to see good growth opportunities in the insurance ~~market, as new program submission activity is strong.~~

market. In particular, our insurance underwriting platforms in the United States and Europe continued their growth in premiums during 2020.

We also see opportunities on the reinsurance side in general liability, commercial auto liability and other casualty lines. ~~During 2019, we bound a large, three-year, casualty reinsurance excess of loss contract in which Arch also has a significant participation.~~ Our current underwriting portfolio has concentrations in general liability, professional liability, multiline, ~~workers~~workers’ compensation and motor product lines through reinsurance of third-party cedants and retrocessions from Arch.

Despite positive earnings in our non-investment grade strategy, we have reduced our exposure to this strategy by reducing the assets in our non-investment grade portfolio throughout 2020. This reduction was a result of ~~Arch. We continue~~both the COVID-19 induced mark-to-market volatility we experienced on our non-investment grade investments in the first quarter of 2020, as well as the fact that credit spreads tightened through the year reducing attractive opportunities to deploy ~~resources opportunistically~~our capital in ~~product lines that meet~~this strategy. Year over year, we have reduced our ~~risk~~non-investment grade portfolio’s net assets by approximately $100 million and ~~return profile.~~the total investments excluding short term investments by over $200 million.

~~Our insurance underwriting platforms in the United States and Europe continue to grow with higher premiums written in 2019.~~

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Our outsourced business model

We have engaged Arch and HPS to perform certain services for us that are essential to the results of our operations, and have entered into long-term, renewable contracts with each in order to ensure continued access to these services. For our underwriting operations, Arch provides underwriting services including sourcing and evaluating underwriting opportunities as well as related services such as claims-handling, loss control, exposure management, portfolio management, modeling, statistical, actuarial and administrative support services, in each case, subject to our underwriting and operational guidelines and the oversight of our senior management and board of directors. With regard to our investments, HPS manages our non-investment grade portfolio while AIM manages the largest portion of our investment grade portfolio, in each case subject to compliance with our investment guidelines and the oversight of our senior management and board of directors. We outsource these functions in order to cost-effectively leverage the respective expertise and strong market positions of our trusted partners. Through our association with Arch, we access Arch’s worldwide platform on a variable cost basis, thus avoiding the fixed expense of maintaining a multi-line platform for our underwriting operations. Similarly, we believe that the terms of service and structure of the compensation we pay to HPS and AIM provide benefits to us both in terms of cost-effective access to the expertise required to execute our investment strategy and in aligning interests.

Natural catastrophe risk

While we are more casualty-focused and assume less catastrophe exposure than many of our peers, we do underwrite a limited amount of natural catastrophe risk in order to balance and diversify our underwriting portfolio. We carefully monitor our natural catastrophe risk globally for all perils and regions where we believe our underwriting portfolio might have significant exposure. Recently, Arch has been increasing its writings in this line in response to an improving rate environment and, as a result, our premiums have grown in proportion.

Limited operating history and comparability of results

We were incorporated in July 2013 and completed our initial funding and began underwriting business in the first quarter of 2014. Our initial underwriting activities focused on writing reinsurance. In 2015, we began our insurance business in connection with the establishment of our U.S. and European insurance platforms. As a result, we have a limited operating history and, given our underwriting and investment strategies, are exposed to volatility in our results of operations that may not be apparent from a review of our historical results. Period-to-period comparisons of our results of operations may not be meaningful. In addition, the amount of premiums written may vary from year to year and period to period as a result of any number of factors, including changes in market conditions and our view of the long-term profit potential of individual lines of business.

Financial measures and ratios

Our management and board of directors use financial indicators and ratios in evaluating our performance and measuring the overall growth in value generated for our common shareholders. The key financial measures that we believe are meaningful in analyzing our performance are: underwriting income (loss), combined ratio, adjusted underwriting income (loss), adjusted combined ratio, net interest income, net interest income yield on average net assets (including the

non-investment grade portfolio and investment grade portfolio components thereof), net investment income (loss), net investment income return on average net assets, net investment income return on average total investments (excluding accrued investment income) (including the non-investment grade portfolio and investment grade portfolio components thereof), book value per diluted common share, growth in book value per diluted common share and return on average equity.

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The table below shows the key performance indicators for the years ended December 31, 2020, 2019 ~~2018~~ and ~~2017:~~2018:


	Year Ended December 31,										Year Ended December 31,
	2019			2018			2017				2020			2019			2018
	($ in thousands, except percentages and share amounts)										($ in thousands, except percentages and per share data)
Key underwriting metrics:										Key underwriting metrics:
Underwriting income (loss)	$	(54,076	)	$	(25,840	)	$	(66,576	)	Underwriting income (loss)	$	(34,013)		$	(54,076)		$	(25,840)
Combined ratio	109.7		%	104.5		%	112.6		%	Combined ratio	106.1		%	109.7		%	104.5		%
Adjusted underwriting income (loss)	$	(40,852	)	$	(19,009	)	$	(59,745	)	Adjusted underwriting income (loss)	$	(20,835)		$	(40,852)		$	(19,009)
Adjusted combined ratio	107.3		%	103.3		%	111.2		%	Adjusted combined ratio	103.7		%	107.3		%	103.3		%
Key investment return metrics:										Key investment return metrics:
Net interest income	$	116,211		$	107,533		$	86,523		Net interest income	$	106,390		$	116,211		$	107,533
Net interest income yield on average net assets (1)	5.4		%	5.4		%	4.9		%	Net interest income yield on average net assets (1)	5.1		%	5.4		%	5.4		%
Non-investment grade portfolio (1)	6.8		%	7.0		%	6.3		%	Non-investment grade portfolio (1)	6.7		%	6.8		%	7.0		%
Investment grade portfolio (1)	2.5		%	1.9		%	1.1		%	Investment grade portfolio (1)	1.6		%	2.5		%	1.9		%
Net investment income (loss)	$	128,263		$	(6,349	)	$	72,738		Net investment income (loss)	$	113,982		$	128,263		$	(6,349)
Net investment income return on average net assets (1)	6.0		%	(0.3		)%	4.1		%	Net investment income return on average net assets (1)	5.4		%	6.0		%	(0.3)		%
Non-investment grade portfolio (1)	6.8		%	(0.2		)%	5.8		%	Non-investment grade portfolio (1)	6.5		%	6.8		%	(0.2)		%
Investment grade portfolio (1)	3.9		%	0.9		%	(0.1		)%	Investment grade portfolio (1)	3.0		%	3.9		%	0.9		%
Net investment income return on average total investments (2)	4.6		%	(0.2		)%	3.2		%
Net investment income return on average total investments (excluding accrued investment income) (2)										Net investment income return on average total investments (excluding accrued investment income) (2)	4.4		%	4.6		%	(0.2)		%
Non-investment grade portfolio (2)	5.7		%	(0.1		)%	4.5		%	Non-investment grade portfolio (2)	5.3		%	5.7		%	(0.1)		%
Investment grade portfolio (2)	3.9		%	0.9		%	(0.1		)%	Investment grade portfolio (2)	3.0		%	3.9		%	0.9		%
Key shareholders’ value creation metrics:										Key shareholders’ value creation metrics:
Book value per diluted common share (3)	$	43.49		$	39.22		$	41.79		Book value per diluted common share (3)	$	47.08		$	43.49		$	39.22
Growth in book value per diluted share (3)	10.9		%	(6.1		)%	(1.0		)%	Growth in book value per diluted share (3)	8.3		%	10.9		%	(6.1)		%
Return on average equity (4)	4.8		%	(5.7		)%	(0.9		)%	Return on average equity (4)	7.8		%	4.8		%	(5.7)		%

•Insurance programs and coinsurance: targeting program managers and/or coinsurers with unique expertise and niche products offering primary and excess general liability, umbrella liability, professional liability, workers’ compensation, personal and commercial automobile, inland marine and property business with minimal catastrophe exposure.

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Gross premiums written

Gross premiums written for the years ended December 31, 2020, 2019 ~~2018~~ and ~~2017~~2018 were as follows:


	Year Ended December 31,
	2020				2019				2018
	Amount		%		Amount		%		Amount		%
	($ in thousands)
Casualty reinsurance	$	188,042	25.8	%	$	279,967	37.1	%	$	274,661	37.4	%
Other specialty reinsurance	117,177		16.1	%	119,518		15.8	%	196,170		26.7	%
Property catastrophe reinsurance	27,334		3.8	%	16,226		2.1	%	10,424		1.4	%
Insurance programs and coinsurance	395,993		54.3	%	339,170		45.0	%	253,760		34.5	%
Total	$	728,546	100.0	%	$	754,881	100.0	%	$	735,015	100.0	%

Year Ended December 31,
2019 2018 2017
Amount % Amount % Amount %
($ in thousands)
Casualty reinsurance $ 279,967
37.1 % $ 274,661
37.4 % $ 284,481
47.4 %
Other specialty reinsurance 119,518
15.8 % 196,170
26.7 % 169,100
28.2 %
Property catastrophe reinsurance 16,226
2.1 % 10,424
1.4 % 12,740
2.1 %
Insurance programs and coinsurance 339,170
45.0 % 253,760
34.5 % 133,983
22.3 %
Total $ 754,881
100.0 % $ 735,015
100.0 % $ 600,304
100.0 %
Results for the year ended December 31, 2020versus 2019:

Gross premiums written were $728.5 million for the year ended December 31, 2020 compared to $754.9 million for the year ended December 31, 2019, a decrease of $26.4 million, or 3%. The decrease primarily related to decreases in casualty reinsurance and other specialty, which were offset in part by increases in insurance programs and coinsurance as well as property catastrophe reinsurance.

Our casualty reinsurance gross premiums decreased by $91.9 million over the prior year, or 32.8%, to $188.0 million. The premium decrease in casualty reinsurance was driven by an $81.1 million, three-year excess of loss contract written in 2019, with no comparable premium written during the current period. In addition, there were non-renewals and reduced participation in 2019 and 2020 on certain workers' compensation professional liability, and multi-line treaties.

Other specialty reinsurance gross premiums written decreased by $2.3 million over the prior year, or 2.0%, to $117.2 million. The other specialty reinsurance premium decrease was primarily attributable to a reduction in mortgage premiums, partially offset by increases in European motor reinsurance contracts.

Our insurance programs and coinsurance line of business gross premiums written increased by $56.8 million over the prior year, or 16.8%, to $396.0 million. The premium growth was driven by the continued expansion of our U.S. and European platforms. During the year ended December 31, 2020, the U.S. business collectively grew its insurance programs’ gross premiums written by $41.5 million, or 33.4%, to $165.7 million. Premium growth in the United States was driven by increased writings for commercial auto, where we are seeing significant rate improvement. In addition, during the year ended December 31, 2020, our European business increased its insurance gross premiums written by $15.3 million, or 7.1%, to $230.3 million, primarily due to increased U.K. motor and multi-line writings.

Property catastrophe reinsurance gross premiums written increased $11.1 million over the prior year, or 68.5%, to $27.3 million. Our primary involvement in this line of business is a 7.5% quota share participation of ARL’s worldwide property catastrophe excess of loss portfolio. Recently, Arch has been increasing its writings in this line in response to an improving rate environment and, as a result, our premiums have grown in proportion.

Results for the year ended December 31, 2019versus 2018:

Gross premiums written were $754.9 million for the year ended December 31, 2019 compared to $735.0 million for the year ended December 31, 2018, an increase of $19.9 million, or 2.7%. The 2019 results included the binding of an $81.1 million multi-year excess of loss contract within casualty, for which all of the written premium for the three-year term was booked in 2019. When these multi-year contract premiums are annualized, gross premiums written decreased 4.7%.

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Our casualty reinsurance gross premiums increased due to the large multi-year excess of loss contract written during 2019 as discussed above. When these multi-year contract premiums are annualized, casualty gross premiums written decreased 17.8%. The decrease was driven by the 2019 first quarter non-renewal of one multi-line quota share contract as well as the continued impact of gradually reduced participations over time on one cedant’s professional liability reinsurance program.

Other specialty reinsurance gross premiums were down primarily due to the 2019 first quarter non-renewal of one motor quota share contract and a reduction in one large client’s underlying exposure ceded at this year’s renewal. Separately, the 2018 first quarter included the renewal of a $24.0 million multi-year contract, in which all of the written premium for the 3-year term was booked that quarter with no comparable written premium in 2019.

The growth in our insurance programs and coinsurance line of business was driven by the continued expansion of our U.S. and European platforms. During the year ended December 31, 2019, WICE increased its gross premiums written by $33.3 million, or 18.3%, to $215.0 million. The increase in gross premiums written primarily related to increases in U.K. and European motor writings. In addition, during the year ended December 31, 2019, WSIC and WIC collectively grew their insurance programs’ gross premiums written by $52.1 million, or 72.3%, to $124.2 million.

~~Results for the year ended December 31, 2018 versus 2017:~~Premiums ceded

~~Gross premiums written~~Premiums ceded were ~~$735.0~~$191.0 million for the year ended December 31, ~~2018~~2020, compared to $600.3 million for the year ended December 31, 2017, an increase of $134.7 million, or 22.4%. Our 2018 premium growth was primarily due to the continued expansion of our U.S. and European insurance programs and coinsurance, while our reinsurance portfolio grew 3.2%. Within reinsurance, we grew our other specialty business by 16.0% and reduced our casualty business by 3.5%, which was reflective of our view of the relative market opportunities. During 2018, WICE grew its insurance gross premiums written by $66.1 million, or 57.2%, to $181.7 million. In addition, during 2018, WSIC and WIC collectively grew their insurance programs’ gross premiums written by $53.7 million, or 291%, to $72.1 million.

~~Premiums ceded~~

~~Premiums ceded were~~ $222.0 million ~~for the year ended December 31, 2019, compared to~~and $130.8 ~~million and $47.2~~ million for the years ended December 31, ~~2018~~2019 and ~~2017,~~2018, respectively. The ~~2019 increase~~decrease in premiums ceded ~~primarily related to the binding of~~was driven by a ~~3-year $81.1 million casualty reinsurance~~three-year excess of loss contract written ~~during the~~in 2019, ~~third quarter,~~ of which a significant portion was ceded to Arch, ~~to match our risk tolerances. In addition,~~and no comparable ceded premium during the current year. Partially offsetting this decrease, was an increase in insurance programs and coinsurance premiums ceded, ~~increased due to the fact that,~~ as ~~WICE, WSIC and WIC~~our U.S. operations have ~~collectively~~ grown their ~~insurance~~ gross premiums written ~~the outward~~and ceded ~~premiums have grown proportionately.~~

a higher percentage externally.

Net premiums written

Net premiums written for the years ended December 31, 2020, 2019 ~~2018~~ and ~~2017~~2018 were as follows:


	Year Ended December 31,
	2020				2019				2018
	Amount		%		Amount		%		Amount		%
	($ in thousands)
Casualty reinsurance	$	185,968	34.6	%	$	225,758	42.4	%	$	273,048	45.2	%
Other specialty reinsurance	111,575		20.8	%	114,876		21.6	%	181,096		30.0	%
Property catastrophe reinsurance	26,587		4.9	%	15,517		2.9	%	10,193		1.7	%
Insurance programs and coinsurance	213,459		39.7	%	176,711		33.1	%	139,838		23.1	%
Total	$	537,589	100.0	%	$	532,862	100.0	%	$	604,175	100.0	%

Year Ended December 31,
2019 2018 2017
Amount % Amount % Amount %
($ in thousands)
Casualty reinsurance $ 225,758
42.4 % $ 273,048
45.2 % $ 281,783
50.9 %
Other specialty reinsurance 114,876
21.6 % 181,096
30.0 % 155,666
28.1 %
Property catastrophe reinsurance 15,517
2.9 % 10,193
1.7 % 12,455
2.3 %
Insurance programs and coinsurance 176,711
33.1 % 139,838
23.1 % 103,213
18.7 %
Total $ 532,862
100.0 % $ 604,175
100.0 % $ 553,117
100.0 %
Results for the year ended December 31, 2020versus 2019:

Net premiums written were $537.6 million for the year ended December 31, 2020 compared to $532.9 million for the year ended December 31, 2019, an increase of $4.7 million or 0.9%. The increase in our net premiums written was in line with our gross premiums written and ceded premium movements, as discussed above.

Results for the year ended December 31, 2019versus 2018:

Net premiums written were $532.9 million for the year ended December 31, 2019 compared to $604.2 million for the year ended December 31, 2018, a decrease of $71.3 million or 11.8%. The 2019 decrease in net premium written was driven by reductions within casualty and other specialty

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reinsurance, consistent with the reduction in gross premium written across these lines. This decrease was partially offset by the continued expansion of our U.S. and European insurance programs and coinsurance, which grew 26.4%.

~~Results for the year ended December 31, 2018 versus 2017:~~

Net premiums written were $604.2 million for the year ended December 31, 2018 compared to $553.1 million for the year ended December 31, 2017, an increase of $51.1 million or 9.2%. Our 2018 premium growth was primarily due to the continued expansion of our U.S. and European insurance programs and coinsurance while our reinsurance portfolio grew 3.2%. Within reinsurance, we grew our other specialty business by 16.3% and reduced our casualty business by 3.1%, which was reflective of our view of the relative market opportunities. During 2018, WSIC and WIC collectively grew their insurance programs’ net premiums written by $36.5 million or 310% to $48.2 million.

Net premiums earned

Net premiums earned for the years ended December 31, 2020, 2019 ~~2018~~ and ~~2017~~2018 were as follows:


	Year Ended December 31,
	2020				2019				2018
	Amount		%		Amount		%		Amount		%
	($ in thousands)
Casualty reinsurance	$	205,192	36.6	%	$	238,437	42.8	%	$	278,656	48.1	%
Other specialty reinsurance	131,873		23.5	%	149,688		26.9	%	162,691		28.1	%
Property catastrophe reinsurance	23,037		4.1	%	13,399		2.4	%	10,998		1.9	%
Insurance programs and coinsurance	200,249		35.7	%	155,166		27.9	%	126,517		21.9	%
Total	$	560,351	100.0	%	$	556,690	100.0	%	$	578,862	100.0	%

Year Ended December 31,
2019 2018 2017
Amount % Amount % Amount %
($ in thousands)
Casualty reinsurance $ 238,437
42.8 % $ 278,656
48.1 % $ 308,526
57.9 %
Other specialty reinsurance 149,688
26.9 % 162,691
28.1 % 134,855
25.4 %
Property catastrophe reinsurance 13,399
2.4 % 10,998
1.9 % 12,690
2.4 %
Insurance programs and coinsurance 155,166
27.9 % 126,517
21.9 % 75,655
14.2 %
Total $ 556,690
100.0 % $ 578,862
100.0 % $ 531,726
100.0 %
Results for the year ended December 31, 2020versus 2019:

Net premiums earned were $560.4 million for the year ended December 31, 2020 compared to $556.7 million for the year ended December 31, 2019, an increase of $3.7 million or 0.7%. The increase in net premiums earned reflected increased writings in insurance programs and coinsurance, and, to a lesser extent, greater assumed property catastrophe reinsurance during 2020. This increase was partially offset by decreases in casualty reinsurance driven by non-renewals and reduced participation on certain workers' compensation, professional liability and multi-line treaties. The other specialty reinsurance earned premium decrease was primarily attributable to a reduction in mortgage premiums.

Results for the year ended December 31, 2019versus 2018:

Net premiums earned were $556.7 million for the year ended December 31, 2019 compared to $578.9 million for the year ended December 31, 2018, a decrease of $22.2 million or 3.8%. The decrease in net premiums earned was primarily due to the 2019 non-renewal of one multi-line quota share contract and the continued impact of reduced participations over time on one cedant’s

professional liability contract. Reductions in earned premium were offset in part by the growth of the WSIC and WIC platforms.

~~Results for the year ended December 31, 2018 versus 2017:~~

146

Net premiums earned were $578.9 million for the year ended December 31, 2018, compared to $531.7 million for the year ended December 31, 2017, an increase of $47.1 million, or 8.9%, over the prior year. The growth in the 2018 earned premium was due to the aggregate effect of earned premium recognition relating to net premiums written in 2018 and prior periods, as well as the growth of the WICE, WSIC and WIC platforms.

Loss ratio

The following table shows the components of our loss and loss adjustment expenses for the years ended December 31, 2020, 2019 ~~2018~~ and ~~2017:~~2018:


	Year Ended December 31,
	2020				2019				2018
	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	$	441,175	78.7	%	$	429,322	77.1	%	$	443,482	76.6	%
Prior year development (favorable)/adverse	(693)		(0.1)	%	23,813		4.3	%	(2,227)		(0.4)	%
Loss and loss adjustment expenses	$	440,482	78.6	%	$	453,135	81.4	%	$	441,255	76.2	%

Year Ended December 31,
2019 2018 2017
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 $ 429,322
77.1 % $ 443,482
76.6 % $ 399,530
75.2 %
Prior year development (favorable)/adverse 23,813
4.3 % (2,227 ) (0.4 )% 36,872
6.9 %
Loss and loss adjustment expenses $ 453,135
81.4 % $ 441,255
76.2 % $ 436,402
82.1 %
Results for the year ended December 31, 2020versus 2019:

Our loss ratio was 78.6% for the year ended December 31, 2020, compared to 81.4% for the year ended December 31, 2019, a decrease of 2.8% points. The prior year loss reserve development for the year ended December 31, 2020 was essentially flat. The year ended December 31, 2019 results were impacted by 4.3 points of net unfavorable loss reserve development. The 2019 prior year loss reserve strengthening of $23.8 million was related to higher than projected reported losses, primarily in U.S. casualty reinsurance, and also certain casualty exposures where greater severity of losses are expected.

Results for the year ended December 31, 2019versus 2018:

Our loss ratio was 81.4% for the year ended December 31, 2019, compared to 76.2% for the year ended December 31, 2018, an increase of 5.2 points. The increase was driven by prior year loss reserve strengthening of $23.8 million in response to higher than projected reported losses, primarily in U.S. casualty reinsurance, and also certain casualty exposures where greater severity of losses are expected.

~~Results for the year ended December 31, 2018 versus 2017:~~

Our loss ratio was 76.2% for the year ended December 31, 2018, compared to 82.1% for the year ended December 31, 2017. The 2018 loss ratio was impacted by $19.0 million of property catastrophe losses primarily related to the 2018 California wildfires, Hurricanes Michael and Florence, and Typhoon Jebi versus $33.2 million of property catastrophe losses in 2017 emanating primarily from Hurricanes Harvey, Irma and Maria and the 2017 California wildfires.

The 2018 loss ratio benefited from net favorable prior year loss reserve development of $2.2 million primarily driven by property catastrophe and other specialty lines of business. This contrasts with $36.9 million of net unfavorable loss reserve development in 2017.

Refer to Note 5, “Reserve for losses and loss adjustment expenses” to our consolidated financial statements in Part II Item 8 of this report for more information about our prior year reserve development.

Acquisition expense ratio

Results for the year ended December 31, 2020versus 2019:

Our acquisition expense ratio was 22.4% for the year ended December 31, 2020, a decrease of 0.4 points from the year ended December 31, 2019. The lower acquisition expense ratio was driven by non-renewals and reduced participations in 2019 and 2020 on certain professional liability and multi-line treaties with relatively higher acquisition expenses.

Results for the year ended December 31, 2019versus 2018:

Our acquisition expense ratio was 22.8% for the year ended December 31, 2019, a reduction of 1.6 points from the year ended December 31, 2018. The lower acquisition expense ratio was largely driven by an increased proportion of insurance net premiums earned.

147

General and administrative expense ratio

Results for the year ended December 31, ~~2018~~ 2020versus ~~2017:~~2019:

Our ~~acquisition~~general and administrative expense ratio was ~~24.4%~~5.1% for the year ended December 31, ~~2018, a reduction of 2.1 points from~~2020, compared to 5.5% for the ~~prior~~ year ended December 31, ~~2017.~~2019. The 0.4 point decrease was primarily attributable to lower ~~acquisition~~fees paid to Arch for their employees as well as accelerated long-term incentive compensation expenses recognized in the 2019 second quarter with a lower accelerated long-term incentive compensation expense ratio was largely driven by an increased percentage of insurance net premiums earned and a greater percentage of premiums earned on certain contracts with higher loss ratios and corresponding lower acquisition expenses.booked in 2020.

~~General and administrative expense ratio~~

Results for the year ended December 31, 2019versus 2018:

Our general and administrative expense ratio was 5.5% for the year ended December 31, 2019, compared to 3.9% for the year ended December 31, 2018. The 1.6 point increase reflected ongoing public company expenses, including certain accelerated long-term incentive compensation expenses incurred in the 2019 second quarter.

Combined ratio

Results for the year ended December 31, ~~2018~~ 2020versus ~~2017:~~2019:

Our ~~general and administrative expense~~combined ratio was ~~3.9%~~106.1% for the year ended December 31, ~~2018,~~2020, compared to ~~4.0%~~109.7% for the year ended December 31, ~~2017. While~~2019, a decrease of 3.6 points. During 2020, there was a 2.8 point decrease in the loss ratio, and a 0.4 point decrease in both acquisition expense and general and administrative expense ~~ratio remained consistent with~~ratios versus the prior year, increases in expenses reimbursable to Arch and professional fees were offset by a reduction in fees pertaining to letters of credit outstanding. Starting mid-2017, we altered our strategy for meeting collateral requirements by posting collateral into trusts more frequently than utilizing letters of credit, and therefore the amount of letters of credit outstanding decreased.as described above.

~~Combined ratio~~

Results for the year ended December 31, 2019versus 2018:

Our combined ratio was 109.7% for the year ended December 31, 2019, compared to 104.5% for the year ended December 31, 2018, an increase of 5.2 points. During 2019, there was a 5.2 point increase in the loss ratio, a 1.6 point increase in the general and administrative expense ratio, offset in part by a 1.6 point decrease in acquisition expense ratio versus the prior year, as described above.

~~Results for the year ended December 31, 2018 versus 2017:~~

148

Our combined ratio was 104.5% for the year ended December 31, 2018, compared to 112.6% for the year ended December 31, 2017. In 2018, there was a 5.9 point decrease in the loss ratio and a 2.1 point decrease in acquisition expense ratio versus the prior year, as described above.

