UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q


☒    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended March 31, 20202021
OR


☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Commission file number: 001-38788
wtre-20210331_g1.jpg
Watford Holdings Ltd.
(Exact Name of Registrant as Specified in its Charter)
Bermuda98-1155442
(State or other jurisdiction
of incorporation or organization)		(I.R.S. Employer Identification Number)
Bermuda
(State or other jurisdiction
of incorporation or organization)
98-1155442
(I.R.S. Employer Identification Number)

Waterloo House, 1st Floor
(441)278-3455
100 Pitts Bay Road, Pembroke HM 08, Bermuda
(Address of principal executive offices)

(441) 278-3455
Bermuda
(Registrant’s telephone number, including area code)
(Address of principal executive offices)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer☐Accelerated filer ☐☒Non-accelerated filer ☒☐Smaller reporting company ☐☐Emerging growth company☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common SharesWTRENasdaq Global Select Market
8½% Cumulative Redeemable Preference SharesWTREPNasdaq Global Select Market


As of May 11, 2020,10, 2021, there were 19,886,97919,924,220 common shares, $0.01 par value per share, of the registrant outstanding.






Watford Holdings Ltd.
Index to Form 10-Q
Page
Part I.
34
Item 1.
56
Item 2.
5149
Item 3.
9290
Item 4.
9694
Part II.
9795
Item 1.
9795
Item 1A.
9795
Item 2.
10096
Item 3.
10096
Item 4.
10096
Item 5.
10096
Item 6.
10197
10298

1


Explanatory note - Certain defined terms
Unless the context suggests otherwise, any reference in this report to:
•“ACGL” refers to Arch Capital Group Ltd. and its controlled subsidiaries;
•“Arch” refers to any one or more of the following direct or indirect subsidiaries of ACGL, as applicable in the context in which such term appears:
•Arch Investment Management Ltd., or AIM, which manages the majority of our investment grade portfolio;
•Arch Reinsurance Company, or ARC, which is a party to certain quota share agreements with one or more of our operating subsidiaries and a services agreement with Watford Holdings (U.S.) Inc.;
•Arch Reinsurance Ltd., or ARL, which is a party to certain quota share agreements with one or more of our operating subsidiaries and owned approximately 12.6%10.2% of our outstanding common shares as of March 31, 2020;
2021;
•Arch Underwriters Inc., or AUI, which manages the underwriting business of our U.S. operating subsidiaries;
•Arch Underwriters Ltd., or AUL, which manages the underwriting business of our non-U.S. operating subsidiaries, including Watford Re;
•“HPS” refers to HPS Investment Partners, LLC (formerly known as Highbridge Principal Strategies, LLC), which manages our non-investment grade portfolio, as well as accounts in our investment grade portfolio;
•our “Investment Managers” refers to AIM, HPS or any other investment managers that manage our investment grade portfolio or our non-investment grade portfolio from time to time;
•“Watford,” “we,” “us” and “our” refers to Watford Holdings Ltd. and its subsidiaries;
•“Watford Holdings” refers to our company, Watford Holdings Ltd., a Bermuda exempted company;
•“Watford Re” refers to Watford Re Ltd., a Bermuda domiciled insurance company and a wholly-owned subsidiary of our company;
•“Watford Trust” refers to Watford Asset Trust I, a statutory trust organized under the laws of the State of Delaware;
•“WIC” refers to Watford Insurance Company, a New Jersey domiciled insurance company and a wholly-owned subsidiary of our company;
•“WICE” refers to Watford Insurance Company Europe Limited, a Gibraltar domiciled insurance company and a wholly-owned subsidiary of our company; and
•“WSIC” refers to Watford Specialty Insurance Company, a New Jersey domiciled insurance company and a wholly-owned subsidiary of our company.

In addition, unless the context suggests otherwise, any reference in this report to:


•“HoldCo” refers to Greysbridge Holdings Ltd., a newly formed entity of which ACGL will own approximately 40%, and funds managed by Warburg Pincus LLC and Kelso & Company will each own approximately 30%;


2

•“Merger” refers to the merger of Merger Sub with and into Watford Holdings pursuant to the Merger Agreement, with Watford Holdings surviving as a wholly-owned subsidiary of HoldCo;
•“Merger Agreement” refers to the Agreement and Plan of Merger, dated as of October 9, 2020, among Watford Holdings, ACGL and Merger Sub, as amended by Amendment No. 1 to Agreement and Plan of Merger, dated as of November 2, 2020, among Watford Holdings, ACGL and Merger Sub; and
•“Merger Sub” refers to Greysbridge Ltd., a newly formed entity that is a wholly-owned subsidiary of HoldCo.
Explanatory note - Proposed merger
On October 9, 2020, we announced that we had entered into (i) an Agreement and Plan of Merger with ACGL and Merger Sub pursuant to which, among other things, Merger Sub will merge with and into Watford Holdings, with Watford Holdings surviving as a wholly-owned subsidiary of ACGL, and (ii) a Voting and Support Agreement (or the Arch Voting Agreement) with ARL and Gulf Reinsurance Ltd., each a subsidiary of ACGL, pursuant to which, among other things, ARL and Gulf Reinsurance Ltd. agreed to vote all of the Company’s common shares and preference shares owned by them in favor of the Merger and to not transfer any such shares, subject to the conditions set forth in the Arch Voting Agreement. On November 2, 2020, we announced that we had entered into an amendment to the merger agreement with ACGL and Merger Sub to amend certain terms of the original merger agreement. ACGL assigned its interests and obligations in connection with this acquisition to HoldCo, a newly formed entity of which ACGL will own approximately 40%, and funds managed by Warburg Pincus LLC and Kelso & Company will each own approximately 30%.
On February 16, 2021, ARL sold an aggregate of 230,400 common shares to affiliates of Kelso & Company, or Kelso, and 230,400 common shares to an affiliate of Warburg Pincus LLC, Warburg Pincus, in each case, at a purchase price of $34.66 per common share which was the then current market price of the common shares (based on the closing sale price of the common shares on the Nasdaq Global Select Market on February 12, 2021) (such sales collectively referred to as the Arch Sales). In connection with the Arch Sales, the Company entered into a waiver to the Arch Voting Agreement with ARL and Gulf Reinsurance Ltd. in order to permit the Arch Sales to Kelso and Warburg Pincus. The Company also entered into Voting and Support Agreements with Kelso and Warburg Pincus, which are substantially similar to the Arch Voting Agreement and pursuant to which Kelso and Warburg Pincus agreed, among other things, to vote any common shares or preference shares owned by them (i) in favor of the adoption of the Merger Agreement and (ii) against any proposal or action that would reasonably be expected to impede or adversely affect in any material respect the merger or any of the other transactions contemplated by the Merger Agreement.
The Merger is expected to close in the first half of 2021, subject to customary closing conditions, including regulatory approval. Shareholder approval was obtained on March 30, 2021 at the Company's special general meeting.
Unless stated otherwise, all forward-looking information contained in this Quarterly Report on Form 10-Q does not take into account or give any effect to the impact of the Merger. For additional details regarding the Merger, see Part II Item 1A “Risk factors”, Part II Item 1 “Legal proceedings” and Part I Item 2 “Management’s discussion and analysis of financial condition and results of operations” of this Quarterly Report on Form 10-Q.


3

Part I. Financial information
Cautionary note regarding forward-looking statements
The Private Securities Litigation Reform Act of 1995 (or the PSLRA) provides a “safe harbor” for forward-looking statements. This report contains forward-looking statements that are intended to enhance the reader’s ability to assess our future financial and business performance. These statements are based on the beliefs and assumptions of our management, and are subject to risks and uncertainties. Generally, statements that are not about historical facts, including statements concerning our possible or assumed future actions or results of operations are forward-looking statements. Forward-looking statements include, but are not limited to, statements that represent our beliefs, expectations or estimates concerning future operations, strategies, financial results or performance, financings, investments, acquisitions, expenditures or other developments and anticipated trends and competition in the markets in which we operate. Forward-looking statements, for purposes of the PSLRA or otherwise, can also be identified by the use of forward-looking terminology such as “may,” “believes,” “intends,” “anticipates,” “plans,” “estimates,” “expects,” “should” or similar expressions.
Forward-looking statements involve our current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. Important factors that could cause actual events or results to differ materially from those indicated in such statements are discussed below and elsewhere in this report and in our other reports and other documents filed with the Securities and Exchange Commission, or the SEC, and include:
our limited operating history;
fluctuations in the results of our operations;
our ability to compete successfully with more established competitors;
our losses exceeding our reserves;
downgrades, potential downgrades or other negative actions by rating agencies, including the recent announcements by A.M. Best Company, or A.M. Best, that it has placed under review with negative implications our financial strength and credit ratings and Kroll Bond Rating Agency, or KBRA, that it has placed on watch our financial strength and credit ratings;
our dependence on key executives and inability to attract qualified personnel, or the potential loss of suitably qualified personnel as a result of Bermuda employment and immigration restrictions;
our dependence on letter of credit facilities and borrowing facilities that may not be available on commercially acceptable terms;
our potential inability to pay dividends or distributions;
our potential need for additional capital in the future and the potential unavailability of such capital to us on favorable terms or at all;
our dependence on clients’ evaluations of risks associated with such clients’ insurance underwriting;
the suspension or revocation of our subsidiaries’ insurance licenses;
Watford Holdings potentially being deemed an investment company under U.S. federal securities law;


the potential characterization of us and/or any of our subsidiaries as a passive foreign investment company, or PFIC;
our dependence on Arch for services critical to our underwriting operations;
changes to our strategic relationship with Arch or the termination by Arch of any of our services agreements or quota share agreements;
our dependence on HPS and AIM to implement our investment strategy;
the termination by HPS or AIM of any of our investment management agreements;
risks associated with our investment strategy being greater than those faced by competitors;
changes in the regulatory environment;
our potentially becoming subject to U.S. federal income taxation;
our potentially becoming subject to U.S. withholding and information reporting requirements under the U.S. Foreign Account Tax Compliance Act, or FATCA, provisions;
our ability to complete acquisitions and integrate businesses successfully;
◦adverse general economic and market conditions, including those caused by pandemics, including the current global pandemic related to the novel coronavirus, or COVID-19, and government actions in response thereto;
◦our limited operating history;
◦fluctuations in the results of our operations;
◦our ability to compete successfully with more established competitors;
◦our losses exceeding our reserves;
◦downgrades, potential downgrades or other negative actions by rating agencies, including the announcements by A.M. Best Company, or A.M. Best, that it has placed under review with negative implications status for our financial strength and credit ratings and Kroll Bond Rating Agency, or KBRA, that it has revised the outlook of our financial strength and credit ratings to negative;
◦our dependence on key executives and inability to attract qualified personnel, or the potential loss of suitably qualified personnel as a result of Bermuda employment and immigration restrictions;
◦our dependence on letter of credit facilities and borrowing facilities that may not be available on commercially acceptable terms;
◦our potential inability to pay dividends or distributions;
◦our potential need for additional capital in the future and the potential unavailability of such capital to us on favorable terms or at all;
◦our dependence on clients’ evaluations of risks associated with such clients’ insurance underwriting;
◦the suspension or revocation of our subsidiaries’ insurance licenses;
4

◦Watford Holdings potentially being deemed an investment company under U.S. federal securities law;
◦the potential characterization of us and/or any of our subsidiaries as a passive foreign investment company, or PFIC;
◦our dependence on Arch for services critical to our underwriting operations;
◦changes to our strategic relationship with Arch or the termination by Arch of any of our services agreements or quota share agreements;
◦our dependence on HPS and AIM to implement our investment strategy;
◦the termination by HPS or AIM of any of our investment management agreements;
◦risks associated with our investment strategy being greater than those faced by competitors;
◦changes in the regulatory environment;
◦our potentially becoming subject to U.S. federal income taxation;
◦our potentially becoming subject to U.S. withholding and information reporting requirements under the U.S. Foreign Account Tax Compliance Act, or FATCA, provisions;
◦our ability to complete acquisitions and integrate businesses successfully;
◦one or more closing conditions to the Merger, including certain regulatory approvals, may not be satisfied or waived, on a timely basis or otherwise, including that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of the Merger;
◦uncertainties regarding the proposed acquisition of Watford Holdings by HoldCo;
◦our business may suffer as a result of uncertainty surrounding the proposed transaction with HoldCo, and there may be challenges with employee retention as a result of the proposed transaction with HoldCo;
◦the proposed transaction with HoldCo may involve unexpected costs, liabilities or delays;
◦legal proceedings that have been, and additional proceedings that may be, initiated against us or our directors related to the proposed transactions with HoldCo;
◦an event, change or other circumstance may occur that could give rise to the termination of the Merger Agreement (including circumstances requiring us to pay HoldCo a termination fee pursuant to the Merger Agreement); and
◦the other matters set forth under Item 1A “Risk factors,” Item 7 “Management’s discussion and analysis of financial condition and results of operations,” and other sections of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, Part II Item 1A “Risk factors” and Part I Item 2 “Management’s discussion and analysis of financial condition and results of operations” of this Form 10-Q as well as the other factors set forth in the Company’s other documents on file with the SEC and management’s response to any of the aforementioned factors.
Consequently, such forward-looking statements should be regarded solely as our current plans, estimates or belief as of the date of this report. All subsequent forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. We do not intend, and do not undertake, any obligation to update any forward-looking statements to reflect future events or circumstances after the date of this report.

5


Item 1. Consolidated financial statements
Page
March 31, 2021 (unaudited) and December 31, 2020
7
Page
March 31, 2020 (unaudited) and December 31, 2019
6
Consolidated Statements of Income (Loss)
For the three months ended March 31, 2021 and 2020 and 2019 (unaudited)
78
For the three months ended March 31, 2021 and 2020 and 2019 (unaudited)
89
For the three months ended March 31, 2021 and 2020 and 2019 (unaudited)
910
For the three months ended March 31,202031,2021 and 20192020 (unaudited)
1011
Notes to the Consolidated Financial Statements (unaudited)
1112
12
1514
1615
1716
1817
1917
2927
3634
3836
3836
3937
4442
4745
4846
4846
4947
5048
48





6

WATFORD HOLDINGS LTD.
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
(Unaudited)  (Unaudited)
March 31, December 31,March 31,December 31,
2020 201920212020
Assets   Assets
Investments:   Investments:
Term loans, fair value option (Amortized cost: $1,113,510 and $1,113,212)$906,999
 $1,061,934
Fixed maturities, fair value option (Amortized cost: $504,750 and $432,576)392,452
 416,594
Short-term investments, fair value option (Cost: $348,059 and $325,542)343,861
 329,303
Term loans, fair value option (Amortized cost: $815,305 and $890,996)Term loans, fair value option (Amortized cost: $815,305 and $890,996)$790,186 $851,539 
Fixed maturities, fair value option (Amortized cost: $546,878 and $477,548)Fixed maturities, fair value option (Amortized cost: $546,878 and $477,548)539,687 455,162 
Short-term investments, fair value option (Cost: $477,084 and $412,762)Short-term investments, fair value option (Cost: $477,084 and $412,762)483,600 418,690 
Equity securities, fair value option58,091
 59,799
Equity securities, fair value option67,295 64,994 
Other investments, fair value option (1)30,682
 30,461
Investments, fair value option1,732,085
 1,898,091
Investments, fair value option1,880,768 1,790,385 
Fixed maturities, available for sale (Amortized cost: $749,835 and $739,456)717,552
 745,708
Fixed maturities, available for sale (Amortized cost: $616,054 and $638,075)Fixed maturities, available for sale (Amortized cost: $616,054 and $638,075)627,387 655,249 
Equity securities, fair value through net income63,169
 65,338
Equity securities, fair value through net income63,758 53,207 
Total investments (1)2,512,806
 2,709,137
Total investments (1)2,571,913 2,498,841 
Cash and cash equivalents96,580
 102,437
Cash and cash equivalents236,164 211,451 
Accrued investment income16,344
 14,025
Accrued investment income14,325 14,679 
Premiums receivable (1)281,541
 273,657
Premiums receivable (1)252,523 224,377 
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses (1)197,458
 170,974
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses (1)291,485 286,590 
Prepaid reinsurance premiums (1)128,570
 132,577
Prepaid reinsurance premiums (1)113,180 122,339 
Deferred acquisition costs, net (1)71,402
 64,044
Deferred acquisition costs, net (1)62,224 53,705 
Receivable for securities sold26,789
 16,288
Receivable for securities sold68,076 37,423 
Intangible assets7,650
 7,650
Intangible assets7,650 7,650 
Funds held by reinsurers (1)40,520
 42,505
Funds held by reinsurers (1)54,929 45,989 
Other assets27,287
 17,562
Other assets (1)Other assets (1)30,985 29,016 
Total assets$3,406,947
 $3,550,856
Total assets$3,703,454 $3,532,060 
Liabilities   Liabilities
Reserve for losses and loss adjustment expenses (1)$1,300,249
 $1,263,628
Reserve for losses and loss adjustment expenses (1)$1,568,243 $1,519,583 
Unearned premiums (1)478,663
 438,907
Unearned premiums (1)426,975 407,714 
Losses payable (1)46,424
 61,314
Losses payable (1)48,415 59,397 
Reinsurance balances payable (1)71,204
 77,066
Reinsurance balances payable (1)77,041 63,269 
Payable for securities purchased63,829
 18,180
Payable for securities purchased50,265 16,916 
Payable for securities sold short30,076
 66,257
Payable for securities sold short34,589 21,975 
Revolving credit agreement borrowings576,486
 484,287
Revolving credit agreement borrowings250,579 211,640 
Senior notes (1)172,486
 172,418
Senior notes (1)172,757 172,689 
Amounts due to affiliates (1)4,168
 4,467
Amounts due to affiliates (1)4,516 7,708 
Investment management and performance fees payable (1)5,428
 17,762
Investment management and performance fees payable (1)12,012 21,641 
Other liabilities (1)41,552
 21,912
Other liabilities (1)28,645 35,786 
Total liabilities$2,790,565
 $2,626,198
Total liabilities$2,674,037 $2,538,318 
Commitments and contingencies
 
Commitments and contingencies00
Contingently redeemable preference shares (1)52,328
 52,305
Contingently redeemable preference shares (1)52,421 52,398 
Shareholders’ equity   Shareholders’ equity
Common shares ($0.01 par; shares authorized: 120 million; shares issued: 22,703,170 and 22,692,300)227
 227
Common shares ($0.01 par; shares authorized: 120 million; shares issued: 22,813,915 and 22,804,128)Common shares ($0.01 par; shares authorized: 120 million; shares issued: 22,813,915 and 22,804,128)228 228 
Additional paid-in capital898,693
 898,083
Additional paid-in capital899,761 899,491 
Retained earnings (deficit)(224,737) 43,470
Retained earnings (deficit)144,441 103,554 
Accumulated other comprehensive income (loss)(32,206) 5,629
Accumulated other comprehensive income (loss)10,489 15,994 
Common shares held in treasury, at cost (shares: 2,917,149 and 2,789,405)(77,923) (75,056)
Common shares held in treasury, at cost (shares: 2,917,149 and 2,917,149)Common shares held in treasury, at cost (shares: 2,917,149 and 2,917,149)(77,923)(77,923)
Total shareholders’ equity564,054
 872,353
Total shareholders’ equity976,996 941,344 
Total liabilities, contingently redeemable preference shares and shareholders’ equity$3,406,947
 $3,550,856
Total liabilities, contingently redeemable preference shares and shareholders’ equity$3,703,454 $3,532,060 
(1) See Note 12, “Transactions with related parties” for disclosure of related party amounts.

See Notes to Consolidated Financial Statements
7

WATFORD HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(U.S. dollars in thousands, except share and per share data)
(Unaudited)(Unaudited)
Three Months Ended March 31,Three Months Ended March 31,
2020 201920212020
Revenues   Revenues
Gross premiums written (1)$234,902
 $186,689
Gross premiums written (1)$216,523 $234,902 
Gross premiums ceded (1)(48,202) (41,302)Gross premiums ceded (1)(37,212)(48,202)
Net premiums written186,700
 145,387
Net premiums written (1)Net premiums written (1)179,311 186,700 
Change in unearned premiums (1)(46,661) 707
Change in unearned premiums (1)(31,580)(46,661)
Net premiums earned (1)140,039
 146,094
Net premiums earned (1)147,731 140,039 
Other underwriting income (loss)133
 592
Other underwriting income (loss)411 133 
Interest income37,824
 43,141
Interest income25,798 37,824 
Investment management fees - related parties (1)(4,352) (4,409)Investment management fees - related parties (1)(4,487)(4,352)
Borrowing and miscellaneous other investment expenses(5,669) (8,298)Borrowing and miscellaneous other investment expenses(2,354)(5,669)
Net interest income27,803
 30,434
Net interest income18,957 27,803 
Realized and unrealized gains (losses) on investments(290,502) 33,720
Realized and unrealized gains (losses) on investments46,173 (290,502)
Investment performance fees - related parties (1)—
 (5,800)Investment performance fees - related parties (1)(6,016)0 
Net investment income (loss)(262,699) 58,354
Net investment income (loss)59,114 (262,699)
Total revenues(122,527) 205,040
Total revenues207,256 (122,527)
   
Expenses   Expenses
Loss and loss adjustment expenses (1)(110,676) (110,850)Loss and loss adjustment expenses (1)(118,794)(110,676)
Acquisition expenses (1)(28,367) (33,974)Acquisition expenses (1)(35,135)(28,367)
General and administrative expenses (1)(7,139) (7,240)General and administrative expenses (1)(7,292)(7,139)
Interest expense (1)(2,912) —
Interest expense (1)(2,912)(2,912)
Net foreign exchange gains (losses)5,013
 (437)Net foreign exchange gains (losses)(475)5,013 
Transaction costs and otherTransaction costs and other(715)0 
Total expenses(144,081) (152,501)Total expenses(165,323)(144,081)
Income (loss) before income taxes(266,608) 52,539
Income (loss) before income taxes41,933 (266,608)
Income tax expense—
 —
Income tax expense(8)0 
Net income (loss) before preference dividends(266,608) 52,539
Net income (loss) before preference dividends41,925 (266,608)
Preference dividends (1)(1,171) (4,907)Preference dividends (1)(1,038)(1,171)
Net income (loss) available to common shareholders$(267,779) $47,632
Net income (loss) available to common shareholders$40,887 $(267,779)
   
Earnings (loss) per common share:   Earnings (loss) per common share:
Basic and diluted$(13.42) $2.10
BasicBasic$2.06 $(13.42)
DilutedDiluted$2.05 $(13.42)
Weighted average number of common shares used in the determination of earnings (loss) per share:   Weighted average number of common shares used in the determination of earnings (loss) per share:
Basic and diluted19,951,932
 22,682,875
BasicBasic19,892,886 19,951,932 
DilutedDiluted19,956,123 19,951,932 
(1) See Note 12, “Transactions with related parties” for disclosure of related party amounts.