~~Investing~~Investment results

The following table summarizes the components of total investment income:


	Year Ended December 31,										Year Ended December 31,
	2019			2018			2017				2020			2019			2018
	($ in thousands)										($ in thousands)
Interest income	$	163,888		$	152,916		$	125,463		Interest income	$	140,390		$	163,888		$	152,916
Investment management fees - related parties	(18,392		)	(17,006		)	(21,451		)	Investment management fees - related parties	(17,193)			(18,392)			(17,006)
Borrowing and miscellaneous other investment expenses	(29,285		)	(28,377		)	(17,489		)	Borrowing and miscellaneous other investment expenses	(16,807)			(29,285)			(28,377)
Net interest income	116,211			107,533			86,523			Net interest income	106,390			116,211			107,533
Net realized gains (losses) on investments	(7,948		)	(4,788		)	722			Net realized gains (losses) on investments	12,217			(7,948)			(4,788)
Net unrealized gains (losses) on investments	32,191			(109,046		)	398			Net unrealized gains (losses) on investments	7,412			32,191			(109,046)
Investment performance fees - related parties	(12,191		)	(48		)	(14,905		)	Investment performance fees - related parties	(12,037)			(12,191)			(48)
Net investment income (loss)	128,263			(6,349		)	72,738			Net investment income (loss)	113,982			128,263			(6,349)

Net interest income yield on average net assets (1)	5.4		%	5.4		%	4.9		%	Net interest income yield on average net assets (1)	5.1		%	5.4		%	5.4		%
Non-investment grade portfolio (1)	6.8		%	7.0		%	6.3		%	Non-investment grade portfolio (1)	6.7		%	6.8		%	7.0		%
Investment grade portfolio (1)	2.5		%	1.9		%	1.1		%	Investment grade portfolio (1)	1.6		%	2.5		%	1.9		%

Net investment income return on average net assets (1)	6.0		%	(0.3		)%	4.1		%	Net investment income return on average net assets (1)	5.4		%	6.0		%	(0.3)		%
Non-investment grade portfolio (1)	6.8		%	(0.2		)%	5.8		%	Non-investment grade portfolio (1)	6.5		%	6.8		%	(0.2)		%
Investment grade portfolio (1)	3.9		%	0.9		%	(0.1		)%	Investment grade portfolio (1)	3.0		%	3.9		%	0.9		%

Net investment income return on average total investments (2)	4.6		%	(0.2		)%	3.2		%
Net investment income return on average total investments (excluding accrued investment income) (2)										Net investment income return on average total investments (excluding accrued investment income) (2)	4.4		%	4.6		%	(0.2)		%
Non-investment grade portfolio (2)	5.7		%	(0.1		)%	4.5		%	Non-investment grade portfolio (2)	5.3		%	5.7		%	(0.1)		%
Investment grade portfolio (2)	3.9		%	0.9		%	(0.1		)%	Investment grade portfolio (2)	3.0		%	3.9		%	0.9		%

~~(1) Includes $3.4 million, $(2.7) million and $Nil unrealized net foreign exchange gains (losses) for the years ended December 31, 2019, 2018 and 2017, respectively.~~

WATFORD HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(U.S. dollars in thousands)


	Year Ended December 31,
	2020		2019		2018
Common shares
Balance at beginning of year	$	227	$	227	$	227
Common shares issued	1		0		0
Balance at end of year	228		227		227

Additional paid-in capital
Balance at beginning of year	898,083		895,386		895,386
Common shares issued under share plans	249		250		0
Share-based compensation	1,159		2,447		0
Balance at end of year	899,491		898,083		895,386

Accumulated other comprehensive income (loss)
Balance at beginning of year	5,629		(4,730)		(972)
Unrealized holding gains (losses) of available for sale investments:
Balance at beginning of year	6,252		(4,158)		0
Unrealized holding gains (losses) of available for sale investments, net of reclassification adjustment	11,119		10,410		(4,158)
Balance at end of year	17,371		6,252		(4,158)
Currency translation adjustment:
Balance at beginning of year	(623)		(572)		(972)
Currency translation adjustment	(754)		(51)		400
Balance at end of year	(1,377)		(623)		(572)
Balance at end of year	15,994		5,629		(4,730)

Common shares held in treasury, at cost
Balance at beginning of year	(75,056)		0		0
Shares repurchased for treasury	(2,867)		(75,056)		0
Balance at end of year	(77,923)		(75,056)		0

Retained earnings (deficit)
Balance at beginning of year	43,470		(1,275)		53,241
Cumulative effect of adoption of updated accounting guidance for credit losses at January 1, 2020	(428)		0		0
Net income (loss) before preference dividends and redemption costs	64,914		62,541		(34,883)
Preference share dividends paid and accrued	(4,402)		(13,632)		(19,633)
Accelerated amortization of costs related to the redemption of preference shares	0		(4,164)		0
Balance at end of year	103,554		43,470		(1,275)
Total shareholders’ equity	$	941,344	$	872,353	$	889,608

See Notes to Consolidated Financial Statements

191

Year Ended December 31,
2019 2018 2017
Common shares
Balance at beginning of year $ 227
$ 227
$ 227
Common shares issued —
—
—
Balance at end of year 227
227
227

Additional paid-in capital
Balance at beginning of year 895,386
895,386
895,386
Common shares issued under share plans 250
—
—
Share-based compensation 2,447
—
—
Balance at end of year 898,083
895,386
895,386

Accumulated other comprehensive income (loss)
Balance at beginning of year (4,730 ) (972 ) (375 )
Unrealized holding gains (losses) of available for sale investments:
Balance at beginning of year (4,158 ) —
—
Unrealized holding gains (losses) of available for sale investments, net of reclassification adjustment 10,410
(4,158 ) —
Balance at end of year 6,252
(4,158 ) —
Currency translation adjustment:
Balance at beginning of year (572 ) (972 ) (375 )
Currency translation adjustment (51 ) 400
(597 )
Balance at end of year (623 ) (572 ) (972 )
Balance at end of year 5,629
(4,730 ) (972 )

Common shares held in treasury, at cost
Balance at beginning of year —
—
—
Shares repurchased for treasury (75,056 ) —
—
Balance at end of year (75,056 ) —
—

Retained earnings (deficit)
Balance at beginning of year (1,275 ) 53,241
62,133
Net income (loss) before preference dividends 62,541
(34,883 ) 10,741
Preference share dividends paid and accrued (13,632 ) (19,633 ) (19,633 )
Accelerated amortization of costs related to the redemption of preference shares (4,164 ) —
—
Balance at end of year 43,470
(1,275 ) 53,241
Total shareholders’ equity $ 872,353
$ 889,608
$ 947,882

WATFORD HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. dollars in thousands)


	Year Ended December 31,
	2020		2019		2018
Operating Activities
Net income (loss) before preference dividends	$	64,914	$	62,541	$	(34,883)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net realized and unrealized (gains) losses on investments	(19,629)		(24,243)		113,834
Amortization of fixed assets	7		86		157
Share-based compensation	1,408		2,697		0
Changes in:
Accrued investment income	(648)		5,441		(1,212)
Premiums receivable	50,586		(39,849)		(58,700)
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	(109,265)		(84,737)		(42,822)
Prepaid reinsurance premiums	10,239		(70,990)		(36,825)
Deferred acquisition costs, net	8,458		19,577		5,709
Reserve for losses and loss adjustment expenses	237,076		216,596		257,479
Unearned premiums	(33,001)		47,162		62,138
Reinsurance balances payable	(17,430)		57,554		3,847
Funds held with reinsurers	(1,333)		2,915		(5,219)
Other liabilities	3,503		44,605		(24,021)
Other items	(4,185)		(71)		(10,168)
Net Cash Provided By Operating Activities	190,700		239,284		229,314
Investing Activities
Purchase of term loans	(331,350)		(443,550)		(774,570)
Purchase of fixed maturity investments	(1,315,679)		(1,247,573)		(1,286,151)

Purchase of short-term investments with maturities over three months	(11,118)		(45,106)		(25,876)
Proceeds from sale, redemptions and maturity of term loans	505,037		324,142		633,923
Proceeds from sales, redemptions and maturities of fixed maturity investments	1,360,450		1,508,008		1,062,966
Proceeds from sales, redemptions and maturities of other investments	35,222		47,281		0
Proceeds from sales, redemptions and maturities of short-term investments with maturities over three months	6,515		6,953		0
Net (purchases) sales of short-term investments with maturities less than three months	(75,213)		(6,015)		70,165
Purchases of equity securities	(11,021)		(75,164)		(122,766)
Proceeds from sales of equity securities	33,682		26,112		95,371
Net settlements of derivative instruments	(2,841)		2,471		1,642
Purchases of furniture, equipment and other assets	(13)		0		(11)
Net Cash Provided by (Used For) Investing Activities	193,671		97,559		(345,307)
Financing Activities
Dividends paid on redeemable preference shares	(4,309)		(13,402)		(19,264)
Repayments on borrowings	(359,000)		(273,155)		(201,401)
Proceeds from borrowings	86,353		62,800		348,433
Repurchase of preference shares	0		(173,081)		0
Net proceeds from issuance of senior notes	0		172,283		0
Purchases of common shares under share repurchase program	(2,867)		(75,056)		0

Net Cash Provided By (Used For) Financing Activities	(279,823)		(299,611)		127,768
Effects of exchange rate changes on foreign currency cash	4,466		1,676		(2,749)
Increase (decrease) in cash	109,014		38,908		9,026
Cash and cash equivalents, beginning of year	102,437		63,529		54,503
Cash and cash equivalents, end of year	$	211,451	$	102,437	$	63,529
Supplementary information
Income taxes paid	$	379	$	20	$	27
Interest paid	$	26,387	$	33,384	$	26,717
Non-cash exchange of investments	$	101,100	$	45,541	$	0

See Notes to Consolidated Financial Statements

192

Year Ended December 31,
2019 2018 2017
Operating Activities
Net income (loss) before preference dividends $ 62,541
$ (34,883 ) $ 10,741
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net realized and unrealized (gains) losses on investments (24,243 ) 113,834
(1,120 )
Amortization of fixed assets 86
157
187
Share-based compensation 2,697
—
—
Changes in:
Accrued investment income 5,441
(1,212 ) (1,237 )
Premiums receivable (39,849 ) (58,700 ) 18,923
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses (84,737 ) (42,822 ) (18,023 )
Prepaid reinsurance premiums (70,990 ) (36,825 ) (11,716 )
Deferred acquisition costs, net 19,577
5,709
950
Reserve for losses and loss adjustment expenses 216,596
257,479
272,295
Unearned premiums 47,162
62,138
33,106
Reinsurance balances payable 57,554
3,847
5,367
Funds held with reinsurers 2,915
(5,219 ) (17,855 )
Other liabilities 44,605
(24,021 ) 18,051
Other items (71 ) (10,168 ) (17,444 )
Net Cash Provided By Operating Activities 239,284
229,314
292,225
Investing Activities
Purchase of term loans (443,550 ) (774,570 ) (827,757 )
Purchase of fixed maturity investments (1,247,573 ) (1,286,151 ) (1,579,591 )
Purchase of other investments —
—
(50,000 )
Purchase of short-term investments with maturities over three months (45,106 ) (25,876 ) —
Proceeds from sale, redemptions and maturity of term loans 324,142
633,923
731,679
Proceeds from sales, redemptions and maturities of fixed maturity investments 1,508,008
1,062,966
1,162,210
Proceeds from sales, redemptions and maturities of other investments 47,281
—
—
Proceeds from sales, redemptions and maturities of short-term investments with maturities over three months 6,953
—
—
Net (purchases) sales of short-term investments with maturities less than three months (6,015 ) 70,165
50,829
Purchases of equity securities (75,164 ) (122,766 ) (71,562 )
Proceeds from sales of equity securities 26,112
95,371
8,486
Net settlements of derivative instruments 2,471
1,642
(1,734 )
Purchases of furniture, equipment and other assets —
(11 ) (21 )
Net Cash Provided by (Used For) Investing Activities 97,559
(345,307 ) (577,461 )
Financing Activities
Dividends paid on redeemable preference shares (13,402 ) (19,264 ) (19,264 )
Repayments on borrowings (273,155 ) (201,401 ) (72,000 )
Proceeds from borrowings 62,800
348,433
359,238
Repurchase of preference shares (173,081 ) —
—
Net proceeds from issuance of senior notes 172,283
—
—
Purchases of common shares under share repurchase program (75,056 ) —
—
Borrowings issuance costs —
—
(5,667 )
Net Cash Provided By (Used For) Financing Activities (299,611 ) 127,768
262,307
Effects of exchange rate changes on foreign currency cash 1,676
(2,749 ) 2,539
Increase (decrease) in cash 38,908
9,026
(20,390 )
Cash and cash equivalents, beginning of year 63,529
54,503
74,893
Cash and cash equivalents, end of year $ 102,437
$ 63,529
$ 54,503
Supplementary information
Income taxes paid $ 20
$ 27
$ 21
Interest paid $ 33,384
$ 26,717
$ 15,719
Non-cash exchange of investments $ 45,541
$ —
$ —

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

1. Organization

Watford Holdings Ltd. (the “Parent”) and its wholly-owned subsidiary, Watford Re Ltd. (“Watford Re”), were incorporated under the laws of Bermuda on July 19, 2013.

As used herein, the terms “Company” or “Companies,” or “we,” “us” and “our,” collectively refer to the Parent and/or, as applicable, its subsidiaries. Watford Re is licensed as a Class 4 multi-line insurer under the Insurance Act 1978 of Bermuda, as amended, and related regulations (the “Insurance Act”) and is licensed to underwrite general business on an insurance and reinsurance basis. Through Watford Re, the Company primarily underwrites reinsurance on exposures worldwide.

In the first quarter of 2014, the Company raised approximately $1.1 billion of capital consisting of $907.3 million in common equity ($895.6 million net of issuance costs) and $226.6 million in preference equity ($219.2 million net of issuance costs and discount). Through its wholly-owned subsidiary, Arch Reinsurance Ltd. (“ARL”), Arch Capital Group Ltd. (“ACGL”) invested $100.0 million and acquired approximately 11% of the Company’s common equity and a warrant to purchase up to 975,503 of common shares. These warrants were not exercised and expired on March 25, 2020. See Note ~~18 -~~19, “Shareholders’ equity” for further details.

On March 28, 2019, the Company completed a direct listing of its common shares on the Nasdaq Global Select Market. On June 28, 2019, the Company completed a direct listing of its 8½% Cumulative Redeemable Preference Shares (the “preference shares”) on the Nasdaq Global Select Market. The Company did not issue any new common shares or preference shares, nor did the Company receive any proceeds from the sale of common shares or preference shares by the selling shareholders.

Watford Re and Watford Insurance Company Europe Limited(“WICE”) have engaged Arch Underwriters Ltd. (“AUL”), a company incorporated in Bermuda and a wholly-owned subsidiary of Arch Capital Group Ltd. (“ACGL”), to act as their insurance and reinsurance manager pursuant to services agreements between AUL and Watford Re and WICE, respectively. AUL manages the day-to-day underwriting activities of Watford Re and WICE, subject to the provisions of the services agreement and the oversight of our board of directors. See Note ~~13 -~~14, “Transactions with related parties” for further details.

In May 2018, ~~Watford Insurance Company Europe (“WICE”)~~WICE formed a branch in Romania and commenced underwriting operations in June 2018. WICE is a wholly-owned subsidiary of Watford Re. The Romanian branch ceased accepting new business from September 1, 2020.

Watford Specialty Insurance Company (“WSIC”) and Watford Insurance Company (“WIC”), which are wholly-owned, indirect subsidiaries of Watford Re, have engaged Arch Underwriters Inc. (“AUI”), a company incorporated in Delaware and a wholly-owned subsidiary of ACGL, to act as their insurance and reinsurance manager pursuant to services agreements between AUI and WSIC and WIC, respectively. AUI manages the day-to-day underwriting activities of WSIC and WIC, subject to the provisions of the services agreement and the oversight of our board of directors. See Note ~~13 -~~14, “Transactions with related parties” for further details.

The Company has engaged HPS Investment Partners, LLC (“HPS”), as ~~investment manager~~Investment Manager of the assets in its non-investment grade portfolio pursuant to various investment management agreements. HPS invests the Company’s non-investment grade assets and a portion of its investment grade assets, subject to the terms of the applicable investment management ~~agreements.~~agreements and the oversight of our senior management and board of directors. See Note ~~13 -~~14, “Transactions with related parties” for further details.

The Company has engaged Arch Investment Management Ltd. (“AIM”), a Bermuda exempted company and a subsidiary of ACGL, as ~~investment manager~~Investment Manager of assets in its investment grade ~~portfolio pursuant to various investment management agreements. AIM manages the majority of~~

193

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

portfolio pursuant to various investment management agreements. AIM manages the majority of the Company’s investment grade assets pursuant to the terms of the investment management agreements ~~with AIM.~~and the oversight of our senior management and board of directors. See Note ~~13 -~~14, “Transactions with related parties” for further details.

2. Basis of presentation and significant accounting policies

(a) Basis of presentation

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany transactions and balances have been eliminated in consolidation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.

To facilitate comparison of information across periods, certain reclassifications have been made to prior year amounts to conform to the current year’s presentation.

(b) Premium revenues and related expenses

Reinsurance premiums written are recorded based on the type of contracts the Company writes. Premiums on the Company’s excess of loss and pro rata reinsurance contracts are estimated when the business is underwritten. For excess of loss contracts, premiums are recorded as written, on the inception date, based on the terms of the contract. Estimates of premiums written under pro rata contracts are recorded in the period in which the underlying risks are expected to incept and are based on information provided by the brokers and the ceding companies. For multi-year reinsurance treaties which are payable in annual installments, premium recognition depends on whether the contract is non-cancellable. If either party retains the ability to cancel or commute coverage prior to expiration, only the initial annual installment is included as premiums written at policy inception. The remaining annual installments would then be included as premiums written at each successive anniversary date within the multi-year term. If, on the other hand, the contract is non-cancellable, the full multi-year premiums would be recognized as written at policy inception.

Reinsurance premiums written and assumed include amounts reported by brokers and ceding companies, supplemented by the Company’s own estimates of premiums where reports have not been received. The determination of premium estimates requires a review of the ceding companies, familiarity with each market, the timing of the reported information, an analysis and understanding of the characteristics of each line of business, and management’s judgment of the impact of various factors, including premium or loss trends, on the volume of business written and ceded to the Company. On an ongoing basis, the Company reviews the amounts reported by these third parties for reasonableness based on their experience and knowledge of the subject class of business. In addition, reinsurance contracts under which the Company assumes business generally contain specific provisions which allow the Company to perform audits of the ceding company to ensure compliance with the terms and conditions of the contract, including accurate and timely reporting of information. Based on a review of all available information, management establishes premium estimates where reports have not been received. Premium estimates are updated when new information is received and differences between such estimates and actual amounts are recorded in the period in which estimates are changed or the actual amounts are determined. Adjustments to premium estimates could be material and such adjustments could directly and significantly impact earnings favorably or unfavorably in the period they are determined because the estimated premium may be fully or substantially earned.

194

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

Reinstatement premiums are recognized at the time a loss event occurs, where coverage limits for the remaining life of the contract are reinstated under pre-defined contract terms. Reinstatement premiums, if obligatory, are fully earned when recognized. The accrual of reinstatement premiums

~~WATFORD HOLDINGS LTD.~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. dollars in thousands, except share data)~~

is based on an estimate of losses and loss adjustment expenses, which reflects management’s judgment.

Reinsurance premiums written, irrespective of the class of business, are generally earned on a pro rata basis over the term of the underlying policies or reinsurance contracts. Contracts and policies written on a “losses occurring” basis cover claims that may occur during the term of the contract or policy, which is typically 1 year. Accordingly, the premium is earned evenly over the term. Contracts which are written on a “risks attaching” basis cover claims which attach to the underlying insurance policies written during the terms of such contracts. Premiums earned on such contracts usually extend beyond the original term of the reinsurance contract, typically resulting in recognition of premiums earned over a 2 ~~years~~year period. Certain of the Company’s reinsurance contracts include provisions that adjust premiums or acquisition expenses based upon the experience under the contracts. Premiums written and earned, as well as related acquisition expenses are recorded based upon the projected experience under such contracts.

Acquisition expenses consist primarily of brokerage fees, ceding commissions, premium taxes, underwriting fees payable to Arch under our services agreements and other direct expenses that relate to our contracts and policies and are presented net of commissions received from reinsurance we purchase. We amortize deferred acquisition expenses over the related contract term in the same proportion that the premiums are earned. Our acquisition expenses may also include profit commissions paid to our sources of business in the event of favorable underwriting experience.

Deferred acquisition costs, which are based on the related unearned premiums, are carried at their estimated realizable value and take into account anticipated losses and loss adjustment expenses, based on historical and current experience, and anticipated investment income. A premium deficiency occurs if the sum of anticipated losses and loss adjustment expenses, unamortized acquisition costs and anticipated investment income exceed unearned premiums. A premium deficiency is recorded by charging any unamortized acquisition costs to expense to the extent required in order to eliminate the deficiency. If the premium deficiency exceeds unamortized acquisition costs then a liability is accrued for the excess deficiency. No premium deficiency charges were recorded by the Company during December 31, 2020, 2019 ~~2018~~ and ~~2017.~~2018.

Retroactive reinsurance reimburses a ceding company for liabilities incurred as a result of past insurable events covered by the underlying policies reinsured. For retroactive contracts that meet the established criteria for reinsurance accounting, written premiums are fully earned and corresponding losses and loss expense are recognized at inception. The initial gain, if applicable, is deferred and amortized into income over an actuarially determined expected payout period. Any future loss is recognized immediately and charged against earnings. The contracts can cause significant variances in gross premiums written, net premiums written, net premiums earned, and net incurred losses in the years in which they are written. Reinsurance contracts sold not meeting the established criteria for reinsurance accounting are recorded using the deposit method.

In certain instances, reinsurance contracts cover losses both on a prospective basis and on a retroactive basis and, accordingly, the Company bifurcates the prospective and retrospective elements of these reinsurance contracts and accounts for each element separately where practical. Underwriting income generated in connection with retroactive reinsurance contracts is deferred and amortized into income over the settlement period while losses are charged to income immediately. Subsequent changes in estimated or actual cash flows under such retroactive reinsurance contracts are accounted for by adjusting the previously deferred amount to the balance that would have existed had the revised estimate been available at the inception of the reinsurance transaction, with a corresponding charge or credit to income.

195

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

(d) Reinsurance ceded

The accompanying consolidated statements of income (loss) reflect premiums and losses and loss adjustment expenses and acquisition expenses, net of reinsurance ceded (see Note 4, “Reinsurance”). Ceded unearned premiums are reported as prepaid reinsurance premiums and estimated amounts of reinsurance recoverable on unpaid losses are reported as unpaid losses and loss adjustment expenses recoverable. Reinsurance premiums ceded and unpaid losses and loss adjustment expenses recoverable are estimated in a manner consistent with that of the original policies issued and the terms of the reinsurance contracts. If the reinsurers are unable to satisfy their obligations under the agreements, the Company would be liable for such defaulted amounts. Reinsurance ceding commissions are recognized as income on a pro rata basis over the period of risk. Reinsurance ceding commissions that represent a recovery of acquisition costs are recognized as a reduction to acquisition expenses while the remaining portion is deferred.

(e) Cash and cash equivalents

Cash includes cash equivalents, which are investments with original maturities of three months or less that are not managed by the external ~~investment managers.~~Investment Managers. Short-term investments include certain cash equivalents which are part of investment portfolios under the management of our ~~investment managers.~~Investment Managers.

(f) Investments

The Company has elected the fair value option for the majority of its long and short-term investments in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 825, Financial Instruments. As a result, the Company’s non-investment grade investments are reported at fair value with changes in fair value included in “realized and unrealized gain (loss) on investments” in the consolidated statements of income (loss). See Note ~~7 -~~8, “Investment information” for further information about the investment portfolios.

The fair values of investments are based on quotations received from nationally recognized pricing services, or when such prices are not available, by reference to broker or underwriter bid indications. Short-term investments are comprised of securities due to mature within one year of the date of issue. Investment transactions are recorded on a trade date basis with balances pending settlement recorded separately in the consolidated balance sheets as receivable for securities sold or payable for securities purchased. See Note ~~8 -~~9, “Fair value” for further details.

Beginning January 1, 2018, the Company elected to classify newly acquired debt investments in its investment grade portfolio as “available for sale.” Accordingly, they are carried at estimated fair value (also known as fair value) with the changes in fair value recorded as an unrealized gain or loss component of accumulated other comprehensive income in shareholders’ equity.

Investment Impairments

The Company ~~performs quarterly reviews~~conducts a periodic review to identify and evaluate invested assets that may have credit impairments.

Credit Impairments of ~~its investment grade investments~~Available For Sale Fixed Maturities

The Company derives estimated credit losses for fixed maturities by comparing expected future cash flows to ~~determine whether declines in fair value below~~be collected to the amortized cost basis are considered other-than-temporary in accordance with applicable accounting guidance regarding the recognition and presentation of other-than-temporary impairment (“OTTI”). The process of determining whether a security is other-than-temporarily impaired requires judgment and involves analyzing many factors. These factors include (i) an analysis of the ~~liquidity, business prospects and overall~~security. Estimates of expected future cash flows consider among other things, macroeconomic conditions as well as the financial condition of the issuer, ~~(ii)~~near-term and long-term prospects for the ~~time period~~issuer, and the likelihood of the recoverability of principal and interest.

Beginning on January 1, 2020, credit losses are recognized through an allowance account subject to reversal, rather than a reduction in ~~which there was a significant decline~~amortized cost. Declines in value ~~(iii) the significance of the decline and (iv) the analysis of specific credit events.~~

~~When there are credit-related losses associated with investment grade debt securities for which the Company does not have an intent~~attributable to sell and it is more likely than not that it will not be required to sell the security before recovery of its cost basis, the amount of the OTTI related to a credit loss is recognized in earnings and the amount of the OTTI related tofactors other ~~factors (e.g., interest rates, market conditions, etc.) is recorded as a component of other comprehensive income (loss). The~~

196

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

~~amount of~~than credit are reported in other comprehensive income while the allowance for credit loss is charged to “realized and unrealized gains (losses) on investments” in the Company’s consolidated statements of ~~an impaired debt security is~~income (loss).

For fixed maturity investments the ~~difference between the amortized cost and the greater of (i) the present value of expected future cash flows and (ii) the fair value of the security. In instances where no credit loss exists but~~Company intends to sell or for which it is more likely than not that the Company will ~~have~~be required to sell ~~the debt security prior to the~~before an anticipated recovery in value, the ~~decline~~full amount of the impairment is included in ~~fair value below amortized cost is recognized as an OTTI in earnings. In periods after the recognition of an OTTI~~“realized and unrealized gains (losses) on ~~debt securities, the Company accounts for such securities as if they had been purchased~~investments” on the ~~measurement date~~Company’s consolidated statements of income (loss). The new cost basis of the ~~OTTI at an amortized cost basis equal to~~investment is the previous amortized cost basis less the ~~OTTI~~impairment recognized in ~~earnings. For debt securities for which OTTI were recognized in earnings, the difference between the~~“realized and unrealized gains (losses) on investments.” The new ~~amortized~~ cost basis ~~and the cash flows expected to be collected will be accreted or amortized into net~~is not adjusted for any subsequent recoveries in fair value.

The Company reports accrued investment ~~income. As of December 31, 2019, the Company had no investment losses on the~~income separately from available for sale ~~portfolio~~fixed maturities, and has elected not to measure an allowance for credit losses for accrued investment income. Uncollectible accrued interest is written off when the Company determines that ~~are considered as other-than-temporary.~~no additional interest payments will be received.

Investment gains or losses realized on the sale of investments are determined on a first-in, first-out basis and are reflected in net income. Unrealized appreciation or decline in the value of available for sale securities, which are carried at fair value, is excluded from net income and recorded as a separate component of accumulated other comprehensive income, net of applicable deferred income tax.

Net interest income includes interest income together with amortization of market premiums and discounts, net of investment management fees, interest expense and custody fees. Anticipated prepayments and expected maturities are used in applying the interest method for certain investments, such as asset-backed securities. When actual prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The investment in such securities is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the security. Such adjustments, if any, are included in interest income when determined. Investment gains or losses realized on the sale of investments are determined on a first-in, first-out basis and are reflected in “realized and unrealized gain (loss) on investments” in the consolidated statements of income (loss).

Performance fees related to the non-investment grade portfolio ~~(i) equal to 15% of income for periods prior to January 1, 2018 and (ii) for periods beginning January 1, 2018~~ equal to 10% of income plus an additional performance fee equal to 25% of any Excess Income (as defined in such investment management agreements) in excess of a net 10% return to Watford after deduction for paid and accrued management fees and base performance fees, with the total performance fees not to exceed 17.5% of the Income or Aggregate Income, as applicable, are reflected in “investment performance fees - related parties” in the consolidated statements of income (loss). See Note ~~7 -~~8, “Investment information” for further details.

The Company invests in limited partnerships and limited liability companies. Such amounts are included in other investments, fair value option. These investments can often have characteristics of a variable interest entity (“VIE”). A VIE refers to entities that have characteristics such as (i) insufficient equity at risk to allow the entity to finance its activities without additional financial support or (ii) instances where the equity investors, as a group, do not have the characteristic of a controlling financial interest. If the Company is determined to be the primary beneficiary, it is required to consolidate the VIE. The primary beneficiary is defined as the variable interest holder that is determined to have the controlling financial interest as a result of having both (i) the power to direct the activities of a VIE that most significantly impact the economic performance of the VIE and (ii) the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. At inception of the VIE as well as on an ongoing basis, the Company determines whether it is the primary beneficiary based on an analysis of the Company’s level of involvement in the VIE, the contractual terms, and the overall structure of the VIE. The ~~Company’s maximum exposure to loss with respect to these investments is limited to the investment~~

197

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

Company’s maximum exposure to loss with respect to these investments is limited to the investment carrying amounts reported in the Company’s consolidated balance sheet and any unfunded commitment. See Note 8, “Investment information” for further details.

(g) Derivative instruments

The Company recognizes all derivative financial instruments, including embedded derivative instruments, at fair value in the consolidated balance sheets. The Company’s investment and underwriting strategy allows for the use of derivative instruments to enhance investment performance, replicate investment positions or manage market exposures and duration risk that would be allowed under the Company’s investment guidelines if implemented in other ways. For such investment derivative instruments, changes in assets and liabilities measured at fair value are recorded as a component of “realized and unrealized gain (loss) on investments.” In addition, the Company’s derivative instruments include amounts related to underwriting activities where an insurance or reinsurance contract meets the accounting definition of a derivative instrument. For such contracts, changes in fair value are reflected in “other underwriting income” in the consolidated statements of income (loss), as the underlying contract originates from the Company’s underwriting operations. See Note ~~10 -~~11, “Derivative instruments” for further details.

(h) Reserves for losses and loss adjustment expenses

The reserve for losses and loss adjustment expenses consists of estimates of unpaid reported losses and loss adjustment expenses and estimates for losses incurred but not reported. The reserve for unpaid reported losses and loss adjustment expenses, established by management based on reports from ceding companies and claims from insureds, represents the estimated ultimate cost of events or conditions that have been reported to or specifically identified by the Company. Such reserves are supplemented by management’s estimates of reserves for losses incurred for which reports or claims have not been received. The Company’s reserves are based on a combination of reserving methods, incorporating ceding company and industry loss development patterns. The Company selects the initial expected loss and loss adjustment expense ratios based on information derived by AUL and AUI managers during the initial pricing of the business, supplemented by industry data where appropriate. Such ratios consider, among other things, rate changes and changes in terms and conditions that have been observed in the market. The Company, in conjunction with data and analysis supplied by AUL and AUI, reviews the reserves regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, are reflected in income in the period in which they are determined. Inherent in the estimates of ultimate losses and loss adjustment expenses are expected trends in claims severity and frequency and other factors which may vary significantly as claims are settled. Accordingly, ultimate losses and loss adjustment expenses may differ materially from the amounts recorded in the accompanying consolidated financial statements. Losses and loss adjustment expenses are recorded on an ~~un-discounted~~undiscounted basis. See Note 5, - “Reserve for losses and loss adjustment expenses” for further details.

(i) Foreign exchange

Monetary assets and liabilities, such as premiums receivable and the reserve for losses and loss adjustment expenses, denominated in foreign currencies are revalued at the exchange rate in effect at the balance sheet date with the resulting foreign exchange gains and losses included in net income. Accounts that are classified as non-monetary, such as deferred acquisition costs and the unearned premium reserves, are not subsequently re-measured. In the case of foreign currency-denominated cash and investments, the change in exchange rates between the local currency and the Company’s functional currency at each balance sheet date is included as a component of net foreign exchange gains and losses included in the consolidated statements of income (loss). In the case of foreign currency denominated fixed maturity securities which are classified as “available for sale,” the change in exchange rates between the local currency in which the investments are denominated and the Company’s functional currency at each balance sheet date is included in

198

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

unrealized appreciation or decline in value of securities, a component of accumulated other comprehensive income, net of applicable deferred income tax.

~~WATFORD HOLDINGS LTD.~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. dollars in thousands, except share data)~~

Assets and liabilities of foreign operations whose functional currency is not the U.S. dollar are translated at the prevailing exchange rates at each balance sheet date. Revenues and expenses of such foreign operations are translated at average exchange rates during the year. The net effect of the translation adjustments for foreign operations is included in accumulated other comprehensive income.

(j) Intangible assets

The Company’s intangible assets with indefinite lives include licenses held by its U.S. insurance subsidiary which allow such subsidiary to write insurance business in various jurisdictions. These indefinite-lived intangible assets are carried at or below fair value and are tested annually for impairment, either qualitatively or quantitatively, and between annual tests if events or change in circumstances indicate that it is more likely than not that the asset is impaired. If intangible assets are impaired, such assets are written down to their fair values with the related expense recorded in the Company’s results of operations.

(k) Income taxes

Deferred income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. A valuation allowance is recorded if it is more likely than not that some or all of a deferred tax asset may not be realized. The Company considers future taxable income and feasible tax planning strategies in assessing the need for a valuation allowance. In the event the Company determines that it will not be able to realize all or part of its deferred income tax assets in the future, an adjustment to the deferred income tax assets would be charged to income in the period in which such determination is made. In addition, if the Company subsequently assesses that the valuation allowance is no longer needed, a benefit would be recorded to income in the period in which such determination is made. See Note ~~12 -~~13, “Income taxes” for more information.

The Company recognizes a tax benefit where it concludes that it is more likely than not that the tax benefit will be sustained on audit by the taxing authority based solely on the technical merits of the associated tax position. If the recognition threshold is met, the Company recognizes a tax benefit measured at the largest amount of the tax benefit that, in the Company’s judgment, is greater than 50% likely to be realized. The Company records related interest and penalties in income tax expense.

(l) Warrants

The Company issued certain warrant contracts to Arch and HPS in conjunction with the initial capitalization of the ~~Company which may be settled by the Company using either the physical settlement or net-share settlement methods. In the event these~~Company. These warrants ~~are~~were not exercised and ~~settled, the fair value of these warrants would be recorded in equity as additional paid-in capital based~~expired on ~~an option-pricing model (Black-Scholes) used to calculate the fair value of the warrants issued.~~March 25, 2020.

(m) Earnings per share

Basic earnings per share is calculated by dividing net income (loss) available to common shareholders by the weighted average number of common shares and participating securities outstanding during the period. The weighted average number of common shares excludes any dilutive effect of outstanding warrants, options and convertible securities, such as nonparticipating unvested restricted shares, if applicable. Diluted earnings per share are based on the weighted average number of common shares and share equivalents including any dilutive effects of warrants, options and other awards under stock plans, if applicable. U.S. GAAP requires that unvested stock awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid (referred to as “participating securities”), be included in the number of shares outstanding for both basic and diluted earnings per share calculations. In the event of a net loss, the

199

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

participating securities are excluded from the calculation of both basic and diluted loss per share. See Note ~~11 -~~12, “Earnings per common share” for more information.

(n) Share-based compensation

The Company applies a fair value-based measurement method in accounting for its share-based compensation plans with eligible employees and directors. Compensation expense is estimated based on the fair value of the award at the grant date and is recognized in net income over the requisite service period with a corresponding increase in shareholders’ equity. No value is attributed to awards that employees forfeit because they fail to satisfy vesting conditions. The Company’s time-based awards generally vest over a ~~three-year~~three-year period with one-third vesting on each of the first, second and third anniversaries of the grant date. The share-based compensation expense associated with awards that have graded vesting features and vest based only on service conditions is calculated on a straight-line basis over the requisite service period for the entire award. Compensation expense recognized in connection with performance awards is based on the achievement of the specified performance and service conditions. The final measure of compensation expense recognized over the requisite service period reflects the final performance outcome. During the recognition period, compensation expense is accrued based on the specified performance conditions that are probable of achievement. For awards granted to retirement-eligible employees where no service is required for the employee to retain the award, the grant date fair value is immediately recognized as compensation expense at the grant date because the employee is able to retain the award without continuing to provide service. For employees near retirement eligibility, the attribution of compensation expense is over the period from the grant date to the retirement eligibility date. The Company accounts for forfeitures of share-based awards as such forfeitures occur. See Note ~~19 -~~20, “Share transactions” for information relating to the Company’s share-based compensation.

(o) Treasury shares

Treasury shares are common shares purchased by the Company and not subsequently canceled. These shares are recorded at cost and result in a reduction of the Company’s shareholders’ equity in its consolidated balance sheets.

(p) ~~Recent accounting pronouncements~~Reinsurance recoverables

~~Recently adopted accounting standards~~In the normal course of business, the Company’s subsidiaries cede a portion of their premium and ~~accounting standard updates (~~“~~ASU~~”)

losses through pro rata and excess of loss reinsurance agreements on a treaty or facultative basis. Reinsurance recoverables are recorded as assets, predicated on the reinsurers’ ability to meet their obligations under the reinsurance agreements. In ~~February 2016,~~certain instances, the ~~Financial Accounting Standards Board (“FASB”) issued ASU 2016-02,~~ ~~Leases~~ Company obtains collateral, including letters of credit and ~~subsequently issued several improvements~~trust accounts, to ~~that update (collectively “ASU 2016-02”). The new accounting guidance requires that~~further reduce the lessee recognize an asset and a liability for leases with a lease term greater than 12 months regardless of whether the lease is classified as operating or financing. Under the previous accounting standard, operating leases were not reflected in the balance sheet.

credit exposure on its reinsurance recoverables. The Company ~~adopted ASU 2016-02 on January 1, 2019. The adoption~~reports its reinsurance recoverables net of ~~the updated guidance resulted in the Company recognizing a right-of-use asset of $1.1 million and a lease liability of $1.1 million in other assets and other liabilities, respectively,~~an allowance for expected credit loss in the Company’s consolidated balance sheets. The ~~cumulative effect adjustment to the opening balance of retained earnings was $Nil. The adoption of the updated guidance did not have a material effect on~~allowance is based upon the Company’s ~~results~~ongoing review of ~~operations or liquidity.~~

~~In August 2017, the FASB issued ASU 2017-12,~~ ~~Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities~~ ~~(“ASU 2017-12”). ASU 2017-12 intends to improve~~amounts outstanding, the financial ~~reporting~~condition of ~~hedging relationships~~its reinsurers, amounts and form of collateral obtained and other relevant factors. A ratings based probability-of-default and loss-given-default methodology is used to ~~better portray~~estimate the ~~economic results of an entity’s risk management activities in its financial statements. ASU 2017-12~~allowance for expected credit loss. Any allowance for credit losses is ~~effective January 1, 2019. This ASU was adopted on January 1, 2019, and did not have a material impact on~~charged to the Company’s consolidated ~~financial statements.~~statements of income (loss) in the period the recoverable is recorded and revised in subsequent periods to reflect changes in the Company’s estimate of expected credit losses.

(q) Premiums receivable and unearned premium reserves

Premiums are recognized as revenues pro rata over the policy period. Unearned premium reserves represent the unexpired portion of policy premiums. Accrued retrospective premiums are included in premiums receivable balances. Premiums receivable balances are reported net of an allowance for expected credit losses. The Company monitors credit risk associated with premiums receivable through its ongoing review of amounts outstanding, aging of the receivable, historical loss data

200

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

and counterparty financial strength measures. The allowance also includes estimated uncollectible amounts related to dispute risk. Amounts deemed to be uncollectible, are written off against the allowance. In certain instances, credit risk may be reduced by the Company’s right to offset loss obligations or unearned premiums against premiums receivable. Any allowance for credit losses is charged to the Company’s consolidated statements of income (loss) in the period the receivable is recorded and revised in subsequent periods to reflect changes in the Company’s estimate of expected credit losses.

(r) Recent accounting pronouncements

Issued and effective as of December 31, 2020 - Credit Losses

Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments

The Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”) which was issued in June 2016. This ASU applies a new credit loss model (current expected credit losses, or “CECL”) for determining credit-related impairments for financial instruments measured at amortized cost (including reinsurance recoverables) and requires an entity to estimate the credit losses expected over the life of an exposure or pool of exposures. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The expected credit losses, and subsequent adjustments to such losses, are recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the Company’s consolidated balance sheet.

This ASU also amends the previous other-than-temporary impairment model for available for sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limiting the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. In ~~February~~addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists.

The Company adopted this ASU as of January 1, 2020. For available for sale debt securities, the updated guidance was applied prospectively. For financial instruments measured at amortized cost, the updated guidance was applied by recognizing a cumulative effect adjustment of $0.4 million, net of tax, to the opening balance of retained earnings as of January 1, 2020, the beginning of the period of adoption. This adjustment is associated with “premiums receivable” and “reinsurance recoverables on unpaid and paid losses and loss adjustment expenses” in the Company’s consolidated balance sheets. The cumulative effect of the adjustment decreased retained earnings as of January 1, 2020 and increased the allowance for estimated uncollectible reinsurance.

The accounting policies have been updated to reflect the Company’s adoption of ASU 2016-13, as described above. Results for the reporting periods beginning January 1, 2020 and thereafter are presented under ASC 326, while prior period amounts continue to be reported in accordance with previous applicable GAAP.

Issued and effective as of December 31, 2020

In August 2018, the FASB issued ASU ~~2018-02,~~ ~~Income Statement~~2018-13, Fair Value Measurement(Topic 820), Disclosure Framework - ~~Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income~~ Changes to the Disclosure Requirements for Fair Value Measurements (“ASU ~~2018-02”~~2018-13”). ASU ~~2018-02 permits companies to reclassify disproportionate tax effects in accumulated other comprehensive income caused by~~2018-13 modifies the ~~Tax Cuts and Jobs Act of 2017 to retained earnings. ASU 2018-02 is effective for fiscal years beginning after December 31, 2018 and interim periods within those fiscal years.~~disclosure requirements on fair value measurements. This ASU was adopted on January 1, 2020, and the Company considers the impact to be immaterial to the Company’s consolidated financial statements and disclosures.

In April 2019, the FASB issued ASU 2019-04, which identified and clarified issues relevant to ASU 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). For amendments related to ASU 2017-12, the effective date is as of the beginning of the first annual reporting period beginning after April 25, 2019. This ASU was adopted

201

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

on January 1, 2020 and did not have a material impact on the Company’s consolidated financial ~~statements~~statements.

In March 2020, the FASB issued ASU 2020-03, Codification Improvements (“ASU 2020-03”), which provides updates to a wide variety of Topics in the Codification. For public business entities, this ASU was effective upon issuance. This ASU was adopted upon issuance, and ~~disclosures.~~did not have a material impact on the Company’s consolidated financial statements.

Recently issued accounting standards not yet adopted

In ~~June 2016,~~December 2019, the FASB issued ASU ~~2016-13,~~ ~~Financial Instruments - Credit Losses~~2019-12, Income Taxes (Topic ~~326)~~ 740), Simplifying the Accounting for Income Taxes (“ASU ~~2016-13”~~2019-12”). ~~The new~~ASU 2019-12 simplifies the accounting ~~guidance introduces a new model~~ for ~~recognizing credit losses on financial instruments based on an estimate of current expected credit losses rather than incurred credit losses.~~income taxes by removing certain exceptions to the general principles in Topic 740. ASU ~~2016-13~~2019-12 will be effective for fiscal years beginning after December ~~15, 2019, including~~31, 2021, and interim periods within ~~those~~ fiscal ~~years.~~years beginning after December 15, 2022. The Company has assessed the impact of the implementation of this ASU and considers the impact to be immaterial to the Company’s consolidated financial statements and disclosures.

In ~~August 2018,~~March 2020, the FASB issued ASU ~~2018-13,~~ ~~Fair Value Measurement(Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements~~ 2020-04, Reference Rate Reform (Topic 848) (“ASU ~~2018-13”~~2020-04”), and in January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), Scope (“ASU 2021-01”). These ASUs provide practical expedients and exceptions for applying GAAP to contracts and transactions affected by reference rate reform if such contracts or transactions reference LIBOR or another reference rate expected to be discontinued. Amendments in this ASU ~~2018-13 intends to modify the disclosure requirements on fair value measurements. The accounting guidance is effective~~ for ~~fiscal years, and interim periods within those fiscal years, beginning after~~contract modifications may be applied as of March 12, 2020 through December ~~15, 2019. Early adoption is permitted; removal or modification disclosures can~~31, 2022. Once adopted, this ASU must be ~~early adopted upon issuance of ASU 2018-13, and a delay of the adoption of additional disclosures is permitted until the effective date noted above.~~applied prospectively for all eligible contract modifications. The Company is currently assessing the impact the implementation of this ~~standard~~ASU will have on its consolidated financial statements and ~~disclosures.~~disclosures, but does not believe that such impact will be material.

~~In April 2019, the FASB issued ASU 2019-04,~~ ~~Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments~~ ~~(“ASU 2019-04”), which identified and clarified issues relevant to the implementation of ASU 2016-01,~~ ~~Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities~~ ~~(“ASU 2016-01”), ASU 2016-13 and ASU 2017-12. The Company is assessing the impact the implementation will have on its consolidated financial statements and disclosures.~~

For amendments related to ASU 2016-01 and ASU 2016-13, the effective date is for fiscal years and interim periods beginning after December 15, 2019; with early adoption in any interim period permitted for ASU 2016-01.

For amendments related to ASU 2017-12, the effective date is as of the beginning of the first annual reporting period beginning after April 25, 2019. As the Company has implemented ASU 2017-12, early adoption in any interim period is permitted.

3. Segment information

The Company reports results under ~~one~~1 segment, referred to as the “underwriting segment.” The underwriting segment captures the results of the Company’s underwriting lines of business, which are comprised of specialty products on a worldwide basis. Lines of business include: (i) casualty reinsurance; (ii) property catastrophe reinsurance; (iii) other specialty reinsurance; and (iv) insurance programs and coinsurance.

The accounting policies of the underwriting segment are the same as those used for the preparation of the Company’s consolidated financial statements.

~~WATFORD HOLDINGS LTD.~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. dollars in thousands, except share data)~~

The Company has a corporate function that includes certain general and administrative expenses related to corporate activities, interest expense (on the 6.5% senior notes due 2029), net foreign exchange gains (losses), income tax expense and items related to the Company’s preference shares.

202

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

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


	Year Ended December 31,
	2020		2019		2018
	($ in thousands)
Gross premiums written:
Casualty reinsurance	$	188,042	$	279,967	$	274,661
Other specialty reinsurance	117,177		119,518		196,170
Property catastrophe reinsurance	27,334		16,226		10,424
Insurance programs and coinsurance	395,993		339,170		253,760
Total	$	728,546	$	754,881	$	735,015

Net premiums written:
Casualty reinsurance	$	185,968	$	225,758	$	273,048
Other specialty reinsurance	111,575		114,876		181,096
Property catastrophe reinsurance	26,587		15,517		10,193
Insurance programs and coinsurance	213,459		176,711		139,838
Total	$	537,589	$	532,862	$	604,175

Net premiums earned:
Casualty reinsurance	$	205,192	$	238,437	$	278,656
Other specialty reinsurance	131,873		149,688		162,691
Property catastrophe reinsurance	23,037		13,399		10,998
Insurance programs and coinsurance	200,249		155,166		126,517
Total	$	560,351	$	556,690	$	578,862

Net premiums written by underwriting location:
United States	$	115,471	$	127,176	$	49,800
Europe	97,753		52,065		91,635
Bermuda	324,365		353,621		462,740
Total	$	537,589	$	532,862	$	604,175

203

Year Ended December 31,
2019 2018 2017
($ in thousands)
Gross premiums written:
Casualty reinsurance $ 279,967
$ 274,661
$ 284,481
Other specialty reinsurance 119,518
196,170
169,100
Property catastrophe reinsurance 16,226
10,424
12,740
Insurance programs and coinsurance 339,170
253,760
133,983
Total $ 754,881
$ 735,015
$ 600,304

Net premiums written:
Casualty reinsurance $ 225,758
$ 273,048
$ 281,783
Other specialty reinsurance 114,876
181,096
155,666
Property catastrophe reinsurance 15,517
10,193
12,455
Insurance programs and coinsurance 176,711
139,838
103,213
Total $ 532,862
$ 604,175
$ 553,117

Net premiums earned:
Casualty reinsurance $ 238,437
$ 278,656
$ 308,526
Other specialty reinsurance 149,688
162,691
134,855
Property catastrophe reinsurance 13,399
10,998
12,690
Insurance programs and coinsurance 155,166
126,517
75,655
Total $ 556,690
$ 578,862
$ 531,726

Net premiums written by underwriting location:
United States $ 127,176
$ 49,800
$ 11,750
Europe 52,065
91,635
91,463
Bermuda 353,621
462,740
449,904
Total $ 532,862
$ 604,175
$ 553,117

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

4. Reinsurance

Through reinsurance agreements with Arch Reinsurance Ltd. (“ARL”) and Arch Reinsurance Company (“ARC”), which are subsidiaries of ACGL, as well as through other third-party reinsurance agreements, the Company cedes a portion of its premiums. The effects of reinsurance on the Company’s written and earned premiums, losses and loss adjustment expenses were as follows:


	Year Ended December 31,										Year Ended December 31,
	2019			2018			2017				2020		2019		2018
	($ in thousands)										($ in thousands)
Premiums written										Premiums written
Direct	$	339,170		$	253,760		$	133,983		Direct	$	395,993	$	339,170	$	253,760
Assumed	415,711			481,255			466,321			Assumed	332,553		415,711		481,255
Ceded	(222,019		)	(130,840		)	(47,187		)	Ceded	(190,957)		(222,019)		(130,840)
Net	$	532,862		$	604,175		$	553,117		Net	$	537,589	$	532,862	$	604,175
Premiums earned										Premiums earned
Direct	$	290,328		$	201,868		$	96,125		Direct	$	376,870	$	290,328	$	201,868
Assumed	419,778			468,156			471,073			Assumed	387,461		419,778		468,156
Ceded	(153,416		)	(91,162		)	(35,472		)	Ceded	(203,980)		(153,416)		(91,162)
Net	$	556,690		$	578,862		$	531,726		Net	$	560,351	$	556,690	$	578,862
Losses and loss adjustment expenses										Losses and loss adjustment expenses
Direct	$	244,354		$	157,991		$	71,679		Direct	$	326,249	$	244,354	$	157,991
Assumed	347,378			348,332			393,565			Assumed	298,689		347,378		348,332
Ceded	(138,597		)	(65,068		)	(28,842		)	Ceded	(184,456)		(138,597)		(65,068)
Net	$	453,135		$	441,255		$	436,402		Net	$	440,482	$	453,135	$	441,255

The Company monitors the financial condition of its reinsurers and attempts to place coverages only with financially sound carriers. At December 31, 2020 and 2019, 100% of ceded loss and ~~2018, approximately 95% and 98%, respectively,~~loss adjustment reserves were due from carriers which had an A.M. Best or Standard & Poor’s rating of “A-” or ~~better, while 5% and 2%, respectively, were due from companies not rated.~~better.

At December 31, 2020 and 2019, approximately 44% and ~~2018, approximately~~ 47% ~~and 53%~~, respectively, of the Company’s reinsurance recoverables on paid and unpaid losses (not including prepaid reinsurance premiums) were due from ARL and ARC, each of which have ratings of “A+” from A.M. Best. Although the Company has not experienced any material credit losses to date, an inability of its reinsurers to meet their obligations to it over the relevant exposure periods for any reason could have a material adverse effect on its financial condition and results of operations.

204

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

5. Reserve for losses and loss adjustment expenses

The following table represents an analysis of losses and loss adjustment expenses and a reconciliation of the beginning and ending reserve for losses and loss adjustment expenses for the years ended December 31, 2020, 2019 ~~2018~~ and ~~2017.~~2018.


	Year Ended December 31,
	2020		2019		2018
	($ in thousands)
Gross reserve for losses and loss adjustment expenses at beginning of year	$	1,263,628	$	1,032,760	$	798,262
Unpaid losses and loss adjustment expenses recoverable	165,549		81,267		39,856
Net reserve for losses and loss adjustment expenses at beginning of year	1,098,079		951,493		758,406

Net incurred losses and loss adjustment expenses relating to losses occurring in:
Current year	441,175		429,322		443,482
Prior years	(693)		23,813		(2,227)
Total net losses and loss adjustment expenses	440,482		453,135		441,255

Foreign exchange losses (gains)	21,029		15,286		(23,962)

Net paid losses and loss adjustment expenses relating to losses occurring in:
Current year	(69,571)		(73,723)		(64,026)
Prior years	(240,338)		(248,112)		(160,180)
Total paid losses and loss adjustment expenses	(309,909)		(321,835)		(224,206)

Net reserve for losses and loss adjustment expenses at end of year	1,249,681		1,098,079		951,493
Unpaid losses and loss adjustment expenses recoverable	269,902		165,549		81,267
Gross reserve for losses and loss adjustment expenses at end of year	$	1,519,583	$	1,263,628	$	1,032,760

Year Ended December 31,
2019 2018 2017
($ in thousands)
Gross reserve for losses and loss adjustment expenses at beginning of year $ 1,032,760
$ 798,262
$ 510,809
Unpaid losses and loss adjustment expenses recoverable 81,267
39,856
21,518
Net reserve for losses and loss adjustment expenses at beginning of year 951,493
758,406
489,291

Net incurred losses and loss adjustment expenses relating to losses occurring in:
Current year 429,322
443,482
399,530
Prior years 23,813
(2,227 ) 36,872
Total net losses and loss adjustment expenses 453,135
441,255
436,402

Foreign exchange gains (losses) 15,286
(23,962 ) 14,832

Net paid losses and loss adjustment expenses relating to losses occurring in:
Current year (73,723 ) (64,026 ) (70,423 )
Prior years (248,112 ) (160,180 ) (111,696 )
Total paid losses and loss adjustment expenses (321,835 ) (224,206 ) (182,119 )

Net reserve for losses and loss adjustment expenses at end of year 1,098,079
951,493
758,406
Unpaid losses and loss adjustment expenses recoverable 165,549
81,267
39,856
Gross reserve for losses and loss adjustment expenses at end of year $ 1,263,628
$ 1,032,760
$ 798,262
During 2020, the Company recorded net favorable development on prior year loss reserves of $0.7 million. Net favorable development was experienced on other specialty reinsurance losses of $5.8 million, casualty reinsurance losses of $4.9 million and property catastrophe reinsurance losses of $3.3 million. This favorable development was partially offset by unfavorable development on insurance programs and coinsurance losses of $13.3 million.

During 2019, the Company recorded net unfavorable development on prior year loss reserves of $23.8 million. Net unfavorable development was experienced on casualty reinsurance losses of $24.4 million and insurance programs of $3.2 million. This unfavorable development was partially offset by favorable development on property catastrophe reinsurance of $3.2 million and other specialty reinsurance of $0.6 million.

The loss reserve strengthening in 2019 is in response to higher than projected reported losses, mainly in U.S. casualty reinsurance and certain casualty exposures where losses are expected to have been incurred but have yet to be reported.

During 2018, the Company recorded net favorable development on prior year loss reserves of $2.2 million. Net favorable development was experienced on property catastrophe reinsurance losses of $5.9 million and other specialty reinsurance losses of $3.6 million. This favorable development was offset by adverse development on casualty reinsurance losses of $6.3 million and $0.9 million on insurance programs.

During 2017, the Company recorded net unfavorable development on prior year loss reserves of $36.9 million. The net unfavorable prior year development was driven by casualty reinsurance and other specialty reinsurance contracts. Casualty reinsurance experienced net unfavorable

205

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

development of $33.8 million primarily due to the U.K. Ministry of Justice’s reduction of the discount rate known as the “Ogden” rate and adverse development on certain large multi-line and professional liability contracts. The Ogden rate was reduced from 2.5% to negative 0.75%; the resulting claims development in 2017 was higher than expected. Other specialty reinsurance experienced net unfavorable development of $5.2 million primarily due to worse than expected emergence on nonstandard and U.K. motor quota share contracts. The remaining lines had net favorable prior year development of $2.2 million due to better than expected emergence of reported losses.

6. Short duration contracts

The Company is required by applicable insurance laws and regulations and U.S. GAAP to establish reserves for losses and loss adjustment expenses (“loss reserves”) that arise from the business it underwrites. Loss reserves are balance sheet liabilities representing estimates of future amounts required to pay losses and loss adjustment expenses for insured or reinsured events which have occurred at or before the balance sheet date. Loss reserves do not reflect contingency reserve allowances to account for future loss occurrences. Losses arising from future events will be estimated and recognized at the time the losses are incurred and could be substantial.

Loss reserves are comprised of (1) case reserves for claims reported, (2) additional case reserves, or ACRs, and (3) IBNR reserves. Loss reserves are established to provide for loss adjustment expenses and represent the estimated expense of settling claims, including legal and other fees and the general expenses of administering the claims adjustment process. Periodically, adjustments to the reported or case reserves may be made as additional information regarding the claims is reported or payments are made.

IBNR reserves are established to provide for incurred claims which have not yet been reported at the balance sheet date as well as to adjust for any projected variance in case reserving. Actuaries estimate ultimate losses and loss adjustment expenses using various generally accepted actuarial methods applied to known losses and other relevant information. Like case reserves, IBNR reserves are adjusted as additional information becomes known or payments are made. The process of estimating reserves involves a considerable degree of judgment by management and, as of any given date, is inherently uncertain.

Ultimate losses and loss adjustment expenses are generally determined by extrapolation of claim emergence and settlement patterns observed in the past that can reasonably be expected to persist into the future. In forecasting ultimate losses and loss adjustment expenses with respect to any line of business, past experience with respect to that line of business is the primary resource, developed through both industry and company experience, but cannot be relied upon in isolation. Uncertainties in estimating ultimate losses and loss adjustment expenses are magnified by the time lag between when a claim actually occurs and when it is reported and settled. This time lag is sometimes referred to as the “claim-tail.” The claim-tail for most property coverages is typically short (usually several months up to a few years). The claim-tail for certain professional liability, executive assurance and health care coverages, which are generally written on a claims-made basis, is typically longer than property coverages but shorter than casualty lines. The claim-tail for liability/casualty coverages, such as general liability, products liability, multiple peril coverage and workers’ compensation, may be especially long as claims are often reported and ultimately paid or settled years, or even decades, after the related loss events occur. During the claims reporting and settlement period, additional facts regarding coverages written in prior accident years, as well as about actual claims and trends, may become known and, as a result, management may adjust its reserves. If management determines that an adjustment is appropriate, the adjustment is recorded in the accounting period in which such determination is made in accordance with U.S. GAAP. Accordingly, if loss reserves need to be increased or decreased in the future from amounts currently established, future results of operations would be negatively or positively impacted, respectively.

~~WATFORD HOLDINGS LTD.~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. dollars in thousands, except share data)~~

In addition, the inherent uncertainties of estimating such reserves are even greater for our reinsurance lines of business, due primarily to the following factors: (1) the claim-tail for reinsurers is generally longer because claims are first reported to the ceding company and then to the reinsurer through one or more intermediaries, (2) the reliance on premium estimates, where reports have not been received from the ceding company, in the reserving process, (3) the potential for writing a number of reinsurance contracts with different ceding companies with the same exposure to a single loss event, (4) the diversity of loss development patterns among different types of reinsurance contracts, (5) the necessary reliance on the ceding companies for information regarding reported claims and (6) the differing reserving practices among ceding companies.

206

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

In determining ultimate losses and loss adjustment expenses, the cost to indemnify claimants, provide needed legal defense and other services for insureds and administer the investigation and adjustment of claims are considered. These claim costs are influenced by many factors that change over time, such as expanded coverage definitions as a result of new court decisions, inflation in costs to repair or replace damaged property, inflation in the cost of medical services and legislated changes in statutory benefits, as well as by the particular, unique facts that pertain to each claim. As a result, the rate at which claims arose in the past and the costs to settle them may not always be representative of what will occur in the future. The factors influencing changes in claim costs are often difficult to isolate or quantify and developments in paid and incurred losses are frequently subject to multiple and conflicting interpretations. Changes in coverage terms or claims handling practices may also cause future experience and/or development patterns to vary from the past. A key objective of actuaries in developing estimates of ultimate losses and loss adjustment expenses, and resulting IBNR reserves, is to identify aberrations and systemic changes occurring within historical experience and accurately adjust for them so that the future can be projected reliably. Pricing actuaries devote considerable effort to understanding and analyzing a ceding company and program administrator’s operations and loss history during the underwriting of the business, using a combination of ceding company, program administrator, and industry statistics. Such statistics normally include historical premium and loss data by class of business, individual claim information for larger claims, distributions of insurance limits provided, loss reporting and payment patterns, and rate change history. Because of the factors previously discussed, this process requires the substantial use of informed judgment and is inherently uncertain.

As mentioned above, there can be a considerable time lag from the time a claim is reported to a ceding company to the time it is reported to the reinsurer. The lag can be several years in some cases and may be attributed to a number of reasons; including the time it takes to investigate a claim, delays associated with the litigation process, the deterioration in a claimant’s physical condition many years after an accident occurs, the case reserving approach of the ceding company, etc. In the reserving process, the Company assumes that such lags are predictable, on average, over time and therefore the lags are contemplated in the loss reporting patterns used in their actuarial methods. This means that reserves for our reinsurance lines of business must rely on estimates for a longer period of time than for our insurance lines of business. Backlogs in the recording of assumed reinsurance can also complicate the accuracy of loss reserve estimation. As of December 31, ~~2019~~2020 there were no significant backlogs related to the processing of assumed reinsurance information for our reinsurance lines of business.

Although loss reserves are initially determined based on underwriting and pricing analysis, we apply several generally accepted actuarial methods, as discussed below, on a quarterly basis. Each quarter, as part of the reserving process, actuaries at our operations reaffirm that the assumptions used in the reserving process continue to form a sound basis for projection of liabilities. If actual loss activity differs substantially from expectations based on historical information, an adjustment to loss reserves may be supported. Estimated loss reserves for more mature underwriting years are based more on actual loss activity and historical patterns than on the initial assumptions based on pricing indications. More recent underwriting years rely more heavily on internal pricing assumptions. We place more or less reliance on a particular actuarial method based on the facts and circumstances at the time the estimates of loss reserves are made.