See Notes to Consolidated Financial Statements
8

WATFORD HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(U.S. dollars in thousands)
(Unaudited)
Three Months Ended March 31,
20212020
Comprehensive income (loss)
Net income (loss) available to common shareholders$40,887 $(267,779)
Other comprehensive income (loss) net of income tax:
Available for sale investments:
Unrealized holding gains (losses) arising during the period(5,116)(28,431)
Unrealized foreign currency gains (losses) arising during the period620 (7,699)
Credit loss recognized in net income (loss)412 563 
Reclassification of net realized (gains) losses, included in net income (loss)(1,345)(2,405)
Unrealized holding gains (losses) of available for sale investments(5,429)(37,972)
Foreign currency translation adjustments(76)137 
Other comprehensive income (loss) net of income tax(5,505)(37,835)
Comprehensive income (loss)$35,382 $(305,614)
See Notes to Consolidated Financial Statements
9
 (Unaudited)
 Three Months Ended March 31,
 2020 2019
Comprehensive income (loss)   
Net income (loss) available to common shareholders$(267,779) $47,632
Other comprehensive income (loss) net of income tax:   
Available for sale investments:   
Unrealized holding gains (losses) arising during the year(28,431) 3,915
Unrealized foreign currency gains (losses) arising during the year(7,699) 1,130
Credit loss recognized in net income (loss)563
 —
Reclassification of net realized (gains) losses, net of income taxes, included in net income (loss)(2,405) (229)
Unrealized holding gains (losses) of available for sale investments(37,972) 4,816
Foreign currency translation adjustments137
 (165)
Other comprehensive income (loss) net of income tax(37,835) 4,651
Comprehensive income (loss)$(305,614) $52,283


WATFORD HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(U.S. dollars in thousands)
(Unaudited)
Three Months Ended March 31,
20212020
Common shares
Balance at beginning of period$228 $227 
Common shares issued0 0 
Balance at end of period228 227 
Additional paid-in capital
Balance at beginning of period899,491 898,083 
Common shares issued under share plans225 250 
Share-based compensation45 360 
Balance at end of period899,761 898,693 
Accumulated other comprehensive income (loss)
Balance at beginning of period15,994 5,629 
Unrealized holding gains (losses) of available for sale investments:
Balance at beginning of period17,371 6,252 
Unrealized holding gains (losses) of available for sale investments, net of reclassification adjustments(5,429)(37,972)
Balance at end of period11,942 (31,720)
Currency translation adjustment:
Balance at beginning of period(1,377)(623)
Currency translation adjustment(76)137 
Balance at end of period(1,453)(486)
Balance at end of period10,489 (32,206)
Common shares held in treasury, at cost
Balance at beginning of period(77,923)(75,056)
Shares repurchased for treasury0 (2,867)
Balance at end of period(77,923)(77,923)
Retained earnings (deficit)
Balance at beginning of period103,554 43,470 
Cumulative effect of adoption of updated accounting guidance for credit losses at January 1, 20200 (428)
Net income (loss) before preference dividends41,925 (266,608)
Preference share dividends paid and accrued(1,038)(1,171)
Balance at end of period144,441 (224,737)
Total shareholders’ equity$976,996 $564,054 
See Notes to Consolidated Financial Statements
10
 (Unaudited)
 Three Months Ended March 31,
 2020 2019
Common shares   
Balance at beginning of period$227
 $227
Common shares issued—
 —
Balance at end of period227
 227
    
Additional paid-in capital   
Balance at beginning of period898,083
 895,386
Common shares issued under share plans250
 —
Share-based compensation360
 —
Balance at end of period898,693
 895,386
    
Accumulated other comprehensive income (loss)   
Balance at beginning of period5,629
 (4,730)
Unrealized holding gains (losses) of available for sale investments:   
Balance at beginning of period6,252
 (4,158)
Unrealized holding gains (losses) of available for sale investments, net of reclassification adjustments(37,972) 4,816
Balance at end of period(31,720) 658
Currency translation adjustment:   
Balance at beginning of period(623) (572)
Currency translation adjustment137
 (165)
Balance at end of period(486) (737)
Balance at end of period(32,206) (79)
    
Common shares held in treasury, at cost   
Balance at beginning of period(75,056) —
Shares repurchased for treasury(2,867) —
Balance at end of period(77,923) —
    
Retained earnings (deficit)   
Balance at beginning of period43,470
 (1,275)
Cumulative effect of adoption of updated accounting guidance for credit losses at January 1, 2020(428) —
Net income (loss) before preference dividends(266,608) 52,539
Preference share dividends paid and accrued(1,171) (4,907)
Balance at end of period(224,737) 46,357
Total shareholders’ equity$564,054
 $941,891


WATFORD HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
(Unaudited)
Three Months Ended March 31,
20212020
Operating Activities
Net income (loss) before preference dividends$41,925 $(266,608)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net realized and unrealized (gains) losses on investments(46,173)290,502 
Amortization of fixed assets4 1 
Share-based compensation270 610 
Changes in:
Accrued investment income356 (2,329)
Premiums receivable(29,097)(16,272)
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses(8,457)(23,069)
Prepaid reinsurance premiums9,158 4,007 
Deferred acquisition costs, net(9,103)(7,995)
Reserve for losses and loss adjustment expenses50,539 60,178 
Unearned premiums22,422 42,654 
Reinsurance balances payable14,277 (6,901)
Funds held with reinsurers(8,829)(2,868)
Other liabilities(28,126)(27,662)
Other items(2,182)(19,673)
Net Cash Provided By Operating Activities6,984 24,575 
Investing Activities
Purchase of term loans(105,440)(86,702)
Purchase of fixed maturity investments(554,618)(328,927)
Purchase of short-term investments with maturities over three months0 (36,119)
Proceeds from sale, redemptions and maturity of term loans166,281 98,992 
Proceeds from sales, redemptions and maturities of fixed maturity investments546,187 215,719 
Proceeds from sales, redemptions and maturities of short-term investments with maturities over three months0 5,596 
Net (purchases) sales of short-term investments with maturities less than three months(64,138)22,337 
Purchases of equity securities(6,180)(6,388)
Proceeds from sales of equity securities1,024 1,531 
Net settlements of derivative instruments(600)2,336 
Purchases of furniture, equipment and other assets(14)(2)
Net Cash Provided by (Used For) Investing Activities(17,498)(111,627)
Financing Activities
Dividends paid on redeemable preference shares(1,015)(1,148)
Proceeds from borrowings38,939 92,199 
Purchases of common shares under share repurchase program0 (2,867)
Net Cash Provided By (Used For) Financing Activities37,924 88,184 
Effects of exchange rate changes on foreign currency cash(2,697)(6,989)
Increase (decrease) in cash24,713 (5,857)
Cash and cash equivalents, beginning of period211,451 102,437 
Cash and cash equivalents, end of period$236,164 $96,580 
Supplementary information
Income taxes paid$8 $0 
Interest paid$1,810 $5,422 
Non-cash exchange of investments$15,328 $13,467 
See Notes to Consolidated Financial Statements
11
 (Unaudited)
 Three Months Ended March 31,
 2020 2019
Operating Activities   
Net income (loss) before preference dividends$(266,608) $52,539
Adjustments to reconcile net income (loss) to net cash provided by operating activities:  
Net realized and unrealized (gains) losses on investments290,502
 (33,720)
Amortization of fixed assets1
 38
Share-based compensation610
 —
Changes in:   
Accrued investment income(2,329) 2,121
Premiums receivable(16,272) (22,686)
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses(23,069) (16,703)
Prepaid reinsurance premiums4,007
 (11,374)
Deferred acquisition costs, net(7,995) 471
Reserve for losses and loss adjustment expenses60,178
 67,964
Unearned premiums42,654
 10,667
Reinsurance balances payable(6,901) 6,069
Funds held with reinsurers(2,868) 598
Other liabilities(27,662) 18,353
Other items(19,673) (4,031)
Net Cash Provided By Operating Activities24,575
 70,306
Investing Activities   
Purchase of term loans(86,702) (72,168)
Purchase of fixed maturity investments(328,927) (306,656)
Purchase of short-term investments with maturities over three months(36,119) —
Proceeds from sale, redemptions and maturity of term loans98,992
 48,630
Proceeds from sales, redemptions and maturities of fixed maturity investments215,719
 303,076
Proceeds from sales, redemptions and maturities of short-term investments with maturities over three months5,596
 25,000
Net (purchases) sales of short-term investments with maturities less than three months22,337
 504
Purchases of equity securities(6,388) (38,399)
Proceeds from sales of equity securities1,531
 7,312
Net settlements of derivative instruments2,336
 824
Purchases of furniture, equipment and other assets(2) —
Net Cash Provided by (Used For) Investing Activities(111,627) (31,877)
Financing Activities   
Dividends paid on redeemable preference shares(1,148) (4,816)
Repayments on borrowings—
 (100,102)
Proceeds from borrowings92,199
 59,000
Purchases of common shares under share repurchase program(2,867) —
Net Cash Provided By (Used For) Financing Activities88,184
 (45,918)
Effects of exchange rate changes on foreign currency cash(6,989) 261
Increase (decrease) in cash(5,857) (7,228)
Cash and cash equivalents, beginning of period102,437
 63,529
Cash and cash equivalents, end of period$96,580
 $56,301
Supplementary information   
Income taxes paid$—
 $—
Interest paid$5,422
 $7,864
Non-cash exchange of investments$13,467
 $—


WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(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.
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 12, “Transactions with related parties” for further details.
In May 2018, 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 12, “Transactions with related parties” for further details.
The Company has engaged HPS Investment Partners, LLC (“HPS”), as investment managerInvestment 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 12, “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 managerInvestment Manager of assets in its investment grade portfolio pursuant to various investment management agreements. AIM manages the majority of the Company’s investment grade assets pursuant to the terms of the applicable investment management agreements with AIM.and the oversight of our senior management and board of directors. See Note 12, “Transactions with related parties” for further details.
The results for the three months ended March 31, 20202021 are not necessarily indicative of the results expected for the full calendar year.

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


2. Basis of presentation and significant accounting policies
There has been no material change to the Company’s significant accounting policies as described in its audited consolidated financial statements and the accompanying notes as of December 31, 20192020 and 20182019 and for each of the years in the periods ended December 31, 2020, 2019 2018 and 2017,2018, except as noted below.
12

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)

(a) Basis of presentation
The unaudited interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) on a basis consistent with reporting interim financial information in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities and Exchange Act of 1934, as amended. All significant intercompany transactions and balances have been eliminated on 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. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of recurring accruals) necessary for a fair statement of results on an interim basis.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted; however management believes that the disclosures are adequate to make the information presented not misleading. This reportThese unaudited interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the accompanying notes for the years ended December 31, 2020, 2019 2018 and 2017.2018.
To facilitate comparison of information across periods, certain reclassifications have been made to prior yearperiod amounts to conform to the current year’speriod’s presentation.
(b) Recent accounting pronouncements
Issued and effective as of March 31, 2020 - Credit LossesRecently issued accounting standards not yet adopted
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 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 for the quarter ending March 31, 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

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


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 adjustment decreased retained earnings as of January 1, 2020 and increased the allowance for estimated uncollectible reinsurance.
The following 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.
Investment Impairments
The Company conducts a periodic review to identify and evaluate invested assets that may have credit impairments.
Credit Impairments of Available For Sale Fixed Maturities
The Company derives estimated credit losses for fixed maturities by comparing expected future cash flows to be collected to the amortized cost of the security. Estimates of expected future cash flows consider among other things, macroeconomic conditions as well as the financial condition, near-term and long-term prospects for the 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 amortized cost. Declines in value attributable to factors other 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 income.
For fixed maturity investments the Company intends to sell or for which it is more likely than not that the Company will be required to sell before an anticipated recovery in value, the full amount of the impairment is included in “realized and unrealized gains (losses) on investments” on the Company’s consolidated statements of income (loss). The new cost basis of the investment is the previous amortized cost basis less the impairment recognized in “realized and unrealized gains (losses) on investments.” The new cost basis is not adjusted for any subsequent recoveries in fair value.
The Company reports accrued investment income separately from available for sale 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 no additional interest payments will be received.
Reinsurance Recoverables
In the normal course of business, the Company’s subsidiaries cede a portion of their premium and 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 certain instances, the Company obtains collateral, including letters of credit and trust accounts, to further reduce the credit exposure on its reinsurance recoverables. The Company reports its reinsurance recoverables net of an allowance for expected credit loss in the Company’s consolidated balance sheets. The allowance is based upon the Company’s ongoing review of amounts outstanding, the financial condition of 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 estimate the allowance for expected credit loss. Any allowance for credit losses is charged to the Company’s consolidated statement of income

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


(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.
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 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.
Issued and effective as of March 31, 2020
In August 2018,December 2019, the FASB issued ASU 2018-13, Fair Value Measurement(Topic 820)2019-12, Income Taxes (Topic 740), Disclosure Framework - ChangesSimplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the Disclosure Requirementsgeneral principles in Topic 740. ASU 2019-12 will be effective for Fair Value Measurements (“fiscal years beginning after December 31, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company has assessed the impact of the implementation of this ASU 2018-13”). ASU 2018-13 intends to modify the 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 March 2020, the FASB issued ASU 2020-03, Codification Improvements (“ASU 2020-03”), which provide 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 did not have a material impact on the Company’s consolidated financial statements.
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 on January 1, 2020 and did not have a material impact on the Company’s consolidated financial statements.
Recently issued accounting standards not yet adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), (“ASU 2020-04”), and in January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), Scope (“ASU 2021-01”). This ASU providesThese 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 for contract modifications may be applied as of March 12, 2020 through December 31, 2022. Once adopted, this ASU must be applied prospectively for all eligible contract modifications. The Company is currently assessing the impact the implementation of this ASU will have on its consolidated financial statements and disclosures, but does not believe that such impact will be material.
For additional information regarding accounting standards that the Company has not yet adopted, see Note 2, “Basis of presentation and significant accounting policies” in the Company’s audited consolidated financial statements in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year endingended December 31, 2019.2020.

13

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)



3. Segment information
The Company reports results under one1 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.
The Company has a corporate function that includes certain general and administrative expenses related to corporate activities, interest expense (on itsthe 6.5% senior notes due July 2, 2029), net foreign exchange gains (losses), income tax expense and items related to the Company’s preference shares.
The following table provides summary information regarding premiums written and earned by line of business and net premiums written by underwriting location:
Three Months Ended March 31,
20212020
($ in thousands)
Gross premiums written:
Casualty reinsurance$57,070 $83,818 
Other specialty reinsurance46,519 36,880 
Property catastrophe reinsurance13,410 9,832 
Insurance programs and coinsurance99,524 104,372 
Total$216,523 $234,902 
Net premiums written:
Casualty reinsurance$57,016 $83,667 
Other specialty reinsurance39,468 35,484 
Property catastrophe reinsurance13,410 9,832 
Insurance programs and coinsurance69,417 57,717 
Total$179,311 $186,700 
Net premiums earned:
Casualty reinsurance$47,138 $52,765 
Other specialty reinsurance35,203 35,364 
Property catastrophe reinsurance8,318 4,884 
Insurance programs and coinsurance57,072 47,026 
Total$147,731 $140,039 
Net premiums written by underwriting location:
United States$30,030 $36,303 
Europe39,388 21,203 
Bermuda109,893 129,194 
Total$179,311 $186,700 

14
 Three Months Ended March 31,
 2020 2019
 ($ in thousands)
Gross premiums written:   
Casualty reinsurance$83,818
 $75,601
Other specialty reinsurance36,880
 24,298
Property catastrophe reinsurance9,832
 5,992
Insurance programs and coinsurance104,372
 80,798
Total$234,902
 $186,689
    
Net premiums written:   
Casualty reinsurance$83,667
 $75,065
Other specialty reinsurance35,484
 23,182
Property catastrophe reinsurance9,832
 5,982
Insurance programs and coinsurance57,717
 41,158
Total$186,700
 $145,387
    
Net premiums earned:   
Casualty reinsurance$52,765
 $63,313
Other specialty reinsurance35,364
 44,561
Property catastrophe reinsurance4,884
 2,971
Insurance programs and coinsurance47,026
 35,249
Total$140,039
 $146,094
    
Net premiums written by underwriting location:   
United States$36,303
 $18,402
Europe21,203
 23,258
Bermuda129,194
 103,727
Total$186,700
 $145,387


WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(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:
Three Months Ended March 31,Three Months Ended March 31,
2020 201920212020
($ in thousands)($ in thousands)
Premiums written   Premiums written
Direct$104,372
 $80,798
Direct$99,524 $104,372 
Assumed130,530
 105,891
Assumed116,999 130,530 
Ceded(48,202) (41,302)Ceded(37,212)(48,202)
Net$186,700
 $145,387
Net$179,311 $186,700 
Premiums earned   Premiums earned
Direct$88,536
 $63,517
Direct$101,414 $88,536 
Assumed99,529
 113,481
Assumed97,779 99,529 
Ceded(48,026) (30,904)Ceded(51,462)(48,026)
Net$140,039
 $146,094
Net$147,731 $140,039 
Losses and loss adjustment expenses   Losses and loss adjustment expenses
Direct$88,694
 $48,404
Direct$71,593 $88,694 
Assumed74,720
 84,524
Assumed77,546 74,720 
Ceded(52,738) (22,078)Ceded(30,345)(52,738)
Net$110,676
 $110,850
Net$118,794 $110,676 
The Company monitors the financial condition of its reinsurers and attempts to place coverages only with financially sound carriers. At March 31, 20202021 and December 31, 2019, approximately 95%2020, 100% of ceded loss and 95%, 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 5%, respectively, were due from companies not rated.better.
At March 31, 20202021 and December 31, 2019,2020, approximately 45%46% and 47%44%, 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.

15

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(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 three months ended March 31, 20202021 and 2019.2020.
Three Months Ended March 31,
20212020
($ in thousands)
Gross reserve for losses and loss adjustment expenses at beginning of period$1,519,583 $1,263,628 
Unpaid losses and loss adjustment expenses recoverable269,902 165,549 
Net reserve for losses and loss adjustment expenses at beginning of period1,249,681 1,098,079 
Net incurred losses and loss adjustment expenses relating to losses occurring in:
Current period118,687 110,856 
Prior years107 (180)
Total net losses and loss adjustment expenses118,794 110,676 
Foreign exchange losses (gains)(1,876)(26,015)
Net paid losses and loss adjustment expenses relating to losses occurring in:
Current period(12,953)(10,585)
Prior years(58,526)(62,585)
Total paid losses and loss adjustment expenses(71,479)(73,170)
Net reserve for losses and loss adjustment expenses at end of period1,295,120 1,109,570 
Unpaid losses and loss adjustment expenses recoverable273,123 190,679 
Gross reserve for losses and loss adjustment expenses at end of period$1,568,243 $1,300,249 
 Three Months Ended March 31,
 2020 2019
 ($ in thousands)
Gross reserve for losses and loss adjustment expenses at beginning of period$1,263,628
 $1,032,760
Unpaid losses and loss adjustment expenses recoverable165,549
 81,267
Net reserve for losses and loss adjustment expenses at beginning of period1,098,079
 951,493
    
Net incurred losses and loss adjustment expenses relating to losses occurring in:   
Current period110,856
 110,901
Prior years(180) (51)
Total net losses and loss adjustment expenses110,676
 110,850
    
Foreign exchange (gains) losses(26,015) 4,163
    
Net paid losses and loss adjustment expenses relating to losses occurring in:   
Current period(10,585) (6,330)
Prior years(62,585) (54,598)
Total paid losses and loss adjustment expenses(73,170) (60,928)
    
Net reserve for losses and loss adjustment expenses at end of period1,109,570
 1,005,578
Unpaid losses and loss adjustment expenses recoverable190,679
 98,954
Gross reserve for losses and loss adjustment expenses at end of period$1,300,249
 $1,104,532
During the three months ended March 31, 2021, the Company recorded net unfavorable development on prior year loss reserves of $0.1 million. Net unfavorable development was experienced on insurance programs and coinsurance losses of $3.1 million and property catastrophe reinsurance losses of $2.1 million, offset by favorable development on casualty reinsurance losses of $2.9 million and other specialty reinsurance losses of $2.2 million.
During the three months ended March 31, 2020, the Company recorded net favorable development on prior year loss reserves of $0.2 million. Net favorable development was experienced on casualty reinsurance losses of $4.0 million, property catastrophe reinsurance losses of $0.5 million and other specialty reinsurance losses $0.1 million, offset by unfavorable development on insurance losses of $4.4 million.
During the three months ended March 31, 2019, the Company recorded net favorable development on prior year loss reserves of $0.1 million. Net favorable development was experienced on casualty reinsurance losses of $1.8 million, offset by unfavorable development on property catastrophe reinsurance losses of $0.8 million, insurance programs and coinsurance losses of $0.6 million, and other specialty reinsurance losses of $0.4$4.4 million.

16

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)



6. 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, 2020March 31, 2021 and MarchDecember 31, 2020, and changes in the allowance for expected credit losses for the three months ended March 31, 2021 and the twelve months ended December 31, 2020.
At and For the Three Months Ended March 31, 2021At and For the Twelve Months Ended December 31, 2020
Premiums Receivable, Net of Allowance Allowance for Expected Credit LossesPremiums Receivable, Net of AllowanceAllowance for Expected Credit LossesPremiums Receivable, Net of AllowanceAllowance for Expected Credit Losses
($ in thousands)($ in thousands)
Balance at beginning of period$273,657
 $—
Balance at beginning of period$224,377 $156 $273,657 $0 
Cumulative effect of adoption of updated accounting guidance for credit losses at January 1, 2020  156
Cumulative effect of adoption of updated accounting guidance for credit losses at January 1, 20200 156 
Current period change for expected credit losses  —
Current period change for expected credit losses0 0 
Write-offs charged against the allowance  —
Write-offs charged against the allowance0 0 
Balance at end of period$281,541
 $156
Balance at end of period$252,523 $156 $224,377 $156 
Reinsurance Recoverables
The following table presents the balances of reinsurance recoverables, net of the allowance for expected credit losses, at January 1, 2020March 31, 2021 and MarchDecember 31, 2020, and changes in the allowance for expected credit losses for the three months ended March 31, 2021 and the twelve months ended December 31, 2020.
At and For the Three Months Ended March 31, 2021At and For the Twelve Months Ended December 31, 2020
Reinsurance Recoverables, Net of Allowance Allowance for Expected Credit LossesReinsurance Recoverables, Net of AllowanceAllowance for Expected Credit LossesReinsurance Recoverables, Net of AllowanceAllowance for Expected Credit Losses
($ in thousands)($ in thousands)
Balance at beginning of period$170,974
 $—
Balance at beginning of period$286,590 $305 $170,974 $0 
Cumulative effect of adoption of updated accounting guidance for credit losses at January 1, 2020 (1)  297
0 297 
Current period change for expected credit losses  —
Current period change for expected credit losses2 8 
Write-offs charged against the allowance  —
Write-offs charged against the allowance0 0 
Balance at end of period(1)$197,458
 $297
$291,485 $307 $286,590 $305 
(1) TheAs at March 31, 2021 and December 31, 2020, the allowance for credit losses is gross of deferred tax of $25 thousand.


17

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)



7. Investment information
Available for Sale Investments
The following tables summarize the fair value of the Company’s securities classified as available for sale as of March 31, 20202021 and December 31, 2019:2020:
Cost or Amortized CostGross Unrealized GainsGross Unrealized LossesAllowance for Expected Credit LossesFair Value
($ in thousands)
March 31, 2021
Fixed maturities:
Corporate bonds$197,849 $4,829 $(1,287)$(395)$200,996 
U.S. government and government agency bonds164,898 755 (243)0 165,410 
Non-U.S. government and government agency bonds152,527 9,012 (875)(207)160,457 
Asset-backed securities83,515 779 (864)0 83,430 
Mortgage-backed securities15,579 1 (259)(6)15,315 
Municipal government and government agency bonds1,686 93 0 0 1,779 
Total investments, available for sale$616,054 $15,469 $(3,528)$(608)$627,387 
Cost or Amortized CostGross Unrealized GainsGross Unrealized LossesAllowance for Expected Credit LossesFair Value
($ in thousands)
December 31, 2020
Fixed maturities:
U.S. government and government agency bonds$201,114 $1,122 $(22)$0 $202,214 
Corporate bonds188,473 9,176 (456)(196)196,997 
Non-U.S. government and government agency bonds146,594 10,837 (102)0 157,329 
Asset-backed securities82,803 536 (3,081)0 80,258 
Mortgage-backed securities17,405 5 (747)0 16,663 
Municipal government and government agency bonds1,686 102 0 0 1,788 
Total investments, available for sale$638,075 $21,778 $(4,408)$(196)$655,249 







18
 Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses (1) Fair Value
 ($ in thousands)
March 31, 2020       
Fixed maturities:       
U.S. government and government agency bonds$256,191
 $8,635
 $—
 $264,826
Non-U.S. government and government agency bonds151,000
 4,040
 (6,564) 148,476
Corporate bonds169,735
 2,296
 (4,969) 167,062
Asset-backed securities144,808
 —
 (31,225) 113,583
Mortgage-backed securities26,341
 —
 (4,556) 21,785
Municipal government and government agency bonds1,760
 60
 —
 1,820
Total investments, available for sale$749,835
 $15,031
 $(47,314) $717,552
(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-(b) Recent accounting pronouncements-Issued and effective as of March 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 $0.6 million for securities with an unrealized loss of $5.7 million as of March 31, 2020.
 Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
 ($ in thousands)
December 31, 2019       
Fixed maturities:       
U.S. government and government agency bonds$282,076
 $1,708
 $(137) $283,647
Corporate bonds155,834
 2,326
 (41) 158,119
Asset-backed securities145,555
 614
 (735) 145,434
Non-U.S. government and government agency bonds129,456
 3,530
 (1,033) 131,953
Mortgage-backed securities24,776
 18
 (44) 24,750
Municipal government and government agency bonds1,759
 46
 —
 1,805
Total investments, available for sale$739,456
 $8,242
 $(1,990) $745,708








WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(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 Months12 Months or MoreTotal
Less than 12 Months 12 Months or More TotalFair ValueGross Unrealized LossesFair ValueGross Unrealized LossesFair ValueGross Unrealized Losses
Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses
March 31, 2020($ in thousands)
March 31, 2021March 31, 2021($ in thousands)
Fixed maturities:           Fixed maturities:
Non-U.S. government and government agency bonds$120,115
 $(6,564) $—
 $—
 $120,115
 $(6,564)
U.S. government and government agency bondsU.S. government and government agency bonds$89,559 $(243)$0 $0 $89,559 $(243)
Corporate bonds86,724
 (4,969) —
 —
 86,724
 (4,969)Corporate bonds59,919 (1,386)5,540 (296)65,459 (1,682)
Asset-backed securities100,514
 (27,336) 13,069
 (3,889) 113,583
 (31,225)Asset-backed securities12,330 (133)35,767 (731)48,097 (864)
Non-U.S. government and government agency bondsNon-U.S. government and government agency bonds39,805 (1,082)0 0 39,805 (1,082)
Mortgage-backed securities21,784
 (4,556) —
 —
 21,784
 (4,556)Mortgage-backed securities1,515 (3)12,719 (262)14,234 (265)
Total$329,137
 $(43,425) $13,069
 $(3,889) $342,206
 $(47,314)Total$203,128 $(2,847)$54,026 $(1,289)$257,154 $(4,136)
December 31, 2019           
December 31, 2020December 31, 2020
Fixed maturities:           Fixed maturities:
Asset-backed securitiesAsset-backed securities$48,790 $(2,538)$16,730 $(543)$65,520 $(3,081)
Corporate bondsCorporate bonds19,862 (652)0 0 19,862 (652)
Mortgage-backed securitiesMortgage-backed securities13,194 (671)2,909 (76)16,103 (747)
U.S. government and government agency bonds$36,540
 $(137) $—
 $—
 $36,540
 $(137)U.S. government and government agency bonds15,492 (22)0 0 15,492 (22)
Non-U.S. government and government agency bonds51,779
 (1,027) 5,410
 (6) 57,189
 (1,033)Non-U.S. government and government agency bonds14,296 (102)0 0 14,296 (102)
Corporate bonds9,854
 (41) —
 —
 9,854
 (41)
Asset-backed securities55,194
 (504) 19,430
 (231) 74,624
 (735)
Mortgage-backed securities14,481
 (44) —
 —
 14,481
 (44)
Total$167,848
 $(1,753) $24,840
 $(237) $192,688
 $(1,990)Total$111,634 $(3,985)$19,639 $(619)$131,273 $(4,604)
At March 31, 2020, 1032021, 68 positions out of a total of 140 positions were in an unrealized loss position. The unrealized loss position increaseddecreased during the three-month period from $2.0$4.6 million to $47.3$4.1 million. The reduction in the unrealized loss position can be attributed to overall market improvements, which primarily benefited asset-backed and mortgage-backed securities during the period. This was partially offset by a rise in yields, which negatively impacted corporate bonds and non-U.S. government bonds. The Company believes that such securities were temporarily impaired at March 31, 2021.
At December 31, 2020, 47 positions out of a total of 144 positions were in an unrealized loss position. 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 and unfavorable foreign exchange rates impacting the non-U.S. government agency bonds during the period.
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, 2019.2020.
Allowance for expected credit losses
The Company recognized an allowance for expected credit losses on available for sale securities was $0.6 million and $0.2 million as of March 31, 2021 and December 31, 2020, respectively. The Company recognized changes in the allowance of $0.4 million, $0.6 million and $0.2 million for the three months ended March 31, 2020. No credit losses were previously recognized2021 and there2020 and the twelve months ended December 31, 2020, respectively. There were no write-offs charged against the allowance.allowance for the three months ended March 31, 2021 and 2020, or for the twelve months ended December 31, 2020. The change in allowance is recognized in “realized and unrealized gains (losses) on investments” in the Company’s consolidated statements
19

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)

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.


WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(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 March 31, 20202021 and December 31, 20192020 are shown in the following tables.
March 31, 2021
Amortized CostEstimated Fair Value% of Fair Value
($ in thousands)
Due in one year or less$17,435 $17,906 2.9 %
Due after one year through five years351,930 360,593 57.5 %
Due after five years through ten years133,455 136,440 21.7 %
Due after ten years14,140 13,703 2.2 %
Asset-backed securities83,515 83,430 13.3 %
Mortgage-backed securities15,579 15,315 2.4 %
Total investments, available for sale$616,054 $627,387 100.0 %
March 31, 2020December 31, 2020
Amortized Cost Estimated Fair Value % of Fair ValueAmortized CostEstimated Fair Value% of Fair Value
($ in thousands)($ in thousands)
Due in one year or less$15,055
 $14,846
 2.1%Due in one year or less$27,469 $28,336 4.3 %
Due after one year through five years423,133
 428,376
 59.7%Due after one year through five years367,343 378,427 57.8 %
Due after five years through ten years127,826
 127,555
 17.8%Due after five years through ten years123,253 132,165 20.2 %
Due after ten years12,672
 11,407
 1.6%Due after ten years19,802 19,400 3.0 %
Asset-backed securities144,808
 113,583
 15.8%Asset-backed securities82,803 80,258 12.2 %
Mortgage-backed securities26,341
 21,785
 3.0%Mortgage-backed securities17,405 16,663 2.5 %
Total investments, available for sale$749,835
 $717,552
 100.0%Total investments, available for sale$638,075 $655,249 100.0 %












20
 December 31, 2019
 Amortized Cost Estimated Fair Value % of Fair Value
 ($ in thousands)
Due in one year or less$9,235
 $9,248
 1.3%
Due after one year through five years414,235
 417,921
 56.0%
Due after five years through ten years133,822
 136,329
 18.3%
Due after ten years11,833
 12,026
 1.6%
Asset-backed securities145,555
 145,434
 19.5%
Mortgage-backed securities24,776
 24,750
 3.3%
Total investments, available for sale$739,456
 $745,708
 100.0%


WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)



Fair Value Option and Fair Value Through Net Income
The following table summarizestables summarize the fair value of the Company’s securities held as of March 31, 20202021 and December 31, 2019,2020, classified as fair value through net income or for which the fair value option was elected:
Cost or Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
($ in thousands)
March 31, 2021
Term loan investments$815,305 $11,286 $(36,405)$790,186 
Fixed maturities:
Corporate bonds394,828 15,675��(7,115)403,388 
Asset-backed securities150,365 2,436 (18,276)134,525 
Non-U.S. government and government agency bonds1,419 82 0 1,501 
U.S. government and government agency bonds266 7 0 273 
Short-term investments477,084 6,517 (1)483,600 
Equities49,045 23,079 (4,829)67,295 
Investments, fair value option$1,888,312 $59,082 $(66,626)$1,880,768 
Fair Value Through Net Income:
Equities, fair value through net income$72,866 $6,856 $(15,964)$63,758 
Cost or Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value($ in thousands)
($ in thousands)
March 31, 2020       
December 31, 2020December 31, 2020
Term loan investments$1,113,510
 $986
 $(207,497) $906,999
Term loan investments$890,996 $7,948 $(47,405)$851,539 
Fixed maturities:       Fixed maturities:
Corporate bonds296,918
 4,038
 (59,878) 241,078
Corporate bonds313,212 17,772 (18,114)312,870 
Asset-backed securitiesAsset-backed securities162,644 2,154 (24,290)140,508 
Non-U.S. government and government agency bondsNon-U.S. government and government agency bonds1,425 85 0 1,510 
U.S. government and government agency bonds586
 11
 —
 597
U.S. government and government agency bonds267 7 0 274 
Asset-backed securities198,262
 2,231
 (59,880) 140,613
Mortgage-backed securities7,289
 1,649
 (409) 8,529
Non-U.S. government and government agency bonds1,443
 42
 (103) 1,382
Municipal government and government agency bonds252
 1
 —
 253
Short-term investments348,059
 542
 (4,740) 343,861
Short-term investments412,762 5,928 0 418,690 
Other investments28,673
 2,009
 —
 30,682
Equities53,111
 12,130
 (7,150) 58,091
Equities49,044 20,855 (4,905)64,994 
Investments, fair value option$2,048,103
 $23,639
 $(339,657) $1,732,085
Investments, fair value option$1,830,350 $54,749 $(94,714)$1,790,385 
Fair Value Through Net Income:       Fair Value Through Net Income:
Equities, fair value through net income$88,134
 $1,855
 $(26,820) $63,169
Equities, fair value through net income$74,258 $5,126 $(26,177)$53,207 


21

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)



 Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
 ($ in thousands)
December 31, 2019       
Term loan investments$1,113,212
 $7,340
 $(58,618) $1,061,934
Fixed maturities:       
Corporate bonds221,024
 8,430
 (15,100) 214,354
U.S. government and government agency bonds1,963
 1
 (2) 1,962
Asset-backed securities200,361
 3,329
 (12,953) 190,737
Mortgage-backed securities7,399
 712
 (405) 7,706
Non-U.S. government and government agency bonds1,449
 18
 (11) 1,456
Municipal government and government agency bonds380
 —
 (1) 379
Short-term investments325,542
 3,817
 (56) 329,303
Other investments28,672
 2,264
 (475) 30,461
Equities54,893
 10,690
 (5,784) 59,799
Investments, fair value option$1,954,895
 $36,601
 $(93,405) $1,898,091
Fair Value Through Net Income:       
Equities, fair value through net income$78,031
 $2,360
 $(15,053) $65,338


WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(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 March 31, 20202021 and December 31, 20192020 are shown in the following tables.
March 31, 2020March 31, 2021
Amortized Cost Estimated Fair Value % of Fair ValueAmortized CostEstimated Fair Value% of Fair Value
($ in thousands)($ in thousands)
Due in one year or less$368,381
 $361,088
 22.0%Due in one year or less$498,680 $505,474 27.9 %
Due after one year through five years809,886
 660,746
 40.2%Due after one year through five years731,977 718,449 39.6 %
Due after five years through ten years582,501
 472,336
 28.7%Due after five years through ten years440,795 438,017 24.2 %
Due after ten yearsDue after ten years17,450 17,008 0.9 %
Asset-backed securities198,262
 140,613
 8.6%Asset-backed securities150,365 134,525 7.4 %
Mortgage-backed securities7,289
 8,529
 0.5%
Total$1,966,319
 $1,643,312
 100.0%Total$1,839,267 $1,813,473 100.0 %
December 31, 2019December 31, 2020
Amortized Cost Estimated Fair Value % of Fair ValueAmortized CostEstimated Fair Value% of Fair Value
($ in thousands)($ in thousands)
Due in one year or less$368,452
 $370,479
 20.5%Due in one year or less$435,818 $440,003 25.5 %
Due after one year through five years779,643
 742,960
 41.1%Due after one year through five years833,722 809,119 46.9 %
Due after five years through ten years514,961
 495,416
 27.4%Due after five years through ten years340,164 327,184 19.0 %
Due after ten years514
 533
 —%Due after ten years8,958 8,577 0.5 %
Asset-backed securities200,361
 190,737
 10.6%Asset-backed securities162,644 140,508 8.1 %
Mortgage-backed securities7,399
 7,706
 0.4%
Total$1,871,330
 $1,807,831
 100.0%Total$1,781,306 $1,725,391 100.0 %
Variable Interest Entities
In the normal course of its investing activities, the Company invests in limited partnerships, limited liability companies and other investment securities. Due to the legal forms of the entities and the fact that the investors lack the ability, through voting rights or similar rights, to make decisions that have a significant effect on the entities, such investments are considered variable interest entities. Since the Company lacks the ability to control the activities that most significantly impact the economic performance of these variable interest entities, the Company is not considered the primary beneficiary and does not consolidate these investments.
The activities of these entities are generally limited to holding and managing the underlying investments. The Company’s maximum exposure to loss with respect to these investments is limited to the investment carrying amounts reported as “other investments” in the Company’s consolidated balance sheet and any unfunded commitments. Realized and unrealized gains and losses from such investments are included in “realized and unrealized gains (losses) on investments” in the Company’s consolidated statements of income (loss).

22

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)



The tabletables below summarizessummarize the credit quality of our total investments as of March 31, 20202021 and December 31, 2019,2020, as rated by Standard & Poor’s Financial Services, LLC, or Standard & Poor’s, Moody’s Investors Service, or Moody’s, Fitch Ratings Inc., or Fitch, Kroll Bond Rating Agency, or KBRA, or DBRS Morningstar, or DBRS, as applicable:
Credit Rating (1)
Credit Rating (1)
March 31, 2020Fair Value AAA AA A BBB BB B CCC CC C D Not Rated
March 31, 2021March 31, 2021Fair ValueAAAAAABBBBBBCCCCCCNot Rated
($ in thousands)($ in thousands)
Term loan investments$906,999
 $—
 $—
 $—
 $—
 $10,277
 $650,028
 $161,307
 $2,823
 $1,314
 $1,590
 $79,660
Term loan investments$790,186 $0 $0 $0 $11,564 $34,507 $518,654 $174,552 $4,144 $1,283 $45,482 
Fixed maturities:                       Fixed maturities:
Corporate bonds408,140
 —
 34,647
 76,063
 58,018
 19,222
 84,955
 118,847
 1,872
 —
 3,699
 10,817
Corporate bonds604,384 0 18,674 92,658 92,145 68,227 252,327 52,415 9,765 0 18,173 
U.S. government and government agency bonds265,423
 —
 265,423
 —
 —
 —
 —
 —
 —
 —
 —
 —
U.S. government and government agency bonds165,683 0 165,683 0 0 0 0 0 0 0 0 
Asset-backed securities254,196
 1,628
 —
 19,319
 181,547
 19,727
 7,395
 1,418
 —
 —
 —
 23,162
Asset-backed securities217,955 0 609 7,431 136,415 33,536 9,085 5,770 262 0 24,847 
Mortgage-backed securities30,314
 —
 —
 4,600
 17,185
 1,190
 —
 —
 —
 —
 2,552
 4,787
Mortgage-backed securities15,315 0 0 1,516 13,799 0 0 0 0 0 0 
Non-U.S. government and government agency bonds149,858
 —
 149,858
 —
 —
 —
 —
 —
 —
 —
 —
 —
Non-U.S. government and government agency bonds161,958 0 161,958 0 0 0 0 0 0 0 0 
Municipal government and government agency bonds2,073
 1,023
 570
 480
 —
 —
 —
 —
 —
 —
 —
 —
Municipal government and government agency bonds1,779 782 588 409 0 0 0 0 0 0 0 
Total fixed income instruments2,017,003
 2,651
 450,498
 100,462
 256,750
 50,416
 742,378
 281,572
 4,695
 1,314
 7,841
 118,426
Total fixed income instruments1,957,260 782 347,512 102,014 253,923 136,270 780,066 232,737 14,171 1,283 88,502 
Short-term investments343,861
 30,174
 154,787
 402
 110,795
 —
 40,000
 —
 —
 —
 —
 7,703
Short-term investments483,600 143,441 187,807 99,140 49,494 0 3,163 555 0 0 0 
Total fixed income instruments and short-term investments2,360,864
 32,825
 605,285
 100,864
 367,545
 50,416
 782,378
 281,572
 4,695
 1,314
 7,841
 126,129
Total fixed income instruments and short-term investments2,440,860 144,223 535,319 201,154 303,417 136,270 783,229 233,292 14,171 1,283 88,502 
Other Investments30,682
                      
Equities121,260
                      Equities131,053 
Total$2,512,806
 $32,825
 $605,285
 $100,864
 $367,545
 $50,416
 $782,378
 $281,572
 $4,695
 $1,314
 $7,841
 $126,129
Total$2,571,913 $144,223 $535,319 $201,154 $303,417 $136,270 $783,229 $233,292 $14,171 $1,283 $88,502 
(1) For individual fixed maturity investments, Standard & Poor’s ratings are used. In the absence of a Standard & Poor’s rating, ratings from Moody’s are used, followed by ratings from Fitch, followed by ratings from KBRA, followed by ratings from DBRS.

23

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)



Credit Rating (1)
Credit Rating (1)
December 31, 2019Fair Value AAA AA A BBB BB B CCC CC C D Not Rated
December 31, 2020December 31, 2020Fair ValueAAAAAABBBBBBCCCCCCNot Rated
($ in thousands)($ in thousands)
Term loan investments$1,061,934
 $—
 $—
 $—
 $—
 $9,617
 $761,168
 $215,909
 $6,823
 $2,119
 $—
 $66,298
Term loan investments$851,539 $0 $0 $0 $11,352 $19,486 $588,215 $185,221 $7,406 $2,727 $37,132 
Fixed maturities:                       Fixed maturities:
Corporate bonds372,473
 —
 36,128
 81,401
 41,103
 9,003
 58,345
 135,613
 —
 —
 —
 10,880
Corporate bonds509,867 0 19,812 82,379 87,913 38,232 194,418 59,421 8,280 1,894 17,518 
U.S. government and government agency bonds285,609
 —
 285,609
 —
 —
 —
 —
 —
 —
 —
 —
 —
U.S. government and government agency bonds202,488 0 202,488 0 0 0 0 0 0 0 0 
Asset-backed securities336,171
 2,006
 —
 29,179
 223,956
 29,695
 18,381
 —
 —
 —
 —
 32,954
Asset-backed securities220,766 0 0 15,675 133,471 31,822 8,385 8,262 837 0 22,314 
Mortgage-backed securities32,456
 —
 —
 1,100
 23,650
 976
 —
 —
 —
 —
 2,497
 4,233
Mortgage-backed securities16,663 0 0 2,092 14,571 0 0 0 0 0 0 
Non-U.S. government and government agency bonds133,409
 —
 132,460
 —
 949
 —
 —
 —
 —
 —
 —
 —
Non-U.S. government and government agency bonds158,839 0 158,839 0 0 0 0 0 0 0 0 
Municipal government and government agency bonds2,184
 1,135
 573
 476
 —
 —
 —
 —
 —
 —
 —
 —
Municipal government and government agency bonds1,788 783 592 413 0 0 0 0 0 0 0 
Total fixed income instruments2,224,236
 3,141
 454,770
 112,156
 289,658
 49,291
 837,894
 351,522
 6,823
 2,119
 2,497
 114,365
Total fixed income instruments1,961,950 783 381,731 100,559 247,307 89,540 791,018 252,904 16,523 4,621 76,964 
Short-term investments329,303
 25,783
 136,842
 34,903
 115,155
 —
 —
 8,359
 —
 —
 —
 8,261
Short-term investments418,690 89,519 168,700 108,905 47,891 0 3,186 489 0 0 0 
Total fixed income instruments and short-term investments2,553,539
 28,924
 591,612
 147,059
 404,813
 49,291
 837,894
 359,881
 6,823
 2,119
 2,497
 122,626
Total fixed income instruments and short-term investments2,380,640 90,302 550,431 209,464 295,198 89,540 794,204 253,393 16,523 4,621 76,964 
Other Investments30,461
                      
Equities125,137
                      Equities118,201 
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 
(1) For individual fixed maturity investments, Standard & Poor’s ratings are used. In the absence of a Standard & Poor’s rating, ratings from Moody’s are used, followed by ratings from Fitch, followed by ratings from KBRA, followed by ratings from DBRS.





24

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)



Fair value option
The Company elected to carry the majority of fixed maturity securities and other investments at fair value under the fair value option afforded by accounting guidance regarding the fair value option for financial assets and liabilities. Changes in fair value of investments accounted for using the fair value option are included in “realized and unrealized gain (loss) on investments” in the Company’s consolidated statements of income (loss). The Company elected to use this option as investments are not necessarily held to maturity, and in order to address simplification and cost-benefit considerations.
Net investment income (loss)
The components of net investment income (loss) for the three months ended March 31, 20202021 and 20192020 were derived from the following sources:
Three Months Ended March 31, 2021
Net Interest IncomeNet Unrealized Gains (Losses)Net Realized Gains (Losses)Net Investment Income (Loss)
($ in thousands)
Net investment income (loss) by asset class:
Term loan investments$13,505 $14,338 $1,398 $29,241 
Fixed maturities - Fair value option9,768 16,317 5,623 31,708 
Fixed maturities - Available for sale (1)2,478 0 499 2,977 
Short-term investments47 38 (75)10 
Equities0 2,300 0 2,300 
Equities, fair value through net income (2)0 10,063 (6,646)3,417 
Other (3)0 1,415 903 2,318 
Investment management fees - related parties(4,487)— — (4,487)
Borrowing and miscellaneous other investment expenses(2,354)— — (2,354)
Investment performance fees - related parties— — — (6,016)
$18,957 $44,471 $1,702 $59,114 
(1) Net realized gains (losses) from the fixed maturities available for sale portfolio consists of realized gains and realized losses of $1.2 million and $0.7 million, respectively. Realized losses include an allowance for expected credit losses on available for sale securities of $0.4 million for the three months ended March 31, 2021.
(2) Net interest income includes dividends for securities held in long and short positions.
(3) Other includes unrealized gains and unrealized losses for total return swaps.
25

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)

Three Months Ended March 31, 2020Three Months Ended March 31, 2020
Net Interest Income Net Unrealized Gains (Losses) Net Realized Gains (Losses) Net Investment Income (Loss)Net Interest IncomeNet Unrealized Gains (Losses)Net Realized Gains (Losses)Net Investment Income (Loss)
($ in thousands)($ in thousands)
Net investment income (loss) by asset class:       Net investment income (loss) by asset class:
Term loan investments$21,018
 $(155,233) $(8,145) $(142,360)Term loan investments$21,018 $(155,233)$(8,145)$(142,360)
Fixed maturities - Fair value option9,068
 (89,675) (1,244) (81,851)Fixed maturities - Fair value option9,068 (89,675)(1,244)(81,851)
Fixed maturities - Available for sale (1)4,660
 —
 2,180
 6,840
Fixed maturities - Available for sale (1)4,660 0 2,180 6,840 
Short-term investments1,850
 (3,440) 87
 (1,503)Short-term investments1,850 (3,440)87 (1,503)
Equities (2)—
 76
 1,041
 1,117
Equities, fair value through net income (2)377
 (12,275) (212) (12,110)
EquitiesEquities0 76 (39)37 
Equities, fair value through net incomeEquities, fair value through net income377 (12,275)868 (11,030)
Other investments851
 220
 —
 1,071
Other investments851 220 0 1,071 
Other (3)—
 (25,129) 1,247
 (23,882)
Other (2)Other (2)0 (25,129)1,247 (23,882)
Investment management fees - related parties(4,352) —
 —
 (4,352)Investment management fees - related parties(4,352)— — (4,352)
Borrowing and miscellaneous other investment expenses(5,669) —
 —
 (5,669)Borrowing and miscellaneous other investment expenses(5,669)— — (5,669)
$27,803
 $(285,456) $(5,046) $(262,699)
$27,803 $(285,456)$(5,046)$(262,699)
(1) Net realized gains (losses) from the fixed maturities available for sale portfolio consists of realized gains and realized losses of $3.3 million and $1.1 million, respectively. Realized losses include an allowance for expected credit losses on available for sale securities of $0.6 million for the three months ended March 31, 2020.
(2) Net interest income includes dividends for securities held in long and short positions.
(3) Other includes unrealized gains and unrealized losses for total return swaps.