~~WATFORD HOLDINGS LTD.~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. dollars in thousands, except share data)~~

These methods generally fall into one of the following categories or are hybrids of one or more of the following categories:

•Expected loss methods: these methods are based on the assumption that ultimate losses vary proportionately with premiums. Expected loss and loss adjustment expense ratios are typically developed based upon the information derived by underwriters and actuaries during the initial pricing of the business, supplemented by industry data available from organizations, such as statistical bureaus and consulting firms, where appropriate. These ratios consider, among other things, rate changes and changes in terms and conditions that have been observed in the market.

207

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

Expected loss methods are useful for estimating ultimate losses and loss adjustment expenses in the early years of long-tailed lines of business, when little or no paid or incurred loss information is available, and is commonly applied when limited loss experience exists for a company.

•Historical incurred loss development methods: these methods assume that the ratio of losses in one period to losses in an earlier period will remain constant in the future. These methods use incurred losses (i.e., the sum of cumulative historical loss payments plus outstanding case reserves) over discrete periods of time to estimate future losses. Historical incurred loss development methods may be preferable to historical paid loss development methods because they explicitly take into account open cases and the claims adjusters’ evaluations of the cost to settle all known claims. However, historical incurred loss development methods necessarily assume that case reserving practices are consistently applied over time. Therefore, when there have been significant changes in how case reserves are established, using incurred loss data to project ultimate losses may be less reliable than other methods.

•Historical paid loss development methods: these methods, like historical incurred loss development methods, assume that the ratio of losses in one period to losses in an earlier period will remain constant. These methods use historical loss payments over discrete periods of time to estimate future losses and necessarily assume that factors that have affected paid losses in the past, such as inflation or the effects of litigation, will remain constant in the future. Because historical paid loss development methods do not use incurred losses to estimate ultimate losses, they may be more reliable than the other methods that use incurred losses in situations where there are significant changes in how incurred losses are established by a company’s claims adjusters. However, historical paid loss development methods are more leveraged (meaning that small changes in payments have a larger impact on estimates of ultimate losses) than actuarial methods that use incurred losses because cumulative loss payments take much longer to equal the expected ultimate losses than cumulative incurred amounts. In addition, and for similar reasons, historical paid loss development methods are often slow to react to situations when new or different factors arise than those that have affected paid losses in the past.

•Adjusted historical paid and incurred loss development methods: these methods take traditional historical paid and incurred loss development methods and adjust them for the estimated impact of changes from the past in factors such as inflation, the speed of claim payments or the adequacy of case reserves. Adjusted historical paid and incurred loss development methods are often more reliable methods of predicting ultimate losses in periods of significant change, provided the actuaries can develop methods to reasonably quantify the impact of changes. As such, these methods utilize more judgment than historical paid and incurred loss development methods.

•Bornhuetter-Ferguson, or B-F, paid and incurred loss methods: these methods utilize actual paid and incurred losses and expected patterns of paid and incurred losses, taking the initial expected ultimate losses into account to determine an estimate of expected ultimate losses. The B-F paid and incurred loss methods are useful when there are few reported claims and a relatively less stable pattern of reported losses.

•Additional analysis: other methodologies are often used in the reserving process for specific types of claims or events, such as catastrophic or other specific major events. These include vendor catastrophe models, which are typically used in the estimation of loss reserves at the early stage of

~~WATFORD HOLDINGS LTD.~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. dollars in thousands, except share data)~~

known catastrophic events before information has been reported to an insurer or reinsurer, and analysis of specific industry events, such as large lawsuits or claims.

In the initial reserving process for short-tail lines, consisting of property catastrophe and other exposures, we rely on a combination of the reserving methods discussed above. For known catastrophic events, our reserving process also includes the usage of catastrophe models and a heavy reliance on analysis which includes ceding company inquiries and management judgment. The development of property losses may be unstable, especially where there is high catastrophic exposure, may be characterized by high severity, low frequency losses for excess and ~~catastrophe-exposed~~catastrophe-

208

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

exposed business and may be highly correlated across contracts. As time passes, for a given underwriting year, additional weight is given to the paid and incurred B-F loss development methods and historical paid and incurred loss development methods in the reserving process. We make a number of key assumptions in reserving for short-tail lines, including that historical paid and reported development patterns are stable, catastrophe models provide useful information about our exposure to catastrophic events that have occurred and our underwriters’ judgment and guidance received from ceding companies as to potential loss exposures may be relied on. The expected loss ratios used in the initial reserving process for our property exposures will vary over time due to changes in pricing, reinsurance structure, estimates of catastrophe losses, terms and conditions and geographical distribution. As losses in property lines are reported relatively quickly, expected loss ratios are selected for the current underwriting year incorporating the experience for earlier underwriting years, adjusted for rate changes, inflation, changes in reinsurance programs, expectations about present and future market conditions and expected attritional losses based on modeling. Due to the short-tail nature of property business, reported loss experience emerges quickly and ultimate losses are known in a comparatively short period of time.

In the initial reserving process for medium-tail and long-tail lines, consisting of casualty, other specialty, and other exposures, we primarily rely on the expected loss method. The development of medium-tail and long-tail business may be unstable, especially if there are high severity major events, with business written on an excess of loss basis typically having a longer tail than business written on a pro rata basis. As time passes, for a given exposure, additional weight is given to the paid and incurred B-F loss development methods and historical paid and incurred loss development methods in the reserving process. We make a number of key assumptions in reserving for medium-tail and long-tail lines, including that the pricing loss ratio is the best estimate of the ultimate loss ratio at the time the contract is entered into, historical paid and reported development patterns are stable and our claims personnel and underwriters analysis of our exposure to major events are assumed to be our best estimate of our exposure to the known claims on those events. The expected loss ratios used in initial reserving process for medium-tail and long-tail contracts will vary over time due to changes in pricing, terms and conditions and reinsurance structure. As the credibility of historical experience for earlier underwriting year’s increases, the experience from these underwriting years will be used in the actuarial analysis to determine future underwriting year expected loss ratios, adjusted for changes in pricing, loss trends, terms and conditions and reinsurance structure.

Our reinsurance business receives reports of claims notices from ceding companies and record case reserves based upon the amount of reserves recommended by the ceding company. Case reserves on known events may be supplemented by ACRs, which are often estimated by our reinsurance operations’ claims personnel ahead of official notification from the ceding company, or when our reinsurance operations’ judgment regarding the size or severity of the known event differs from the ceding company. In certain instances, our reinsurance operations establish ACRs even when the ceding company does not report any liability on a known event. In addition, specific claim information reported by ceding companies or obtained through claim audits can alert our reinsurance operations to emerging trends such as changing legal interpretations of coverage and liability, claims from unexpected sources or classes of business, and significant changes in the frequency or severity of individual claims.

~~WATFORD HOLDINGS LTD.~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. dollars in thousands, except share data)~~

Our reinsurance business relies heavily on information reported by ceding companies, as discussed above. In order to determine the accuracy and completeness of such information, underwriters, actuaries, and claims personnel at our reinsurance operations often perform audits of ceding companies and regularly review information received from ceding companies for unusual or unexpected results. Material findings are usually discussed with the ceding companies. Our reinsurance operations sometimes encounter situations where they determine that a claim presentation from a ceding company is not in accordance with contract terms. In these situations, our reinsurance operations attempt to resolve the dispute with the ceding company. Most situations are resolved amicably and without the need for litigation or arbitration. However, in the infrequent

209

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

situations where a resolution is not possible, our reinsurance operations will vigorously defend their position in such disputes.

For our insurance programs and coinsurance line of business, Arch’s claim personnel, under our service arrangements, determine whether to establish a case reserve for the estimated amount of the ultimate settlement of individual claims. The estimate reflects the judgment of claims personnel based on general corporate reserving practices, the experience and knowledge of such personnel regarding the nature and value of the specific type of claim and, where appropriate, advice of counsel. We contract with a number of outside third-party administrators in the claims process who, in certain cases, have limited authority to establish case reserves. The work of these administrators is reviewed and monitored by such claims personnel.

Our reserves for loss and loss adjustment expenses primarily relate to short-duration contracts with various characteristics (e.g., type of coverage, geography, claims duration). We have considered such information in determining the level of disaggregation for disclosures related to our short-duration contracts, as detailed in the table below:



Level of disaggregation						Included product lines
Casualty reinsurance - pro rata						Executive assurance, medical malpractice liability, other professional liability, workers’ compensation, excess and umbrella liability and excess auto liability all written primarily on a treaty pro rata basis
Casualty reinsurance - excess of loss						Executive assurance, medical malpractice liability, other professional liability, workers’ compensation, excess and umbrella liability and excess auto liability all written primarily on a treaty excess of loss basis
Other specialty reinsurance						Personal and commercial auto (other than excess auto liability), surety, accident and health, and workers compensation catastrophe written primarily on a treaty basis
Property catastrophe reinsurance						Property catastrophe reinsurance
Insurance programs and coinsurance						Primary and excess general liability, umbrella liability, professional liability, workers’ compensation, personal and commercial automobile, inland marine and property business with minimal catastrophe exposure written on a direct basis

We have determined the following product lines to be insignificant for disclosure purposes: (i) mortgage reinsurance, (ii) marine and aviation reinsurance; (iii) other property reinsurance; and (iv) agriculture reinsurance. Such amounts are included as reconciling items.

We do not include claim count information in our short duration triangles for reinsurance. A significant percentage of our reinsurance business is written on a proportional basis, for which individual loss information is typically unavailable.

~~WATFORD HOLDINGS LTD.~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. dollars in thousands, except share data)~~

For our insurance programs and coinsurance line of business, we generally consider a reported claim to be per claimant, and we include claims with nil or nominal payments and/or case reserves.

We write the majority of our reinsurance contracts on an underwriting year basis and therefore may involve multiple accident years. Pursuant to customary cedant/reinsurer reporting requirements, the cedant reports premium for a given contract to us in total for the contract period, not separated by accident year. Similarly, for certain contract structures, the paid and outstanding losses will also be reported in total for the contract period, not by accident year. The short duration disclosure requires us to separately disclose paid losses, case reserves and IBNR losses by accident year, which necessitates an allocation of the underwriting year data between each of the applicable accident

210

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

years. To separate reported losses by accident year we employ certain assumptions, which can lead to anomalies in the presentation of individual accident year results.

The following tables present information on the short-duration contracts by line of business:


Casualty reinsurance - Pro Rata ($000’s)	Casualty reinsurance - Pro Rata ($000’s)															Casualty reinsurance - Pro Rata ($000’s)
Incurred losses and allocated loss adjustment expenses, net of reinsurance	Incurred losses and allocated loss adjustment expenses, net of reinsurance													December 31, 2019		Incurred losses and allocated loss adjustment expenses, net of reinsurance															December 31, 2020
		Year ended December 31,												Total of IBNR liabilities plus expected development on reported claims			Year ended December 31,														Total of IBNR liabilities plus expected development on reported claims
Accident year		2014 unaudited		2015 unaudited		2016 unaudited		2017 unaudited		2018 unaudited		2019				Accident year	2014 unaudited		2015 unaudited		2016 unaudited		2017 unaudited		2018 unaudited		2019 unaudited		2020
2014		$	43,675	$	43,026	$	44,255	$	45,847	$	48,675	$	50,353	$	7,057	2014	$	44,482	$	43,295	$	44,706	$	46,353	$	48,732	$	50,420	$	50,385	$	5,050
2015				159,460		160,004		173,994		177,786		185,728		35,987		2015			163,087		165,718		180,287		178,252		186,336		188,457		25,920
2016						167,764		186,899		188,019		197,028		51,520		2016					168,422		187,602		188,316		197,390		203,217		38,244
2017								178,479		179,978		192,420		67,144		2017							179,043		180,070		192,638		193,524		49,026
2018										147,936		143,108		74,847		2018									148,019		143,278		144,213		52,175
2019												115,895		75,819		2019											115,993		113,703		49,959
2020																2020													74,069		47,186
										Total		$	884,532														Total		$	967,568

Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance	Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance															Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
2014		$	883	$	6,869	$	13,980	$	20,741	$	25,628	$	32,184			2014	$	940	$	6,881	$	14,041	$	20,847	$	25,658	$	32,218	$	35,988
2015				12,985		37,392		70,101		86,921		114,698				2015			13,093		38,051		71,260		87,129		115,013		132,491
2016						11,409		45,346		68,884		111,334				2016					11,451		45,461		69,004		111,529		134,488
2017								15,369		40,632		82,190				2017							15,410		40,689		82,326		109,040
2018										11,134		35,905				2018									11,143		35,927		60,515
2019												16,598				2019											16,607		36,934
2020																2020													11,309
										Total		392,909															Total		520,765
Liabilities for losses and loss adjustment expenses, net of reinsurance	Liabilities for losses and loss adjustment expenses, net of reinsurance											$	491,623			Liabilities for losses and loss adjustment expenses, net of reinsurance													$	446,803

212

Casualty reinsurance - Excess of Loss ($000’s)
Incurred losses and allocated loss adjustment expenses, net of reinsurance December 31, 2019
Year ended December 31, Total of IBNR liabilities plus expected development on reported claims
Accident year
2014
unaudited

2015
unaudited

2016
unaudited
2017 unaudited 2018 unaudited 2019
2014 $ 4,759
$ 5,756
$ 5,315
$ 11,636
$ 10,647
$ 10,392
$ 821
2015 27,910
29,008
36,466
38,030
38,343
2,247
2016 38,321
42,553
49,517
50,252
7,956
2017 45,349
36,170
39,442
12,043
2018 70,079
67,550
27,263
2019 79,050
53,402
Total
$ 285,029

Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
2014 $ —
$ 2
$ 72
$ 671
$ 1,348
$ 3,369

2015 97
622
2,015
6,957
8,756

2016 218
797
2,617
5,554

2017 107
970
2,476

2018 155
2,455

2019 301

Total
22,911

Liabilities for losses and loss adjustment expenses, net of reinsurance $ 262,118

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)


Other specialty reinsurance ($000’s)
Incurred losses and allocated loss adjustment expenses, net of reinsurance															December 31, 2020
	Year ended December 31,														Total of IBNR liabilities plus expected development on reported claims
Accident year	2014 unaudited		2015 unaudited		2016 unaudited		2017 unaudited		2018 unaudited		2019 unaudited		2020
2014	$	17,019	$	17,363	$	17,231	$	17,720	$	18,139	$	18,145	$	18,730	$	425
2015			72,560		73,919		72,347		74,985		77,508		79,831		1,461
2016					68,946		59,343		59,003		56,623		62,014		3,130
2017							83,827		73,536		78,401		81,299		2,120
2018									80,831		83,314		81,385		4,892
2019											86,964		82,711		18,337
2020													78,263		42,536
											Total		$	484,233

Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
2014	$	4,835	$	12,492	$	14,351	$	15,501	$	16,969	$	17,264	$	17,515
2015			30,181		49,417		58,412		67,847		70,815		73,748
2016					25,397		38,879		45,925		50,320		54,799
2017							31,522		55,493		61,834		66,923
2018									17,710		51,329		65,192
2019											21,248		31,720
2020													11,607
											Total		321,504
Liabilities for losses and loss adjustment expenses, net of reinsurance													$	162,729

213

Other specialty reinsurance ($000’s)
Incurred losses and allocated loss adjustment expenses, net of reinsurance December 31, 2019
Year ended December 31, Total of IBNR liabilities plus expected development on reported claims
Accident year
2014
unaudited

2015
unaudited

2016
unaudited
2017 unaudited 2018 unaudited 2019
2014 $ 16,868
$ 17,247
$ 17,134
$ 17,605
$ 18,032
$ 18,031
$ 732
2015 72,131
73,461
71,845
74,414
76,917
2,841
2016 66,514
57,377
58,375
55,979
2,786
2017 77,923
73,308
77,661
7,003
2018 81,807
84,262
12,260
2019 85,895
33,440
Total
$ 398,745

Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
2014 $ 4,835
$ 12,471
$ 14,329
$ 15,460
$ 16,892
$ 17,182

2015 30,103
49,238
58,214
67,476
70,401

2016 25,293
38,342
45,545
49,885

2017 29,764
55,164
61,226

2018 18,376
52,457

2019 20,982

Total
272,133

Liabilities for losses and loss adjustment expenses, net of reinsurance $ 126,612

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)


Property catastrophe reinsurance ($000’s)
Incurred losses and allocated loss adjustment expenses, net of reinsurance															December 31, 2020
	Year ended December 31,														Total of IBNR liabilities plus expected development on reported claims
Accident year	2014 unaudited		2015 unaudited		2016 unaudited		2017 unaudited		2018 unaudited		2019 unaudited		2020
2014	$	1,574	$	1,185	$	863	$	833	$	704	$	654	$	613	$	25
2015			4,732		3,627		2,836		2,127		2,038		2,012		(12)
2016					5,186		4,192		3,484		3,042		2,948		(1)
2017							22,567		18,243		17,476		16,624		200
2018									16,854		15,020		13,245		387
2019											10,695		10,194		1,160
2020													21,650		4,399
											Total		$	67,286

Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
2014	$	0	$	238	$	586	$	619	$	643	$	652	$	680
2015			392		820		1,407		1,492		1,532		1,576
2016					1,034		1,968		2,355		2,639		2,687
2017							6,627		12,130		13,294		14,340
2018									2,771		7,607		9,800
2019											605		4,093
2020													2,916
											Total		36,092
Liabilities for losses and loss adjustment expenses, net of reinsurance													$	31,194

214

Property catastrophe reinsurance ($000’s)
Incurred losses and allocated loss adjustment expenses, net of reinsurance December 31, 2019
Year ended December 31, Total of IBNR liabilities plus expected development on reported claims
Accident year
2014
unaudited

2015
unaudited

2016
unaudited
2017 unaudited 2018 unaudited 2019
2014 $ 1,516
$ 1,127
$ 815
$ 783
$ 659
$ 613
$ 25
2015 4,662
3,563
2,766
2,065
1,981
—
2016 5,111
4,113
3,413
2,968
78
2017 22,516
18,178
17,404
244
2018 16,734
14,833
875
2019 10,332
2,272
Total
$ 48,131

Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
2014 $ —
$ 221
$ 545
$ 576
$ 598
$ 606

2015 377
804
1,374
1,456
1,494

2016 1,021
1,932
2,297
2,574

2017 6,615
12,090
13,245

2018 2,765
7,499

2019 583

Total
26,001

Liabilities for losses and loss adjustment expenses, net of reinsurance $ 22,130

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)


Insurance programs and coinsurance ($000’s except claim count)
Incurred losses and allocated loss adjustment expenses, net of reinsurance															December 31, 2020
	Year ended December 31,														Total of IBNR liabilities plus expected development on reported claims (1)		Cumulative number of reported claims
Accident year	2014 unaudited		2015 unaudited		2016 unaudited		2017 unaudited		2018 unaudited		2019 unaudited		2020
2014	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	0
2015			1,066		1,066		1,198		1,207		1,206		1,163		(120)		775
2016					27,111		26,793		28,463		28,938		29,650		1,429		31,579
2017							61,857		60,724		64,480		65,170		6,480		55,361
2018									103,815		103,182		112,293		9,668		49,445
2019											130,806		135,007		16,894		66,676
2020													158,258		102,037		53,919
											Total		$	501,541

Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
2014	$	0	$	0	$	0	$	0	$	0	$	0	$	0
2015			9		416		758		884		951		1,289
2016					6,228		16,217		21,763		23,909		26,543
2017							19,106		39,076		46,541		52,324
2018									32,600		69,161		79,365
2019											32,347		78,875
2020													26,887
											Total		265,283
Liabilities for losses and loss adjustment expenses, net of reinsurance													$	236,258

Insurance programs and coinsurance ($000’s except claim amount)
Incurred losses and allocated loss adjustment expenses, net of reinsurance December 31, 2019
Year ended December 31, Total of IBNR liabilities plus expected development on reported claims Cumulative number of reported claims
Accident year
2014
unaudited

2015
unaudited

2016
unaudited
2017 unaudited 2018 unaudited 2019
2014 $ —
$ —
$ —
$ —
$ —
$ —
$ —
—
2015 1,033
1,033
1,161
1,169
1,169
22
775
2016 26,299
25,992
27,627
28,090
2,284
31546
2017 59,717
58,665
62,289
8,530
55106
2018 100,538
100,011
15,379
49283
2019 127,368
51,992
58262
Total
$ 318,927

Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
2014 $ —
$ —
$ —
$ —
$ —
$ —

2015 9
403
735
857
922

2016 6,036
15,723
21,115
23,198

2017 18,491
37,778
45,005

2018 31,561
67,067

2019 31,199

Total
167,391

Liabilities for losses and loss adjustment expenses, net of reinsurance $ 151,536

(1) Total IBNR liabilities for the 2015 accident year contains the results of a multi-year program where results are considered over a three-year period. The IBNR for the multi-year program is positive, however our methodology results in negative IBNR allocations for certain years, offset by positive IBNR in other years.

The following table presents the average annual percentage payout of incurred losses and allocated loss adjustment expenses by age, net of reinsurance, as of December 31, ~~2019:~~2020:


	Average annual percentage payout of incurred losses and loss adjustment expenses by age, net of reinsurance							Average annual percentage payout of incurred losses and loss adjustment expenses by age, net of reinsurance
	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6		Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7
Casualty reinsurance - pro rata	7.4%	14.5%	16.3%	14.7%	12.3%	13.0%	Casualty reinsurance - pro rata	8.6%	15.0%	16.4%	14.2%	11.9%	11.1%	7.5%
Casualty reinsurance - excess of loss	0.3%	1.6%	2.9%	8.2%	5.6%	19.5%	Casualty reinsurance - excess of loss	0.3%	1.9%	5.9%	9.0%	7.2%	17.6%	7.3%
Other specialty reinsurance	32.6%	32.7%	10.7%	8.7%	5.9%	1.6%	Other specialty reinsurance	29.4%	28.4%	11.5%	7.8%	6.3%	2.6%	1.3%
Property catastrophe reinsurance	19.3%	30.4%	25.1%	6.2%	2.8%	1.2%	Property catastrophe reinsurance	19.2%	32.6%	24.5%	6.4%	2.5%	1.8%	4.6%
Insurance programs and coinsurance	21.6%	33.7%	19.7%	8.9%	5.6%	N/A	Insurance programs and coinsurance	20.2%	33.3%	17.2%	9.0%	7.3%	29.2%	N/A

For the year ended December 31, ~~2019,~~2020, the Company did not make any significant changes in its methodologies or assumptions.

215

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

The following table represents a reconciliation of the disclosures of net incurred and paid loss development tables to the reserve for losses and loss adjustment expenses at December 31, ~~2019:~~2020:

December 31, 2019
($ in thousands)
Net outstanding liabilities:
Casualty reinsurance - pro rata $ 491,623
Casualty reinsurance - excess of loss 262,118
Insurance programs and coinsurance 151,536
Other specialty reinsurance 126,612
Property catastrophe reinsurance 22,130
Other short duration lines not included in disclosures (1) 39,055
Total for short duration lines 1,093,074

Unpaid losses and loss adjustment expenses recoverable:
Insurance programs and coinsurance 128,674
Other specialty reinsurance 19,700
Casualty reinsurance - excess of loss 9,949
Casualty reinsurance - pro rata 4,889
Property catastrophe reinsurance 3
Other short duration lines not included in disclosures (1) 2,334
Total for short duration lines 165,549

Unallocated claims adjustment expenses 5,005
Reserve for losses and loss adjustment expenses $ 1,263,628


	December 31, 2020
	($ in thousands)
Net outstanding liabilities:
Casualty reinsurance - pro rata	$	446,803
Casualty reinsurance - excess of loss	327,060
Insurance programs and coinsurance	236,258
Other specialty reinsurance	162,729
Property catastrophe reinsurance	31,194
Other short duration lines not included in disclosures	41,018
Total for short duration lines	1,245,062

Unpaid losses and loss adjustment expenses recoverable:
Insurance programs and coinsurance	216,128
Casualty reinsurance - excess of loss	24,285
Other specialty reinsurance	22,891
Casualty reinsurance - pro rata	4,698
Property catastrophe reinsurance	27
Other short duration lines not included in disclosures (1)	1,873
Total for short duration lines	269,902

Unallocated claims adjustment expenses	4,619
Reserve for losses and loss adjustment expenses	$	1,519,583

(1) Other short duration lines includes liabilities acquired in the purchase of WIC, ~~of $2.3 million,~~ which are 100% reinsured pursuant to a 100% quota share agreement, and other miscellaneous items.

7. Allowance for expected credit losses

Premiums Receivable

The following table presents the balances of premiums receivable, net of the allowance for expected credit losses, at January 1, 2020 and December 31, 2020 and changes in the allowance for expected credit losses for the year ended December 31, 2020.


	At and For the Year Ended December 31, 2020
	Premiums Receivable, Net of Allowance		Allowance for Expected Credit Losses
	($ in thousands)
Balance at beginning of year	$	273,657	$	0
Cumulative effect of adoption of updated accounting guidance for credit losses at January 1, 2020			156
Current period change for expected credit losses			0
Write-offs charged against the allowance			0
Balance at end of year	$	224,377	$	156

216

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

Reinsurance Recoverables

7.The following table presents the balances of reinsurance recoverables, net of the allowance for expected credit losses, at January 1, 2020 and December 31, 2020, and changes in the allowance for expected credit losses for the year ended December 31, 2020.


	At and For the Year Ended December 31, 2020
	Reinsurance Recoverables, Net of Allowance		Allowance for Expected Credit Losses
	($ in thousands)
Balance at beginning of year	$	170,974	$	0
Cumulative effect of adoption of updated accounting guidance for credit losses at January 1, 2020 (1)			297
Current period change for expected credit losses			8
Write-offs charged against the allowance			0
Balance at end of year	$	286,590	$	305

(1) As at December 31, 2020, the allowance for credit losses is gross of deferred tax of $25 thousand.

217

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

8. Investment information

Available for Sale Investments

The following ~~table summarizes~~tables summarize the fair value of the Company’s securities classified as available for sale as of December 31, ~~2019~~2020 and ~~2018:~~2019:


	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses (1)		Fair Value
	($ in thousands)
December 31, 2020
Fixed maturities:
U.S. government and government agency bonds	$	201,114	$	1,122	$	(22)	$	202,214
Corporate bonds	188,473		9,176		(652)		196,997
Asset-backed securities	82,803		536		(3,081)		80,258
Non-U.S. government and government agency bonds	146,594		10,837		(102)		157,329
Mortgage-backed securities	17,405		5		(747)		16,663
Municipal government and government agency bonds	1,686		102		0		1,788
Total investments, available for sale	$	638,075	$	21,778	$	(4,604)	$	655,249

1) Effective January 1, 2020, the Company adopted ASU 2016-13, and as a result any credit impairment losses on the Company’s available for sale securities are recorded as an allowance, subject to reversal. See Note 2. “Basis of presentation and significant accounting policies-(p) Recent accounting pronouncements-Issued and effective as of December 31, 2020 - Credit Losses” above for more information about ASU 2016-13. Included within the gross unrealized losses for corporate bonds is a credit allowance of $0.2 million for securities with an unrealized loss of $0.8 million as of December 31, 2020.


	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	($ in thousands)
December 31, 2019
Fixed maturities:
U.S. government and government agency bonds	$	282,076	$	1,708	$	(137)	$	283,647
Corporate bonds	155,834		2,326		(41)		158,119
Asset-backed securities	145,555		614		(735)		145,434
Non-U.S. government and government agency bonds	129,456		3,530		(1,033)		131,953
Mortgage-backed securities	24,776		18		(44)		24,750
Municipal government and government agency bonds	1,759		46		0		1,805
Total investments, available for sale	$	739,456	$	8,242	$	(1,990)	$	745,708

218

Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
($ in thousands)
December 31, 2019
Fixed maturities:
U.S. government and government agency bonds $ 282,076
$ 1,708
$ (137 ) $ 283,647
Corporate bonds 155,834
2,326
(41 ) 158,119
Asset-backed securities 145,555
614
(735 ) 145,434
Non-U.S. government and government agency bonds 129,456
3,530
(1,033 ) 131,953
Mortgage-backed securities 24,776
18
(44 ) 24,750
Municipal government and government agency bonds 1,759
46
—
1,805
Total investments, available for sale $ 739,456
$ 8,242
$ (1,990 ) $ 745,708

Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
($ in thousands)
December 31, 2018
Fixed maturities:
U.S. government and government agency bonds $ 156,884
$ 672
$ (127 ) $ 157,429
Non-U.S. government and government agency bonds 89,661
670
(2,859 ) 87,472
Corporate bonds 77,178
19
(1,204 ) 75,993
Asset-backed securities 58,369
72
(1,351 ) 57,090
Mortgage-backed securities 14,344
17
(81 ) 14,280
Municipal government and government agency bonds 1,073
14
—
1,087
Total investments, available for sale $ 397,509
$ 1,464
$ (5,622 ) $ 393,351

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

The following table summarizes, for all available for sale securities in an unrealized loss position, the fair value and gross unrealized losses by length of time the security has been in a continual unrealized loss position:


	Less than 12 Months				12 Months or More				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	($ in thousands)
December 31, 2020
Fixed maturities:
U.S. government and government agency bonds	$	15,492	$	(22)	$	0	$	0	$	15,492	$	(22)
Non-U.S. government and government agency bonds	14,296		(102)		0		0		14,296		(102)
Corporate bonds	19,862		(652)		0		0		19,862		(652)
Asset-backed securities	48,790		(2,538)		16,730		(543)		65,520		(3,081)
Mortgage-backed securities	13,194		(671)		2,909		(76)		16,103		(747)
Total	$	111,634	$	(3,985)	$	19,639	$	(619)	$	131,273	$	(4,604)
December 31, 2019
Fixed maturities:
U.S. government and government agency bonds	$	36,540	$	(137)	$	0	$	0	$	36,540	$	(137)
Non-U.S. government and government agency bonds	51,779		(1,027)		5,410		(6)		57,189		(1,033)
Corporate bonds	9,854		(41)		0		0		9,854		(41)
Asset-backed securities	55,194		(504)		19,430		(231)		74,624		(735)
Mortgage-backed securities	14,481		(44)		0		0		14,481		(44)
Total	$	167,848	$	(1,753)	$	24,840	$	(237)	$	192,688	$	(1,990)

Less than 12 Months 12 Months or More Total
Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses
($ in thousands)
December 31, 2019
Fixed maturities:
U.S. government and government agency bonds $ 36,540
$ (137 ) $ —
$ —
$ 36,540
$ (137 )
Non-U.S. government and government agency bonds 51,779
(1,027 ) 5,410
(6 ) 57,189
(1,033 )
Corporate bonds 9,854
(41 ) —
—
9,854
(41 )
Asset-backed securities 55,194
(504 ) 19,430
(231 ) 74,624
(735 )
Mortgage-backed securities 14,481
(44 ) —
—
14,481
(44 )
Total $ 167,848
$ (1,753 ) $ 24,840
$ (237 ) $ 192,688
$ (1,990 )
December 31, 2018
Fixed maturities:
U.S. government and government agency bonds $ 66,422
$ (127 ) $ —
$ —
$ 66,422
$ (127 )
Non-U.S. government and government agency bonds 78,084
(2,859 ) —
—
78,084
(2,859 )
Corporate bonds 70,443
(1,204 ) —
—
70,443
(1,204 )
Asset-backed securities 49,400
(1,351 ) —
—
49,400
(1,351 )
Mortgage-backed securities 8,478
(81 ) —
—
8,478
(81 )
Total $ 272,827
$ (5,622 ) $ —
$ —
$ 272,827
$ (5,622 )
At December 31, 2020, 47 positions out of a total of 144 positions were in an unrealized loss position. The unrealized loss position increased during the twelve-month period from $2.0 million to $4.6 million. The decrease in value can be attributed to the market movements resulting from the COVID-19 global pandemic, which primarily impacted the asset-backed securities during the year. The Company believes that such securities were temporarily impaired at December 31, 2020.