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


 Three Months Ended March 31, 2019
 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$22,410
 $9,366
 $64
 $31,840
Fixed maturities - Fair value option16,043
 19,975
 (749) 35,269
Fixed maturities - Available for sale (1)3,422
 —
 395
 3,817
Short-term investments524
 (448) —
 76
Equities (2)120
 2,158
 —
 2,278
Equities, fair value through net income (2)622
 (1,989) 1,572
 205
Other investments—
 1,794
 —
 1,794
Other (3)—
 1,582
 —
 1,582
Investment management fees - related parties(4,409) —
 —
 (4,409)
Borrowing and miscellaneous other investment expenses(8,298) —
 —
 (8,298)
Investment performance fees - related parties—
 —
 —
 (5,800)
 $30,434
 $32,438
 $1,282
 $58,354
(1) Net realized gains (losses) from the fixed maturities available for sale portfolio consists of realized gains and realized losses of $498.0 thousand and $103.0 thousand, respectively.
(2) Net interest income includes dividends for securities held in long and short positions.
(3) Other includes unrealized gains and unrealized losses for total return swaps.
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 March 31, 20202021 and December 31, 2019,2020, the Company held $2.1$2.0 billion and $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 $5.1$7.7 million and $6.4$7.8 million, respectively, in deposits with U.S. regulatory authorities.
Non-cash investing activities
During the first quarter of 2021, $15.3 million of investments were converted or exchanged in non-cash transactions from fixed maturities or listed common stock equity positions to fixed maturities or unlisted common stock equity positions, as presented on the consolidated statements of cash flows.
During the first quarter of 2020, as a result of the restructuring of an investment position held by the Company, $13.5 million of term loans, held within “term loans, fair value option,” were exchanged for $13.5 million of short-term investments held within “short-term investments, fair value option.”

26

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)



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.
During 2019, as 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. 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).
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;
•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

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


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
27

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)

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 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 March 31, 2020,2021, approximately $130.0$137.3 million, or 5.3%5.4%, were priced using non-binding broker-dealer quotes or modeled valuations. Of the $2.6$2.5 billion of net financial assets and liabilities measured at fair value at December 31, 2019,2020, approximately $131.8$142.5 million, or 5.0%5.8%, 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 and others. A discussion of the general classification of the Company’s financial instruments follows:
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 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.

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


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 using quantitative and qualitative assessments such as internally modeled values, which are reviewed by the Company’s management. The modeled values
28

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)

are based on peer bonds and comparison to industry-specific market data. In addition, the 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 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 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

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


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.
29

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)

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 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.
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 9, “Derivative instruments” for more information.
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 9, “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 NAVs as a practical expedient, therefore the fair value of the funds have not been categorized within the fair value hierarchy.













30

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)



The following table presentstables present the Company’s financial assets and liabilities measured at fair value by level as of March 31, 20202021 and December 31, 2019:2020:
Fair Value Measurement Using:
  Fair Value Measurement Using:
March 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)
March 31, 2021March 31, 2021Estimated
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$906,999
 $—
 $871,054
 $35,945
Term loans$790,186 $0 $746,790 $43,396 
Fixed maturities:       Fixed maturities:
Corporate bonds408,140
 —
 407,175
 965
Corporate bonds604,384 0 603,395 989 
U.S. government and government agency bonds265,423
 265,310
 113
 —
U.S. government and government agency bonds165,683 165,574 109 0 
Asset-backed securities254,196
 —
 254,196
 —
Asset-backed securities217,955 0 217,955 0 
Mortgage-backed securities30,314
 —
 30,314
 —
Mortgage-backed securities15,315 0 15,315 0 
Non-U.S. government and government agency bonds149,858
 —
 149,858
 —
Non-U.S. government and government agency bonds161,958 0 161,958 0 
Municipal government and government agency bonds2,073
 —
 2,073
 —
Municipal government and government agency bonds1,779 0 1,779 0 
Short-term investments343,861
 296,158
 47,703
 —
Short-term investments483,600 479,880 3,720 0 
Equities121,260
 9,750
 1,420
 110,090
Equities131,053 14,943 8,491 107,619 
Other investments measured at net asset value (1)30,682
 —
 —
 —
Other underwriting derivative assetsOther underwriting derivative assets31 0 31 0 
Investment derivative assets (1)Investment derivative assets (1)840 0 840 0 
Total assets measured at fair value$2,512,806
 $571,218
 $1,763,906
 $147,000
Total assets measured at fair value$2,572,784 $660,397 $1,760,383 $152,004 
       
Other underwriting derivative liabilities$314
 $—
 $314
 $—
Other underwriting derivative liabilities$0 $0 $0 $0 
Investment derivative liabilities (2)23,726
 —
 23,726
 —
Investment derivative liabilities (1)Investment derivative liabilities (1)176 0 176 0 
Payable for securities sold short:       Payable for securities sold short:
U.S. government and government agency bondsU.S. government and government agency bonds21,664 21,664 0 0 
Corporate bonds30,076
 —
 30,076
 —
Corporate bonds12,433 0 12,433 0 
EquitiesEquities492 0 492 0 
Total liabilities measured at fair value$54,116
 $—
 $54,116
 $—
Total liabilities measured at fair value$34,765 $21,664 $13,101 $0 
(1) 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.
(2) Investment derivative assets and liabilities represent the fair value of total return swaps, which are recorded in “other assets” and “other liabilities” in the consolidated balance sheets as of March 31, 2020.2021.




31

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)



Fair Value Measurement Using:
December 31, 2020Estimated
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 bonds509,867 0 508,882 985 
U.S. government and government agency bonds202,488 202,378 110 0 
Asset-backed securities220,766 0 220,766 0 
Mortgage-backed securities16,663 0 16,663 0 
Non-U.S. government and government agency bonds158,839 0 158,839 0 
Municipal government and government agency bonds1,788 0 1,788 0 
Short-term investments418,690 415,014 3,676 0 
Equities118,201 624 13,025 104,552 
Other underwriting derivative assets25 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 bonds21,680 0 21,680 0 
Equities295 0 295 0 
Total liabilities measured at fair value$23,092 $0 $23,092 $0 
   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)
 ($ in thousands)
Assets measured at fair value:       
Term loans$1,061,934
 $—
 $1,025,886
 $36,048
Fixed maturities:       
Corporate bonds372,473
 —
 371,540
 933
U.S. government and government agency bonds285,609
 285,500
 109
 —
Asset-backed securities336,171
 —
 336,171
 —
Mortgage-backed securities32,456
 —
 32,456
 —
Non-U.S. government and government agency bonds133,409
 —
 133,409
 —
Municipal government and government agency bonds2,184
 —
 2,184
 —
Short-term investments329,303
 318,012
 11,291
 —
Equities125,137
 13,548
 2,998
 108,591
Other underwriting derivative assets148
 —
 148
 —
Investment derivative assets (1)1,667
 —
 1,667
 —
Other investments measured at net asset value (2)30,461
 —
 —
 —
Total assets measured at fair value$2,710,952
 $617,060
 $1,917,859
 $145,572
        
Investment derivative liabilities (1)257
 —
 257
 —
Payable for securities sold short:       
Corporate bonds66,257
 —
 66,257
 —
Total liabilities measured at fair value$66,514
 $—
 $66,514
 $—
(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, 2019.
(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.2020.
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.



32

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)



The following table presentstables 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 three months ended March 31, 20202021 and 2019:2020:
Three Months Ended March 31, 2021Beginning
Balance		Net Purchases (Sales)(1)Net Unrealized Gains (Losses)(2)Ending
Balance
($ in thousands)
Term loans$49,879 $(6,786)$303 $43,396 
Corporate bonds985 0 4 989 
Equities104,552 0 3,067 107,619 
Total$155,416 $(6,786)$3,374 $152,004 
Three Months Ended March 31, 2020Beginning
Balance		 Net Purchases (Sales)(1) Net Unrealized Gains (Losses)(2) Net Unrealized Foreign Exchange Gains (Losses) Ending
Balance		Three Months Ended March 31, 2020Beginning
Balance		Net Purchases (Sales)(1)Net Unrealized Gains (Losses)(2)Ending
Balance
($ in thousands)
Term loans$36,048
 $(74) $(29) $—
 $35,945
Term loans$36,048 $(74)$(29)$35,945 
Corporate bonds933
 32
 —
 —
 965
Corporate bonds933 32 0 965 
Equities108,591
 3,277
 (1,778) —
 110,090
Equities108,591 3,277 (1,778)110,090 
Total$145,572
 $3,235
 $(1,807) $—
 $147,000
Total$145,572 $3,235 $(1,807)$147,000 
Three Months Ended March 31, 2019Beginning
Balance		 Transfers in (out) of Level 3 (3) Net Purchases (Sales)(1) Net Unrealized Gains (Losses)(2) Net Unrealized Foreign Exchange Gains (Losses) Ending
Balance
Term loans$47,479
 $—
 $163
 $(274) $—
 $47,368
Corporate bonds24,277
 —
 (90) (69) (399) 23,719
Asset-backed securities22,560
 (22,560) —
 —
 —
 —
Equities70,451
 —
 30,534
 (334) —
 100,651
Total$164,767
 $(22,560) $30,607
 $(677) $(399) $171,738
(1) For the three months ended March 31, 2021, the net purchases (sales) consisted of calls and redemptions of $6.8 million of term loans. For the three months ended March 31, 2020, the net purchases (sales) consisted of purchases of $3.3 million of equities and $32.0 thousand of corporate bonds, partially offset by calls and redemptions of $74.0 thousand of term loans. For the three months ended March 31, 2019, the net purchases (sales) consisted of purchases of $37.8 million of equities and $237.0 thousand of term loans, offset in part by sales, calls and redemptions of $7.3 million of equities, $89.9 thousand of corporate bonds and $74.0 thousand of term loans.
(2) Realized and unrealized gains or losses on Level 3 investments are included in “realized and unrealized gain (loss) on investments” in the Company’s consolidated statements of income (loss).
(3) During the three months ended March 31, 2019, the Company obtained pricing for an asset-backed security, for which pricing was not available as of December 31, 2018. As such, the security was transferred from Level 3 to Level 2 at its fair value as of December 31, 2018.
Financial instruments disclosed, but not carried, at fair value
The Company uses various financial instruments in the normal course of its business. The carrying values of cash and cash equivalents, accrued investment income, receivable for securities sold, certain other assets, payable for securities purchased and certain other liabilities approximated their fair values at March 31, 20202021 and December 31, 20192020 due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.
On July 2, 2019, the Company completed a private offering of $175.0 million in aggregate principal amount of its 6.5% senior notes due July 2, 2029 (the “senior notes”). At March 31, 2020,2021, the Company’s 6.5% senior notes were carried at cost, net of debt issuance costs, of $172.5$172.8 million and had a fair value of $167.2$189.3 million. The fair value of the senior notes was obtained from a third partythird-party pricing service and was based on observable market inputs. As such, the fair values of the senior notes are classified within Level 2.
Fair value measurements on a non-recurring basis
The Company measures the fair value of certain assets on a non-recurring basis, generally quarterly, annually, or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company uses a variety of techniques, such as discounted expected future cash flows, to determine the fair value of these assets when appropriate,appropriate. There were no such triggering events or changes in circumstances as described below.

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


of March 31, 2021 and December 31, 2020. There were no additional assets measured at fair value on a non-recurring basis as of March 31, 2021 and December 31, 2020.
Intangible Assets
The Company tests intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. When the Company determines intangible assets may be impaired, the Company uses techniques including discounted expected future cash
33

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)

flows, to measure fair value. There were no such triggering events or changes in circumstances as of March 31, 2020. There were no additional assets measured at fair value on a non-recurring basis as of March 31, 20202021 and December 31, 2019.2020.
9. Derivative instruments
Underwriting Derivatives
The Company’s underwriting strategy allows it to enter into government-sponsored enterprise credit-risk sharing transactions. These transactions are accounted for as derivatives. The derivative assets and derivative liabilities relating to these transactions are included in “other assets” and “other liabilities,” respectively, in the Company’s consolidated balance sheets. Realized and unrealized gains and losses from other derivatives are included in “other underwriting income (loss)” in the Company’s consolidated statements of net income (loss). The risk in force of these transactions is considered the notional amount.
As of March 31, 20202021 and December 31, 2019,2020, the Company posted $12.5$7.8 million and $13.1$9.2 million, respectively, in assets as collateral. These assets are included in “fixed maturities,” which are recorded at fair value in the Company’s consolidated balance sheets.
Investment Derivatives
The Company’s investment strategy allows for the use of derivative securities. The Company invests in call options to manage specific market risks; such derivative instruments are recorded at fair value, and shown as part of “payable for securities sold short” on its consolidated balance sheets. Such call options were purchased and sold in the first quarter of 2020.
Additionally, beginning in the fourth quarter of 2018, the Company investedinvests in put options to manage specific market risks; such derivative instruments are recorded at fair value, and shown as part of “equity securities” on its consolidated balance sheets. Such put options were sold in the first quarter of 2019.
The Company began investing in total return swaps (“swaps”) during 2018, through a Master Confirmation of Total Return Swap Transactions agreement, and recognizes the swap derivatives at fair value. The derivative assets and derivative liabilities relating to these transactions are included in “other assets” and “other liabilities,” respectively, in the Company’s consolidated balance sheets. At March 31, 20202021 and December 31, 2019,2020, the Company had collateral funds held by the counterparty of $62.1$67.7 million and $64.1$67.1 million, respectively, included in “short-term investments” in the Company’s consolidated balance sheets.
The fair value of such options and swaps are based on observable inputs and classified in Level 2 of the valuation hierarchy. Realized and unrealized gains and losses from investment derivatives are included in “realized and unrealized gains (losses)” on investmentsinvestments” in the Company’s consolidated statements of net income (loss).
The Company did not hold any derivatives designated as hedging instruments at March 31, 20202021 and December 31, 2019.2020.



34

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)



The following table summarizes information on the fair values and notional amount of the Company’s derivative instruments at March 31, 20202021 and December 31, 2019:2020:
Estimated Fair Value
Estimated Fair Value  Asset DerivativesLiability DerivativesNet Derivatives
Notional Amount (1)
Asset Derivatives Liability Derivatives Net Derivatives 
Notional Amount (1)
($ in thousands)
($ in thousands)
March 31, 2020       
March 31, 2021March 31, 2021
Other underwriting derivatives$—
 $314
 $(314) $56,923
Other underwriting derivatives$31 $0 $31 $33,116 
OptionsOptions1,444 492 952 497,190 
Total return swaps—
 23,726
 (23,726) 112,745
Total return swaps840 176 664 112,182 
Total$—
 $24,040
 $(24,040) $169,668
Total$2,315 $668 $1,647 $642,488 
       
December 31, 2019       
December 31, 2020December 31, 2020
Other underwriting derivatives$148
 $—
 $148
 $59,879
Other underwriting derivatives$25 $0 $25 $39,165 
Options (2)Options (2)796 296 500 491,803 
Total return swaps1,667
 257
 1,410
 162,678
Total return swaps255 1,117 (862)113,852 
Total$1,815
 $257
 $1,558
 $222,557
Total$1,076 $1,413 $(337)$644,820 
(1) The notional amount represents the absolute value of all outstanding contracts.contracts, consisting of long and short positions. As of March 31, 2021, the notional value of the long and short option positions were $248.9 million and $248.3 million, respectively. As of December 31, 2020, the notional value of the long and short option positions were $309.0 million and $182.8 million, respectively.
(2) The notional amount as at December 31, 2020 has been revised, which is not considered material to the previously issued consolidated financial statements.
The realized and unrealized gains and losses on the Company’s derivative instruments are reflected in the consolidated statements of income (loss), as summarized in the following table:
Three Months Ended March 31,
20212020
($ in thousands)
Underwriting derivatives:
Other underwriting income (loss)$411 $133 
Investment derivatives:
Net realized and unrealized gains (losses):
Options(2,386)1,081 
Total return swaps2,318 (23,882)
35
 Three Months Ended March 31,
 2020 2019
 ($ in thousands)
Underwriting derivatives:   
Other underwriting income (loss)$133
 $592
Investment derivatives:   
Net realized and unrealized gains (losses):   
Options1,081
 801
Total return swaps(23,882) 1,582


WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)



10. Earnings per common share
The following table sets forth the computation of basic and diluted earnings per common share:
Three Months Ended March 31,Three Months Ended March 31,
2020 201920212020
($ in thousands except share and per share data)($ in thousands except share and per share data)
Numerator:   Numerator:
Net income (loss) before preference dividends$(266,608) $52,539
Net income (loss) before preference dividends$41,925 $(266,608)
Preference dividends(1,171) (4,907)Preference dividends(1,038)(1,171)
Net income (loss) available to common shareholders(267,779) 47,632
Net income (loss) available to common shareholders40,887 (267,779)
   
Denominator:   Denominator:
Weighted average common shares outstanding - basic and diluted (1)(2)19,951,932
 22,682,875
Weighted average common shares outstanding - basicWeighted average common shares outstanding - basic19,892,886 19,951,932 
Effect of dilutive common share equivalents:Effect of dilutive common share equivalents:
Weighted average non-vested restricted share units (1)(2)Weighted average non-vested restricted share units (1)(2)63,237 0 
Weighted average common shares outstanding - diluted (3)Weighted average common shares outstanding - diluted (3)19,956,123 19,951,932 
   
Earnings (loss) per common share:   Earnings (loss) per common share:
Basic and diluted$(13.42) $2.10
BasicBasic$2.06 $(13.42)
DilutedDiluted$2.05 $(13.42)
(1) During the three months ended March 31, 2020, theThe Company granted an aggregate of 63,591 restricted share units and common shares to certain employees and directors, 48,916 of which are non-vested. During the three months ended March 31, 2019, the Company did not grant anydirectors. Non-vested restricted share units or common shares.as of March 31, 2021 and March 31, 2020, were 95,302 and 131,276, respectively.
(2) The weighted average non-vested restricted share units of 13,727 are excluded from the calculation of diluted weighted average common shares outstanding for the three months ended March 31, 2020, due to a net loss reported. Refer to Note 17, “Share transactions” for further details.
(2)(3) Warrants held by Arch and HPS were not included in the computation of diluted earnings because the exercise price of the warrants exceeded the market price of the common shares during the period and the exercise of the warrants would have been anti-dilutive. TheThese warrants were not exercised and expired on March 25, 2020. The number of common shares issuable upon exercise of the warrants that was excluded was 1,704,691 common shares.
11. Income taxes
Watford Holdings and Watford Re are incorporated under the laws of Bermuda and, under current law, are not obligated to pay any taxes in Bermuda based upon income or capital gains. In the event that any legislation is enacted in Bermuda imposing such taxes, a written undertaking has been received from the Bermuda Minister of Finance under the Exempted Undertakings Tax Protection Act 1966 that such taxes will not be applicable to Watford Holdings and Watford Re until March 31, 2035.
WICE is incorporated under the laws of Gibraltar and regulated by the Gibraltar Financial Services Commission (the “FSC”) under the Financial Services (Insurance Company) Act (the “Gibraltar Act”). In addition to its operations in Gibraltar, WICE operates a branch in Romania. The Romanian branch ceased accepting new business from September 1, 2020. The current rates of tax on applicable profits in Gibraltar and Romania are 10% and 16%, respectively. The open tax years that are potentially subject to examination are 20182019 through 20202021 in Gibraltar and 2018 through 20202021 in Romania.
Watford Holdings (U.K.) Limited is incorporated in the United Kingdom and is subject to U.K. corporate income tax. The current U.K. corporate income tax rate is 19% and will be reduced to 17% from April 1, 2020.. The open tax years that are potentially subject to examination by U.K. tax authorities are 20182019 through 2020.2021.
Watford Holdings (U.S.) Inc. is incorporated in the United States and files a consolidated U.S. federal tax return with its subsidiaries, WSIC, WIC and Watford Services Inc. The U.S. federal tax rate is 21% for tax years beginning after December 31, 2017. The open tax years that are potentially subject to examination by U.S. tax authorities are 2016 through 2020..

36

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)



The open tax years that are potentially subject to examination by U.S. tax authorities are 2017 through 2021.
The Company provides a valuation allowance to reduce certain deferred tax assets to an amount which management expects to more likely than not be realized. As of March 31, 20202021 and December 31, 2019,2020, the Company’s valuation allowance was $1.7 million and $1.5 million, and $1.3 million, respectively. The valuation allowance includes U.S. operating loss carry-forwards that begin to expire in 2037. After consideration of the valuation allowance, the Company had net deferred tax assets of $Nil$0.4 million as of March 31, 20202021 and December 31, 2019.2020.
After taking into account the impact of the change in the valuation allowance, the Company recognized income tax expense of $Nil$8 thousand and $NaN, respectively, in the consolidated statements of income (loss) during the three months ended March 31, 20202021 and 2019.2020.
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. The Company records interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of both March 31, 20202021 and December 31, 2019,2020, the Company’s total unrecognized tax benefits, including interest and penalties, were $Nil.$NaN.
12. Transactions with related parties
In March 2014, ARL invested $100.0 million in the Company and acquired approximately 11% of its common equity.
AUL acts as the insurance and reinsurance manager for Watford Re and WICE while AUI acts as the insurance and reinsurance manager for WSIC and WIC, all under separate long-term services agreements. HPS manages the Company’s non-investment grade portfolio and a portion of the Company’s investment grade portfolio as investment managerInvestment Manager and AIM manages a portion of the Company’s investment grade portfolio as investment manager,Investment Manager, each under separate long-term services agreements. ARL and HPS were granted warrants to purchase additional common equity based on performance criteria.criteria; such warrants were unexercised and expired on March 25, 2020. In recognition of the sizable ownership interest, two2 senior executives of ACGL were appointed to the Company’s board of directors. The services agreements with AUL and AUI and the investment management agreements with HPS and AIM provide for services for an extended period of time with limited termination rights by the Company. In addition, these agreements allow for AUL, AUI HPS and AIMHPS to participate in the favorable results of the Company in the form of performance fees.
ACGL and affiliates
At March 31, 2020,2021, ARL held approximately 12.6%10.2% of the Company’s common equity. Affiliates of ACGL held approximately 6.6% of the Company’s preference shares.
On July 2, 2019, affiliates of ACGL purchasedshares and $35 million in aggregate principal amount of the Company’s 6.5% senior notes due July 2, 2029. On August 1, 2019, affiliates of ACGL received $11.5 million in connection with the Company’s redemption of its preference shares.
Certain directors, executive officers and management of ACGL own common and preference shares of the Company.
The related balances presented in the consolidated statementstatements of income (loss) for the three months ended March 31, 20202021 and 20192020 were as follows:
Three Months Ended March 31,
Three Months Ended March 31,20212020
2020 2019($ in thousands)
($ in thousands)
Consolidated statement of income (loss) items:   
Consolidated statements of income (loss) items:Consolidated statements of income (loss) items:
Interest expense$582
 $—
Interest expense$582 $582 
Preference dividends78
 325
Preference dividends69 78 

37

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)



Merger Agreement and Arch Voting Agreement
On October 9, 2020, the Company entered into an Agreement and Plan of Merger with ACGL and Greysbridge Ltd., a Bermuda exempted company limited by shares and wholly-owned subsidiary of ACGL (“Merger Sub”). On November 2, 2020, the Company entered into an amendment to the merger agreement with ACGL and Merger Sub (the original merger agreement as so amended, the “Merger Agreement”) and ACGL assigned its rights under the Merger Agreement to Greysbridge Holdings Ltd. (“HoldCo”), a newly formed Bermuda exempted company limited by shares, of which ACGL will own approximately 40% and funds managed by Warburg Pincus LLC and Kelso & Company will each own approximately 30%. Pursuant to the merger agreement, as amended, Merger Sub will merge with and into the Company, with the Company surviving as a wholly-owned subsidiary of HoldCo, and each holder of the Company’s common shares receiving consideration of $35.00 per common share and each issued and outstanding preference share of the Company remaining outstanding as a preference share of the surviving company and entitled to the same dividend and other relative rights, preferences, limitations and restrictions as are now provided to the preference shares. Refer to Note 13, “Commitments and contingencies” for additional information.
At the time it entered into the merger agreement on October 9, 2020, the Company also entered into a voting and support agreement (the “Arch Voting Agreement”) with ARL and Gulf Reinsurance Ltd., another subsidiary of ACGL, pursuant to which each of ARL and Gulf Reinsurance Ltd. committed to vote all of its shares in favor of the merger and to not transfer any such shares, subject to the conditions set forth in the Arch Voting Agreement.
On February 16, 2021, ARL sold an aggregate of 230,400 common shares to affiliates of Kelso & Company (“Kelso”) and 230,400 common shares to an affiliate of Warburg Pincus LLC (“Warburg Pincus”), in each case, at a purchase price of $34.66 per common share, which was the then current market price of the common shares, based on the closing sale price of the common shares on the Nasdaq Global Select Market on February 12, 2021 (such sales collectively, the “Arch Sales”). Subsequent to the Arch Sales, ARL held approximately 10.3% of the Company's outstanding common shares, a decrease from 12.6% as of December 31, 2020. In connection with the Arch Sales, on February 16, 2021, the Company entered into a waiver to the Arch Voting Agreement with ARL and Gulf Reinsurance Ltd. in order to permit the Arch Sales to Kelso and Warburg Pincus.
The Company also entered into voting and support Agreements with Kelso and Warburg Pincus, which are substantially similar to the Arch Voting Agreement and pursuant to which the parties agreed, among other things, to vote any common shares or preference shares owned by them (i) in favor of the adoption of the Merger Agreement and (ii) against any proposal or action that would reasonably be expected to impede or adversely affect in any material respect the merger or any of the other transactions contemplated by the Merger Agreement. Shareholder approval was obtained on March 30, 2021 at the Company's special general meeting.
AUL and AUI
Watford Re and WICE entered into services agreements with AUL. WSIC and WIC entered into services agreements with AUI. AUL and AUI provide services related to the management of the underwriting portfolio for a term ending onin December 2025. The services agreements perpetually renew automatically in five-year increments unless either the Company or Arch gives notice to not renew at least 24 months before the end of the then-current term.
As part of the services agreements, AUL and AUI make available to the Companies, on a non-exclusive basis, certain designated employees who serve as officers of the Companies and underwrite business on behalf of the Companies (the “Designated Employees”). AUL and AUI also provide portfolio management, Designated Employee supervision, exposure modeling, loss reserve recommendations, claims-handling, accounting and other related services as part of the services agreements.
38

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)

In return for their services, AUL and AUI receive fees from the Companies, including an underwriting fee and profit commission, as well as reimbursement for the services of the Designated Employees and reimbursements for an allocated portion of the expenses related to seconded employees, plus other expenses incurred on behalf of the Company. A profit commission is earned for each underwriting year where the performance meets defined thresholds within the service agreements.
The related AUL and AUI fees and reimbursements incurred in the consolidated statementstatements of income (loss) for the three months ended March 31, 20202021 and 20192020 were as follows:
Three Months Ended March 31,
20212020
($ in thousands)
Consolidated statements of income (loss) items:
Acquisition expenses (1)$7,813 $6,563 
General and administrative expenses1,027 988 
Total$8,840 $7,551 
 Three Months Ended March 31,
 2020 2019
 ($ in thousands)
Consolidated statement of income (loss) items:   
Acquisition expenses$6,563
 $4,948
General and administrative expenses988
 2,011
Total$7,551
 $6,959
(1) For the three months ended March 31, 2021 and 2020, the Company incurred profit commission fees due to Arch of $0.8 million and $NaN, respectively, included within acquisition expenses above.
Reinsurance transactions with ACGL affiliates
The Company reinsures ARL and other ACGL subsidiaries and affiliates for property and casualty risks on a quota share basis. ACGL cedes business to the Company pursuant to inward retrocession agreements the Company’s operating subsidiaries have entered into with ACGL. Pursuant to these inward retrocession agreements, the Company pays a ceding fee based on the business ceded and the terms of the applicable retrocession agreement. Such fees, in addition to origination fees, are reflected in “acquisition expenses” on the Company’s consolidated statementstatements of income (loss).

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


The related consolidated statementstatements of income (loss) for the three months ended March 31, 20202021 and 20192020 were as follows:
Three Months Ended March 31,
Three Months Ended March 31,20212020
2020 2019($ in thousands)
($ in thousands)
Consolidated statement of income (loss) items:   
Consolidated statements of income (loss) items:Consolidated statements of income (loss) items:
Gross premiums written$81,348
 $72,005
Gross premiums written$72,376 $81,348 
Net premiums earned58,785
 61,838
Net premiums earned57,461 58,785 
Loss and loss adjustment expenses46,541
 45,370
Losses and loss adjustment expensesLosses and loss adjustment expenses45,194 46,541 
Acquisition expenses (1)13,853
 19,915
Acquisition expenses (1)14,876 13,853 
(1) Acquisition expenses relating to the ACGL inward quota share agreements referred to above. For the three months ended March 31, 20202021 and 2019,2020, the Company incurred ceding fees to Arch, in aggregate, of $4.0$4.2 million and $4.2$4.0 million, respectively, under these inward retrocession agreements.
Separately, the Company’s operating subsidiaries have entered into outward quota share retrocession or reinsurance agreements with ACGL subsidiaries. Specifically, each of Watford Re and WICE has entered into a separate outward quota share retrocession or reinsurance agreement with ARL, and each of WSIC and WIC has entered into a separate outward quota share reinsurance agreement with ARC.
The related consolidated statement of income (loss) for the three months ended March 31, 2020 and 2019 for the outward retrocession transactions were as follows:
39
 Three Months Ended March 31,
 2020 2019
 ($ in thousands)
Consolidated statement of income (loss) items:   
Gross premiums ceded$(19,828) $(16,990)
Net premiums earned(19,788) (12,940)
Loss and loss adjustment expenses(15,815) (9,138)
Acquisition expenses (1)(4,537) (3,104)
(1) Acquisition expenses relating to the ACGL outward quota share agreements referred to above.










WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)



The related consolidated statements of income (loss) for the three months ended March 31, 2021 and 2020 for the outward retrocession transactions were as follows:
Three Months Ended March 31,
20212020
($ in thousands)
Consolidated statements of income (loss) items:
Gross premiums ceded$(24,555)$(19,828)
Net premiums earned(23,676)(19,788)
Losses and loss adjustment expenses(17,810)(15,815)
Acquisition expenses (1)(5,245)(4,537)
(1) Acquisition expenses relating to the ACGL outward quota share agreements referred to above.
The related consolidated balance sheet account balances as of March 31, 20202021 and December 31, 20192020 were as follows:
March 31, December 31,March 31,December 31,
2020 201920212020
($ in thousands)($ in thousands)
Consolidated balance sheet items:   Consolidated balance sheet items:
Total investments$680,448
 $815,528
Total investments$734,218 $744,998 
Premiums receivable122,147
 106,462
Premiums receivable106,211 84,155 
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses88,179
 79,597
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses134,839 126,294 
Prepaid reinsurance premiums74,696
 75,249
Prepaid reinsurance premiums65,084 64,074 
Deferred acquisition costs, net34,760
 31,609
Deferred acquisition costs, net17,978 19,010 
Funds held by reinsurers26,964
 29,867
Funds held by reinsurers29,681 31,639 
Other assets - prepaid expensesOther assets - prepaid expenses4,052 3,991 
Reserve for losses and loss adjustment expenses684,802
 693,861
Reserve for losses and loss adjustment expenses701,586 712,478 
Unearned premiums160,328
 143,852
Unearned premiums124,623 113,724 
Losses payable32,146
 39,619
Losses payable37,419 54,028 
Reinsurance balances payable58,604
 62,301
Reinsurance balances payable49,270 41,812 
Senior notes34,497
 34,484
Senior notes34,551 34,538 
Amounts due to affiliates32,146
 4,467
Amounts due to affiliates4,516 7,708 
Other liabilities - contingent commissions3,911
 5,516
Other liabilities - contingent commissions5,190 4,416 
Contingently redeemable preference shares3,463
 3,462
Contingently redeemable preference shares3,470 3,468 
AIM
Watford Re, WSIC, WICE and WIC entered into investment management agreements with AIM pursuant to which AIM manages a portion of ourthe Company’s investment grade portfolio. Each of the Watford Re, WICE, WSIC and WIC investment management agreements with AIM has a one-year term, with the terms ending annually on March 31, July 31, January 31 and July 31, respectively. The terms will continue to renew for successive one-year periods; provided, however, that either party may terminate any of the investment management agreements with AIM at any time upon 45 days prior written notice. To date, there has been no such notice filed under such agreements.
In return for its investment management services, AIM receives a monthly management fee. The management fee is based on a percentage of the aggregate asset value of the AIM managed portfolio. For the purposes of calculating the management fees, asset value is determined by AIM in accordance with the investment management agreements and is measured before deduction of any
40

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)

management fees or expense reimbursement. The Company has also agreed to reimburse AIM for additional services related to investment consulting and oversight services, administrative operations and risk analytic support services related to the management of the Company’s portfolio, as set forth in the investment management agreements.

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


The related consolidated statementstatements of income (loss) for the three months ended March 31, 20202021 and 20192020 were as follows:
Three Months Ended March 31,
20212020
($ in thousands)
Consolidated statements of income (loss) items:
Investment management fees - related parties$228 $253 
 Three Months Ended March 31,
 2020 2019
 ($ in thousands)
Consolidated statement of income (loss) items:   
Investment management fees - related parties$253
 $262
Enstar Group Limited Voting Agreement
At March 31, 2021, Cavello Bay Reinsurance Limited (“Cavello Bay”), a wholly-owned subsidiary of Enstar Group Limited (“Enstar”), held 1,815,858 common shares, or 9.1% of the Company’s outstanding common shares. On November 2, 2020, Enstar, Cavello Bay, ACGL and the Company entered into a voting and support agreement pursuant to which Cavello Bay committed to vote all of its shares in favor of the merger. Shareholder approval was obtained on March 30, 2021 at the Company’s special general meeting.
HPS
Certain HPS principals and management own common and preference shares of the Company.
In return for its investment services, HPS receives a management fee, a performance fee and allocated operating expenses. The management fee is calculated at an annual rate of 1.0% of the aggregate net asset value of the assets that are managed by HPS for the first $1.5 billion in net asset value, and 0.75% of the aggregate net value of assets exceeding $1.5 billion, payable quarterly in arrears. For purposes of calculating the management fees, net asset value is determined by HPS in accordance with the investment management agreements and is measured before reduction for any management fees, performance fees or any expense reimbursement and asis adjusted for any non-routine intra-month withdrawals. The Company has also agreed to reimburse HPS for certain expenses related to the management of the Company’s investment portfolios as set forth in the investment management agreements.
The base performance fee is equal to 10% of the Income (as defined in the investment management agreements relating to Watford Re, WICE and Watford Trust) or Aggregate Income (as defined in the investment management agreements relating to WSIC and WIC), as applicable, if any, on the assets managed by HPS, calculated and payable as of each fiscal year-end and the date on which the investment management agreements are terminated and not renewed, and HPS is eligible to earn an additional performance fee equal to 25% of any Excess Income (as defined in the 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. No performance fees will be paid to HPS if the high water mark (as described in the investment management agreements with HPS) is not met.
During 2017, the Company invested $50.0 million in a private fund (��Master Fund”) as part of HPS’s investment strategy. HPS acts as the Trading Manager and provides certain administrative management services to the Master Fund. During 2019, the Company fully redeemed its investment in the Master Fund.
During 2019, the Company invested $28.7 million in a limited partnership as part of HPS’s investment strategy. HPS acts as the general partner and manager of the limited partnership. At March 31,During 2020, the Company’sCompany fully redeemed its investment had a fair value of $30.7 million and represented approximately 12% ofin the outstanding partnership interests.limited partnership. The management fees and performance fees on the limited partnership will be subject to the existing fee structure of the existing investment management agreement between the Company and HPS, as discussed above.

41

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)



fee structure of the existing investment management agreement between the Company and HPS, as discussed above.
The related consolidated statementstatements of income (loss) for the three months ended March 31, 20202021 and 2019,2020, and consolidated balance sheet account balances for HPS management fees and performance fees as of March 31, 20202021 and December 31, 20192020 were as follows:
Three Months Ended March 31,
20212020
($ in thousands)
Consolidated statements of income (loss) items:
Investment management fees - related parties$4,259 $4,099 
Investment performance fees - related parties6,016 0 
$10,275 $4,099 
 Three Months Ended March 31,
 2020 2019
 ($ in thousands)
Consolidated statement of income (loss) items:   
Investment management fees - related parties$4,099
 $4,147
Investment performance fees - related parties—
 5,800
 $4,099
 $9,947
March 31, December 31,March 31,December 31,
2020 201920212020
($ in thousands)($ in thousands)
Consolidated balance sheet items:   Consolidated balance sheet items:
Other investments, at fair value$30,682
 $30,461
Investment management and performance fees payable5,428
 17,762
Investment management and performance fees payable$12,012 $21,641 
Artex
In 2015, WICE and AUL entered into an insurance management services agreement with Artex Risk Solutions (Gibraltar) Limited, or Artex, pursuant to which Artex provides services to WICE relating to management, secretarial, governance, underwriting, claims, reinsurance, financial management, investment, regulatory, compliance, risk management and Solvency II. In addition, two2 principals of Artex have been appointed directors of WICE. In exchange for these services, the Company pays Artex fees based on WICE’s gross premiums written, subject to a minimum amount of £150,000 per annum and a maximum amount of £400,000 per annum, in each case subject to an inflation increase on an annual basis. The insurance management services agreement may be terminated by either Artex or WICE upon twelve months prior written notice; provided that the agreement is subject to earlier termination by WICE or Artex upon the occurrence of certain events.
The table below provides the aggregate fees the Company paid to Artex under the insurance management services agreement for the three months ended March 31, 20202021 and 2019.2020.
 Three Months Ended March 31,
 2020 2019
 ($ in thousands)
Fees paid to Artex under insurance management services agreement$86
 $131
Three Months Ended March 31,
20212020
($ in thousands)
Fees paid to Artex under insurance management services agreement$138 $86 
For the three months ended March 31, 20202021 and 2019,2020, the Company paid no0 fees to Arch under this insurance management services agreement.
13. Commitments and contingencies
Concentrations of credit risk
For our reinsurance agreements, the creditworthiness of a counterparty is evaluated by the Company, taking into account credit ratings assigned by independent agencies. The credit approval process involves an assessment of factors, including, among others, the counterparty country and

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


industry exposures. Collateral may be required, at the discretion of the Company, on certain transactions based on the creditworthiness of the counterparty.
42

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)

The areas where significant concentrations of credit risk may exist include unpaid losses and loss adjustment expenses recoverable, prepaid reinsurance premiums and paid losses and loss adjustment expenses recoverable net of reinsurance balances payable (collectively, “net reinsurance recoverables”), investments and cash and cash equivalent balances.
The Company’s reinsurance recoverables, and prepaid reinsurance premiums, net of reinsurance balances payable, resulting from reinsurance agreements entered into with ARL and ARC as of March 31, 20202021 and December 31, 20192020 amounted to $104.3$150.7 million and $92.5$148.6 million, respectively. ARL and ARC have “A+” credit ratings from A.M. Best.
A credit exposure exists with respect to reinsurance recoverables as they may become uncollectible. The Company manages its credit risk in its reinsurance relationships by transacting with reinsurers that it considers financially sound and, if necessary, the Company may hold collateral in the form of funds, trust accounts and/or irrevocable letters of credit. This collateral can be drawn on for amounts that remain unpaid beyond specified time periods on an individual reinsurer basis.
In addition, the Company underwrites a significant amount of its business through brokers and a credit risk exists should any of these brokers be unable to fulfill their contractual obligations with respect to the payments of insurance and reinsurance balances owed to the Company.
The Company’s investment portfolios are managed in accordance with investment guidelines that include standards of diversification, which limit the allowable holdings of any single issuer. There were no investments in any entity in excess of 10% of the Company’s shareholders’ equity at March 31, 20202021 and December 31, 2019,2020, other than cash and cash equivalents held in operating and investment accounts with financial institutions with credit ratings between “A” and “AA-.”
Lloyds letter of credit facility
On May 14, 2019,15, 2020, Watford Re renewed its letter of credit facility with Lloyds Bank Corporate Markets Plc, New York Branch (the “Lloyds Facility”). The Lloyds Facility amount is $100.0 million and was renewed through to May 16, 2020.2021. Under the renewed Lloyds Facility, the Company may request an increase in the facility amount, up to an aggregate of $50.0 million. The principal purpose of the Lloyds Facility is to issue, as required, evergreen standby letters of credit in favor of primary insurance or reinsurance counterparties with which the Company has entered into reinsurance arrangements to ensure that such counterparties are permitted to take credit for reinsurance obtained from the Company as required under insurance regulations in the United States. The amount of letters of credit issued is driven by, among other things, the timing and payment of catastrophe losses, loss development of existing reserves, the payment pattern of such reserves, the further expansion of the Company’s business and the loss experience of such business. When issued, the letters of credit are secured by certificates of deposit or cash. In addition, the Lloyds Facility also requires the maintenance of certain covenants, with which the Company was in compliance at March 31, 20202021 and December 31, 2019.2020. At such dates, the Company had $48.7$49.5 million and $51.0$47.9 million, respectively, in restricted assets as collateral for outstanding letters of credit issued from the Lloyds Facility, which were secured by certificates of deposit. These collateral amounts are reflected as short-term investments in the Company’s consolidated balance sheets.
Unsecured letter of credit facility
On September 20, 2019,17, 2020, Watford Re signed arenewed and amended its 364-day letter of credit agreement with Lloyds Bank Corporate Markets Plc and BMO Capital Markets Corp. (the “Unsecured Facility”). The Unsecured Facility amount iswas reduced from $100.0 million to $50.0 million, and will be automatically extended for a period of one year unless canceled or not renewed by either counterparty prior to expiration. The principal purpose of the Unsecured Facility is to issue, as required, evergreen standby letters of credit in favor of primary insurance or reinsurance counterparties with which the Company has entered into reinsurance arrangements to ensure that such counterparties are permitted to take credit for reinsurance obtained from the Company as

43

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)



arrangements to ensure that such counterparties are permitted to take credit for reinsurance obtained from the Company as required under insurance regulations in the United States. The amount of letters of credit issued is driven by, among other things, the timing and payment of catastrophe losses, loss development of existing reserves, the payment pattern of such reserves, the further expansion of the Company’s business and the loss experience of such business. The Unsecured Facility requires the maintenance of certain covenants, as well as the making of certain representations and warranties that are customary for facilities of this type. At March 31, 20202021 and December 31, 2019,2020, the Company had $25.2$48.1 million and $19.3$49.9 million, respectively, in outstanding letters of credit issued from the Unsecured Facility, and was in compliance with all covenants contained in the Unsecured Facility requirements.
Bank of America secured credit facility
On November 30, 2017, Watford Re amended and restated its $800.0 million secured credit facility (the “Secured Facility”) with Bank of America, N.A., which expires on November 30, 2021. On August 27, 2020, Watford Re elected to reduce the borrowing capacity from $800.0 million to $640.0 million, and on November 9, 2020, further reduced the borrowing capacity from $640.0 million to $440.0 million, under the terms of the amended and restated agreement. The purpose of the Secured Facility is to provide borrowings, backed by Watford Re’s investment portfolios.
In addition, the Secured Facility allows for Watford Re to issue up to $220.0 million, reduced from $400.0 million as of August 27, 2020, and from $320.0 million as of November 9, 2020, in evergreen standby letters of credit in favor of primary insurance or reinsurance counterparties with which the Company has entered into reinsurance arrangements. At March 31, 2020,2021, Watford Re had $500.6$155.7 million and $52.5$28.2 million in borrowings and outstanding letters of credit, respectively. At December 31, 2019,2020, Watford Re had $484.3$155.7 million and $52.5$28.2 million in borrowings and outstanding letters of credit, respectively. At March 31, 20202021 and December 31, 2019,2020, Watford Re was in compliance with all covenants contained in the Secured Facility.
Custodian bank facilityfacilities
As of March 31, 20202021 and December 31, 2019,2020, Watford Re had $75.9$94.9 million and $Nil,$56.0 million, respectively, in borrowings from ourits custodian bankbanks to purchase U.S. dollar denominatedinvestment securities.
As of March 31, 2020,2021, the total borrowed amount of $75.9$94.9 million included 0.64.8 million Euros, or EUR, (U.S. dollar equivalent of $0.7$5.7 million) to purchase EUR-denominated securities. The Company pays interest based on 3-month LIBOR or the Overnight Bank Funding Rate (“OBFR”), plus a margin and the borrowed amount is payable upon demand. The foreign exchange gain or loss on revaluation on the non-U.S. dollar-denominated borrowed funds is included as a component of “net foreign exchange gains (losses)” included in the Company’s consolidated statements of net income (loss).
The custodian bank requiresbanks require the Company to hold cash and investments on deposit, or in an investment account with respect to the borrowed funds. At March 31, 20202021 and December 31, 2019,2020, the Company was required to hold $108.2$167.9 million and $Nil,$96.3 million, respectively, in such deposits and investment accounts.
Employment and other arrangements
The Company has employment agreements with certain of its executive officers. Such employment arrangements provide for compensation in the form of base salary, annual bonus, participation in the Company’s employee benefit programs, the Company’s share-based compensation plans and the reimbursements of expenses.
Investment commitments
As of March 31, 2021 and December 31, 2020, the Company had unfunded commitments of $23.1$1.7 million relating to equities within its investment portfolios. As of December 31, 2019, the Company had unfunded commitments of $8.4and $3.9 million, respectively, relating to term loans and $26.4 million relating to equities within its investment portfolios.
Acquisition commitments
TheIn 2020, the Company has entered into an agreement to acquire Axeria IARD, a property and casualty insurance company based in France. The Company has committed to acquireacquiring 100% of the capital stock of Axeria IARD from the APRIL group. The transaction was completed on April 9, 2021. Refer to Note 19, “Subsequent events” for more information.