At December 31, 2019, 48 positions out of a total of 146 positions were in an unrealized loss position; however, the unrealized loss was less than 10% of the fair value for all 48 positions. The decrease in value can be attributed to movement in foreign exchange rates for the non-U.S. government agency bonds since purchase and the decrease in value for the asset-backed securities, primarily driven by market movements during the ~~period.~~ year.The Company believes that such securities were temporarily impaired at December 31, 2019.

~~At December 31, 2018, 60 positions out~~Allowance for expected credit losses

The Company recognized changes in the allowance for expected credit losses on available for sale securities of ~~a total of 73 positions were in an unrealized loss position; however, the unrealized loss was less than 10% of the fair value~~$0.2 million for ~~all 60 positions. The decrease in value can be attributed to an increase in interest rates and unfavorable foreign exchange rates for the non-U.S. government agency bonds during~~ the year ended December 31, ~~2018.~~2020. The ~~Company believes that such securities were temporarily impaired at~~credit allowance as of December 31, ~~2018.~~2020 was $0.2 million. No credit losses were previously recognized and there were no write-offs charged against the allowance. The change in allowance is recognized in “realized and unrealized gains (losses) on investments” in the Company’s consolidated statements of income (loss). There were no impairments of securities which the Company intends to sell or more likely than not will be required to sell.

219

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

The amortized cost and fair value of our fixed maturities classified as available for sale, summarized by contractual maturity as of December 31, ~~2019~~2020 and December 31, ~~2018~~2019 are shown in the following tables.


	December 31, 2020
	Amortized Cost		Estimated Fair Value		% of Fair Value
	($ in thousands)
Due in one year or less	$	27,469	$	28,336	4.3	%
Due after one year through five years	367,343		378,427		57.8	%
Due after five years through ten years	123,253		132,165		20.2	%
Due after ten years	19,802		19,400		3.0	%
Asset-backed securities	82,803		80,258		12.2	%
Mortgage-backed securities	17,405		16,663		2.5	%
Total investments, available for sale	$	638,075	$	655,249	100.0	%


	December 31, 2019							December 31, 2019
	Amortized Cost		Estimated Fair Value		% of Fair Value			Amortized Cost		Estimated Fair Value		% of Fair Value
	($ in thousands)							($ in thousands)
Due in one year or less	$	9,235	$	9,248	1.3	%	Due in one year or less	$	9,235	$	9,248	1.3	%
Due after one year through five years	414,235		417,921		56.0	%	Due after one year through five years	414,235		417,921		56.0	%
Due after five years through ten years	133,822		136,329		18.3	%	Due after five years through ten years	133,822		136,329		18.3	%
Due after ten years	11,833		12,026		1.6	%	Due after ten years	11,833		12,026		1.6	%
Asset-backed securities	145,555		145,434		19.5	%	Asset-backed securities	145,555		145,434		19.5	%
Mortgage-backed securities	24,776		24,750		3.3	%	Mortgage-backed securities	24,776		24,750		3.3	%
Total investments, available for sale	$	739,456	$	745,708	100.0	%	Total investments, available for sale	$	739,456	$	745,708	100.0	%

220

December 31, 2018
Amortized Cost Estimated Fair Value % of Fair Value
($ in thousands)
Due after one year through five years $ 278,443
$ 276,706
70.4 %
Due after five years through ten years 46,353
45,275
11.5 %
Asset-backed securities 58,369
57,090
14.5 %
Mortgage-backed securities 14,344
14,280
3.6 %
Total investments, available for sale $ 397,509
$ 393,351
100.0 %

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

Fair Value Option and Fair Value Through Net Income

The following ~~table summarizes~~tables summarize the fair value of the Company’s securities held as of December 31, ~~2019~~2020 and December 31, ~~2018,~~2019, classified as fair value through net income or for which the fair value option was elected:


	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	($ in thousands)
December 31, 2020
Term loan investments	$	890,996	$	7,948	$	(47,405)	$	851,539
Fixed maturities:
Corporate bonds	313,212		17,772		(18,114)		312,870
U.S. government and government agency bonds	267		7		0		274
Asset-backed securities	162,644		2,154		(24,290)		140,508

Non-U.S. government and government agency bonds	1,425		85		0		1,510

Short-term investments	412,762		5,928		0		418,690

Equities	49,044		20,855		(4,905)		64,994
Investments, fair value option	$	1,830,350	$	54,749	$	(94,714)	$	1,790,385
Fair Value Through Net Income:
Equities, fair value through net income	$	74,258	$	5,126	$	(26,177)	$	53,207


	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value			Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	($ in thousands)										($ in thousands)
December 31, 2019										December 31, 2019
Term loan investments	$	1,113,212	$	7,340	$	(58,618	)	$	1,061,934	Term loan investments	$	1,113,212	$	7,340	$	(58,618)	$	1,061,934
Fixed maturities:										Fixed maturities:
Corporate bonds	221,024		8,430		(15,100		)	214,354		Corporate bonds	221,024		8,430		(15,100)		214,354
U.S. government and government agency bonds	1,963		1		(2		)	1,962		U.S. government and government agency bonds	1,963		1		(2)		1,962
Asset-backed securities	200,361		3,329		(12,953		)	190,737		Asset-backed securities	200,361		3,329		(12,953)		190,737
Mortgage-backed securities	7,399		712		(405		)	7,706		Mortgage-backed securities	7,399		712		(405)		7,706
Non-U.S. government and government agency bonds	1,449		18		(11		)	1,456		Non-U.S. government and government agency bonds	1,449		18		(11)		1,456
Municipal government and government agency bonds	380		—		(1		)	379		Municipal government and government agency bonds	380		0		(1)		379
Short-term investments	325,542		3,817		(56		)	329,303		Short-term investments	325,542		3,817		(56)		329,303
Other investments	28,672		2,264		(475		)	30,461		Other investments	28,672		2,264		(475)		30,461
Equities	54,893		10,690		(5,784		)	59,799		Equities	54,893		10,690		(5,784)		59,799
Investments, fair value option	$	1,954,895	$	36,601	$	(93,405	)	$	1,898,091	Investments, fair value option	$	1,954,895	$	36,601	$	(93,405)	$	1,898,091
Fair Value Through Net Income:										Fair Value Through Net Income:
Equities, fair value through net income (1)	$	78,031	$	2,360	$	(15,053	)	$	65,338
Equities, fair value through net income										Equities, fair value through net income	$	78,031	$	2,360	$	(15,053)	$	65,338

221

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
($ in thousands)
December 31, 2018
Term loan investments $ 1,055,664
$ 767
$ (55,779 ) $ 1,000,652
Fixed maturities:
Corporate bonds 617,013
6,468
(44,867 ) 578,614
U.S. government and government agency bonds 113,452
—
(2,206 ) 111,246
Asset-backed securities 174,846
673
(6,626 ) 168,893
Mortgage-backed securities 9,122
—
(1,241 ) 7,881
Non-U.S. government and government agency bonds 50,914
1
(1,874 ) 49,041
Municipal government and government agency bonds 7,306
—
(162 ) 7,144
Short-term investments 281,959
570
(397 ) 282,132
Other investments 50,000
—
(238 ) 49,762
Equities 56,609
5,136
(5,107 ) 56,638
Investments, fair value option $ 2,416,885
$ 13,615
$ (118,497 ) $ 2,312,003
Fair Value Through Net Income:
Equities, fair value through net income (1) $ 41,358
$ 2,030
$ (10,375 ) $ 33,013

(1) Effective January 1, 2018, the Company adopted new accounting guidance for financial instruments. As a result, equity securities acquired after January 1, 2018 are classified as fair value through net income and are shown separately above.

~~WATFORD HOLDINGS LTD.~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. dollars in thousands, except share data)~~

The amortized cost and fair value of our term loans, fixed maturities and short-term investments, excluding securities classified as available for sale, summarized by contractual maturity as of December 31, ~~2019~~2020 and December 31, ~~2018~~2019 are shown in the following tables.


	December 31, 2019							December 31, 2020
	Amortized Cost		Estimated Fair Value		% of Fair Value			Amortized Cost		Estimated Fair Value		% of Fair Value
	($ in thousands)							($ in thousands)
Due in one year or less	$	307,041	$	306,372	16.9	%	Due in one year or less	$	435,818	$	440,003	25.5	%
Due after one year through five years	779,643		742,960		41.1	%	Due after one year through five years	833,722		809,119		46.9	%
Due after five years through ten years	514,961		495,416		27.4	%	Due after five years through ten years	340,164		327,184		19.0	%
Due after ten years	61,925		64,640		3.6	%	Due after ten years	8,958		8,577		0.5	%
Asset-backed securities	200,361		190,737		10.6	%	Asset-backed securities	162,644		140,508		8.1	%
Mortgage-backed securities	7,399		7,706		0.4	%

Total	$	1,871,330	$	1,807,831	100.0	%	Total	$	1,781,306	$	1,725,391	100.0	%


	December 31, 2018							December 31, 2019
	Amortized Cost		Estimated Fair Value		% of Fair Value			Amortized Cost		Estimated Fair Value		% of Fair Value
	($ in thousands)							($ in thousands)
Due in one year or less	$	300,554	$	300,519	13.6	%	Due in one year or less	$	368,452	$	370,479	20.5	%
Due after one year through five years	1,044,539		992,834		45.0	%	Due after one year through five years	779,643		742,960		41.1	%
Due after five years through ten years	777,290		731,662		33.2	%	Due after five years through ten years	514,961		495,416		27.4	%
Due after ten years	3,925		3,814		0.2	%	Due after ten years	514		533		0	%
Asset-backed securities	174,846		168,893		7.6	%	Asset-backed securities	200,361		190,737		10.6	%
Mortgage-backed securities	9,122		7,881		0.4	%	Mortgage-backed securities	7,399		7,706		0.4	%
Total	$	2,310,276	$	2,205,603	100.0	%	Total	$	1,871,330	$	1,807,831	100.0	%

226

Year Ended December 31, 2017
Net Interest Income Net Unrealized Gains (Losses) Net Realized Gains (Losses) Net Investment Income (Loss)
($ in thousands)
Net investment income (loss) by asset class:
Term loan investments $ 73,472
$ (10,354 ) $ 346
$ 63,464
Fixed maturities - Fair value option 49,179
8,017
(660 ) 56,536
Short-term investments 2,473
220
(1,745 ) 948
Equities (1) 339
2,902
2,781
6,022
Other investments —
(387 ) —
(387 )
Investment management fees - related parties (21,451 ) —
—
(21,451 )
Borrowing and miscellaneous other investment expenses (17,489 ) —
—
(17,489 )
Investment performance fees - related parties —
—
—
(14,905 )
$ 86,523
$ 398
$ 722
$ 72,738

~~(1) Net interest income includes dividends for securities held in long and short positions.~~

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

Fixed maturities that have been non-income producing for the twelve months preceding December 31, 2020, 2019, ~~2018~~ and ~~2017~~2018 have a market value of ~~$Nil,~~$9.7 million, $NaN and $1.0 million, ~~and $Nil.~~

~~Other-than-temporary impairments~~

The Company reviews its available for sale investments on a quarterly basis to determine whether declines in fair value below the amortized cost basis are considered other-than-temporary in accordance with applicable guidance. As of ~~December 31, 2019, the Company did not identify any other-than-temporary impairments.As such,~~ the Company did not intend to sell these investments, and it was not more likely than not that the Company would be required to sell these investments before the anticipated recovery of the remaining amortized cost basis as of December 31, 2019.respectively.

Pledged and restricted assets

For the benefit of certain Arch entities and other third parties that cede business to the Company, the Company is required to post and maintain collateral to support its potential obligations under reinsurance contracts written. This collateral can be in the form of either investment assets held in collateral trust accounts or letters of credit. Under its secured credit facilities, in order for the Company to have the bank issue a letter of credit to the Company’s reinsurance contract counterparty, the Company must post investment assets or cash as collateral to the bank. In either case, the amounts remain restricted for the duration of the term of the trust or letter of credit, as applicable.

At December 31, ~~2019~~2020 and ~~2018,~~2019, the Company held ~~$2.1~~$2.0 billion and ~~$2.4~~$2.1 billion, respectively, in pledged assets in support of insurance and reinsurance liabilities as well as to collateralize the Company’s secured credit facilities and investment derivatives. Included within total pledged assets, the Company held ~~$6.4~~$7.8 million and ~~$5.5~~$6.4 million, respectively, in deposits with U.S. regulatory authorities.

Non-cash investing activities

During 2020, $101.1 million of investments converted or exchanged in non-cash transactions from fixed maturities or preferred equity positions to short-term investments, fixed maturities or common stock equity positions, as presented on the ~~year ended December 31,~~consolidated statements of cash flows.

During 2019, the Company exchanged a preference share position of $28.7 million, which was held within “equity securities, fair value through net income,” for a limited partnership interest of $28.7 million, held under “other investments, fair value option.” HPS acts as the general partner and manager of the limited partnership. ~~At December 31,~~The fund fully redeemed during the third quarter of 2020. During 2019, ~~the Company’s investment had a fair value of $30.5 million and represented approximately 12% of the outstanding partnership interest.~~

Asas a result of the restructuring of an investment position held by the Company, $16.9 million of term loans were converted to $23.0 million of common and preferred stock held within “equity securities, fair value through net income,” along with cash funding from short-term investments of $6.5 million.

8.9. Fair value

Fair value hierarchy

Accounting guidance regarding fair value measurements addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement (Level 1 being the highest priority and Level 3 being the lowest priority).

~~WATFORD HOLDINGS LTD.~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. dollars in thousands, except share data)~~

The levels in the hierarchy are defined as follows:

•Level 1: Inputs to the valuation methodology are observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets;

227

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

•Level 2: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and

•Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The availability of observable inputs can vary by financial instrument and is affected by a wide variety of factors including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment. The degree of judgment exercised by the Company in determining fair value is greatest for financial instruments categorized in Level 3. In periods of market dislocation, the observability of prices and inputs may be reduced for many financial instruments. This may lead to a change in the valuation techniques used to estimate the fair value measurement and cause an instrument to be reclassified between levels within the fair value hierarchy.

Fair value measurements on a recurring basis

The following is a description of the valuation methodologies used for securities measured at fair value, as well as the general classification of such securities pursuant to the valuation hierarchy.

The Company determines the existence of an active market based on its judgment as to whether transactions for the financial instrument occur in such market with sufficient frequency and volume to provide reliable pricing information. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. The Company uses quoted values and other data provided by nationally recognized independent pricing sources as inputs into its process for determining fair values of its fixed maturity investments. Each price source has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing source uses observable market inputs including, but not limited to, investment yields, credit risks and spreads, benchmarking of like securities, broker-dealer quotes, reported trades and sector groupings to determine a reasonable fair value.

Where multiple quotes or prices are obtained, a price source hierarchy is maintained in order to determine which price source would be used (i.e., a price obtained from a pricing service with more seniority in the hierarchy will be used over a less senior one in all cases). The hierarchy prioritizes pricing services based on availability and reliability and assigns the highest priority to index providers. Based on the above review, the Company will challenge any prices for a security or portfolio which are considered not to be representative of fair value.

In certain circumstances, when fair values are unavailable from these independent pricing sources, quotes are obtained directly from broker-dealers who are active in the corresponding markets. Such quotes are subject to the validation procedures noted above. Where quotes are unavailable, fair value is determined by the ~~investment manager~~Investment Manager using quantitative and qualitative assessments such as internally modeled values, which are reviewed by the Company’s management.

Of the $2.5 billion of net financial assets and liabilities measured at fair value at December 31, 2020, approximately $142.5 million, or 5.8%, were priced using non-binding broker-dealer quotes or modeled valuations. Of the $2.6 billion of net financial assets and liabilities measured at fair value at December 31, 2019, approximately $131.8 million, or 5.0%, were priced using non-binding broker-dealer quotes or modeled valuations. ~~Of the $2.7 billion of net financial assets and liabilities measured at fair value~~

~~WATFORD HOLDINGS LTD.~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. dollars in thousands, except share data)~~

~~at December 31, 2018, approximately $178.3 million, or 6.5%, were priced using non-binding broker-dealer quotes or modeled valuations.~~

The Company reviews its securities measured at fair value and discusses the proper classification of such investments with its ~~investment managers~~Investment Managers and others. A discussion of the general classification of the Company’s financial instruments follows:

228

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

Fixed Maturities. The Company uses the market approach valuation technique to estimate the fair value of its fixed maturity securities, when possible. The market approach includes obtaining prices from independent pricing services, such as index providers and pricing vendors, as well as to a lesser extent quotes from broker-dealers. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. Each source has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing source uses observable market inputs including, but not limited to, investment yields, credit risks and spreads, benchmarking of like securities, broker-dealer quotes, reported trades and sector groupings to determine a reasonable fair value.

The following describes the significant inputs generally used to determine the fair value of the Company’s investment securities by asset class:

Term Loans. Fair values are estimated by using quoted prices obtained from independent pricing services for term loan investments with similar characteristics, pricing models or matrix pricing. Such investments are generally classified within Level 2. The fair values for certain of the Company’s term loans are determined by the ~~investment manager~~Investment Manager using quantitative and qualitative assessments such as internally modeled values, which are reviewed by the Company’s management. The modeled values are based on peer loans and comparison to industry-specific market data. Significant unobservable inputs used to price these securities may include changes in peer and/or comparable credit spreads, accretion of any original issue discount and changes in the issuer’s debt leverage since issue. Changes in peer credit spreads, comparable credits spreads and issuer debt leverage are negatively correlated with the modeled fair value measurement. Such investments are generally classified within Level 3.

Corporate Bonds. Valuations are provided by independent pricing services, substantially all through index providers and pricing vendors, with a small amount through broker-dealers. The fair values of these securities are generally determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. As the significant inputs used in the pricing process for corporate bonds are observable market inputs, the fair value of the majority of these securities are classified within Level 2. The fair values for certain of the Company’s corporate bonds are determined by the ~~investment manager~~Investment Manager using quantitative and qualitative assessments such as internally modeled values, which are reviewed by the Company’s management. The modeled values are based on peer bonds and comparison to industry-specific market data. In addition, the ~~investment manager~~Investment Manager assesses the fair value based on the valuation of the underlying holdings in accordance with the bonds’ governing documents. Significant unobservable inputs used to price these securities may include changes in peer and/or comparable credit spreads, accretion of any original issue discount and changes in the issuer’s debt leverage since issue. Changes in peer credit spreads, comparable credits spreads, and issuer debt leverage are negatively correlated with the modeled fair value measurement. Such investments are generally classified within Level 3.

Asset-Backed Securities. Valuations are provided by independent pricing services, substantially all through index providers and pricing vendors, with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models (including option adjusted spread) which use spreads to determine the appropriate average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review

~~WATFORD HOLDINGS LTD.~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. dollars in thousands, except share data)~~

prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for asset-backed securities are observable market inputs, the fair value of these securities are classified within Level 2.

Mortgage-Backed Securities. Valuations are provided by independent pricing services, substantially all through pricing vendors and index providers with a small amount through broker-dealers. The

229

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

fair values of these securities are generally determined through the use of pricing models (including option adjusted spread) which use spreads to determine the expected average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for mortgage-backed securities are observable market inputs, the fair value of these securities are classified within Level 2.

U.S. Government and Government Agencies. Valuations are provided by independent pricing services, with all prices provided through index providers and pricing vendors. The Company determined that all U.S. Treasuries would be classified as Level 1 securities due to observed levels of trading activity, the high number of strongly correlated pricing quotes received on U.S. Treasuries and other factors. The fair values of U.S. government agency securities are generally determined using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are classified within Level 2.

Non-U.S. Government Securities. Valuations are provided by independent pricing services, with all prices provided through index providers and pricing vendors. The fair values of these securities are generally based on international indices or valuation models which include daily observed yield curves, cross-currency basis index spreads and country credit spreads. As the significant inputs used in the pricing process for non-U.S. government securities are observable market inputs, the fair value of these securities are classified within Level 2.

Municipal Government Bonds. Valuations are provided by independent pricing services, with all prices provided through index providers and pricing vendors. The fair values of these securities are generally determined using spreads obtained from broker-dealers who trade in the relevant security market, trade prices and the new issue market. As the significant inputs used in the pricing process for municipal bonds are observable market inputs, the fair value of these securities are classified within Level 2.

Short-Term Investments. The Company determined that certain of its short-term investments, held in highly liquid money market-type funds, and equities would be included in Level 1 as their fair values are based on quoted market prices in active markets. The fair values of other short-term investments are generally determined using the spread above the risk-free yield curve and are classified within Level 2.

Equity Securities. The Company determined that exchange-traded equity securities would be included in Level 1 as their values are based on quoted market prices in active markets. Other equity securities are initially valued at cost which approximates fair value. In subsequent measurement periods, the fair values of these securities are determined using non-binding broker-dealer quotes. These equity securities are included in Level 2 of the valuation hierarchy. Where such quotes are unavailable, fair value is determined by the ~~investment manager~~Investment Manager using quantitative and qualitative assessments such as internally modeled values, which are reviewed by the Company’s management. As the significant inputs used to price these securities are unobservable, the fair value of these securities are classified as Level 3. Significant unobservable inputs used to price preferred stock may include changes in peer and/or comparable credit spreads, accretion of any original issue discount and changes in the issuer’s debt leverage since issue. Changes in peer credit spreads, comparable credit spreads, and issuer debt leverage are negatively correlated with the modeled fair value measurement.

~~WATFORD HOLDINGS LTD.~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. dollars in thousands, except share data)~~

Underwriting Derivative Instruments. The Company values the government-sponsored enterprise credit-risk sharing transactions using a valuation methodology based on observable inputs from non-binding broker-dealer quotes and/or recent trading activity. As the inputs used in the valuation process are observable market inputs, the fair value of these securities are classified within Level 2. Refer to Note ~~10 -~~11, “Derivative instruments” for more information.

230

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

Investment Derivative Instruments. The Company values the investment derivatives, including total return swaps and options, at fair value. As the underlying investments have observable inputs, the fair value of these securities are classified within Level 2. Refer to Note ~~10 -~~11, “Derivative instruments” for more information.

Other Investments. The fair value of the Company’s investments in private funds are measured using the most recently available net asset valuations, or NAVs, as advised by the third-party administrators.

Measuring the Fair Value of Other Investments Using Net Asset Valuations

The fair value of the Company’s investments in private funds are measured using the most recently available NAVs as advised by the third-party administrators. The fund NAVs are based on the administrator’s valuation of the underlying holdings in accordance with the fund’s governing documents and in accordance with GAAP.

The Company often does not have access to financial information relating to the underlying securities held within the fund therefore management is unable to corroborate the fair values placed on the securities underlying the asset valuations provided by the fund manager or fund administrator. In order to assess the reasonableness of the NAVs, the Company performs a number of monitoring procedures on a quarterly basis, to assess the quality of the information provided by the fund manager and fund administrator. These procedures include, but are not limited to, regular review and discussion of the fund’s performance with its manager.

The fair value of the private funds are measured using the ~~NAV~~NAVs as a practical expedient, therefore the fair value of the funds have not been categorized within the fair value hierarchy.

~~The following table presents the Company’s financial assets and liabilities measured at fair value by level as of December 31, 2019 and 2018:~~

231

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

The following tables present the Company’s financial assets and liabilities measured at fair value by level as of December 31, 2020 and 2019:


			Fair Value Measurement Using:
December 31, 2020	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	($ in thousands)
Assets measured at fair value:
Term loans	$	851,539	$	0	$	801,660	$	49,879
Fixed maturities:
Corporate bonds	509,867		0		508,882		985
U.S. government and government agency bonds	202,488		202,378		110		0
Asset-backed securities	220,766		0		220,766		0
Mortgage-backed securities	16,663		0		16,663		0
Non-U.S. government and government agency bonds	158,839		0		158,839		0
Municipal government and government agency bonds	1,788		0		1,788		0
Short-term investments	418,690		415,014		3,676		0
Equities	118,201		624		13,025		104,552
Other underwriting derivative assets	25		0		25		0
Investment derivative assets (1)	255		0		255		0
Total assets measured at fair value	$	2,499,121	$	618,016	$	1,725,689	$	155,416

Investment derivative liabilities (1)	$	1,117	$	0	$	1,117	$	0
Payable for securities sold short:
Corporate bonds	21,680		0		21,680		0
Equities	295		0		295		0
Total liabilities measured at fair value	$	23,092	$	0	$	23,092	$	0

232

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)


			Fair Value Measurement Using:									Fair Value Measurement Using:
December 31, 2019	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		December 31, 2019	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	($ in thousands)									($ in thousands)
Assets measured at fair value:									Assets measured at fair value:
Term loans	$	1,061,934	$	—	$	1,025,886	$	36,048	Term loans	$	1,061,934	$	0	$	1,025,886	$	36,048
Fixed maturities:									Fixed maturities:
Corporate bonds	372,473		—		371,540		933		Corporate bonds	372,473		0		371,540		933
U.S. government and government agency bonds	285,609		285,500		109		—		U.S. government and government agency bonds	285,609		285,500		109		0
Asset-backed securities	336,171		—		336,171		—		Asset-backed securities	336,171		0		336,171		0
Mortgage-backed securities	32,456		—		32,456		—		Mortgage-backed securities	32,456		0		32,456		0
Non-U.S. government and government agency bonds	133,409		—		133,409		—		Non-U.S. government and government agency bonds	133,409		0		133,409		0
Municipal government and government agency bonds	2,184		—		2,184		—		Municipal government and government agency bonds	2,184		0		2,184		0
Short-term investments	329,303		318,012		11,291		—		Short-term investments	329,303		318,012		11,291		0
Equities	125,137		13,548		2,998		108,591		Equities	125,137		13,548		2,998		108,591
Other underwriting derivative assets	148		—		148		—		Other underwriting derivative assets	148		0		148		0
Investment derivative assets (1)	1,667		—		1,667		—		Investment derivative assets (1)	1,667		0		1,667		0
Other investments measured at net asset value (2)	30,461		—		—		—		Other investments measured at net asset value (2)	30,461		0		0		0
Total assets measured at fair value	$	2,710,952	$	617,060	$	1,917,859	$	145,572	Total assets measured at fair value	$	2,710,952	$	617,060	$	1,917,859	$	145,572

Investment derivative liabilities (1)	257		—		257		—		Investment derivative liabilities (1)	$	257	$	0	$	257	$	0
Payable for securities sold short:									Payable for securities sold short:
Corporate bonds	66,257		—		66,257		—		Corporate bonds	66,257		0		66,257		0
Total liabilities measured at fair value	$	66,514	$	—	$	66,514	$	—	Total liabilities measured at fair value	$	66,514	$	0	$	66,514	$	0

(2) In accordance with applicable accounting guidance, other investments that are measured at fair value using the net asset value practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.

~~WATFORD HOLDINGS LTD.~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. dollars in thousands, except share data)~~

Fair Value Measurement Using:
December 31, 2018
Estimated
Fair Value

Quoted Prices in Active Markets for Identical Assets
(Level 1)

Significant Other Observable Inputs
(Level 2)

Significant Unobservable Inputs
(Level 3)
($ in thousands)
Assets measured at fair value:
Term loans $ 1,000,652
$ —
$ 953,173
$ 47,479
Fixed maturities:
Corporate bonds 654,607
—
630,330
24,277
U.S. government and government agency bonds 268,675
268,567
108
—
Asset-backed securities 225,983
—
203,423
22,560
Mortgage-backed securities 22,161
—
22,161
—
Non-U.S. government and government agency bonds 136,513
—
136,513
—
Municipal government and government agency bonds 8,231
—
8,231
—
Short-term investments 282,132
256,288
25,844
—
Equities 89,651
7,977
11,223
70,451
Other underwriting derivative assets 249
—
249
—
Investment derivative assets (1) 51
—
51
—
Other investments measured at net asset value (2) 49,762
—
—
—
Total assets measured at fair value $ 2,738,667
$ 532,832
$ 1,991,306
$ 164,767

Investment derivative liabilities (1) 1,279
—
1,279
—
Payable for securities sold short:
Corporate bonds 7,790
—
7,790
—
Equities (1) 1,138
—
1,138
—
Total liabilities measured at fair value $ 10,207
$ —
$ 10,207
$ —

(1) Investment derivative assets and liabilities represent the fair value of total return swaps, which are recorded in other assets and other liabilities, respectively, in the consolidated balance sheets as of December 31, 2018. The Company’s call options are recorded as equities in payable for securities sold short in the consolidated balance sheets as of December 31, 2018. Such call options matured in the first quarter of 2019. The Company’s put options are recorded as equities in the consolidated balance sheets as of December 31, 2018.

When the fair value of financial assets and financial liabilities cannot be derived from active markets, the fair value is determined using a variety of valuation techniques that include the use of models. The inputs to these models are taken from observable markets where possible, but where this is not feasible, estimation is required to establish fair values. Changes in assumptions about these factors could affect the reported fair value of financial instruments and the level where the instruments are disclosed in the fair value hierarchy.

233

WATFORD HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data)

The following ~~table presents~~tables present a reconciliation of the beginning and ending balances for all the financial assets measured at fair value on a recurring basis using Level 3 inputs for the year ending December 31, ~~2019~~2020 and ~~2018:~~2019:


Year Ended December 31, 2020	Beginning Balance		Net Purchases (Sales)(1)		Net Unrealized Gains (Losses)(2)		Ending Balance
Term loans	$	36,048	$	13,701	$	130	$	49,879
Corporate bonds	933		65		(13)		985

Equities	108,591		(22,840)		18,801		104,552
Total	$	145,572	$	(9,074)	$	18,918	$	155,416

Year Ended December 31, 2019
Beginning
Balance
Transfers in (out) of Level 3 (1) Net Purchases (Sales)(2) Net Unrealized Gains (Losses)(3) Net Unrealized Foreign Exchange Gains (Losses)
Ending
Balance
Term loans $ 47,479
$ —
$ (15,402 ) $ 3,971
$ —
$ 36,048
Corporate bonds 24,277
—
(23,341 ) (3 ) —
933
Asset-backed securities 22,560
(22,560 ) —
—
—
—
Equities 70,451
—
39,705
(1,565 ) —
108,591
Total $ 164,767
$ (22,560 ) $ 962
$ 2,403
$ —
$ 145,572


Year Ended December 31, 2018	Beginning Balance		Net Purchases (Sales)(2)			Net Unrealized Gains (Losses)(3)			Net Unrealized Foreign Exchange Gains (Losses)			Ending Balance
Year Ended December 31, 2019														Year Ended December 31, 2019	Beginning Balance		Transfers in (out) of Level 3 (3)		Net Purchases (Sales)(1)		Net Unrealized Gains (Losses)(2)		Ending Balance
Term loans	$	62,478	$	(11,705	)	$	(3,294	)	$	—		$	47,479	Term loans	$	47,479	$	0	$	(15,402)	$	3,971	$	36,048
Corporate bonds	24,710		985			(285		)	(1,133		)	24,277		Corporate bonds	24,277		0		(23,341)		(3)		933
Asset-backed securities	—		22,560			—			—			22,560		Asset-backed securities	22,560		(22,560)		0		0		0
Equities	52,921		21,932			(4,402		)	—			70,451		Equities	70,451		0		39,705		(1,565)		108,591
Total	$	140,109	$	33,772		$	(7,981	)	$	(1,133	)	$	164,767	Total	$	164,767	$	(22,560)	$	962	$	2,403	$	145,572


2.			~~Financial statement schedules~~

Page

	~~Page~~
I. Summary of Investments- Other than Investments in Related Parties
As of December 31, ~~2019~~2020		~~251~~270

II. Condensed Financial Statements of Registrant
As of December 31, ~~2019~~2020 and ~~2018,~~2019, and for the years ended December 31, 2020, 2019 ~~2018~~ and ~~2017~~2018		~~252~~271

IV. Reinsurance
As of and for the years ended December 31, 2020, 2019 ~~2018~~ and ~~2017~~2018		~~255~~274

VI. Supplementary Information for Property and Casualty Insurance Underwriters
As of and for the years ended December 31, 2020, 2019 ~~2018~~ and ~~2017~~2018		~~256~~275

Schedules other than those listed above are omitted for the reason that they are not applicable or the information is provided in Item 8 of this report.


3.	~~Exhibits~~

3.Exhibits

Incorporated by Reference

Exhibit
Number

Exhibit Description

Form

Original Exhibit Number

Date Filed

Filed Herewith

2.1

Agreement and Plan of Merger, dated as of October 9, 2020, by and among Watford Holdings Ltd., Arch Capital Group Ltd. and Greysbridge Ltd.

8-K

2.1

October 13, 2020

2.1.1

Amendment No. 1, dated November 2, 2020, by and among Watford Holdings Ltd., Arch Capital Group Ltd. and Greysbridge Ltd., to the Agreement and Plan of Merger, dated as of October 9, 2020.

8-K

2.1

November 2, 2020

3.1

Certificate of Incorporation.

Form 10

3.1

January 29, 2019

3.2

Memorandum of Association.

Form 10

3.2

January 29, 2019

3.3

Amended and Restated Bye-Laws.

Form 10

3.3

January 29, 2019

4.1

Certificate of Designation of 8½% Cumulative Redeemable Preference Shares of Watford Holdings Ltd., dated March 14, 2014.

Form 10

4.1

January 29, 2019

4.2

Watford Holdings Ltd. Common Share Shareholders’ Agreement, dated March 25, 2014.

Form 10

4.2

January 29, 2019

4.3

Watford Holdings Ltd. Common Share Registration Rights Agreement, dated March 25, 2014.

Form 10

4.3

January 29, 2019

4.4

Watford Holdings Ltd. Preference Share Shareholders’ Agreement, dated March 31, 2014.

Form 10

4.4

January 29, 2019

4.5

Watford Holdings Ltd. Preference Share Registration Rights Agreement, dated March 31, 2014.

Form 10

4.5

January 29, 2019

4.6

Watford Holdings Ltd. - Warrant to purchase Common Shares issued to Arch Reinsurance Ltd., dated March 25, 2014.

Form 10

4.6

January 29, 2019

4.7

Watford Holdings Ltd. - Warrant to purchase Common Shares issued to Highbridge Principal Strategies, LLC, dated March 25, 2014.

Form 10

4.7

January 29, 2019

4.8

Form of Restricted Share Unit Award Agreement

S-8

4.2

May 9, 2019

4.8.1

Form of First Amendment to Restricted Share Unit Agreement

10-K

4.8.1

February 28, 2020

264

Incorporated by Reference
Exhibit
Number
Exhibit Description Form Original Exhibit Number Date Filed Filed Herewith
3.1
Certificate of Incorporation.
Form 10 3.1 January 29, 2019
3.2
Memorandum of Association.
Form 10 3.2 January 29, 2019
3.3
Amended and Restated Bye-Laws.
Form 10 3.3 January 29, 2019
4.1
Certificate of Designation of 8½% Cumulative Redeemable Preference Shares of Watford Holdings Ltd., dated March 14, 2014.
Form 10 4.1 January 29, 2019
4.2
Watford Holdings Ltd. Common Share Shareholders’ Agreement, dated March 25, 2014.
Form 10 4.2 January 29, 2019
4.3
Watford Holdings Ltd. Common Share Registration Rights Agreement, dated March 25, 2014.
Form 10 4.3 January 29, 2019
4.4
Watford Holdings Ltd. Preference Share Shareholders’ Agreement, dated March 31, 2014.
Form 10 4.4 January 29, 2019
4.5
Watford Holdings Ltd. Preference Share Registration Rights Agreement, dated March 31, 2014.
Form 10 4.5 January 29, 2019
4.6
Watford Holdings Ltd. - Warrant to purchase Common Shares issued to Arch Reinsurance Ltd., dated March 25, 2014.
Form 10 4.6 January 29, 2019
4.7
Watford Holdings Ltd. - Warrant to purchase Common Shares issued to Highbridge Principal Strategies, LLC, dated March 25, 2014.
Form 10 4.7 January 29, 2019
4.8
Form of Restricted Share Unit Award Agreement
S-8 4.2 May 9, 2019

Incorporated by Reference

Exhibit
Number

Exhibit Description

Form

Original Exhibit Number

Date Filed

Filed Herewith

4.9

Indenture, dated as of July 2, 2019, between the Company and The Bank of New York Mellon, as trustee

8-K

4.1

July 2, 2019

4.10

Form of 6.500% Senior Notes due 2029 (included in Exhibit 4.1)

8-K

4.2

July 2, 2019

4.11

Description of Registrant's Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934

10-K

4.11

February 28, 2020

10.1

Amended and Restated Services Agreement by and among Watford Re Ltd., Watford Holdings Ltd., Arch Underwriters Ltd., and HPS Investment Partners, LLC, dated January 1, 2019.

Form 10

10.1

January 29, 2019

10.1.1

Addendum No. 1 effective as of January 1, 2019 to Services Agreement by and among Watford Re Ltd., Watford Holdings Ltd., Arch Underwriters Ltd., and HPS Investment Partners, LLC.

Form 10

10.1.1

January 29, 2019

10.2

Amended and Restated Services Agreement by and among Watford Specialty Insurance Co., Arch Underwriters Inc., and HPS Investment Partners, LLC, dated October 1, 2016.

Form 10

10.2

January 29, 2019

10.3

Amended and Restated Services Agreement by and among Watford Insurance Company, Arch Underwriters Inc., HPS Investment Partners LLC, dated August 1, 2016.

Form 10

10.3

January 29, 2019

10.3.1

Addendum No. 1 to Amended and Restated Services Agreement by and among Watford Insurance Company, Arch Underwriters Inc., HPS Investment Partners LLC, dated as of November 1, 2017.

Form 10

10.3.1

January 29, 2019

10.4

Services Agreement by and among Watford Insurance Company Europe Limited, Arch Underwriters Ltd., and Highbridge Principal Strategies, LLC, dated December 7, 2015.

Form 10

10.4

January 29, 2019

10.5

Investment Manager Agreement by and between Watford Re Ltd. and Arch Investment Management Ltd., dated April 1, 2016.

Form 10

10.5

January 29, 2019

10.6

Investment Manager Agreement by and between Watford Specialty Insurance Company and Arch Investment Management Ltd., dated February 1, 2016.

Form 10

10.6

January 29, 2019

10.7

Investment Manager Agreement by and between Watford Insurance Company and Arch Investment Management Ltd., dated August 1, 2016.

Form 10

10.7

January 29, 2019

10.8

Investment Manager Agreement by and between Watford Insurance Company Europe Limited and Arch Investment Management Ltd., dated August 1, 2016.

Form 10

10.8

January 29, 2019

10.9

Second Amended and Restated Investment Management Agreement by and among Watford Re Ltd., Watford Holdings Ltd., Highbridge Investment Partners, LLC, and Arch Underwriters Ltd., effective as of January 1, 2018.

Form 10

10.9

January 29, 2019

10.10

Amended and Restated Investment Management Agreement by and among Watford Asset Trust I, Watford Re Ltd., and HPS Investment Partners, LLC, effective January 1, 2018.

Form 10

10.10

January 29, 2019

10.11

Amended and Restated Investment Management Agreement by and among Watford Specialty Insurance Company, HPS Investment Partners, LLC, and Arch Underwriters Inc., effective as of January 1, 2018.

Form 10

10.11

January 29, 2019

10.12

Amended and Restated Investment Management Agreement by and among Watford Insurance Company, HPS Investment Partners, LLC and Arch Underwriters Inc., effective as of January 1, 2018.

Form 10

10.12

January 29, 2019

10.13

Investment Management Agreement by and among Watford Insurance Company Europe Limited, HPS Principal Strategies, LLC and Arch Underwriters Ltd., dated December 7, 2015.

Form 10

10.13

January 29, 2019

10.14

Guarantee Agreement by and among Watford Re Ltd., Watford Holdings Ltd., and Arch Capital Group Ltd., dated March 25, 2014.

Form 10

10.14

January 29, 2019

10.15#

Quota Share Retrocession Agreement between Arch Reinsurance Europe Underwriting Limited and Watford Re Ltd., effective as of January 1, 2014.

Form 10

10.15#

January 29, 2019

10.15.1#

Addendum No. 1 effective as of January 1, 2017 to Quota Share Retrocession Agreement between Arch Reinsurance Europe Underwriting Designated Activity Company and Watford Re Ltd.

Form 10

10.15.1#

January 29, 2019

10.16#

Property Catastrophe Quota Share Retrocession Agreement between Arch Reinsurance Ltd. and Watford Re Ltd., effective as of April 1, 2014.

Form 10

10.16#

January 29, 2019

10.16.1

Addendum No. 1 to Property Catastrophe Quota Share Retrocession Agreement between Arch Reinsurance Ltd. and Watford Re Ltd., dated as of September 9, 2014.

Form 10

10.16.1

January 29, 2019

10.16.2

Addendum No. 2 to Property Catastrophe Quota Share Retrocession Agreement between Arch Reinsurance Ltd. and Watford Re Ltd., dated as of December 31, 2014.

Form 10

10.16.2

January 29, 2019

10.16.3#

Addendum No. 3 effective as of January 1, 2017 to Property Catastrophe Quota Share Retrocession Agreement between Arch Reinsurance Ltd. and Watford Re Ltd.

Form 10

10.16.3#

January 29, 2019

10.17#

Quota Share Retrocession Agreement between Arch Reinsurance Ltd. and Watford Re Ltd., effective as of January 1, 2014.

Form 10

10.17#

January 29, 2019

10.17.1#

Addendum No. 1 effective as of January 1, 2017 to Quota Share Retrocession Agreement between Arch Reinsurance Ltd. and Watford Re Ltd.

Form 10

10.17.1#

January 29, 2019

10.18#

Quota Share Retrocession Agreement between Arch Reinsurance Company and Watford Re Ltd., effective as of January 1, 2014.

Form 10

10.18#

January 29, 2019

10.18.1#

Endorsement No. 1 effective as of April 1, 2014 to Quota Share Retrocession Agreement between Arch Reinsurance Company and Watford Re Ltd.

Form 10

10.18.1#

January 29, 2019

10.18.2#

Endorsement No. 2 effective as of January 1, 2016 to Quota Share Retrocession Agreement between Arch Reinsurance Company and Watford Re Ltd.

Form 10

10.18.2#

January 29, 2019

10.18.3#

Endorsement No. 3 effective as of January 1, 2017 to the Quota Share Retrocession Agreement between Arch Reinsurance Company and Watford Re Ltd.

Form 10

10.18.3#

January 29, 2019

265

Incorporated by Reference
Exhibit
Number
Exhibit Description Form Original Exhibit Number Date Filed Filed Herewith
4.8.1
Form of First Amendment to Restricted Share Unit Agreement
X
4.9
Indenture, dated as of July 2, 2019, between the Company and The Bank of New York Mellon, as trustee
8-K 4.1 July 2, 2019
4.10
Form of 6.500% Senior Notes due 2029 (included in Exhibit 4.1)
8-K 4.2 July 2, 2019
4.11
Description of Registrant's Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934
X
10.1
Amended and Restated Services Agreement by and among Watford Re Ltd., Watford Holdings Ltd., Arch Underwriters Ltd., and HPS Investment Partners, LLC, dated January 1, 2019.
Form 10 10.1 January 29, 2019
10.1.1
Addendum No. 1 effective as of January 1, 2019 to Services Agreement by and among Watford Re Ltd., Watford Holdings Ltd., Arch Underwriters Ltd., and HPS Investment Partners, LLC.
Form 10 10.1.1 January 29, 2019
10.2
Amended and Restated Services Agreement by and among Watford Specialty Insurance Co., Arch Underwriters Inc., and HPS Investment Partners, LLC, dated October 1, 2016.
Form 10 10.2 January 29, 2019
10.3
Amended and Restated Services Agreement by and among Watford Insurance Company, Arch Underwriters Inc., HPS Investment Partners LLC, dated October 1, 2016.
Form 10 10.3 January 29, 2019
10.3.1
Addendum No. 1 to Amended and Restated Services Agreement by and among Watford Insurance Company, Arch Underwriters Inc., HPS Investment Partners LLC, dated as of November 1, 2017.
Form 10 10.3.1 January 29, 2019
10.4
Services Agreement by and among Watford Insurance Company Europe Limited, Arch Underwriters Ltd., and Highbridge Principal Strategies, LLC, dated December 7, 2015.
Form 10 10.4 January 29, 2019
10.5
Investment Manager Agreement by and between Watford Re Ltd. and Arch Investment Management Ltd., dated April 1, 2016.
Form 10 10.5 January 29, 2019
10.6
Investment Manager Agreement by and between Watford Specialty Insurance Company and Arch Investment Management Ltd., dated February 1, 2016.
Form 10 10.6 January 29, 2019
10.7
Investment Manager Agreement by and between Watford Insurance Company and Arch Investment Management Ltd., dated August 1, 2016.
Form 10 10.7 January 29, 2019
10.8
Investment Manager Agreement by and between Watford Insurance Company Europe Limited and Arch Investment Management Ltd., dated August 1, 2016.
Form 10 10.8 January 29, 2019
10.9
Second Amended and Restated Investment Management Agreement by and among Watford Re Ltd., Watford Holdings Ltd., Highbridge Investment Partners, LLC, and Arch Underwriters Ltd., effective as of January 1, 2018.
Form 10 10.9 January 29, 2019
10.10
Amended and Restated Investment Management Agreement by and among Watford Asset Trust I, Watford Re Ltd., and HPS Investment Partners, LLC, effective January 1, 2018.
Form 10 10.10 January 29, 2019
10.11
Amended and Restated Investment Management Agreement by and among Watford Specialty Insurance Company, HPS Investment Partners, LLC, and Arch Underwriters Inc., effective as of January 1, 2018.
Form 10 10.11 January 29, 2019
10.12
Amended and Restated Investment Management Agreement by and among Watford Insurance Company, HPS Investment Partners, LLC and Arch Underwriters Inc., effective as of January 1, 2018.
Form 10 10.12 January 29, 2019
10.13
Investment Management Agreement by and among Watford Insurance Company Europe Limited, HPS Principal Strategies, LLC and Arch Underwriters Ltd., dated December 7, 2015.
Form 10 10.13 January 29, 2019
10.14
Guarantee Agreement by and among Watford Re Ltd., Watford Holdings Ltd., and Arch Capital Group Ltd., dated March 25, 2014.
Form 10 10.14 January 29, 2019
10.15#
Quota Share Retrocession Agreement between Arch Reinsurance Europe Underwriting Limited and Watford Re Ltd., effective as of January 1, 2014.
Form 10 10.15# January 29, 2019
10.15.1#
Addendum No. 1 effective as of January 1, 2017 to Quota Share Retrocession Agreement between Arch Reinsurance Europe Underwriting Designated Activity Company and Watford Re Ltd.
Form 10 10.15.1# January 29, 2019
10.16#
Property Catastrophe Quota Share Retrocession Agreement between Arch Reinsurance Ltd. and Watford Re Ltd., effective as of April 1, 2014.
Form 10 10.16# January 29, 2019
10.16.1
Addendum No. 1 to Property Catastrophe Quota Share Retrocession Agreement between Arch Reinsurance Ltd. and Watford Re Ltd., dated as of September 9, 2014.
Form 10 10.16.1 January 29, 2019
10.16.2
Addendum No. 2 to Property Catastrophe Quota Share Retrocession Agreement between Arch Reinsurance Ltd. and Watford Re Ltd., dated as of December 31, 2014.
Form 10 10.16.2 January 29, 2019
10.16.3#
Addendum No. 3 effective as of January 1, 2017 to Property Catastrophe Quota Share Retrocession Agreement between Arch Reinsurance Ltd. and Watford Re Ltd.
Form 10 10.16.3# January 29, 2019

Incorporated by Reference

Exhibit
Number

Exhibit Description

Form

Original Exhibit Number

Date Filed

Filed Herewith

10.19#

Quota Share Retrocession Agreement between Watford Re Ltd. and Arch Reinsurance Ltd., effective as of January 1, 2014.

Form 10

10.19#

January 29, 2019

10.19.1

Addendum No. 1 effective as of January 1, 2014 to Quota Share Retrocession Agreement between Watford Re Ltd. and Arch Reinsurance Ltd.

Form 10

10.19.1

January 29, 2019

10.19.2

Addendum No. 2 effective as of July 28, 2015, February 17, 2016 or September 1, 2016 (as applicable) to Quota Share Retrocession Agreement between Watford Re Ltd. and Arch Reinsurance Ltd.

Form 10

10.19.2

January 29, 2019

10.19.3

Addendum No. 3 to Quota Share Retrocession Agreement between Watford Re Ltd. and Arch Reinsurance Ltd., dated as of August 30, 2018.

Form 10

10.19.3

January 29, 2019

10.20#

Quota Share Reinsurance Agreement between Watford Specialty Insurance Company and Arch Reinsurance Company, effective as of January 1, 2016.

Form 10

10.20#

January 29, 2019

10.20.1

Addendum No. 1 to Quota Share Reinsurance Agreement between Watford Specialty Insurance Company and Arch Reinsurance Company, dated October 15, 2018.

Form 10

10.20.1

January 29, 2019

10.21#

Quota Share Reinsurance Agreement between Watford Insurance Company and Arch Reinsurance Company, effective as of September 1, 2016.

Form 10

10.21#

January 29, 2019

10.21.1

Addendum No. 1 effective as of September 1, 2016 to Quota Share Reinsurance Agreement between Watford Insurance Company and Arch Reinsurance Company., dated October 15, 2018.

Form 10

10.21.1

January 29, 2019

10.22#

Quota Share Reinsurance Agreement between Watford Insurance Company Europe Limited and Arch Reinsurance Ltd., effective as of July 28, 2015.

Form 10

10.22#

January 29, 2019

10.23

Services Agreement between Watford Holdings (U.S.) Inc. and Arch Reinsurance Company, dated as of October 1, 2015.

Form 10

10.23

January 29, 2019

10.24

Services Agreement between Watford Holdings (U.S.) Inc. and Arch Capital Services Inc., dated as of October 1, 2015.

Form 10

10.24

January 29, 2019

10.25

Insurance Management Services Agreement between Quest Insurance Management (Gibraltar) Limited, Watford Insurance Company Europe Limited and Arch Underwriters Ltd., dated July 28, 2015.

Form 10

10.25

January 29, 2019

10.26

Guarantee Agreement between Watford Insurance Company and Arch Capital Group (U.S.) Inc., dated January 1, 2017.

Form 10

10.26

January 29, 2019

10.27

Guarantee Agreement between Watford Specialty Insurance Company and Arch Capital Group (U.S.) Inc., dated January 1, 2017.

Form 10

10.27

January 29, 2019

10.28

Employment Agreement between Watford Holdings Ltd. and John Rathgeber, dated December 4, 2018.

Form 10

10.28

January 29, 2019

10.28.1

Amended Employment Agreement between Watford Holdings Ltd. and John Rathgeber, dated May 31, 2019

10-Q

10.3

August 8, 2019

10.29

Employment Agreement between Watford Holdings Ltd. and Jonathan D. Levy, dated December 18, 2018.

Form 10

10.29

January 29, 2019

10.29.1

Amended Employment Agreement between Watford Holdings Ltd. and Jonathan D. Levy, dated May 31, 2019

10-Q

10.4

August 8, 2019

10.29.2

Amended and Restated Employment Agreement between Watford Holdings Ltd. and Jonathan D. Levy, dated August 6, 2020

10-Q

10.2

August 7, 2020

10.29.3

Amended and Restated Employment Agreement between Watford Holdings Ltd. and Jonathan D. Levy, dated November 10, 2020

10-Q

10.2

November 10, 2020

10.30

Employment Agreement between Watford Holdings Ltd. and Robert Hawley, dated November 30, 2018.

Form 10

10.30

January 29, 2019

10.30.1

Amended Employment Agreement between Watford Holdings Ltd. and Robert Hawley, dated May 31, 2019

10-Q

10.5

August 8, 2019

10.30.2

Amended and Restated Employment Agreement between Watford Holdings Ltd. and Robert L. Hawley, dated November 10, 2020

10-Q

10.3

November 10, 2020

10.31

Employment Agreement between Watford Holdings Ltd. and Laurence B. Richardson, II, dated November 30, 2018.

Form 10

10.31

January 29, 2019

10.31.1

Amended Employment Agreement between Watford Holdings Ltd. and Laurence B. Richardson, II, dated May 31, 2019

10-Q

10.6

August 8, 2019

10.31.2

Amended and Restated Employment Agreement between Watford Holdings Ltd. and Laurence B. Richardson, II, dated November 10, 2020

10-Q

10.4

November 10, 2020

10.32

Employment Agreement between Watford Holdings Ltd. and Alexandre Scherer, dated November 18, 2018.

Form 10

10.32

January 29, 2019

10.32.1

Amended Employment Agreement between Watford Holdings Ltd. and Alexandre Scherer, dated May 31, 2019

10-Q

10.7

August 8, 2019

10.32.2

Amended and Restated Employment Agreement between Watford Holdings Ltd. and Alexandre Scherer, dated November 10, 2020

10-Q

10.6

November 10, 2020

10.32.3

Amended and Restated Employment Agreement between Watford Holdings Ltd. and Alexandre Scherer, dated November 10, 2020

10.33#

Amended and Restated Credit Agreement among Watford Asset Trust I, Bank of America, N.A., dated November 30, 2017.

Form 10

10.33#

January 29, 2019

10.34

Facility letter agreement between Lloyds Bank plc and Watford Re Ltd., dated May 19, 2014.

Form 10

10.34

January 29, 2019

10.34.1

Continuing Agreement for Standby Letters of Credit between Lloyds Bank plc and Watford Re Ltd., dated May 19, 2014.

Form 10

10.34.1

January 29, 2019

266

Incorporated by Reference
Exhibit
Number
Exhibit Description Form Original Exhibit Number Date Filed Filed Herewith
10.17#
Quota Share Retrocession Agreement between Arch Reinsurance Ltd. and Watford Re Ltd., effective as of January 1, 2014.
Form 10 10.17# January 29, 2019
10.17.1#
Addendum No. 1 effective as of January 1, 2017 to Quota Share Retrocession Agreement between Arch Reinsurance Ltd. and Watford Re Ltd.
Form 10 10.17.1# January 29, 2019
10.18#
Quota Share Retrocession Agreement between Arch Reinsurance Company and Watford Re Ltd., effective as of January 1, 2014.
Form 10 10.18# January 29, 2019
10.18.1#
Endorsement No. 1 effective as of April 1, 2014 to Quota Share Retrocession Agreement between Arch Reinsurance Company and Watford Re Ltd.
Form 10 10.18.1# January 29, 2019
10.18.2#
Endorsement No. 2 effective as of January 1, 2016 to Quota Share Retrocession Agreement between Arch Reinsurance Company and Watford Re Ltd.
Form 10 10.18.2# January 29, 2019
10.18.3#
Endorsement No. 3 effective as of January 1, 2017 to the Quota Share Retrocession Agreement between Arch Reinsurance Company and Watford Re Ltd.
Form 10 10.18.3# January 29, 2019
10.19#
Quota Share Retrocession Agreement between Watford Re Ltd. and Arch Reinsurance Ltd., effective as of January 1, 2014.
Form 10 10.19# January 29, 2019
10.19.1
Addendum No. 1 effective as of January 1, 2014 to Quota Share Retrocession Agreement between Watford Re Ltd. and Arch Reinsurance Ltd.
Form 10 10.19.1 January 29, 2019
10.19.2
Addendum No. 2 effective as of July 28, 2015, February 17, 2016 or September 1, 2016 (as applicable) to Quota Share Retrocession Agreement between Watford Re Ltd. and Arch Reinsurance Ltd.
Form 10 10.19.2 January 29, 2019
10.19.3
Addendum No. 3 to Quota Share Retrocession Agreement between Watford Re Ltd. and Arch Reinsurance Ltd., dated as of August 30, 2018.
Form 10 10.19.3 January 29, 2019
10.20#
Quota Share Reinsurance Agreement between Watford Specialty Insurance Company and Arch Reinsurance Company, effective as of January 1, 2016.
Form 10 10.20# January 29, 2019
10.20.1
Addendum No. 1 to Quota Share Reinsurance Agreement between Watford Specialty Insurance Company and Arch Reinsurance Company, dated October 15, 2018.
Form 10 10.20.1 January 29, 2019
10.21#
Quota Share Reinsurance Agreement between Watford Insurance Company and Arch Reinsurance Company, effective as of September 1, 2016.
Form 10 10.21# January 29, 2019
10.21.1
Addendum No. 1 effective as of September 1, 2016 to Quota Share Reinsurance Agreement between Watford Insurance Company and Arch Reinsurance Company., dated October 15, 2018.
Form 10 10.21.1 January 29, 2019
10.22#
Quota Share Reinsurance Agreement between Watford Insurance Company Europe Limited and Arch Reinsurance Ltd., effective as of July 28, 2015.
Form 10 10.22# January 29, 2019
10.23
Services Agreement between Watford Holdings (U.S.) Inc. and Arch Reinsurance Company, dated as of October 1, 2015.
Form 10 10.23 January 29, 2019
10.24
Services Agreement between Watford Holdings (U.S.) Inc. and Arch Capital Services Inc., dated as of October 1, 2015.
Form 10 10.24 January 29, 2019
10.25
Insurance Management Services Agreement between Quest Insurance Management (Gibraltar) Limited, Watford Insurance Company Europe Limited and Arch Underwriters Ltd., dated July 28, 2015.
Form 10 10.25 January 29, 2019
10.26
Guarantee Agreement between Watford Insurance Company and Arch Capital Group (U.S.) Inc., dated January 1, 2017.
Form 10 10.26 January 29, 2019
10.27
Guarantee Agreement between Watford Specialty Insurance Company and Arch Capital Group (U.S.) Inc., dated January 1, 2017.
Form 10 10.27 January 29, 2019
10.28
Employment Agreement between Watford Holdings Ltd. and John Rathgeber, dated December 4, 2018.
Form 10 10.28 January 29, 2019
10.28.1
Amended Employment Agreement between Watford Holdings Ltd. and John Rathgeber, dated May 31, 2019
10-Q 10.3 August 8, 2019
10.29
Employment Agreement between Watford Holdings Ltd. and Jonathan D. Levy, dated December 18, 2018.
Form 10 10.29 January 29, 2019
10.29.1
Amended Employment Agreement between Watford Holdings Ltd. and Jonathan D. Levy, dated May 31, 2019
10-Q 10.4 August 8, 2019
10.30
Employment Agreement between Watford Holdings Ltd. and Robert Hawley, dated November 30, 2018.
Form 10 10.30 January 29, 2019
10.30.1
Amended Employment Agreement between Watford Holdings Ltd. and Robert Hawley, dated May 31, 2019
10-Q 10.5 August 8, 2019
10.31
Employment Agreement between Watford Holdings Ltd. and Laurence B. Richardson, II, dated November 30, 2018.
Form 10 10.31 January 29, 2019
10.31.1
Amended Employment Agreement between Watford Holdings Ltd. and Laurence B. Richardson, II, dated May 31, 2019
10-Q 10.6 August 8, 2019
10.32
Employment Agreement between Watford Holdings Ltd. and Alexandre Scherer, dated November 18, 2018.
Form 10 10.32 January 29, 2019

Incorporated by Reference

Exhibit
Number

Exhibit Description

Form

Original Exhibit Number

Date Filed

Filed Herewith

10.34.2

Facility extension letter agreement between Lloyds Bank plc and Watford Re Ltd., effective as of May 16, 2018.