44

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)



Proposed merger
stockOn October 9, 2020, the Company entered into an Agreement and Plan of Axeria IARD fromMerger (the “Original Merger Agreement”) with ACGL and Merger Sub. Further, on November 2, 2020, the APRIL group.Company entered into Amendment No. 1 to the Original Merger Agreement (the Original Merger Agreement, as amended by such Amendment No. 1, the “Merger Agreement”) with ACGL and Merger Sub, and ACGL assigned its interests and obligations under the Merger Agreement to HoldCo. ACGL remains contractually responsible for the performance of its obligations under the Merger Agreement.
Pursuant to the Merger Agreement, Merger Sub will merge with and into the Company, with the Company surviving as a wholly-owned subsidiary of HoldCo (the “Merger”). At the effective time of the Merger, holders of the Company’s common shares will be entitled to receive consideration of $35.00 in cash for each common share they own. The completionCompany's preference shares will remain outstanding following the effective time of this transaction is subjectthe Merger and will be entitled to regulatory approvalthe same dividend and other customary closing conditions,rights and preferences as are now provided to the preference shares. The Merger is expected to close in the third quarterfirst half of 2020.2021, subject to customary closing conditions, including regulatory approval. Shareholder approval was obtained on March 30, 2021 at the Company's special general meeting.
If the Merger Agreement is terminated under specified circumstances, including if: (i) Watford terminates prior to receipt of shareholder approval in order to enter into a definitive written agreement providing for a superior proposal, or (ii) HoldCo terminates prior to the shareholders meeting to approve the Merger Agreement and after the Company’s board has acted in a way that constitutes an adverse recommendation change, the Company will be required to pay HoldCo a termination fee of $28.1 million.
14. Leases
The Company has entered into a lease agreement for real estate that is used for office space in the ordinary course of business. The lease is accounted for as an operating lease, whereby the lease expense is recognized on a straight-line basis over the term of the lease.
The lease includes an option to extend or renew the lease term. The exercise of the renewal option is at the Company’s discretion. The operating lease liability includes lease payments related to options to extend or renew the lease term if the Company is reasonably certain of exercising those options. Such options relating to the extension or renewal of the lease term are not included in the operating lease liability at this time.
Lease expense is included in “general and administrative expenses” in the Company’s consolidated statements of net income (loss). Additional information regarding the Company’s real estate operating lease is as follows.
45

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)

Three Months Ended March 31,Three Months Ended March 31,
202020212020
($ in thousands)($ in thousands)
Lease cost: Lease cost:
Operating lease$62
Operating lease$64 $62 
Other information on operating lease: Other information on operating lease:
Cash payments included in the measurement of lease liability reported in operating cash flows71
Cash payments included in the measurement of lease liability reported in operating cash flows71 71 
Right-of-use assets (1)908
Right-of-use assets (1)654 908 
Operating lease liability (2)908
Operating lease liability (2)654 908 
Weighted average discount rate3.9%Weighted average discount rate3.9 %3.9 %
Weighted average remaining lease term in years3.5 years
Weighted average remaining lease term in years2.5 years3.5 years
(1) Included in “other assets” on the Company’s consolidated balance sheet.
(2) Included in “other liabilities” on the Company’s consolidated balance sheet.
The following tables present the contractual maturity of the Company’s lease liability:
March 31, 2021December 31, 2020
($ in thousands)
Remainder of 2021212 283 
2022283 283 
2023189 189 
Total undiscounted lease payments684 755 
Less: present value adjustment(30)(36)
Operating lease liability654 719 
 March 31, 2020
 ($ in thousands)
Remainder of 2020212
2021283
2022283
2023189
Total undiscounted lease payments967
Less: present value adjustment(59)
Operating lease liability908

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


15. Senior notes
On July 2, 2019, the Company completed a private offering of $175.0 million in aggregate principal amount of itsThe Company’s 6.5% senior notes due July 2, 2029. Interest on the senior notes is paid semi-annually in arrears on each January 2 and July 2, which commenced on January 2, 2020. The $172.3 million net proceeds from the offering were used to redeem a portion of the Company’s outstanding preference shares, as described in Note 16, “Contingently redeemable preference shares”. Affiliates of ACGL purchased $35 million in aggregate principal amount of the senior notes.
The senior notes2029 are the Parent’s senior unsecured and unsubordinated obligations and rank equally with all of the other existing and future obligations of the Parent that are unsecured and unsubordinated. The Company may redeemInterest on the senior notes is paid semi-annually in arrears on each January 2 and July 2, which commenced on January 2, 2020. The senior notes may be redeemed by the Company at any time, in whole or in part, prior to July 2, 2024, at “make-whole” redemption price, subject to BMAthe Bermuda Monetary Authority (“BMA”) requirements. After July 2, 2024, the senior notes are redeemable, in whole or in part, at a redemption price equal to 100% of the principal amount, subject to BMA requirements. The indenture governing the senior notes contains certain customary covenants, including those related to the punctual payment of interest and principal amounts due. The Company was in compliance with such covenants at March 31, 2021 and December 31, 2020.
As of March 31, 2021, the carrying amount of the senior notes was $172.8 million, presented net of unamortized debt issuance costs of $2.2 million. As of December 31, 2020, the carrying amount of the senior notes was $172.5$172.7 million, presented net of unamortized debt issuance costs of $2.5 million. As of December 31, 2019, the carrying amount of the senior notes was $172.4 million, presented net of unamortized debt issuance costs of $2.6$2.3 million.
16. Contingently redeemable preference shares
In March 2014, theThe Company issued 9,065,200has 2,145,202 8½% Cumulative Redeemable Preference Shares (the “preference shares”). The preference shares have outstanding with a par value of $0.01 per share and a liquidation preference of $25.00 per share. The preference shares were issued at a discounted purchase price of $24.50 per share. Holders of the preference shares are entitled to receive, if declared by the board of directors, quarterly cash dividends on the last day of March, June, September and December of each year. Prior to June 30, 2019, dividends
46

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)

Dividends on the preference shares accrued at a fixed rate of 8.5% per annum (the “Fixed Rate Period”). Dividends accrue from (and including) June 30, 2019 (the “Floating Rate Period”), at a floating rate per annum (the “Floating Rate”) equal to three-month U.S. dollar LIBOR plus a margin of 667.85 basis points; provided, that, if, at any time, the three-month U.S. dollar LIBOR shall be less than 1%, then the three-month U.S. dollar LIBOR for purposes of calculating the Floating Rate at the time of such calculation shall be 1%. The preference shares may be redeemed by the Company on or after June 30, 2019 or at the option of the preference shareholders at any time on or after June 30, 2034 at the liquidation price of $25.00 per share. Because the redemption features are not solely within the control of the Company, the preference shares have been recorded as mezzanine equity on the Company’s consolidated balance sheets in accordance with applicable accounting guidance. Preference share dividends, including the accretion of the discount and issuance costs, are included in “preference dividends” in the Company’s consolidated statements of income (loss).
On August 1, 2019, the Company redeemed 6,919,998 of its 9,065,200 total issued and outstanding preference shares, which were redeemed at a total redemption price of $25.19748 per share, inclusive of all declared and unpaid dividends, with accumulation of any undeclared dividends on or after June 30, 2019. After the redemption date, dividends on the preference shares that were redeemed ceased to accrue, and such redeemed preference shares ceased to be outstanding. Affiliates of Arch Capital Group Ltd. received $11.5 million in connection with the redemption of the preference shares.
For the three months ended March 31, 20202021 and 2019,2020, dividends paid on the preference shares totaled $1.0 million and $1.1 million, and $4.9 million, respectively.

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


The following table presents a reconciliation of the preference shares for the three months ended March 31, 20202021 and 2019:2020:
Three Months Ended March 31,
20212020
($ in thousands)
Preference shares:
Balance at the beginning of the period$52,398 $52,305 
Accretion discount and issuance costs on remaining preference shares23 23 
Balance at the end of the period$52,421 $52,328 
 Three Months Ended March 31,
 2020 2019
 ($ in thousands)
Preference shares:   
Balance at the beginning of the period$52,305
 $220,992
Accretion discount and issuance costs on remaining preference shares23
 91
Balance at the end of the period$52,328
 $221,083
17. Share transactions
Share-based compensation
The Company uses share-based compensation plans for officers, other employees and directors of the Parent and its subsidiaries to provide competitive compensation opportunities, to encourage long-term service, to recognize individual contributions and reward achievement of performance goals and to promote the creation of long-term value for shareholders by aligning the interests of such persons with those of shareholders.
The 2018 Stock Incentive Plan (the “2018 Plan”) became effective as of March 28, 2019 following approval by the Board of Directors of the Company and the listing of the Company’s common shares on the Nasdaq Global Select Market. The 2018 Plan provides for the issuance of restricted share units, performance units, restricted shares, performance shares, share options and share appreciation rights and other equity-based awards to the Company’s employees and directors. The 2018 Plan authorizes the issuance of 907,315 common shares and will terminate on March 28, 2029. As of March 31, 2020,2021, 678,437 shares were available for future issuance.
During the first quarter of 2020, the Company granted an aggregate of 63,591 restricted share units and common shares to certain officers, other employees and directors. On the grant date of March 1, 2020, the fair value of the restricted share units and common shares was approximately $23.00 per share. Of the total restricted share units and common shares granted, 14,675 were vested and fully expensed, including 10,870 common shares issued. The remaining 48,916 restricted share units are being amortized over a three-yearthree-year vesting period, being the requisite service period. During the first quarter of 2021, the Company issued 9,787 common shares related to the restricted share units granted on March 1, 2020. There were no forfeitures or expired awards during the first quarter of 2021 or 2020.
The effect of compensation cost arising from share-based payment awards on the Company’s consolidated statementstatements of income (loss), within “general and administrative expenses,”expenses”, for the three months ended March 31, 2021 and 2020, was $0.3 million and 2019, was $0.6 million, and $Nil, respectively, including an accelerated expense recognition for retirement eligible employees.
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WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)

Share repurchase program
In the first quarter of 2020, the board of directors of the Parent authorized the Company’s investment in its common shares through a share repurchase program under which the Company may repurchase up to $50 million of its outstanding common shares (the "current share repurchase program").
During the first quarter of 2020, the Company purchased 127,744 shares at an average price per share of $22.42 under the current share repurchase program.
As of March 31, 2020,2021, approximately $47.1 million of unused share repurchase capacity remained available under the current share repurchase program. Since the inception of the share repurchase programs in 2019,through March 31, 2021, the Company

WATFORD HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. dollars in thousands, except share data)


has repurchased a total of 2.9 million shares. At March 31, 2020,2021, the shares are held in treasury, at an aggregate cost of $77.9 million (excluding transaction costs).
Repurchases under the current share repurchase program may be effected from time to time in open market or privately negotiated transactions. The timing and amount of repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations. Repurchases of the Company’s common shares in connection with the current share repurchase program and other share-based transactions are recorded at cost and result in a reduction of the Company’s shareholders’ equity in its consolidated balance sheets. The Company does not anticipate making any further repurchases under its current share repurchase program as a result of its pending acquisition by HoldCo.
18. Legal proceedings
The Company, in common with the insurance industry in general, is subject to litigation and arbitration in the normal course of its business. Certain lawsuits challenging the Merger have been filed and remained ongoing as of the date of this Report. As of March 31, 2020,2021, the Company was not a party to any other litigation or arbitration, which is expected by management to have a material adverse effect on the Company’s results of operations or financial condition and liquidity.


19. Subsequent events
On April 9, 2021, the Company completed its acquisition of 100% of the capital stock of Axeria IARD, a property and casualty insurance company based in France, from the APRIL Group. The total consideration paid was €45.1 million.
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Item 2. 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 Part I “Financial information - Cautionary note regarding forward-looking statements” and Part II Item 1A “Risk factors.”
This discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto included in Part I Item 1 “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 $788.9 million$1.2 billion in capital as of March 31, 2020,2021, comprised of $172.5$172.8 million of senior notes, $52.3$52.4 million of contingently redeemable preference shares and $564.1$977.0 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 managersInvestment 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.
Current outlook
The outbreak of COVID-19 began significantly impacting the U.S. and global markets during the 2020 first quarter.quarter and the pandemic has continued to cause unprecedented economic volatility and disruption globally throughout 2020 and 2021. We remain committed to the safety of our employees, including restricting travel and instituting an extensivea 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, claims
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information obtained from our clients and brokers, a review of relevant contracts with potential exposure to the pandemic and estimates of reinsurance recoverables. These estimates include losses related only to claims incurred as of March 31, 2021. 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.


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-specificpandemic specific coverages which are likely to correspondthat 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. Our estimated ultimate loss for COVID-19 global pandemic related business whichinterruption losses in our property catastrophe line of business is consistent with$5.5 million as of March 31, 2021. We continue to monitor our strategy to target longer durationpotential COVID-19 global pandemic exposures across all our lines of business.
We believe the casualty lines most likely to be adversely affected by COVID-19 are professional and medical malpractice liability. We have reduced our exposure to professional liability over the last few years, and do not write material amounts of medical malpractice premium at present.
We believe that mortgage insurance may potentially be affected.affected by the COVID-19 global pandemic. We write U.S. mortgage risk predominately through a government-sponsoredgovernment sponsored enterprise (or “GSE”) credit risk transfer programsprogram and have some international mortgage exposure.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 have increased our loss provision in 2020 to account for a potential increase in defaults in our mortgage insurance portfolio. This
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. To date, we have recognized a nominal IBNR provision in our loss reserves for COVID-19 global pandemic-related casualty losses, as well as reductions in IBNR for certain casualty lines in which COVID-19 induced reductions in economic activity had a modest impact on our overall first quarter 2020 results.corresponding reduction in the frequency of claims.
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 been profitable, we believe this was a prudent and responsible course of action given the negative and uncertain economic outlook created by the pandemic.
On a brighter note,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 workersapart 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 consecutivemultiple 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 proposed Merger, we are selectively growing our business in areas that we believe present attractive opportunities and meet our risk and return criteria. In particular, weWe continue to see good growth opportunities in the insurance market. In particular, our insurance underwriting platforms in the United States saw strongand Europe continued their growth in net premiums during in the first quarter of 20202021 versus the comparable prior year quarter. Further we seek to grow our footprint in Europe with the acquisition of Axeria IARD.
We also see opportunities on the reinsurance side in general liability, commercial auto liability and other casualty lines. Our current underwriting portfolio has concentrations in general liability, professional liability, multiline, workersmulti-line, workers’ compensation and motor product lines through reinsurance of third-party cedants and retrocessions from Arch.
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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 three months ended March 31, 20202021 and 2019:2020:
Three Months Ended March 31,Three Months Ended March 31,
2020 201920212020
($ in thousands, except percentages and per share data)($ in thousands, except percentages and per share data)
Key underwriting metrics:   Key underwriting metrics:
Underwriting income (loss)$(6,143) $(5,970)Underwriting income (loss)$(13,490)$(6,143)
Combined ratio104.4 % 104.1%Combined ratio109.1 %104.4 %
Adjusted underwriting income (loss)$(3,014) $(3,415)Adjusted underwriting income (loss)$(10,299)$(3,014)
Adjusted combined ratio102.2 % 102.3%Adjusted combined ratio107.0 %102.2 %
Key investment return metrics:   Key investment return metrics:
Net interest income$27,803
 $30,434
Net interest income$18,957 $27,803 
Net interest income yield on average net assets (1)1.4 % 1.5%Net interest income yield on average net assets (1)0.8 %1.4 %
Non-investment grade portfolio (1)1.7 % 1.9%Non-investment grade portfolio (1)1.1 %1.7 %
Investment grade portfolio (1)0.5 % 0.6%Investment grade portfolio (1)0.2 %0.5 %
Net investment income (loss)$(262,699) $58,354
Net investment income (loss)$59,114 $(262,699)
Net investment income return on average net assets (1)(13.0)% 2.8%Net investment income return on average net assets (1)2.6 %(13.0)%
Non-investment grade portfolio (1)(17.4)% 3.4%Non-investment grade portfolio (1)3.7 %(17.4)%
Investment grade portfolio (1)0.8 % 1.1%Investment grade portfolio (1)0.3 %0.8 %
Net investment income return on average total investments (excluding accrued investment income) (2)(10.1)% 2.1%Net investment income return on average total investments (excluding accrued investment income) (2)2.3 %(10.1)%
Non-investment grade portfolio (2)(14.9)% 2.7%Non-investment grade portfolio (2)3.2 %(14.9)%
Investment grade portfolio (2)0.8 % 1.1%Investment grade portfolio (2)0.3 %0.8 %
Key shareholders’ value creation metrics:
   
Key shareholders’ value creation metrics:
Book value per diluted common share (3)$28.21
 $41.52
Book value per diluted common share (3)$48.86 $28.21 
Growth in book value per diluted share (3)(35.1)% 5.9%Growth in book value per diluted share (3)3.8 %(35.1)%
Annualized return on average equity (4)N.M.
 20.8%Annualized return on average equity (4)17.1 %N.M.
N.M. Ratio is not meaningful.
(1) Net interest income yield on average net assets and net investment income return on average net assets are calculated by dividing net interest income, and net investment income (loss), respectively, by average net assets. Net assets is calculated as the sum of total investments, accrued investment income and receivables for securities sold, less revolving credit agreement borrowings, payable for securities purchased and payable for securities sold short. For the three-month period, average net assets is calculated using the averages of each quarterly period. However, for the investment grade portfolio component of these returns, the impact of the revolving credit agreement borrowings is not subtracted from net interest income, net investment income (loss), or the net assets calculation. The separate components of these returns (non-investment grade portfolio and investment grade portfolio) are non-U.S. GAAP financial measures. Refer to “-Reconciliation of non-U.S. GAAP financial measures” for a reconciliation of these components of our net interest income yield on average net assets and net investment income return on average net assets.
(2) Net investment income return on average total investments (excluding accrued investment income) is calculated by dividing net investment income by average total investments. For the three-month period, average total investments is calculated using the averages of each quarterly period. However, for the investment grade portfolio component of these returns, the impact of revolving credit agreement borrowings is not subtracted from net investment income. The separate components of these returns (non-investment grade portfolio and investment grade portfolio) are non-U.S. GAAP financial measures. Refer to “-Reconciliation of non-U.S. GAAP financial measures” for a reconciliation of these components of our net investment income return on average total investments (excluding accrued investment income).
(3) Book value per diluted common share is calculated by dividing total shareholders’ equity by the number of diluted common shares outstanding at the end of each reporting period. Growth in book value per diluted common share is calculated as the percentage change in value of beginning and ending book value per diluted common share over the reporting period.
(4) Annualized return on average equity represents net income (loss) expressed as a percentage of average total shareholders’ equity during the period. Annualized return on average equity for the three months ended March 31, 20192021 is calculated by extrapolating the quarterly return on average equity over a twelve-month period. For the three-month period, the average total shareholders’ equity is calculated as the average of the beginning and ending total shareholders’ equity of each quarterly period. Due to the net realized and unrealized losses on investments, the annualized return on average equity calculation is not meaningful for the three months ended March 31, 2020. For the three months ended March 31, 20202021 and 2019,2020, the return on average equity was 4.3% and (37.3)% and 5.2%, respectively.

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Underwriting income (loss)
Underwriting income (loss) is a non-U.S. GAAP financial measure. We define underwriting income (loss) as net premiums earned less loss and loss adjustment expenses, acquisition expenses and general and administrative expenses. Underwriting income (loss) is one of the ways we evaluate the performance of our underwriting segment, and does not include other underwriting income (loss), net investment income (loss), interest expense, net foreign exchange gains (losses), transaction and other costs, income tax expensesexpense (benefit) and preference dividends. Although these items are an integral part of our operations, with the exception of other underwriting income (loss), they are independent of the underwriting process and result, in large part, from general economic and financial market conditions. We include other underwriting income (loss) in our adjusted underwriting income (loss), as described in more detail below. See “-Reconciliation of non-U.S. GAAP financial measures” for a reconciliation of underwriting income to net income (loss) available to common shareholders.
Combined ratio
The combined ratio is calculated as the sum of loss and loss adjustment expenses, acquisition expenses and general and administrative expenses, divided by net premiums earned, or equivalently, as the sum of the loss ratio, acquisition expense ratio and general and administrative expense ratio. The combined ratio is a measure of underwriting profitability but does not include other underwriting income or net investment income earned on underwriting cash flows.
Adjusted underwriting income (loss)
Adjusted underwriting income (loss) is a non-U.S. GAAP financial measure. We define adjusted underwriting income (loss) as underwriting income (loss) plus other underwriting income (loss) less certain corporate expenses. Adjusted underwriting income (loss) is one of the ways we evaluate the performance of our underwriting segment. We include other underwriting income (loss), as our underwriting strategy allows us to enter into government-sponsored enterprise credit-risk sharing transactions. Certain corporate expenses are generally comprised of non-recurring costs of the holding company, such as costs associated with the initial setup of subsidiaries, as well as costs associated with the ongoing operations of the holding company, such as compensation of certain executives.executives, and costs associated with the initial setup of subsidiaries. See “-Reconciliation of non-U.S. GAAP financial measures” for a reconciliation of adjusted underwriting income to net income (loss) available to common shareholders.
Adjusted combined ratio
Adjusted combined ratio is a non-U.S. GAAP financial measure. The adjusted combined ratio is calculated as the sum of loss and loss adjustment expenses, acquisition expenses and general and administrative expenses less certain corporate expenses, divided by the sum of net premiums earned and other underwriting income (loss). This ratio is a measure of our underwriting and operational profitability but does not include certain corporate expenses or net investment income earned on underwriting cash flows. Certain corporate expenses are generally comprised of non-recurring costs of the holding company, such as costs associated with the initial setup of subsidiaries, as well as costs associated with the ongoing operations of the holding company, such as compensation of certain executives.executives, and costs associated with the initial setup of subsidiaries. See “-Reconciliation of non-U.S. GAAP financial measures” for a reconciliation of our adjusted combined ratio to our combined ratio.