S-1

10.34.2

March 6, 2019

10.34.3

Facility extension letter agreement between Lloyds Bank Corporate Markets plc and Watford Re Ltd., effective as of May 16, 2019.

10-Q

10.1

August 8, 2019

10.34.4

Pledge and Security Agreement between Lloyds Bank plc and Watford Re Ltd., dated May 19, 2014.

Form 10

10.34.3

January 29, 2019

10.34.5

Facility extension letter agreement between Lloyds Bank Corporate Markets plc and Watford Re Ltd., effective as of May 15, 2020

10-Q

10.1

August 7, 2020

10.35

2018 Equity Incentive Plan.

Form 10

10.35

January 29, 2019

10.36

Form of Director and Officer Indemnification Agreement.

Form 10

10.36

January 29, 2019

10.37

Form of Director Acceptance Letters.

Form 10

10.37

January 29, 2019

10.38

Amended and Restated Fee Sharing Agreement by and among Arch Underwriters Ltd., Highbridge Principal Strategies, LLC, Watford Re Ltd. and Watford Holdings Ltd., effective as of March 25, 2014.

Form 10

10.38

January 29, 2019

10.39

Investment Management Agreement by and between Watford Re Ltd. and HPS Investment Partners, LLC, dated December 7, 2018.

S-1

10.39

March 6, 2019

10.41

364-Day Letter of Credit Agreement, dated as of September 20, 2019, among, inter alios, Watford Holdings Ltd., as parent guarantor, Watford Re Ltd., as account party, Lloyds Bank Corporate Markets Plc and BMO Capital Markets Corp., as joint lead arrangers and joint bookrunners, Lloyds Bank Corporate Markets Plc, as administrative agent and L/C agent, and the lenders party thereto, as issuing lenders

8-K

10.1

September 25, 2019

10.41.1

Second amendment to the 364-Day Letter of Credit Agreement between Watford Holdings Ltd., Lloyds Bank Corporate Markets Plc and BMO Capital Markets Corp. dated September 17, 2020.

10-Q

10.1

November 10, 2020

10.42

Employment Agreement between Watford Holdings Ltd. and Liz Cunningham, dated October 3, 2019.

10-Q

10.42

May 11, 2020

10.42.1

Amended and Restated Employment Agreement between Watford Holdings Ltd. and Liz Cunningham, dated November 10, 2020

10-Q

10.5

November 10, 2020

10.43

Voting and Support Agreement, dated as of October 9, 2020, by and between Watford Holdings Ltd., Arch Reinsurance Ltd., and Gulf Reinsurance Ltd.

8-K

10.1

October 13, 2020

10.43.1

Voting and Support Agreement, dated as of November 2, 2020, by and among Watford Holdings Ltd., Arch Capital Group Ltd., Enstar Group Limited and Cavello Bay Reinsurance Limited.

8-K

10.1

November 2, 2020

10.44

Voting and Support Agreement, dated as of February 16, 2021, by and among Watford Holdings Ltd., Kelso Investment Associates X, L.P., KEP X, LLC, and KSN Fund X, L.P.

8-K

10.1

February 19, 2021

10.45

Voting and Support Agreement, dated as of February 16, 2021, by and between Watford Holdings Ltd. and WP Windstar Investments Ltd.

8-K

10.2

February 19, 2021

List of Subsidiaries.

Consent of PricewaterhouseCoopers LLP (filed herewith)

Power of Attorney

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

The following financial information from Watford Holdings Ltd.’s Annual Report on Form 10-K for the year ended December 31, 2020 formatted in Inline XBRL: (i) Consolidated Balance Sheets at December 31, 2020 and 2019; (ii) Consolidated Statements of Income (loss) for the years ended December 31, 2020, 2019 and 2018; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2020, 2019 and 2018; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018; and (vi) Notes to Consolidated Financial Statements.

104

Cover Page Interactive Data File (embedded within the Inline XBRL document)

267

Incorporated by Reference
Exhibit
Number
Exhibit Description Form Original Exhibit Number Date Filed Filed Herewith
10.32.1
Amended Employment Agreement between Watford Holdings Ltd. and Alexandre Scherer, dated May 31, 2019
10-Q 10.7 August 8, 2019
10.33#
Amended and Restated Credit Agreement among Watford Asset Trust I, Bank of America, N.A., dated November 30, 2017.
Form 10 10.33# January 29, 2019
10.34
Facility letter agreement between Lloyds Bank plc and Watford Re Ltd., dated May 19, 2014.
Form 10 10.34 January 29, 2019
10.34.1
Continuing Agreement for Standby Letters of Credit between Lloyds Bank plc and Watford Re Ltd., dated May 19, 2014.
Form 10 10.34.1 January 29, 2019
10.34.2
Facility extension letter agreement between Lloyds Bank plc and Watford Re Ltd., effective as of May 16, 2018.
S-1 10.34.2 March 6, 2019
10.34.3
Facility extension letter agreement between Lloyds Bank Corporate Markets plc and Watford Re Ltd., effective as of May 16, 2019.
10-Q 10.1 August 8, 2019
10.34.4
Pledge and Security Agreement between Lloyds Bank plc and Watford Re Ltd., dated May 19, 2014.
Form 10 10.34.3 January 29, 2019
10.35
2018 Equity Incentive Plan.
Form 10 10.35 January 29, 2019
10.36
Form of Director and Officer Indemnification Agreement.
Form 10 10.36 January 29, 2019
10.37
Form of Director Acceptance Letters.
Form 10 10.37 January 29, 2019
10.38
Amended and Restated Fee Sharing Agreement by and among Arch Underwriters Ltd., Highbridge Principal Strategies, LLC, Watford Re Ltd. and Watford Holdings Ltd., effective as of March 25, 2014.
Form 10 10.38 January 29, 2019
10.39
Investment Management Agreement by and between Watford Re Ltd. and HPS Investment Partners, LLC, dated December 7, 2018.
S-1 10.39 March 6, 2019
10.41
364-Day Letter of Credit Agreement, dated as of September 20, 2019, among, inter alios, Watford Holdings Ltd., as parent guarantor, Watford Re Ltd., as account party, Lloyds Bank Corporate Markets Plc and BMO Capital Markets Corp., as joint lead arrangers and joint bookrunners, Lloyds Bank Corporate Markets Plc, as administrative agent and L/C agent, and the lenders party thereto, as issuing lenders
8-K 10.1 September 25, 2019
21.1
List of Subsidiaries.
Form 10 21.1 January 29, 2019
23.1
Consent of PricewaterhouseCoopers LLP (filed herewith)
X
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
101 The following financial information from Watford Holdings Ltd.’s Annual Report on Form 10-K for the year ended December 31, 2019 formatted in XBRL: (i) Consolidated Balance Sheets at December 31, 2019 and 2018; (ii) Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2019, 2018 and 2017; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017; and (vi) Notes to Consolidated Financial Statements.

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			WATFORD HOLDINGS LTD.
			(REGISTRANT)

			/s/ Jonathan D. Levy
Date:		February 26, 2021	Jonathan D. Levy, Chief Executive Officer

Date:		February 26, 2021	~~WATFORD HOLDINGS LTD.~~
		~~(REGISTRANT)~~

		~~/s/ John F. Rathgeber~~
~~Date:~~	~~February 28, 2020~~	~~John F. Rathgeber, Chief Executive Officer~~

~~Date:~~	~~February 28, 2020~~	/s/ Robert L. Hawley
			Robert L. Hawley, Chief Financial Officer

268

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

Title

Date

/s/ Jonathan D. Levy

Chief Executive Officer

(Principal Executive Officer)

February ~~28, 2020~~26, 2021

~~John F. Rathgeber~~Jonathan D. Levy

/s/ Robert L. Hawley

Chief Financial Officer

(Principal Financial Officer)

February ~~28, 2020~~26, 2021

Robert L. Hawley

Chairman of the Board and Director

February ~~28, 2020~~26, 2021

Walter Harris

Director

February ~~28, 2020~~26, 2021

Maamoun Rajeh

Director

February ~~28, 2020~~26, 2021

Nicolas Papadopoulo

Director

February ~~28, 2020~~26, 2021

Garth Lorimer Turner

Director

February ~~28, 2020~~26, 2021

Deborah DeCotis

Director

February ~~28, 2020~~26, 2021

Thomas Miller

Director

February ~~28, 2020~~26, 2021

Elizabeth Gile

Authorized Representative

in the United States

February ~~28, 2020~~26, 2021

Alexandre Scherer

*By Jonathan D. Levy, as attorney-in-fact and agent, pursuant to a power of attorney, a copy of which has been filed with the Securities and Exchange Commission as Exhibit 24 to this report.


/s/ Jonathan D. Levy
Name:			Jonathan D. Levy
			Attorney-in-fact

269

WATFORD HOLDINGS LTD.

Schedule I - Summary of investments - other than investments in related parties.

(Expressed in thousands of U.S. dollars)


	Cost or Amortized Cost		Fair Value		Amount Shown on the Balance Sheet
December 31, 2020
Fair Value Option:
Term loan investments	$	890,996	$	851,539	$	851,539
Fixed maturities:
Corporate bonds	313,212		312,870		312,870
U.S. government and government agency bonds	267		274		274
Asset-backed securities	162,644		140,508		140,508

Non-U.S. government and government agency bonds	1,425		1,510		1,510

Total fixed maturities, fair value option	477,548		455,162		455,162
Short-term investments	412,762		418,690		418,690

Equities	49,044		64,994		64,994
Investments, fair value option	1,830,350		1,790,385		1,790,385
Fair Value Through Net Income:
Equities, fair value through net income	74,258		53,207		53,207
Available for Sale:
U.S. government and government agency bonds	201,114		202,214		202,214
Non-U.S. government and government agency bonds	146,594		157,329		157,329
Corporate bonds	188,473		196,997		196,997
Asset-backed securities	82,803		80,258		80,258
Mortgage-backed securities	17,405		16,663		16,663
Municipal government and government agency bonds	1,686		1,788		1,788
Total investments, available for sale	638,075		655,249		655,249
Total Investments	$	2,542,683	$	2,498,841	$	2,498,841

270

Cost or Amortized Cost Fair Value Amount Shown on the Balance Sheet
December 31, 2019
Fair Value Option:
Term loan investments $ 1,113,212
$ 1,061,934
$ 1,061,934
Fixed maturities:

Corporate bonds 221,024
214,354
214,354
U.S. government and government agency bonds 1,963
1,962
1,962
Asset-backed securities 200,361
190,737
190,737
Mortgage-backed securities 7,399
7,706
7,706
Non-U.S. government and government agency bonds 1,449
1,456
1,456
Municipal government and government agency bonds 380
379
379
Short-term investments 325,542
329,303
329,303
Other investments (1) 28,672
30,461
30,461
Equities 54,893
59,799
59,799
Investments, fair value option 1,954,895
1,898,091
1,898,091
Fair Value Through Net Income:

Equities, fair value through net income 78,031
65,338
65,338
Available for Sale:

U.S. government and government agency bonds 282,076
283,647
283,647
Non-U.S. government and government agency bonds 129,456
131,953
131,953
Corporate bonds 155,834
158,119
158,119
Asset-backed securities 145,555
145,434
145,434
Mortgage-backed securities 24,776
24,750
24,750
Municipal government and government agency bonds 1,759
1,805
1,805
Total investments, available for sale 739,456
745,708
745,708
Total Investments $ 2,772,382
$ 2,709,137
$ 2,709,137

~~(1) See Note 13 - “Transactions with related parties” for disclosure of related party amounts.~~

WATFORD HOLDINGS LTD.

Schedule II - Condensed Financial Statements of Registrant

Condensed Balance Sheets - Parent company only

(Expressed in thousands of U.S. dollars)


	December 31, 2020		December 31, 2019
Assets
Cash and cash equivalents	$	168	$	179
Investments in subsidiaries	1,190,378		1,111,003
Prepaid expenses	71		80
Total assets	$	1,190,617	$	1,111,262

Liabilities
Other liabilities	$	2,554	$	840
Amounts due to affiliates	21,632		13,346
Senior notes	172,689		172,418
Total liabilities	196,875		186,604

Contingently redeemable preference shares	52,398		52,305

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	$	1,190,617	$	1,111,262

271

December 31, 2019 December 31, 2018
Assets
Cash and cash equivalents $ 179
$ 4
Investments in subsidiaries 1,111,003
1,120,596
Prepaid expenses 80
31
Total assets $ 1,111,262
$ 1,120,631

Liabilities
Other liabilities $ 840
$ 4,995
Amounts due to affiliates 13,346
5,036
Senior notes 172,418
—
Total liabilities 186,604
10,031

Contingently redeemable preference shares 52,305
220,992

Common shares ($0.01 par; shares authorized: 120 million; shares issued: 22,692,300 and 22,682,875) 227
227
Additional paid-in capital 898,083
895,386
Retained earnings (deficit) 43,470
(1,275 )
Accumulated other comprehensive income (loss) 5,629
(4,730 )
Common shares held in treasury, at cost (shares: 2,789,405 and Nil) (75,056 ) —
Total shareholders’ equity 872,353
889,608
Total liabilities, contingently redeemable preference shares and shareholders’ equity $ 1,111,262
$ 1,120,631

WATFORD HOLDINGS LTD.

Schedule II - Condensed Financial Statements of Registrant

Condensed Statements of Income (Loss) and Comprehensive Income (Loss) - Parent company only

(Expressed in thousands of U.S. dollars)


	Year Ended December 31,
	2020		2019		2018
Revenues
Equity in earnings of consolidated subsidiaries	$	85,122	$	72,771	$	(25,110)
Net investment income (loss)	(1)		247		(1)
Total revenues	85,121		73,018		(25,111)

Expenses
General and administrative expenses	(4,520)		(4,686)		(772)
Interest expense	(11,647)		(5,791)		0
Transaction costs and other	(4,040)		0		0
Non-recurring direct listing expenses	0		0		(9,000)
Total expenses	(20,207)		(10,477)		(9,772)

Net income (loss) before preference dividends and redemption costs	64,914		62,541		(34,883)
Preference dividends	(4,402)		(13,632)		(19,633)
Accelerated amortization of costs related to the redemption of preference shares	0		(4,164)		0
Net income (loss) available to common shareholders	$	60,512	$	44,745	$	(54,516)

Comprehensive income (loss)	$	70,877	$	55,104	$	(58,274)

272

Year Ended December 31,
2019 2018 2017
Revenues
Equity in earnings of consolidated subsidiaries $ 72,771
$ (25,110 ) $ 10,981
Net investment income (loss) 247
(1 ) (1 )
Total revenues 73,018
(25,111 ) 10,980

Expenses
General and administrative expenses (4,686 ) (772 ) (239 )
Interest expense (5,791 ) —
—
Non-recurring direct listing expenses —
(9,000 ) —
Total expenses (10,477 ) (9,772 ) (239 )

Net income (loss) before preference dividends and redemption costs 62,541
(34,883 ) 10,741
Preference dividends (13,632 ) (19,633 ) (19,633 )
Accelerated amortization of costs related to the redemption of preference shares (4,164 ) —
—
Net income (loss) available to common shareholders $ 44,745
$ (54,516 ) $ (8,892 )

Comprehensive income (loss) $ 55,104
$ (58,274 ) $ (9,489 )

WATFORD HOLDINGS LTD.

Schedule II - Condensed Financial Statements of Registrant

Condensed Statements of Cash Flows - Parent company only

(Expressed in thousands of U.S. dollars)


	Year Ended December 31,
	2020		2019		2018
Operating Activities
Net income (loss) before preference dividends and redemption costs	$	64,914	$	62,541	$	(34,883)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Share-based compensation	1,245		2,697		0
Equity in earnings of consolidated subsidiaries	(85,122)		(72,771)		25,110
Prepaid expenses	9		(49)		3,825
Other liabilities	1,714		(4,155)		4,618
Amounts due to affiliates	8,286		8,310		1,332
Other items	435		136		0
Net Cash Provided By (Used For) Operating Activities	(8,519)		(3,291)		2

Investing Activities
Return of capital from subsidiary	0		80,687		0
Dividend received from subsidiary	15,684		12,035		19,265
Net Cash Provided By (Used For) Investing Activities	15,684		92,722		19,265

Financing Activities
Repurchase of preference shares	0		(173,081)		0
Net proceeds of issuances of senior notes	0		172,283		0
Purchases of common shares under share repurchase program	(2,867)		(75,056)		0
Dividends paid on redeemable preference shares	(4,309)		(13,402)		(19,264)
Net Cash Provided By (Used For) Financing Activities	(7,176)		(89,256)		(19,264)

Increase (decrease) in cash	(11)		175		3
Cash and cash equivalents, beginning of year	179		4		1
Cash and cash equivalents, end of year	$	168	$	179	$	4

1. Organization and presentation

Watford Holdings Ltd. (the “Parent Company”) was incorporated on July 19, 2013. The condensed financial information of the Parent Company should be read in conjunction with the consolidated financial statements of Watford Holdings Ltd. and its subsidiaries and the notes thereto (the “Consolidated Financial Statements.”) The condensed financial statements of the Parent Company reflect its direct wholly-owned subsidiaries using the equity method of accounting.

273

Year Ended December 31,
2019 2018 2017
Operating Activities
Net income (loss) before preference dividends and redemption costs $ 62,541
$ (34,883 ) $ 10,741
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Share-based compensation 2,697
—
—
Equity in earnings of consolidated subsidiaries (72,771 ) 25,110
(10,981 )
Prepaid expenses (49 ) 3,825
(3,850 )
Other liabilities (4,155 ) 4,618
374
Amounts due to affiliates 8,310
1,332
3,704
Other items 136
—
—
Net Cash Provided By (Used For) Operating Activities (3,291 ) 2
(12 )

Investing Activities
Return of capital from subsidiary 80,687
—
—
Dividend received from subsidiary 12,035
19,265
19,265
Net Cash Provided By (Used For) Investing Activities 92,722
19,265
19,265

Financing Activities
Repurchase of preference shares (173,081 ) —
—
Net proceeds of issuances of senior notes 172,283
—
—
Purchases of common shares under share repurchase program (75,056 ) —
—
Dividends paid on redeemable preference shares (13,402 ) (19,264 ) (19,264 )
Net Cash Provided By (Used For) Financing Activities (89,256 ) (19,264 ) (19,264 )

Increase (decrease) in cash 175
3
(11 )
Cash and cash equivalents, beginning of year 4
1
12
Cash and cash equivalents, end of year $ 179
$ 4
$ 1

WATFORD HOLDINGS LTD.

Schedule IV - Reinsurance

(Expressed in thousands of U.S. dollars)


	Gross Amount		Ceded to Other Companies		Assumed from Other Companies		Net Amount		Percentage of Amount Assumed to Net
December 31, 2020
Premiums written:
Insurance	$	395,993	$	(182,534)	$	0	$	213,459	0	%
Reinsurance	0		(8,423)		332,553		324,130		102.6	%
Total	$	395,993	$	(190,957)	$	332,553	$	537,589	61.9	%
December 31, 2019
Premiums written:
Insurance	$	339,170	$	(162,459)	$	0	$	176,711	0	%
Reinsurance	0		(59,560)		415,711		356,151		116.7	%
Total	$	339,170	$	(222,019)	$	415,711	$	532,862	78.0	%
December 31, 2018
Premiums written:
Insurance	$	253,760	$	(113,922)	$	0	$	139,838	0	%
Reinsurance	0		(16,918)		481,255		464,337		103.6	%
Total	$	253,760	$	(130,840)	$	481,255	$	604,175	79.7	%

274

Gross Amount Ceded to Other Companies Assumed from Other Companies Net Amount Percentage of Amount Assumed to Net
December 31, 2019
Premiums written:
Insurance $ 339,170
$ (162,459 ) $ —
$ 176,711
— %
Reinsurance —
(59,560 ) 415,711
356,151
116.7 %
Total $ 339,170
$ (222,019 ) $ 415,711
$ 532,862
78.0 %
December 31, 2018
Premiums written:
Insurance $ 253,760
$ (113,922 ) $ —
$ 139,838
— %
Reinsurance —
(16,918 ) 481,255
464,337
103.6 %
Total $ 253,760
$ (130,840 ) $ 481,255
$ 604,175
79.7 %
December 31, 2017
Premiums written:
Insurance $ 133,983
$ (30,770 ) $ —
$ 103,213
— %
Reinsurance —
(16,417 ) 466,321
449,904
103.6 %
Total $ 133,983
$ (47,187 ) $ 466,321
$ 553,117
84.3 %

WATFORD HOLDINGS LTD.

Schedule VI - Supplementary Information for Property and Casualty Insurance Underwriters

(Expressed in thousands of U.S. dollars)


Column A	Column B		Column C		Column D		Column E		Column F		Column G		Column H				Column I		Column J		Column K
													Net Losses and Loss Adjustment Expenses Incurred Relating to
Affiliation with Registrant	Deferred Acquisition Costs, Net		Reserves for Losses and Loss Adjustment Expenses		Discount, if any, deducted in Column C		Unearned Premiums		Net Premiums Earned		Net Investment Income (Loss)		(a) Current Year		(b) Prior Years		Amortization of Deferred Acquisition Costs		Net Paid Losses and Loss Adjustment Expenses		Net Premiums Written
Consolidated Subsidiaries
2020	$	53,705	$	1,519,583	$	0	$	407,714	$	560,351	$	113,982	$	441,175	$	(693)	$	(125,541)	$	309,909	$	537,589
2019	64,044		1,263,628		0		438,907		556,690		128,263		429,322		23,813		(126,788)		321,835		532,862
2018	80,858		1,032,760		0		390,114		578,862		(6,349)		443,482		(2,227)		(141,136)		224,206		604,175

275

Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K
Net Losses and Loss Adjustment Expenses Incurred Relating to
Affiliation with Registrant Deferred Acquisition Costs, Net Reserves for Losses and Loss Adjustment Expenses
Discount, if any,
deducted in
Column C
Unearned
Premiums
Net
Premiums
Earned
Net Investment
Income (Loss)
(a) Current Year
(b)
Prior Years
Amortization
of Deferred
Acquisition Costs
Net Paid Losses
and Loss
Adjustment
Expenses
Net Premiums Written
Consolidated Subsidiaries
2019 $ 64,044
$ 1,263,628
$ —
$ 438,907
$ 556,690
$ 128,263
$ 429,322
$ 23,813
$ (126,788 ) $ 321,835
$ 532,862
2018 80,858
1,032,760
—
390,114
578,862
(6,349 ) 443,482
(2,227 ) (141,136 ) 224,206
604,175
2017 85,961
798,262
—
330,644
531,726
72,738
399,530
36,872
(140,726 ) 182,119
553,117

Item 16. Form 10-K summary

Not applicable.

~~257~~

276


Bermuda						98-1155442
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)


			Watford Holdings Ltd.
			Index to Form 10-K
				Page
			Explanatory notes	2
			Cautionary note regarding forward-looking statements	4
			Risk factors summary	6
Part I.
Item 1.			Business	8
Item 1A.			Risk factors	49
Item 1B.			Unresolved staff comments	123
Item 2.			Properties	124
Item 3.			Legal proceedings	125
Item 4.			Mine safety disclosures	126

			~~Watford Holdings Ltd.~~
	~~Index to Form 10-K~~
		~~Page~~
	~~Explanatory note~~	2
	~~Cautionary note regarding forward-looking statements~~	3
~~Part I.~~
~~Item 1.~~	~~Business~~	5
~~Item 1A.~~	~~Risk factors~~	45
~~Item 1B.~~	~~Unresolved staff comments~~	~~113~~
~~Item 2.~~	~~Properties~~	~~114~~
~~Item 3.~~	~~Legal proceedings~~	~~115~~
~~Item 4.~~	~~Mine safety disclosures~~	~~116~~

Part II.
Item 5.			Market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities	~~117~~127
Item 6.			Selected financial data	~~119~~130
Item 7.			Management’s discussion and analysis of financial condition and results of operations	~~123~~131
Item 7A.			Quantitative and qualitative disclosures about market risk	~~166~~182
Item 8.			Financial statements and supplementary data	~~170~~186
Item 9.			Changes in and disagreements with accountants on accounting and financial disclosure	~~240~~258
Item 9A.			Controls and procedures	~~240~~258
Item 9B.			Other information	~~240~~259

Part III.
Item 10.			Directors, executive officers and corporate governance	~~241~~260
Item 11.			Executive compensation	~~241~~260
Item 12.			Security ownership of certain beneficial owners and management and related stockholder matters	~~241~~260
Item 13.			Certain relationships and related transactions and director independence	~~244~~263
Item 14.			Principal accountant fees and services	~~244~~263

Part IV.
Item 15.			Exhibits and financial statement schedules	~~245~~264
Item 16.			Form 10-K summary	~~257~~276



	Base Period
Company Name / Index	3/28/2019		12/31/2019
Watford Holdings Ltd.	$	100.00	$	93.19
S&P 500 Index	$	100.00	$	116.48
S&P 500 Property & Casualty Insurance Index	$	100.00	$	110.22


	Base Period
Company Name / Index	3/28/2019		12/31/2019		12/31/2020
Watford Holdings Ltd.	$	100.00	$	93.19	$	128.15
S&P 500 Index	$	100.00	$	116.48	$	137.91
S&P 500 Property & Casualty Insurance Index	$	100.00	$	110.22	$	117.89



	Issuer Purchases of Common Shares
Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet be Purchased Under the Plan or Program (1)
10/1/2019 - 10/31/2019	1,048,139	$	27.64	1,048,139	$	46,026
11/1/2019 - 11/30/2019	898,498	26.23		1,946,637	22,460
12/1/2019 - 12/31/2019	842,768	26.65		2,789,405	—
Total	2,789,405	$	26.89	2,789,405	$	—



	December 31,
	2019			2018			2017			2016			2015
	($ in thousands except share and per share data)
Selected balance sheet data:
Total investments	$	2,709,137		$	2,738,367		$	2,496,215		$	1,923,549		$	1,682,731
Net assets (1)	2,170,726			2,019,348			1,924,809			1,606,952			1,237,152
Premiums receivable	273,657			227,301			177,492			189,911			162,263
Cash and cash equivalents	102,437			63,529			54,503			74,893			108,550
Total Assets	3,550,856			3,372,856			3,014,583			2,382,750			2,122,438
Reserves for losses and loss adjustment expenses	1,263,628			1,032,760			798,262			510,809			290,997
Unearned premiums	438,907			390,114			330,644			293,480			249,980
Revolving credit agreement borrowings	484,287			693,917			549,165			258,861			435,278
Senior notes	172,418			—			—			—			—
Total liabilities	2,626,198			2,262,256			1,846,079			1,205,126			1,072,208
Contingently redeemable preferred shares	52,305			220,992			220,622			220,253			219,882
Total shareholders’ equity	872,353			889,608			947,882			957,371			830,348
Book value per share data:
Book value per diluted common share (2)	$	43.49		$	39.22		$	41.79		$	42.21		$	36.61
Growth in book value per diluted common share (2)	10.9		%	(6.1		)%	(1.0		)%	15.3		%	(3.9		)%
Common shares outstanding - diluted (3)	20,058,757			22,682,875			22,682,875			22,682,875			22,682,875