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Net interest income and net investment income (loss)
Net interest income and net investment income (loss) are important contributors to our financial results. These key investment metrics are impacted by the performance of our Investment Managers as well as the state of the overall financial markets.
Net interest income yield on average net assets
Net interest income yield on average net assets is calculated by dividing net interest income by average net assets. Net assets is calculated as the sum of total investments, accrued investment income and receivables for securities sold, less revolving credit agreement borrowings, payable for securities purchased and payable for securities sold short. Net interest income yield on average net assets is a key indicator by which we measure the performance of our Investment Managers.
Net investment income return on average net assets
Net investment income return on average net assets is calculated by dividing net investment income (loss) by average net assets. Net assets is calculated as the sum of total investments, accrued investment income and receivables for securities sold, less revolving credit agreement borrowings, payable for securities purchased and payable for securities sold short. Net investment income return on average net assets is a key indicator by which we measure the performance of our Investment Managers.
Net investment income return on average total investments (excluding accrued investment income)
Net investment income return on average total investments (excluding accrued investment income) is calculated by dividing net investment income (loss) by average total investments. Net investment income return on average total investments (excluding accrued investment income) is a key indicator by which we measure the performance of our Investment Managers.
Non-investment grade portfolio and investment grade portfolio components of certain of our investment metrics
In order to provide further detail regarding our key investment metrics, we also present the non-investment grade portfolio and investment grade portfolio components of our net interest income yield on average net assets, net investment income return on average net assets and net investment income return on average total investments (excluding accrued investment income). In the calculation of the investment grade portfolio component of our net interest income yield on average net assets and net investment income return on average net assets, the impact of the revolving credit agreement borrowings is not subtracted from net interest income, net investment income (loss) or the net assets calculation. The separate components of these returns are non-U.S. GAAP financial measures. See “-Reconciliation of non-U.S. GAAP financial measures” for a reconciliation of these components of our net interest income yield on average net assets, net investment income return on average net assets and net investment income return on average total investments (excluding accrued investment income).
Growth in book value per diluted common share
Book value per diluted common share is calculated by dividing total shareholders’ equity by the number of diluted common shares outstanding at the end of each reporting period. We calculate growth in book value per diluted common share as the percentage change in value of beginning and ending book value per diluted share over the reporting period. Book value per diluted common share is impacted by, among other factors, our underwriting results, our investment returns and our share repurchase activity, which has an accretive or dilutive impact on book value per diluted common share depending on the purchase price.
We measure our long-term financial success by our ability to compound growth in book value per diluted common share at an attractive rate of return. We believe that long-term growth in book

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value per diluted common share is the most comprehensive measure of our success because it includes all underwriting, operating and investing results.
Return on average equity
Return on average equity is net income (loss) expressed as a percentage of average total shareholders’ equity during the period and is used to measure profitability. Our goal is to generate an attractive long-term return on our common shareholders’ equity.
Comment on non-U.S. GAAP financial measures
Throughout this report, we present our operations in the way we believe will be the most meaningful and useful to investors, analysts, rating agencies and others who will use our financial information in evaluating the performance of our company. This presentation includes the use of underwriting income (loss), adjusted underwriting income (loss), adjusted combined ratio and the separate components of our investment returns (non-investment grade investment portfolio and investment grade investment portfolio). The presentation of these metrics constitutes non-U.S. GAAP financial measures as defined by applicable SEC rules. We believe that this presentation enables investors and other users of our financial information to analyze our performance in a manner similar to how management analyzes performance. We also believe that this presentation follows industry practice and, therefore, allows the equity analysts and certain rating agencies that follow us and the insurance industry as a whole, as well as other users of our financial information to compare our performance with our industry peer group. See “-Reconciliation of non-U.S. GAAP financial measures” for reconciliations of such measures to the most directly comparable U.S. GAAP financial measures, in accordance with applicable SEC rules.
Components of our results of operations
Revenues
We derive our revenues from two principal sources:
•premiums from our insurance and reinsurance lines of business; and
•income from investments.
Premiums from our insurance and reinsurance lines of business are directly related to the number, type, size and pricing of contracts we write. Premiums are earned over the contract period in proportion to the period of risk covered which is typically 12 to 24 months.
Income from our investments is comprised of interest income and net realized and unrealized gains (losses), less investment related expenses as described below.
Expenses
Our expenses consist primarily of the following:
•loss and loss adjustment expenses;
•acquisition expenses;
•general and administrative expenses;
•investment related expenses; and
•interest expense.
Loss and loss adjustment expenses are a function of the amount and type of contracts and policies we write and of the loss experience of the underlying coverage. Loss and loss adjustment expenses are based on an actuarial analysis of the estimated losses, including losses incurred during the

55


period and changes in estimates from prior periods. Depending on the nature of the contract, loss and loss adjustment expenses may be paid over a period of years.
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.
General and administrative expenses consist of salaries and benefits and related costs, legal and accounting fees, travel and client entertainment, fees relating to our letter of credit facilities, information technology, occupancy, the cost of employees made available to us by Arch under the services agreements, and other general operating expenses.
Investment-related expenses primarily consist of management and performance fees we pay to our Investment Managers, as well as interest and other expenses on borrowings from our credit facilities when used to finance a portion of our investments. The fee structure that we pay to HPS related to our non-investment grade portfolio was reduced beginning on January 1, 2018. We currently pay a management fee to HPS related to its management of our non-investment grade portfolio on a quarterly basis equal to 1.0% of net assets. BeginningEffective January 1, 2020, to the extent the aggregate net asset value of the HPS-managed non-investment grade portfolio assets exceeds $1.5 billion, the management fee shall beis calculated at a blended annual rate equal to (i) 1.0% of the initial $1.5 billion in net asset value plus (ii) seventy-five basis points (0.75%) of the excess of aggregate net asset value over $1.5 billion, subject to a minimum blended management fee rate of eighty-five basis points (0.85%) on the aggregate net asset value of the HPS-managed non-investment grade portfolio assets. In addition, on an annual basis, subject to then-applicable high water marks, HPS receives a base performance fee equal to 10% of the income generated on the non-investment grade portfolio, and is eligible to earn an additional performance fee equal to 25% of any such investment income in excess of a net 10% return to us 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 (as defined in the investment management agreements relating to Watford Re, WICE and Watford Trust) or Aggregate Income (as defined in the investment management agreements relating to WSIC and WIC), as applicable.
We have also engaged HPS to manage a portion of our investment grade portfolio as a separate managed account. We pay HPS a management fee equal to 0.60% per annum on the assets in the separate managed account. We also pay AIM monthly asset management fees related to the assets it manages for us. We are not obligated to pay performance fees to any of the Investment Managers managing our investment grade portfolios. We include the HPS non-investment grade portfolio base management fee and the AIM investment grade portfolio management fee in “investment management fees - related parties” in our consolidated statementstatements of income (loss), and as management fees are accrued and paid to HPS in connection with its management of a portion of our investment grade portfolio, we will include such fees therein as well. We include interest and other expenses on borrowings in “borrowing and miscellaneous other investment expenses” in our consolidated statementstatements of income.income (loss). The HPS non-investment grade portfolio performance fee, if applicable, is shown on a separate line in our consolidated statementstatements of income.income (loss).
Interest expense consists of interest incurred on the $175.0 million aggregate principal amount of 6.5% senior notes due July 2, 2029, or the senior notes, that we issued on July 2, 2019. Interest on the senior notes is paid semi-annually in arrears on each January 2 and July 2, which commenced on January 2, 2020.


Reportable segment
We report results under one segment, which we refer to as our “underwriting segment.” Our underwriting segment captures the results of our underwriting lines of business, which are comprised of specialty products on a worldwide basis. We also have a corporate function that
56

includes accelerated expense for the unamortized original issue discount and underwriting fees relating to the partial redemption of our 8½% cumulative redeemable preference shares, or the preference shares, and interest expense on our senior notes as well as certain operating expenses related to corporate activities referred to as certain corporate expenses. Certain corporate expenses are generally comprised of non-recurring costs of the holding company, such as costs associated with the initial setup of subsidiaries, accelerated compensation expense recognition for retirement eligible employees, and costs associated with the ongoing operations of the holding company, such as compensation of certain executives, and costs associated with the initial setup of subsidiaries (refer to “- Reconciliation of non-U.S. GAAP financial measures” for a discussion about certain corporate expenses).
RecentOther recent developments
In December 2019,On April 9, 2021, we entered into an agreement to acquirecompleted the acquisition of 100% of the capital stock of Axeria IARD, a P&Cproperty and casualty insurance company based in France.France, from the APRIL Group. The completion of this acquisition is subject to regulatory approval and other customary closing conditions, and is expected to close in the third quarter of 2020. If this pending acquisition is consummated, consistent with our business model, our strategy will be to work closely with Arch to enable Axeria IARD to grow its existing business in France as well as to develop new insurance opportunities throughout the European Union.total consideration paid was €45.1 million.
John Rathgeber retired as Chief Executive Officer on March 31, 2020. Mr. Rathgeber remains a member of Watford’s board of directors and serves as a senior advisor to the Company. Jonathan D. Levy succeeded Mr. Rathgeber as our Chief Executive Officer. Mr. Levy’s appointment is subject to Bermuda immigration approval.



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Consolidated results - for the three months ended March 31, 20202021 and 20192020
The following table summarizes our results of operations for the three months ended March 31, 20202021 and 2019:2020:
Three Months Ended March 31,Three Months Ended March 31,
2020 % Change 20192021% Change2020
($ in thousands)($ in thousands)
Gross premiums written$234,902
 25.8 % $186,689
Gross premiums written$216,523 (7.8)%$234,902 
Gross premiums ceded(48,202)   (41,302)Gross premiums ceded(37,212)(48,202)
Net premiums written186,700
 28.4 % 145,387
Net premiums written179,311 (4.0)%186,700 
Net premiums earned140,039
 (4.1)% 146,094
Net premiums earned147,731 5.5 %140,039 
Loss and loss adjustment expenses(110,676) 

 (110,850)Loss and loss adjustment expenses(118,794)(110,676)
Acquisition expenses(28,367) 

 (33,974)Acquisition expenses(35,135)(28,367)
General and administrative expenses (1)(7,139) 

 (7,240)General and administrative expenses (1)(7,292)(7,139)
Underwriting income (loss) (2)(6,143) 2.9 % (5,970)Underwriting income (loss) (2)(13,490)119.6 %(6,143)
Other underwriting income (loss)133
   592
Other underwriting income (loss)411 133 
Interest income37,824
   43,141
Interest income25,798 37,824 
Investment management fees - related parties(4,352)   (4,409)Investment management fees - related parties(4,487)(4,352)
Borrowing and miscellaneous other investment expenses(5,669)   (8,298)Borrowing and miscellaneous other investment expenses(2,354)(5,669)
Net interest income27,803
   30,434
Net interest income18,957 27,803 
Realized and unrealized gain (loss) on investments(290,502)   33,720
Realized and unrealized gain (loss) on investments46,173 (290,502)
Investment performance fees - related parties—
   (5,800)Investment performance fees - related parties(6,016)— 
Net investment income (loss)(262,699) N.M.
 58,354
Net investment income (loss)59,114 N.M.(262,699)
Interest expense(2,912)   —
Interest expense(2,912)(2,912)
Net foreign exchange gains (losses)5,013
   (437)Net foreign exchange gains (losses)(475)5,013 
Income tax expense—
   —
Transaction costs and otherTransaction costs and other(715)— 
Income tax (expense) benefitIncome tax (expense) benefit(8)— 
Net income (loss) before preference dividends(266,608)   52,539
Net income (loss) before preference dividends41,925 (266,608)
Preference dividends(1,171)   (4,907)Preference dividends(1,038)(1,171)
Net income (loss) available to common shareholders$(267,779) N.M.
 $47,632
Net income (loss) available to common shareholders$40,887 N.M.$(267,779)
N.M. - Percentage change is not meaningful.
Three Months Ended March 31,Three Months Ended March 31,
2020 Change 20192021Change2020
($ in thousands)($ in thousands)
Loss ratio79.0% 3.1 % 75.9%Loss ratio80.4 %1.4 %79.0 %
Acquisition expense ratio20.3% (3.0)% 23.3%Acquisition expense ratio23.8 %3.5 %20.3 %
General & administrative expense ratio5.1% 0.2 % 4.9%General & administrative expense ratio4.9 %(0.2)%5.1 %
Combined ratio104.4% 0.3 % 104.1%Combined ratio109.1 %4.7 %104.4 %
     
Adjusted underwriting income (loss)(2)$(3,014)   $(3,415)Adjusted underwriting income (loss)(2)$(10,299)$(3,014)
Adjusted combined ratio (2)102.2% (0.1)% 102.3%Adjusted combined ratio (2)107.0 %4.8 %102.2 %
Annualized return on average equity (3)N.M.
   20.8%Annualized return on average equity (3)17.1 %N.M.
N.M. Ratio is not meaningful.
(1) General and administrative expenses include certain corporate expenses. Refer to “Reconciliation of non-U.S. GAAP financial measures-Reconciliation of the adjusted combined ratio,” for a discussion of these certain corporate expenses.
(2) Underwriting income (loss), adjusted underwriting income (loss) and the adjusted combined ratio are non-U.S. GAAP financial measures. Refer to “Reconciliation of non-U.S. GAAP financial measures” for a reconciliation of our underwriting income (loss) to net


income (loss) available to common shareholders in accordance with U.S. GAAP, a reconciliation of our adjusted underwriting income (loss) to underwriting income (loss) and a reconciliation of our adjusted combined ratio to our combined ratio.
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(3) Annualized return on average equity represents net income (loss) expressed as a percentage of average total shareholders’ equity during the period. Annualized return on average equity for the three months ended March 31, 20192020 is calculated by extrapolating the quarterly return on average equity over a twelve-month period. For the three-month period, the average total shareholders’ equity is calculated as the average of the beginning and ending total shareholders’ equity of each quarterly period. Due to the net realized and unrealized losses on investments, the annualized return on average equity calculation is not meaningful for the three months ended March 31, 2020. For the three months ended March 31, 20202021 and 2019,2020, the return on average equity was 4.3% and (37.3)% and 5.2%, respectively.
Results for the three months ended March 31, 20202021versus 20192020:
The net income attributable to common shareholders was $40.9 million in the 2021 first quarter, compared to net loss attributable to common shareholders wasof $267.8 million in the 2020 first quarter, compared to net income attributable to common shareholders of $47.6 million in the 2019 first quarter. The 20202021 first quarter net lossincome was driven by a decreasean increase in net investment income, due tooffset in part by an increase in realizedunderwriting losses, an increase in net foreign exchange losses and unrealized losses on investments. The 2020 first quarter net investment return reflectedtransaction costs related to the impact of the COVID-19 global pandemic and the adverse economic and market conditions that followed.Merger.
The net investment lossincome was $262.7$59.1 million in the 20202021 first quarter, compared to a net investment incomeloss of $58.4$262.7 million in the 20192020 first quarter. The net investment lossincome was primarily duedriven by realized and unrealized gains of $46.2 million in the 2021 first quarter, compared to realized and unrealized losses of $290.5 million in the 2020 first quarter.
The 2021 first quarter underwriting loss was $13.5 million, compared to a realized and unrealized gain of $33.7 million in the 2019 first quarter.
The 2020 first quarteran underwriting loss of $6.1 million was in line with the 20192020 first quarter underwriting loss of $6.0 million.quarter. The 20202021 first quarter loss ratio was 79.0%80.4%, 3.11.4 points higher than the 20192020 first quarter. The 20202021 first quarter acquisition expense ratio was 20.3%23.8%, 3.03.5 points lowerhigher than the 20192020 first quarter. The increase in the loss ratio and corresponding decreasewas driven by $8.9 million, or 6.0 points of losses associated with the 2021 U.S. winter storms. The increase in the acquisition expense ratio werewas due to the prior year acquisition ratio being depressed as a result of the loss sensitive commission decreases arising from our mortgage business. In addition, we recorded lower loss ratios in certain portions of our insurance motor business driven by losses incurred related toreduced loss activity in the 2021 first quarter, as a result of the COVID-19 global pandemic, which impacted our mortgage reinsurance business.pandemic. A portion of this increasedecrease in losses was offset by loss sensitive commission decreases,increases, which are reflected as benefits toadversely impacted the acquisition expense ratio. The remaining difference was attributable to changes in the mix of business.
The prior year loss reserve development for both the 20202021 and 20192020 first quarters was essentially flat.flat, with a net adverse development of $0.1 million and a net favorable development of $0.2 million, respectively.
The 20202021 first quarter general and administrative expense ratio was 5.1%4.9%, 0.2 points higherlower than the prior year quarter. The increase this quarter versus the 2019 first quarter reflected ongoing public company corporatedecrease year-over-year can be attributed to lower professional fees, office expenses and bank fees, offset in part by higher compensation, taxes and insurance expenses.
Premiums
Our underwriting segment captures the results of our underwriting lines of business, which are comprised of specialty products on a worldwide basis. Our four major lines of business are described as follows:
•Casualty reinsurance: coverage provided to ceding company clients on third-party liability and workers’ compensation exposures, primarily on a treaty basis. Business written includes coverages such as: executive assurance, medical malpractice liability, other professional liability, workers’ compensation, excess and umbrella liability and excess auto liability.
•Other specialty reinsurance: coverage provided to ceding company clients for personal and commercial auto (other than excess auto liability), mortgage, surety, accident and health, workers’ compensation catastrophe, agriculture, marine and aviation.
•Property catastrophe reinsurance: protects ceding company clients for most catastrophic losses that are covered in the underlying policies. Perils covered may include hurricane, earthquake, flood, tornado, hail and fire, and coverage for other perils on a case-by-case basis. Property catastrophe reinsurance provides coverage on an excess of loss basis when aggregate losses and
59



loss adjustment expense from a single occurrence of a covered peril exceed the retention specified in the contract.
•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.
Gross premiums written
Gross premiums written for the three months ended March 31, 20202021 and 20192020 were as follows:
Three Months Ended March 31,
20212020
Amount%Amount%
($ in thousands)
Casualty reinsurance$57,070 26.4 %$83,818 35.7 %
Other specialty reinsurance46,519 21.5 %36,880 15.7 %
Property catastrophe reinsurance13,410 6.2 %9,832 4.2 %
Insurance programs and coinsurance99,524 46.0 %104,372 44.4 %
Total$216,523 100.0 %$234,902 100.0 %
 Three Months Ended March 31,
 2020 2019
 Amount % Amount %
 ($ in thousands)
Casualty reinsurance$83,818
 35.7% $75,601
 40.5%
Other specialty reinsurance36,880
 15.7% 24,298
 13.0%
Property catastrophe reinsurance9,832
 4.2% 5,992
 3.2%
Insurance programs and coinsurance104,372
 44.4% 80,798
 43.3%
Total$234,902
 100.0% $186,689
 100.0%
Results for the three months ended March 31, 20202021versus 2019:2020:
Gross premiums written were $216.5 million for the three months ended March 31, 2021, compared to $234.9 million for the three months ended March 31, 2020, compared to $186.7 million for the three months ended March 31, 2019, an increasea decrease of $48.2$18.4 million, or 25.8%7.8%. Premium growth was achieved across all lines of business.
Casualty reinsurance and other specialty reinsurance gross premiums increased 10.9% and 51.8%, respectively,written decreased 31.9% over the prior year quarter, primarily due to increased personal and commercial auto writings. The casualty reinsurance increase was primarily due to increaseda reduction in U.K. motor excess of loss writings, while the otherwritings.
Insurance programs and coinsurance gross premiums written decreased 4.6%, driven by lower gross written premiums on certain motor businesses, partially offset by increased U.K. multi-line exposures.
Other specialty reinsurance premium increase wasgross premiums written increased 26.1% over the prior year quarter primarily attributabledue to U.K. and Irisha new quota share on Lloyds syndicate business, offset in part by a reduction in motor proportional business writings.
Our property catastrophe reinsurance gross premiums written increased 64.1%36.4% over the prior year quarter. Our primary involvement in this line of business is a 7.5% quota share participation of ARL’s world-wide property catastrophe excess of loss portfolio. Recently, Arch has been increasingincreased its writings in this line in response to an improving rate environment and, as a result, our premiums have grown in proportion.
The growth in our insurance programs and coinsurance line of business was driven by the continued expansion of our U.S. insurance business. During the 2020 first quarter, WSIC and WIC collectively grew their insurance programs and coinsurance gross premiums written by $26.7 million, or 102.6%, to $52.6 million. WICE insurance gross premiums written decreased slightly, by $3.1 million or 5.6%, to $51.7 million during the 2020 first quarter.
Premiums ceded
Premiums ceded were $37.2 million for the three months ended March 31, 2021, compared to $48.2 million for the three months ended March 31, 2020, compared to $41.3 million for the three months ended March 31, 2019, an increasea decrease of $6.9$11.0 million. Premiums ceded increaseddecreased during the period, as ourdriven by a reduction in the third-party reinsurance purchased for one large insurance gross premiums written have grown in our WSIC and WIC companies and outward ceded premiums to Arch have grown in proportion.program.

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Net premiums written
Net premiums written for the three months ended March 31, 20202021 and 20192020 were as follows:
Three Months Ended March 31,
20212020
Amount%Amount%
($ in thousands)
Casualty reinsurance$57,016 31.8 %$83,667 44.8 %
Other specialty reinsurance39,468 22.0 %35,484 19.0 %
Property catastrophe reinsurance13,410 7.5 %9,832 5.3 %
Insurance programs and coinsurance69,417 38.7 %57,717 30.9 %
Total$179,311 100.0 %$186,700 100.0 %
 Three Months Ended March 31,
 2020 2019
 Amount % Amount %
 ($ in thousands)
Casualty reinsurance$83,667
 44.8% $75,065
 51.6%
Other specialty reinsurance35,484
 19.0% 23,182
 15.9%
Property catastrophe reinsurance9,832
 5.3% 5,982
 4.1%
Insurance programs and coinsurance57,717
 30.9% 41,158
 28.3%
Total$186,700
 100.0% $145,387
 100.0%
Results for the three months ended March 31, 20202021versus 20192020:
Net premiums written were $179.3 million for the three months ended March 31, 2021, compared to $186.7 million for the three months ended March 31, 2020, compared to $145.4 million for the three months ended March 31, 2019, an increasea decrease of $41.3$7.4 million or 28.4%4.0%. The 20202021 first quarter increasedecrease in net reinsurance premiums written was consistent withdriven by the increase inreduction of gross reinsurance premiums written. The 2020 first quarterwritten in the casualty reinsurance line of business. Offsetting this decrease were increases in insurance programs and coinsurance, growth was slightly higher than growthproperty catastrophe and other specialty reinsurance. Despite the reduction in gross premiums written versus the prior year quarter, as the new business writtendescribed earlier, net premiums increased in the United States has a higher retained percentage thaninsurance programs and coinsurance line of business, as we decreased the existing business.amount ceded to third-party reinsurers on one program.
Net premiums earned
Net premiums earned for the three months ended March 31, 20202021 and 20192020 were as follows:
Three Months Ended March 31,
20212020
Amount%Amount%
($ in thousands)
Casualty reinsurance$47,138 31.9 %$52,765 37.7 %
Other specialty reinsurance35,203 23.8 %35,364 25.3 %
Property catastrophe reinsurance8,318 5.6 %4,884 3.5 %
Insurance programs and coinsurance57,072 38.7 %47,026 33.5 %
Total$147,731 100.0 %$140,039 100.0 %
 Three Months Ended March 31,
 2020 2019
 Amount % Amount %
 ($ in thousands)
Casualty reinsurance$52,765
 37.7% $63,313
 43.3%
Other specialty reinsurance35,364
 25.3% 44,561
 30.5%
Property catastrophe reinsurance4,884
 3.5% 2,971
 2.0%
Insurance programs and coinsurance47,026
 33.5% 35,249
 24.1%
Total$140,039
 100.0% $146,094
 100.0%
Results for the three months ended March 31, 20202021versus 20192020:
Net premiums earned were $147.7 million for the three months ended March 31, 2021 compared to $140.0 million for the three months ended March 31, 2020, compared to $146.1 million for the three months ended March 31, 2019, a decreasean increase of $6.1$7.7 million or 4.1%5.5%. The decreaseincrease in net premiums earned reflected a non-renewal of one multi-line quota share contract within casualty reinsurance and a non-recurring exposure within other specialty reinsurance earnedthe increase in the 2019 first quarter. This was partially offset by increased writingsnet premiums written in insurance programs and coinsurance, and, to a lesser extent, property catastrophe reinsurance during the 20202021 first quarter. This was partially offset by a reduction in casualty reinsurance, consistent with the reduction in net premiums written discussed above.

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Loss ratio
The following table shows the components of our loss and loss adjustment expenses for the three months ended March 31, 20202021 and 2019:2020:
Three Months Ended March 31,
20212020
Loss and Loss Adjustment Expenses% of Earned PremiumsLoss and Loss Adjustment Expenses% of Earned Premiums
($ in thousands)
Current year$118,687 80.3 %$110,856 79.1 %
Prior year development (favorable)/adverse107 0.1 %(180)(0.1)%
Loss and loss adjustment expenses$118,794 80.4 %$110,676 79.0 %
 Three Months Ended March 31,
 2020 2019
 Loss and Loss Adjustment Expenses % of Earned Premiums Loss and Loss Adjustment Expenses % of Earned Premiums
 ($ in thousands)
Current year$110,856
 79.1 % $110,901
 75.9%
Prior year development (favorable)/adverse(180) (0.1)% (51) —%
Loss and loss adjustment expenses$110,676
 79.0 % $110,850
 75.9%
Results for the three months ended March 31, 20202021versus 20192020:
Our loss ratio was 80.4% for the three months ended March 31, 2021, compared to 79.0% for the three months ended March 31, 2020, compared to 75.9% for the three months ended March 31, 2019, an increase of 3.11.4 points. The increase in loss ratio and corresponding decrease in acquisition expense ratio werewas driven by $8.9 million, or 6.0 points of losses incurred related toassociated with the 2021 U.S. winter storms.
The prior year first quarter loss ratio was elevated as a result of the COVID-19 global pandemic which impactedlosses arising from our mortgage reinsurance business. A portion of this increase inthese losses waswere contractually offset by loss sensitive commission decreases whichand are reflectedrecorded as benefitsa benefit to the Company’s acquisition expense ratio. Other movements in the loss ratio reflected changes in mix and the type of business.
The prior year loss reserve development for both the 20202021 and 20192020 first quarters was essentially flat.flat, with a net adverse development of $0.1 million and a net favorable development of $0.2 million, respectively.
Refer to Note 5, “Reserve for losses and loss adjustment expenses” to our consolidated financial statements in Part I Item 1 of this report for more information about our prior year reserve development.
Acquisition expense ratio
Results for the three months ended March 31, 20202021versus 20192020:
Our acquisition expense ratio was 20.3%23.8% for the three months ended March 31, 2020, a reduction2021, an increase of 3.03.5 points from the three months ended March 31, 2019.2020. The decreasechange was primarily as a result of the prior year acquisition ratio being depressed due to the loss sensitive commission decreases arising from our mortgage business previously mentioned. In addition, we recorded lower loss ratios in acquisition expense ratio and corresponding increase in loss ratio werecertain portions of our insurance motor business driven by losses incurred related toreduced loss activity in the 2021 first quarter, as a result of the COVID-19 global pandemic,pandemic. A portion of this decrease in losses was offset by loss sensitive commission increases, which impacted our other specialty reinsurance business, as discussed above.adversely affect the acquisition ratio. The remaining difference is attributable to changes in the mix of business.
General and administrative expense ratio
Results for the three months ended March 31, 20202021versus 20192020:
Our general and administrative expense ratio was 4.9% for the three months ended March 31, 2021, compared to 5.1% for the three months ended March 31, 2020, compared2020. The decrease year-over-year can be attributed to 4.9% for the three months ended March 31, 2019. The 0.2 point increase this quarter reflected ongoing public company corporatelower professional fees, office expenses and bank fees, offset in part by higher compensation, taxes and insurance expenses.
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Combined ratio
Results for the three months ended March 31, 20202021versus 20192020:
Our combined ratio was 109.1% for the three months ended March 31, 2021, compared to 104.4% for the three months ended March 31, 2020, compared to 104.1% for the three months ended March 31, 2019, an increase of 0.3%.4.7 points. In the 20202021 first quarter, there was a 3.11.4 point increase in the loss expense ratio and a 3.5 point increase in the acquisition expense ratio, offset in part by a 0.2 point increasedecrease in the general and administrative expense ratio, offset in part by a 3.0 point decrease in the acquisition expense ratio, versus the prior period, as described above.