	Year Ended December 31, 2019												Year Ended December 31, 2018												Year Ended December 31, 2017													Year Ended December 31, 2020												Year Ended December 31, 2019												Year Ended December 31, 2018
	Non-Investment Grade			Investment Grade			Cost of U/W Collateral (4)			Total			Non-Investment Grade			Investment Grade			Cost of U/W Collateral (4)			Total			Non-Investment Grade			Investment Grade			Cost of U/W Collateral (4)			Total				Non-Investment Grade			Investment Grade			Cost of U/W Collateral (4)			Total			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)																																					($ in thousands)
Interest income	$	139,280		$	24,608		$	—		$	163,888		$	135,847		$	17,069		$	—		$	152,916		$	118,263		$	7,200		$	—		$	125,463		Interest income	$	125,504		$	14,886		$	—		$	140,390		$	139,280		$	24,608		$	—		$	163,888		$	135,847		$	17,069		$	—		$	152,916
Investment management fees - related parties	(16,877		)	(1,515		)	—			(18,392		)	(15,818		)	(1,188		)	—			(17,006		)	(20,827		)	(624		)	—			(21,451		)	Investment management fees - related parties	(15,817)			(1,376)			—			(17,193)			(16,877)			(1,515)			—			(18,392)			(15,818)			(1,188)			—			(17,006)
Borrowing and miscellaneous other investment expenses	(15,047		)	(983		)	(13,255		)	(29,285		)	(16,994		)	(375		)	(11,008		)	(28,377		)	(14,816		)	(287		)	(2,386		)	(17,489		)	Borrowing and miscellaneous other investment expenses	(10,290)			(1,025)			(5,492)			(16,807)			(15,047)			(983)			(13,255)			(29,285)			(16,994)			(375)			(11,008)			(28,377)
Net interest income	107,356			22,110			(13,255		)	116,211			103,035			15,506			(11,008		)	107,533			82,620			6,289			(2,386		)	86,523			Net interest income	99,397			12,485			(5,492)			106,390			107,356			22,110			(13,255)			116,211			103,035			15,506			(11,008)			107,533
Net realized gains (losses) on investments	(13,147		)	5,199			—			(7,948		)	392			(5,180		)	—			(4,788		)	5,989			(5,267		)	—			722			Net realized gains (losses) on investments	1,190			11,027			—			12,217			(13,147)			5,199			—			(7,948)			392			(5,180)			—			(4,788)
Net unrealized gains (losses) on investments (1)	24,729			7,462			—			32,191			(105,768		)	(3,278		)	—			(109,046		)	2,029			(1,631		)	—			398			Net unrealized gains (losses) on investments (1)	7,369			43			—			7,412			24,729			7,462			—			32,191			(105,768)			(3,278)			—			(109,046)
Investment performance fees - related parties	(12,191		)	—			—			(12,191		)	(48		)	—			—			(48		)	(14,905		)	—			—			(14,905		)	Investment performance fees - related parties	(12,037)			—			—			(12,037)			(12,191)			—			—			(12,191)			(48)			—			—			(48)
Net investment income (loss)	$	106,747		$	34,771		$	(13,255	)	$	128,263		$	(2,389	)	$	7,048		$	(11,008	)	$	(6,349	)	$	75,733		$	(609	)	$	(2,386	)	$	72,738		Net investment income (loss)	$	95,919		$	23,555		$	(5,492)		$	113,982		$	106,747		$	34,771		$	(13,255)		$	128,263		$	(2,389)		$	7,048		$	(11,008)		$	(6,349)

Average total investments (2)	$1,872,835			$	900,641		$	—		$2,773,476			$1,851,650			$	812,186		$	—		$2,663,836			$1,701,162			$	547,307		$	—		$2,248,469
Average total investments (excluding accrued investment income) (2)																																					Average total investments (excluding accrued investment income) (2)	$1,812,010			$	786,937		$	—		$2,598,947			$1,872,835			$	900,641		$	—		$2,773,476			$1,851,650			$	812,186		$	—		$2,663,836
Average net assets (3)	$1,568,980			$900,069			$(325,527)			$2,143,522			$1,472,297			$814,154			$(287,765)			$1,998,686			$1,314,708			$548,797			$(91,407)			$1,772,098			Average net assets (3)	$1,484,777			$791,754			$(173,500)			$2,103,031			$1,568,980			$900,069			$(325,527)			$2,143,522			$1,472,297			$814,154			$(287,765)			$1,998,686

Net interest income yield on average net assets (3)	6.8		%	2.5		%				5.4		%	7.0		%	1.9		%				5.4		%	6.3		%	1.1		%				4.9		%	Net interest income yield on average net assets (3)	6.7		%	1.6		%				5.1		%	6.8		%	2.5		%				5.4		%	7.0		%	1.9		%				5.4		%
Net investment income return on average total investments (2)	5.7		%	3.9		%				4.6		%	(0.1		)%	0.9		%				(0.2		)%	4.5		%	(0.1		)%				3.2		%
Net investment income return on average total investments (excluding accrued investment income) (2)																																					Net investment income return on average total investments (excluding accrued investment income) (2)	5.3		%	3.0		%				4.4		%	5.7		%	3.9		%				4.6		%	(0.1)		%	0.9		%				(0.2)		%
Net investment income return on average net assets (3)	6.8		%	3.9		%	(4.1		)%	6.0		%	(0.2		)%	0.9		%	(3.8		)%	(0.3		)%	5.8		%	(0.1		)%	(2.6		)%	4.1		%	Net investment income return on average net assets (3)	6.5		%	3.0		%	(3.2)		%	5.4		%	6.8		%	3.9		%	(4.1)		%	6.0		%	(0.2)		%	0.9		%	(3.8)		%	(0.3)		%


																																						As of December 31, 2020									As of December 31, 2019									As of December 31, 2018
	As of December 31, 2019												As of December 31, 2018												As of December 31, 2017													Non-Investment Grade			Investment Grade		Borrowings for U/W Collateral		Total		Non-Investment Grade			Investment Grade		Borrowings for U/W Collateral		Total		Non-Investment Grade			Investment Grade		Borrowings for U/W Collateral		Total
	Non-Investment Grade			Investment Grade			Borrowings for U/W Collateral			Total			Non-Investment Grade			Investment Grade			Borrowings for U/W Collateral			Total			Non-Investment Grade			Investment Grade			Borrowings for U/W Collateral			Total				($ in thousands)
	($ in thousands)
Average total investments	$	1,872,835		$	900,641		$	—		$	2,773,476		$	1,851,650		$	812,186		$	—		$	2,663,836		$	1,701,162		$	547,307		$	—		$	2,248,469
Average total investments (excluding accrued investment income)																																					Average total investments (excluding accrued investment income)	$	1,812,010		$	786,937	$	—	$	2,598,947	$	1,872,835		$	900,641	$	—	$	2,773,476	$	1,851,650		$	812,186	$	—	$	2,663,836
Average net assets	1,568,980			900,069			(325,527		)	2,143,522			1,472,297			814,154			(287,765		)	1,998,686			1,314,708			548,797			(91,407		)	1,772,098			Average net assets	1,484,777			791,754		(173,500)		2,103,031		1,568,980			900,069		(325,527)		2,143,522		1,472,297			814,154		(287,765)		1,998,686

Total investments	$	1,862,253		$	846,884		$	—		$	2,709,137		$	1,882,591		$	855,776		$	—		$	2,738,367		$	1,752,056		$	744,159		$	—		$	2,496,215		Total investments	$	1,724,258		$	774,583	$	—	$	2,498,841	$	1,862,253		$	846,884	$	—	$	2,709,137	$	1,882,591		$	855,776	$	—	$	2,738,367
Accrued Investment Income	9,679			4,346			—			14,025			15,000			4,461			—			19,461			15,034			3,227			—			18,261			Accrued Investment Income	11,640			3,039		—		14,679		9,679			4,346		—		14,025		15,000			4,461		—		19,461
Receivable for Securities Sold	16,275			13			—			16,288			23,820			687			—			24,507			36,355			19			—			36,374			Receivable for Securities Sold	37,412			11		—		37,423		16,275			13		—		16,288		23,820			687		—		24,507
Less: Payable for Securities Purchased	18,180			—			—			18,180			60,142			—			—			60,142			42,501			—			—			42,501			Less: Payable for Securities Purchased	16,916			—		—		16,916		18,180			—		—		18,180		60,142			—		—		60,142
Less: Payable for Securities Sold Short	66,257			—			—			66,257			8,928			—			—			8,928			34,375			—			—			34,375			Less: Payable for Securities Sold Short	21,975			—		—		21,975		66,257			—		—		66,257		8,928			—		—		8,928
Less: Revolving credit agreement borrowings	155,537			—			328,750			484,287			386,430			—			307,487			693,917			295,749			—			253,416			549,165			Less: Revolving credit agreement borrowings	186,890			—		24,750		211,640		155,537			—		328,750		484,287		386,430			—		307,487		693,917
Net assets	$	1,648,233		$	851,243		$	(328,750	)	$	2,170,726		$	1,465,911		$	860,924		$	(307,487	)	$	2,019,348		$	1,430,820		$	747,405		$	(253,416	)	$	1,924,809		Net assets	$	1,547,529		$	777,633	$	(24,750)	$	2,300,412	$	1,648,233		$	851,243	$	(328,750)	$	2,170,726	$	1,465,911		$	860,924	$	(307,487)	$	2,019,348
Non-investment grade borrowing ratio (1)	9.4		%										26.4		%										20.7		%										Non-investment grade borrowing ratio (1)	12.1		%							9.4		%							26.4		%

Unrealized gains on investments	$	38,057		$	9,146		$	—		$	47,203		$	15,635		$	1,474		$	—		$	17,109		$	45,430		$	1,730		$	—		$	47,160		Unrealized gains on investments	$	59,501		$	22,152	$	—	$	81,653	$	38,057		$	9,146	$	—	$	47,203	$	15,635		$	1,474	$	—	$	17,109
Unrealized losses on investments	(108,444		)	(2,004		)	—			(110,448		)	(119,633		)	(14,861		)	—			(134,494		)	(39,549		)	(4,512		)	—			(44,061		)	Unrealized losses on investments	(120,891)			(4,604)		—		(125,495)		(108,444)			(2,004)		—		(110,448)		(119,633)			(14,861)		—		(134,494)
Net unrealized gains (losses) on investments	$	(70,387	)	$	7,142		$	—		$	(63,245	)	$	(103,998	)	$	(13,387	)	$	—		$	(117,385	)	$	5,881		$	(2,782	)	$	—		$	3,099		Net unrealized gains (losses) on investments	$	(61,390)		$	17,548	$	—	$	(43,842)	$	(70,387)		$	7,142	$	—	$	(63,245)	$	(103,998)		$	(13,387)	$	—	$	(117,385)


Development Pattern	Expected Loss Ratio									Development Pattern	Expected Loss Ratio
Increase (decrease) in loss reserves, net:	($ in thousands)									Increase (decrease) in loss reserves, net:	($ in thousands)
Casualty Reinsurance	10% Lower			Unchanged			10% Higher			Casualty Reinsurance	10% Lower		Unchanged		10% Higher

6 Months Shorter	$	(81,533	)	$	(31,788	)	$	10,104		6 Months Shorter	$	(76,543)	$	(41,260)	$	(6,099)
Unchanged	(51,207		)	—			48,498			Unchanged	(43,383)		—		36,900
6 Months Longer	3,337			55,432			114,530			6 Months Longer	1,215		52,082		97,765

Other Specialty Reinsurance	5% Lower			Unchanged			5% Higher			Other Specialty Reinsurance	5% Lower		Unchanged		5% Higher

6 Months Shorter	$	(12,158	)	$	(590	)	$	4,917
3 Months Shorter										3 Months Shorter	$	(14,140)	$	(1,010)	$	4,791
Unchanged	(4,069		)	—			6,541			Unchanged	(8,577)		—		6,854
6 Months Longer	(1,647		)	4,302			13,926
3 Months Longer										3 Months Longer	(4,265)		243		14,798

Property Catastrophe Reinsurance	5% Lower			Unchanged			5% Higher			Property Catastrophe Reinsurance	5% Lower		Unchanged		5% Higher

6 Months Shorter	$	(1,275	)	$	(690	)	$	(104	)
3 Months Shorter										3 Months Shorter	$	(4,957)	$	(4,569)	$	(4,197)
Unchanged	(603		)	—			603			Unchanged	(457)		—		457
6 Months Longer	595			1,226			1,856
3 Months Longer										3 Months Longer	9,791		10,356		10,921

Insurance and Coinsurance	5% Lower			Unchanged			5% Higher			Insurance and Coinsurance	5% Lower		Unchanged		5% Higher

6 Months Shorter	$	(19,188	)	$	(387	)	$	9,008
3 Months Shorter										3 Months Shorter	$	(30,934)	$	(4,131)	$	19,903
Unchanged	(11,173		)	—			10,747			Unchanged	(25,384)		—		25,264
6 Months Longer	(9,031		)	2,138			16,594
3 Months Longer										3 Months Longer	(21,354)		4,060		29,476


																										Credit Rating (1)
December 31, 2020																									December 31, 2020	Fair Value		AAA		AA		A		BBB		BB		B		CCC		CC		C		D		Not Rated
	Credit Rating (1)																									($ in thousands)
December 31, 2019	Fair Value		AAA		AA		A		BBB		BB		B		CCC		CC		C		D		Not Rated
Non-Investment Grade Portfolio:																									Non-Investment Grade Portfolio:
Term loan investments																									Term loan investments	$	851,539	$	—	$	—	$	—	$	11,352	$	19,486	$	588,215	$	185,221	$	7,406	$	2,727	$	—	$	37,132
Corporate bonds																									Corporate bonds	312,620		—		—		—		—		31,089		194,418		59,421		8,280		1,894		—		17,518
Asset-backed securities																									Asset-backed securities	140,508		—		—		—		73,911		26,799		8,385		8,262		837		—		—		22,314
	($ in thousands)
Term loan investments	$	1,061,934	$	—	$	—	$	—	$	—	$	9,617	$	761,168	$	215,909	$	6,823	$	2,119	$	—	$	66,298
Fixed maturities:
Short-term investments																									Short-term investments	301,390		83,308		124,830		89,577		—		—		3,186		489		—		—		—		—
Total fixed income instruments and short-term investments																									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																									Equities	118,201
Total Non-Investment Grade Portfolio																									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:																									Investment Grade Portfolio:
Corporate bonds	372,473		—		36,128		81,401		41,103		9,003		58,345		135,613		—		—		—		10,880		Corporate bonds	$	197,247	$	—	$	19,812	$	82,379	$	87,913	$	7,143	$	—	$	—	$	—	$	—	$	—	$	—
U.S. government and government agency bonds	285,609		—		285,609		—		—		—		—		—		—		—		—		—		U.S. government and government agency bonds	202,488		—		202,488		—		—		—		—		—		—		—		—		—
Asset-backed securities	336,171		2,006		—		29,179		223,956		29,695		18,381		—		—		—		—		32,954		Asset-backed securities	80,258		—		—		15,675		59,560		5,023		—		—		—		—		—		—
Mortgage-backed securities	32,456		—		—		1,100		23,650		976		—		—		—		—		2,497		4,233		Mortgage-backed securities	16,663		—		—		2,092		14,571		—		—		—		—		—		—		—
Non-U.S. government and government agency bonds	133,409		—		132,460		—		949		—		—		—		—		—		—		—		Non-U.S. government and government agency bonds	158,839		—		158,839		—		—		—		—		—		—		—		—		—
Municipal government and government agency bonds	2,184		1,135		573		476		—		—		—		—		—		—		—		—		Municipal government and government agency bonds	1,788		783		592		413		—		—		—		—		—		—		—		—
Total fixed income instruments	2,224,236		3,141		454,770		112,156		289,658		49,291		837,894		351,522		6,823		2,119		2,497		114,365
Short-term investments	329,303		25,783		136,842		34,903		115,155		—		—		8,359		—		—		—		8,261		Short-term investments	117,300		6,211		43,870		19,328		47,891		—		—		—		—		—		—		—
Total fixed income instruments and short-term investments	2,553,539		28,924		591,612		147,059		404,813		49,291		837,894		359,881		6,823		2,119		2,497		122,626
Other Investments	30,461
Equities	125,137
Total Investment Grade Portfolio																									Total Investment Grade Portfolio	$	774,583	$	6,994	$	425,601	$	119,887	$	209,935	$	12,166	$	—	$	—	$	—	$	—	$	—	$	—
Total	$	2,709,137	$	28,924	$	591,612	$	147,059	$	404,813	$	49,291	$	837,894	$	359,881	$	6,823	$	2,119	$	2,497	$	122,626	Total	$	2,498,841	$	90,302	$	550,431	$	209,464	$	295,198	$	89,540	$	794,204	$	253,393	$	16,523	$	4,621	$	—	$	76,964


	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

Mortgage-backed securities	—
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


	Contractual Maturity
December 31, 2020	Fair Value		Due in One Year or Less		Due After One Through Two Years		Due After Three Through Five Years		Due After Five Through Ten Years		Due After Ten Years
	($ in thousands)
Non-Investment Grade Portfolio:
Term loan investments	$	851,539	$	21,035	$	106,014	$	465,153	$	259,337	$	—
Corporate bonds	312,620		28		32,778		203,390		67,847		8,577
Short-term investments	301,390		301,390		—		—		—		—
Subtotal	1,465,549		322,453		138,792		668,543		327,184		8,577
Asset-backed securities	140,508


Equities	118,201
Total Non-Investment Grade Portfolio	$	1,724,258	$	322,453	$	138,792	$	668,543	$	327,184	$	8,577

Investment Grade Portfolio:
Corporate bonds	$	197,247	$	4,290	$	25,914	$	67,785	$	79,858	$	19,400
U.S. government and government agency bonds	202,488		820		180,324		20,945		399		—
Non-U.S. government and government agency bonds	158,839		23,476		29,027		54,428		51,908		—
Municipal government and government agency bonds	1,788		—		1,375		413		—		—
Short-term investments	117,300		117,300		—		—		—		—
Subtotal	677,662		145,886		236,640		143,571		132,165		19,400
Asset-backed securities	80,258
Mortgage-backed securities	16,663
Total - Investment Grade Portfolio	$	774,583	$	145,886	$	236,640	$	143,571	$	132,165	$	19,400
Total	$	2,498,841	$	468,339	$	375,432	$	812,114	$	459,349	$	27,977


												Payments Due by Period
	Payments Due by Period											Total		Less Than One Year		One Year to Less Than Three Years		Three Years to Less Than Five Years		More Than Five Years
	Total		Less Than One Year		One Year to Less Than Three Years		Three Years to Less Than Five Years		More Than Five Years			($ in thousands)
	($ in thousands)
December 31, 2019
December 31, 2020											December 31, 2020
Estimated gross payments for losses and loss adjustment expenses (1)	$	1,263,628	$	319,685	$	415,163	$	223,406	$	305,374	Estimated gross payments for losses and loss adjustment expenses (1)	$	1,519,583	$	383,168	$	518,927	$	264,563	$	352,925
Interest payments on senior notes (2)	108,094		11,375		22,750		22,750		51,219		Interest payments on senior notes (2)	96,688		11,375		22,750		22,750		39,813
Senior notes (2)	175,000		—		—		—		175,000		Senior notes (2)	175,000		—		—		—		175,000
Revolving credit agreement borrowings (3)	484,287		484,287		—		—		—		Revolving credit agreement borrowings (3)	211,640		211,640		—		—		—
Operating lease obligations	1,038		283		566		189		—		Operating lease obligations	755		283		472		—		—
Total	$	2,032,047	$	815,630	$	438,479	$	246,345	$	531,593	Total	$	2,003,666	$	606,466	$	542,149	$	287,313	$	567,738


	Interest Rate Shift in Basis Points																Interest Rate Shift in Basis Points
(U.S. dollars in millions)	-100			-50			0			+50			+100			(U.S. dollars in millions)	-100			-50			0			+50			+100
December 31, 2020																December 31, 2020
Total fair value																Total fair value	$	2,546		$	2,522		$	2,499		$	2,478		$	2,459
Change from base																Change from base	1.9		%	0.9		%	—		%	(0.9)		%	(1.6)		%
Change in unrealized value																Change in unrealized value	$	47		$	23		$	—		$	(21)		$	(40)

December 31, 2019																December 31, 2019
Total fair value	$	2,739		$	2,724		$	2,709		$	2,693		$	2,679		Total fair value	$	2,739		$	2,724		$	2,709		$	2,693		$	2,679
Change from base	1.1		%	0.6		%	—		%	(0.6		)%	(1.1		)%	Change from base	1.1		%	0.6		%	—		%	(0.6)		%	(1.1)		%
Change in unrealized value	$	30		$	15		$	—		$	(16	)	$	(30	)	Change in unrealized value	$	30		$	15		$	—		$	(16)		$	(30)

December 31, 2018
Total fair value	$	2,778		$	2,758		$	2,738		$	2,719		$	2,700
Change from base	1.5		%	0.7		%	—		%	(0.7		)%	(1.4		)%
Change in unrealized value	$	40		$	20		$	—		$	(19	)	$	(38	)


	Percentage Shift in Credit Spreads																Percentage Shift in Credit Spreads
(U.S. dollars in millions)	-50%			-10%			0			+10%			+50%			(U.S. dollars in millions)	-50%			-10%			0			+10%			+50%
December 31, 2020																December 31, 2020
Total fair value																Total fair value	$	2,600		$	2,523		$	2,499		$	2,473		$	2,362
Change from base																Change from base	4.0		%	0.9		%	—		%	(1.0)		%	(5.5)		%
Change in unrealized value																Change in unrealized value	$	101		$	24		$	—		$	(26)		$	(137)

December 31, 2019																December 31, 2019
Total fair value	$	2,836		$	2,735		$	2,709		$	2,681		$	2,569		Total fair value	$	2,836		$	2,735		$	2,709		$	2,681		$	2,569
Change from base	4.7		%	1.0		%	—		%	(1.0		)%	(5.2		)%	Change from base	4.7		%	1.0		%	—		%	(1.0)		%	(5.2)		%
Change in unrealized value	$	127		$	26		$	—		$	(28	)	$	(140	)	Change in unrealized value	$	127		$	26		$	—		$	(28)		$	(140)

December 31, 2018
Total fair value	$	2,930		$	2,778		$	2,738		$	2,698		$	2,539
Change from base	6.6		%	1.4		%	—		%	(1.5		)%	(7.8		)%
Change in unrealized value	$	192		$	40		$	—		$	(40	)	$	(199	)



	Page
Report of Independent Registered Public Accounting Firm		~~171~~187

Consolidated Balance Sheets
At December 31, ~~2019~~2020 and December 31, ~~2018~~2019		~~172~~188

Consolidated Statements of Income (Loss)
For the years ended December 31, 2020, 2019 ~~2018~~ and ~~2017~~2018		~~173~~189

Consolidated Statements of Comprehensive Income (Loss)
For the years ended December 31, 2020, 2019 ~~2018~~ and ~~2017~~2018		~~174~~190

Consolidated Statements of Changes in Shareholders’ Equity
For the years ended December 31, 2020, 2019 ~~2018~~ and ~~2017~~2018		~~175~~191

Consolidated Statements of Cash Flows
For the year ended December 31, 2020, 2019 ~~2018~~ and ~~2017~~2018		~~176~~192

Notes to the Consolidated Financial Statements
Note 1 - Organization		~~177~~193
Note 2 - Basis of Presentation and Significant Accounting Policies		~~178~~194
Note 3 - Segment Information		~~185~~202
Note 4 - Reinsurance		~~187~~204
Note 5 - Reserves for Losses and Loss Adjustment Expenses		~~188~~205
Note 6 - Short Duration Contracts		~~189~~206
Note 7 - ~~Investment Information~~Allowance for Expected Credit Losses		~~200~~216
Note 8 - ~~Fair Value~~Investment Information		~~210~~217
Note 9 - Fair Value		227
Note 10 - Borrowings to Purchase Investments		~~218~~235
Note 1011 - Derivative Instruments		~~219~~236
Note 1112 - Earnings Per Common Share		~~221~~238
Note 1213 - Income Taxes		~~221~~238
Note 1314 - Transactions With Related Parties		~~224~~240
Note 1415 - Commitments and Contingencies		~~229~~246
~~Note 15 - Leases~~		~~232~~
Note 16 - ~~Senior Notes~~Leases	~~233~~249
Note 17 - Senior Notes		250
Note 18 - Contingently Redeemable Preference Shares		~~233~~250
~~Note 18 - Shareholders’ Equity~~		~~234~~
Note 19 - ~~Share Transactions~~Shareholders’ Equity	~~235~~251
Note 20 - ~~Retirement Plans~~Share Transactions		~~236~~252
Note 21 - ~~Legal Proceedings~~Retirement Plans		~~236~~253
Note 22 - ~~Statutory Information~~Legal Proceedings		~~237~~253
Note 23 - Statutory Information		254
Note 24 - Unaudited Condensed Quarterly Financial Information		~~239~~256
Note 2425 - Subsequent Events		~~239~~256


	Year Ended December 31, 2020
	Net Interest Income		Net Unrealized Gains (Losses)		Net Realized Gains (Losses)		Net Investment Income (Loss)
	($ in thousands)
Net investment income (loss) by asset class:
Term loan investments	$	76,157	$	11,821	$	(16,495)	$	71,483
Fixed maturities - Fair value option	42,431		(5,834)		12,563		49,160
Fixed maturities - Available for sale (1)	13,805		0		10,624		24,429
Short-term investments	5,377		46		580		6,003
Equities (2)	0		11,042		198		11,240
Equities, fair value through net income (2)	951		(5,602)		(1,149)		(5,800)
Other investments	1,669		(1,788)		5,521		5,402
Other (3)	0		(2,273)		375		(1,898)
Investment management fees - related parties	(17,193)		—		—		(17,193)
Borrowing and miscellaneous other investment expenses	(16,807)		—		—		(16,807)
Investment performance fees - related parties	—		—		—		(12,037)
	$	106,390	$	7,412	$	12,217	$	113,982



Year Ended December 31, 2019	Beginning Balance		Transfers in (out) of Level 3 (1)			Net Purchases (Sales)(2)			Net Unrealized Gains (Losses)(3)			Net Unrealized Foreign Exchange Gains (Losses)		Ending Balance
Term loans	$	47,479	$	—		$	(15,402	)	$	3,971		$	—	$	36,048
Corporate bonds	24,277		—			(23,341		)	(3		)	—		933
Asset-backed securities	22,560		(22,560		)	—			—			—		—
Equities	70,451		—			39,705			(1,565		)	—		108,591
Total	$	164,767	$	(22,560	)	$	962		$	2,403		$	—	$	145,572


											Estimated Fair Value
	Estimated Fair Value										Asset Derivatives		Liability Derivatives		Net Derivatives		Notional Amount (1)
	Asset Derivatives		Liability Derivatives		Net Derivatives			Notional Amount(1)			($ in thousands)
	($ in thousands)
December 31, 2019
Other underwriting derivatives	$	148	$	—	$	148		$	59,879
Total return swaps	1,667		257		1,410			162,678
Total	$	1,815	$	257	$	1,558		$	222,557

December 31, 2018
December 31, 2020										December 31, 2020
Other underwriting derivatives	$	249	$	—	$	249		$	72,148	Other underwriting derivatives	$	25	$	0	$	25	$	39,165
Options	808		1,138		(330		)	24,551		Options	796		296		500		4,918
Total return swaps	51		1,279		(1,228		)	91,663		Total return swaps	255		1,117		(862)		113,852
Total	$	1,108	$	2,417	$	(1,309	)	$	188,362	Total	$	1,076	$	1,413	$	(337)	$	157,935

December 31, 2019										December 31, 2019
Other underwriting derivatives										Other underwriting derivatives	$	148	$	0	$	148	$	59,879

Total return swaps										Total return swaps	1,667		257		1,410		162,678
Total										Total	$	1,815	$	257	$	1,558	$	222,557



	Year Ended December 31, 2019
	($ in thousands)
Lease cost:
Operating lease	$	241
Other information on operating lease:
Cash payments included in the measurement of lease liability reported in operating cash flows	283
Right-of-use assets (1)	970
Operating lease liability (2)	970
Weighted average discount rate	3.9		%
Weighted average remaining lease term in years	3.75 years


			December 31, 2020
			($ in thousands)
2021			283
2022			283
2023			189
Total undiscounted lease payments			755
Less: present value adjustment			(36)
Operating lease liability			719



	December 31, 2018
	($ in thousands)
Future rental commitments
2019	283
2020	283
2021	283
2022	283
2023	189
Total	1,321


	Fourth Quarter		Third Quarter		Second Quarter		First Quarter
	($ in thousands, except per share data)
Year Ended December 31, 2020
Net premiums written	$	97,717	$	147,316	$	105,856	$	186,700
Net premiums earned	142,746		146,031		131,535		140,039
Net interest income	24,643		26,516		27,428		27,803
Realized and unrealized gains (losses) on investments	70,073		67,995		172,063		(290,502)
Net investment income (loss)	84,437		92,753		199,491		(262,699)
Transaction costs	(4,040)		0		0		0
Preference dividends	(1,061)		(1,061)		(1,109)		(1,171)

Net income (loss) available to common shareholders	61,370		78,093		188,828		(267,779)
Earnings (loss) per common share - basic	$	3.09	$	3.93	$	9.51	$	(13.42)
Earnings (loss) per common share - diluted	$	3.08	$	3.92	$	9.51	$	(13.42)
Weighted average number of common shares used in the determination of earnings (loss) per share - basic	19,890,784		19,890,784		19,863,048		19,951,932
Weighted average number of common shares used in the determination of earnings (loss) per share - diluted	19,952,166		19,904,051		19,863,048		19,951,932

Year Ended December 31, 2019
Net premiums written	$	112,353	$	155,752	$	119,370	$	145,387
Net premiums earned	133,446		125,832		151,318		146,094
Net interest income	29,826		29,536		26,415		30,434
Realized and unrealized gains (losses) on investments	6,105		(14,646)		(936)		33,720
Net investment income (loss)	32,082		14,040		23,787		58,354
Preference dividends	(1,209)		(2,608)		(4,908)		(4,907)
Accelerated amortization of costs related to the redemption of preference shares	0		(4,164)		0		0
Net income (loss) available to common shareholders	(16,864)		152		13,825		47,632
Earnings (loss) per common share - basic	$	(0.79)	$	0.01	$	0.61	$	2.10
Earnings (loss) per common share - diluted	$	(0.79)	$	0.01	$	0.61	$	2.10
Weighted average number of common shares used in the determination of earnings (loss) per share - basic	21,277,287		22,765,802		22,740,762		22,682,875
Weighted average number of common shares used in the determination of earnings (loss) per share - diluted	21,277,287		22,776,204		22,747,033		22,682,875