InvestingInvestment results
The following table summarizes the components of total investment income:
Three Months Ended March 31,Three Months Ended March 31,
2020 201920212020
($ in thousands)($ in thousands)
Interest income$37,824
 $43,141
Interest income$25,798 $37,824 
Investment management fees - related parties(4,352) (4,409)Investment management fees - related parties(4,487)(4,352)
Borrowing and miscellaneous other investment expenses(5,669) (8,298)Borrowing and miscellaneous other investment expenses(2,354)(5,669)
Net interest income27,803
 30,434
Net interest income18,957 27,803 
Net realized gains (losses) on investments(5,046) 1,282
Net realized gains (losses) on investments1,702 (5,046)
Net unrealized gains (losses) on investments(285,456) 32,438
Net unrealized gains (losses) on investments44,471 (285,456)
Investment performance fees - related parties—
 (5,800)Investment performance fees - related parties(6,016)— 
Net investment income (loss)$(262,699) $58,354
Net investment income (loss)$59,114 $(262,699)
   
Net interest income yield on average net assets (1)1.4 % 1.5%Net interest income yield on average net assets (1)0.8 %1.4 %
Non-investment grade portfolio (1)1.7 % 1.9%Non-investment grade portfolio (1)1.1 %1.7 %
Investment grade portfolio (1)0.5 % 0.6%Investment grade portfolio (1)0.2 %0.5 %
Net investment income return on average net assets (1)(13.0)% 2.8%Net investment income return on average net assets (1)2.6 %(13.0)%
Non-investment grade portfolio (1)(17.4)% 3.4%Non-investment grade portfolio (1)3.7 %(17.4)%
Investment grade portfolio (1)0.8 % 1.1%Investment grade portfolio (1)0.3 %0.8 %
Net investment income return on average total investments (excluding accrued investment income) (2)(10.1)% 2.1%Net investment income return on average total investments (excluding accrued investment income) (2)2.3 %(10.1)%
Non-investment grade portfolio (2)(14.9)% 2.7%Non-investment grade portfolio (2)3.2 %(14.9)%
Investment grade portfolio (2)0.8 % 1.1%Investment grade portfolio (2)0.3 %0.8 %
(1) Net interest income yield on average net assets and net investment income return on average net assets are calculated by dividing net interest income, and net investment income (loss), respectively, by average net assets. Net assets is calculated as the sum of total investments, accrued investment income and receivables for securities sold, less revolving credit agreement borrowings, payable for securities purchased and payable for securities sold short. For the three-month period, average net assets is calculated using the averages of each quarterly period. However, for the investment grade portfolio component of these returns, the impact of the revolving credit agreement borrowings is not subtracted from net interest income, net investment income (loss), or the net assets calculation. The separate components of these returns (non-investment grade portfolio and investment grade portfolio) are non-U.S. GAAP financial measures. Refer to “-Reconciliation of non-U.S. GAAP financial measures” for a reconciliation of these components of our net interest income yield on average net assets and net investment income return on average net assets.
(2) Net investment income return on average total investments (excluding accrued investment income) is calculated by dividing net investment income by average total investments. For the three-month period, average total investments is calculated using the averages of each quarterly period. However, for the investment grade portfolio component of these returns, the impact of revolving credit agreement borrowings is not subtracted from net investment income. The separate components of these returns (non-investment grade portfolio and investment grade portfolio) are non-U.S. GAAP financial measures. Refer to “-Reconciliation of non-U.S. GAAP financial measures” for a reconciliation of these components of our net investment income return on average total investments (excluding accrued investment income).
63

Results for the three months ended March 31, 20202021versus 20192020:
Net investment income was $59.1 million for the three months ended March 31, 2021 compared to net investment loss wasof $262.7 million for the three months ended March 31, 2020, compared to net investment incomean increase of $58.4 million for the three months ended March 31, 2019, a decrease of $321.1$321.8 million. The 20202021 first quarter net investment income return on average net assets was (13.0)%2.6% as compared to 2.8%(13.0)% for the 20192020 first quarter.
The 20202021 first quarter net investment return was driven by net realized and unrealized gains of $46.2 million, compared to net realized and unrealized losses of $290.5 million due toin the prior year quarter. The losses in the 2020 first quarter reflected investment market volatility caused by the economic shutdown mandated by governments around the world related to the COVID-19 global pandemic.
The net realized and


unrealized losses on investments was partially offset byinvestment income for the three months ended March 31, 2021 included net interest income of $27.8$19.0 million, a decrease of 31.8% from the prior year quarter. The net interest income decrease over the prior period reflected a gradual shift to higher rated investments in the 2020 first quarter.our non-investment grade portfolio, a reduction in LIBOR and its impact on our investments in floating rate securities, and a reduction in prevailing interest rates period over period.
The 20202021 first quarter non-investment grade portfolio net interest income yield was 1.7%1.1%, compared to 1.9%1.7% in the 20192020 first quarter. The decrease in yield was driven byattributable to a decreasegradual shift to higher rated, lower yielding investments in our non-investment grade portfolio and a reduction in LIBOR rates and its impact on our investments in floating rate assets, as well as the deliberate use of less investment leverage, and therefore a lower net asset base, in the first quarter of 2020 versus the prior year quarter.securities.
The non-investment grade portfolio net unrealized lossesgains reported in the 20202021 first quarter were $285.5$44.5 million, compared to a net unrealized gainlosses of $27.6$285.5 million in the 20192020 first quarter. The net unrealized gains in the 2021 first quarter reflected slight spread tightening as well as idiosyncratic position movements. The net unrealized losses in the 2020 first quarter reflected investment market volatility caused by the economic dislocation resulting from the COVID-19 global pandemic.
The 20202021 first quarter investment grade portfolio net interest income yield was 0.5%0.2%, consistent with 0.6%compared to 0.5% in the prior period.
In addition,2020 first quarter. The reduction in net interest income yield was driven by a reduction in LIBOR and its impact on our investments in floating rate securities, and a reduction in prevailing interest rates during the year.
Transaction costs and other
During the 2021 first quarter, we incurred transaction costs of 2020,$0.7 million, which included various legal, advisory and other consulting costs associated with the investment grade available for sale portfolio experienced $38.0Merger. We have incurred $4.8 million of unrealized holding losses, as disclosed within the statement of other comprehensive income (loss). The unrealized holding losses reflected investment market volatility caused by the economic dislocation resulting from the COVID-19 global pandemic.such Merger transaction costs to date.
Growth in book value per diluted common share
Results for the three months ended March 31, 20202021versus 20192020:
Book value per diluted common share was $28.21$48.86 as of March 31, 2020,2021, compared to $43.49$47.08 per share as of December 31, 2019.2020. The decreaseincrease was driven by a net lossincome of $267.8$40.9 million and a net other comprehensive loss of $37.8$5.5 million.






64

Reconciliation of non-U.S. GAAP financial measures
Underwriting income (loss), adjusted underwriting income (loss), adjusted combined ratio and the non-investment grade portfolio and investment grade portfolio components of our investment returns (net interest income yield on average net assets, and net investment income return on average net assets and on average total investments (excluding accrued investment income), respectively) are non-U.S. GAAP financial measures. We use these measures, together with the GAAP financial statements, to provide information that assists with analyzing our performance. As a result, certain income and expense items are excluded from these measures in an effort to allow an effective analysis. With respect to expenses, we do not view certain operating expenses related to corporate activities, referred to as certain corporate expenses, as part of our underwriting activities. These expenses are generally comprised of non-recurring costs of the holding company, such as costs associated with the initial setup of subsidiaries, as well as costs associated with the ongoing operations of the holding company, such as compensation of certain executives.executives and costs associated with the initial setup of subsidiaries. The following are descriptions of each of the non-U.S. GAAP financial measures used by us.
Underwriting income (loss) is useful in evaluating our underwriting performance, without regard to other underwriting income (losses), net investment income (losses), interest expense, net foreign exchange gains (losses), transaction and other costs, income tax expensesexpense (benefit) and preference dividends.
Adjusted underwriting income (loss) is useful in evaluating our underwriting performance, without regard to net investment income (losses), interest expense, net foreign exchange gains (losses), transaction and other costs, income tax expenses,expense (benefit), preference dividends and certain corporate expenses (which are described in more detail above). We define underwriting income (loss) as net premiums earned, less loss and loss adjustment expenses, acquisition expenses and general and administrative expenses, and we define adjusted underwriting income (loss) as underwriting income (loss) plus other underwriting income (loss) less certain corporate expenses. Our adjusted combined ratio is a key indicator of our profitability, without regard to certain corporate expenses. We calculate the adjusted combined ratio by dividing the sum of loss and loss adjustment expenses, acquisition expenses and general and administrative expenses less certain corporate expenses by the sum of net premiums earned and other underwriting income (loss).
The non-investment grade portfolio and investment grade portfolio components of our investment returns (net interest income yield on average net assets, and net investment income return on average net assets and on average total investments (excluding accrued investment income), respectively) are useful in evaluating our investment performance. The non-investment grade portfolio component of these investment returns reflect the performance of our investment strategy under HPS, which includes the use of leverage. The investment grade portfolio component of these investment returns reflect the performance of the investment portfolios that predominantly support our underwriting collateral.
We use underwriting income (loss), adjusted underwriting income (loss) and the adjusted combined ratio and the separate components of our returns (non-investment grade portfolio and investment grade portfolio) as internal performance measures in the management of our operations because we believe they give us and users of our financial information useful insight into our results of operations and our underlying business performance. Underwriting income (loss) and adjusted underwriting (income) loss should not be viewed as a substitute for net income (loss) calculated in accordance with U.S. GAAP, and our adjusted combined ratio should not be viewed as a substitute for our combined ratio. Furthermore, other companies may define these measures differently.

65


Reconciliation of underwriting income (loss) and adjusted underwriting income (loss)
Underwriting income (loss) reconciles to net income (loss) available to common shareholders, and adjusted underwriting income (loss) reconciles to underwriting income (loss) for the three months ended March 31, 20202021 and 20192020 as follows:
Three Months Ended March 31,
20212020
($ in thousands)
Net income (loss) available to common shareholders$40,887 $(267,779)
Preference dividends1,038 1,171 
Net income (loss) before preference dividends41,925 (266,608)
Income tax expense (benefit)8 — 
Interest expense2,912 2,912 
Net foreign exchange (gains) losses475 (5,013)
Transaction costs and other715 — 
Net investment (income) loss(59,114)262,699 
Other underwriting (income) loss(411)(133)
Underwriting income (loss)(13,490)(6,143)
Certain corporate expenses2,780 2,996 
Other underwriting income (loss)411 133 
Adjusted underwriting income (loss)$(10,299)$(3,014)

66
 Three Months Ended March 31,
 2020 2019
 ($ in thousands)
Net income (loss) available to common shareholders$(267,779) $47,632
Preference dividends1,171
 4,907
Net income (loss) before dividends(266,608) 52,539
Income tax expense—
 —
Interest expense2,912
 —
Net foreign exchange (gains) losses(5,013) 437
Net investment (income) loss262,699
 (58,354)
Other underwriting (income) loss(133) (592)
Underwriting income (loss)(6,143) (5,970)
Certain corporate expenses2,996
 1,963
Other underwriting income (loss)133
 592
Adjusted underwriting income (loss)$(3,014) $(3,415)




Reconciliation of the adjusted combined ratio
The adjusted combined ratio reconciles to the combined ratio for the three months ended March 31, 20202021 and 20192020 as follows:
Three Months Ended March 31,Three Months Ended March 31,
2020 201920212020
Amount Adjustment As Adjusted Amount Adjustment As AdjustedAmountAdjustmentAs AdjustedAmountAdjustmentAs Adjusted
($ in thousands)($ in thousands)
Losses and loss adjustment expenses$110,676
 $—
 $110,676
 $110,850
 $—
 $110,850
Losses and loss adjustment expenses$118,794 $— $118,794 $110,676 $— $110,676 
Acquisition expenses28,367
 —
 28,367
 33,974
 —
 33,974
Acquisition expenses35,135 — 35,135 28,367 — 28,367 
General & administrative expenses (1)7,139
 (2,996) 4,143
 7,240
 (1,963) 5,277
General & administrative expenses (1)7,292 (2,780)4,512 7,139 (2,996)4,143 
Net premiums earned (1)(2)140,039
 133
 140,172
 146,094
 592
 146,686
Net premiums earned (1)(2)147,731 411 148,142 140,039 133 140,172 
           
Loss ratio79.0% 

   75.9% 

  Loss ratio80.4 %79.0 %
Acquisition expense ratio20.3% 

   23.3% 

  Acquisition expense ratio23.8 %20.3 %
General & administrative expense ratio (1)5.1% 

   4.9% 

  General & administrative expense ratio (1)4.9 %5.1 %
Combined ratio104.4% 

   104.1% 

  Combined ratio109.1 %104.4 %
Adjusted loss ratio  

 79.0%   

 75.6%Adjusted loss ratio80.2 %79.0 %
Adjusted acquisition expense ratio  

 20.2%   

 23.2%Adjusted acquisition expense ratio23.7 %20.2 %
Adjusted general & administrative expense ratio  

 3.0%   

 3.5%Adjusted general & administrative expense ratio3.1 %3.0 %
Adjusted combined ratio    102.2%     102.3%Adjusted combined ratio107.0 %102.2 %
(1) Adjustments include certain corporate expenses, which are deducted from general and administrative expenses, and other underwriting income (loss), which is added to net premiums earned.
(2) The adjustment to net premiums earned relates to “other underwriting income” from underwriting contracts accounted for as derivatives.







67


Reconciliation of the non-investment grade portfolio and investment grade portfolio components of our investment returns
The non-investment grade portfolio and the investment grade portfolio components of our investment returns for the three months ended March 31, 20202021 and 20192020 are as follows:
Three Months Ended March 31, 2020 Three Months Ended March 31, 2019Three Months Ended March 31, 2021Three Months Ended March 31, 2020
Non-Investment Grade Investment Grade 
Cost of
 U/W Collateral (4)
 Total Non-Investment Grade Investment Grade 
Cost of
 U/W Collateral (4)
 TotalNon-Investment GradeInvestment GradeCost of
 U/W Collateral (4)		TotalNon-Investment GradeInvestment GradeCost of
 U/W Collateral (4)		Total
($ in thousands)($ in thousands)
Interest income$32,764
 $5,060
 $—
 $37,824
 $37,339
 $5,802
 $—
 $43,141
Interest income$23,293 $2,505 $— $25,798 $32,764 $5,060 $— $37,824 
Investment management fees - related parties(3,973) (379) —
 (4,352) (4,071) (338) —
 (4,409)Investment management fees - related parties(4,151)(336)— (4,487)(3,973)(379)— (4,352)
Borrowing and miscellaneous other investment expenses(2,591) (225) (2,853) (5,669) (4,858) (204) (3,236) (8,298)Borrowing and miscellaneous other investment expenses(1,909)(329)(116)(2,354)(2,591)(225)(2,853)(5,669)
Net interest income26,200
 4,456
 (2,853) 27,803
 28,410
 5,260
 (3,236) 30,434
Net interest income17,233 1,840 (116)18,957 26,200 4,456 (2,853)27,803 
Net realized gains (losses) on investments(7,225) 2,179
 —
 (5,046) 1,319
 (37) —
 1,282
Net realized gains (losses) on investments1,279 423 — 1,702 (7,225)2,179 — (5,046)
Net unrealized gains (losses) on investments (1)(285,493) 37
 —
 (285,456) 27,625
 4,813
 —
 32,438
Net unrealized gains (losses) on investments (1)44,489 (18)— 44,471 (285,493)37 — (285,456)
Investment performance fees - related parties—
 —
 —
 —
 (5,800) —
 —
 (5,800)Investment performance fees - related parties(6,016)— — (6,016)— — — — 
Net investment income (loss)$(266,518) $6,672
 $(2,853) $(262,699) $51,554
 $10,036
 $(3,236) $58,354
Net investment income (loss)$56,985 $2,245 $(116)$59,114 $(266,518)$6,672 $(2,853)$(262,699)
               
Average total investments (excluding accrued investment income) (2)$1,790,337 $820,635 $—
 $2,610,972 $1,895,843 $888,424 $—
 $2,784,267Average total investments (excluding accrued investment income) (2)$1,760,548$774,829$— $2,535,377$1,790,337$820,635$— $2,610,972
Average net assets (3)$1,530,825 $826,062 $(328,750) $2,028,137 $1,506,245 $886,927 $(316,987) $2,076,185Average net assets (3)$1,558,811$775,586$(24,750)$2,309,647$1,530,825$826,062$(328,750)$2,028,137



 
 
 
 
 
 
Net interest income yield on average net assets (3)1.7 % 0.5%   1.4 % 1.9% 0.6%   1.5%Net interest income yield on average net assets (3)1.1 %0.2 %0.8 %1.7 %0.5 %1.4 %
Net investment income return on average total investments (excluding accrued investment income) (2)(14.9)% 0.8%   (10.1)% 2.7% 1.1%   2.1%Net investment income return on average total investments (excluding accrued investment income) (2)3.2 %0.3 %2.3 %(14.9)%0.8 %(10.1)%
Net investment income return on average net assets (3)(17.4)% 0.8% (0.9)% (13.0)% 3.4% 1.1% (1.0)% 2.8%Net investment income return on average net assets (3)3.7 %0.3 %(0.5)%2.6 %(17.4)%0.8 %(0.9)%(13.0)%
(1) Net unrealized gains (losses) on investments excludes unrealized gains and losses from the available for sale portfolios, which are recorded in other comprehensive income.
(2) Net investment income return on average total investments (excluding accrued investment income) is calculated by dividing net investment income by average total investments. For the three-month period, average total investments is calculated using the average of the beginning and ending balance of each quarterly period. However, for the investment grade portfolio component of these returns, the impact of revolving credit agreement borrowings is not subtracted from net investment income.
(3) Net interest income yield on average net assets and net investment income return on average net assets are calculated by dividing net interest income, and net investment income (loss), respectively, by average net assets. For the non-investment grade component of investment returns and total investment returns, net assets is calculated as the sum of total investments, accrued investment income and receivables for securities sold, less total revolving credit agreement borrowings, payable for securities purchased and payable for securities sold short. However, for the investment grade portfolio component of these returns, the impact of the revolving credit agreement borrowings is not subtracted from net interest income, net investment income (loss), or the net assets calculation.
(4) The cost of underwriting collateral is calculated as the revolving credit agreement expenses for the investment grade portfolios divided by the average total revolving credit agreement borrowings for the investment grade portfolios during the period.





68

As of March 31, 2020 As of March 31, 2019As of March 31, 2021As of March 31, 2020
Non-Investment Grade Investment Grade Borrowings for U/W Collateral Total Non-Investment Grade Investment Grade Borrowings for U/W Collateral TotalNon-Investment GradeInvestment GradeBorrowings for U/W CollateralTotalNon-Investment GradeInvestment GradeBorrowings for U/W CollateralTotal
($ in thousands)($ in thousands)
Average total investments (excluding accrued investment income) - QTD$1,790,337
 $820,635
 $—
 $2,610,972
 $1,895,843
 $888,424
 $—
 $2,784,267
Average total investments (excluding accrued investment income) - QTD$1,760,548 $774,829 $— $2,535,377 $1,790,337 $820,635 $— $2,610,972 
Average net assets - QTD1,530,825
 826,062
 (328,750) 2,028,137
 1,506,245
 886,927
 (316,987) 2,076,185
Average net assets - QTD1,558,811 775,586 (24,750)2,309,647 1,530,825 826,062 (328,750)2,028,137 
               
Total investments$1,718,421
 $794,385
 $—
 $2,512,806
 $1,909,095
 $921,071
 $—
 $2,830,166
Total investments$1,796,839 $775,074 $— $2,571,913 $1,718,421 $794,385 $— $2,512,806 
Accrued Investment Income12,312
 4,032
 —
 16,344
 13,300
 4,046
 —
 17,346
Accrued Investment Income12,053 2,272 — 14,325 12,312 4,032 — 16,344 
Receivable for Securities Sold22,329
 4,460
 —
 26,789
 62,365
 201
 —
 62,566
Receivable for Securities Sold65,671 2,405 — 68,076 22,329 4,460 — 26,789 
Less: Payable for Securities Purchased61,834
 1,995
 —
 63,829
 83,189
 12,388
 —
 95,577
Less: Payable for Securities Purchased44,052 6,213 — 50,265 61,834 1,995 — 63,829 
Less: Payable for Securities Sold Short30,076
 —
 —
 30,076
 28,737
 —
 —
 28,737
Less: Payable for Securities Sold Short34,589 — — 34,589 30,076 — — 30,076 
Less: Revolving credit agreement borrowings247,736
 —
 328,750
 576,486
 326,256
 —
 326,487
 652,743
Less: Revolving credit agreement borrowings225,829 — 24,750 250,579 247,736 — 328,750 576,486 
Net assets$1,413,416
 $800,882
 $(328,750) $1,885,548
 $1,546,578
 $912,930
 $(326,487) $2,133,021
Net assets$1,570,093 $773,538 $(24,750)$2,318,881 $1,413,416 $800,882 $(328,750)$1,885,548 
Non-investment grade borrowing ratio (1)17.5%       21.1%      Non-investment grade borrowing ratio (1)14.4 %17.5 %
               
Unrealized gains on investments$25,439
 $15,086
 $—
 $40,525
 $28,066
 $4,040
 $—
 $32,106
Unrealized gains on investments$65,643 $15,764 $— $81,407 $25,439 $15,086 $— $40,525 
Unrealized losses on investments(366,188) (47,603) —
 (413,791) (104,700) (6,835) —
 (111,535)Unrealized losses on investments(82,589)(4,137)— (86,726)(366,188)(47,603)— (413,791)
Net unrealized gains (losses) on investments$(340,749) $(32,517) $—
 $(373,266) $(76,634) $(2,795) $—
 $(79,429)Net unrealized gains (losses) on investments$(16,946)$11,627 $— $(5,319)$(340,749)$(32,517)$— $(373,266)
(1) The non-investment grade borrowing ratio is calculated as revolving credit agreement borrowings divided by net assets.

69


Critical accounting policies, estimates and recent accounting pronouncements
The preparation of consolidated financial statements in accordance with GAAP requires us to make many estimates and judgments that affect the reported amounts of assets, liabilities (including reserves), revenues and expenses, and related disclosures of contingent liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, insurance and other reserves, reinsurance recoverables and fair value measurements. We base our estimates on historical experience, where possible, and on various other assumptions that we believe to be reasonable under the circumstances, which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and judgments for a relatively new company, like our company, are even more difficult to make than those made in a mature company since we have compiled relatively limited historical information through March 31, 2020.2021. Actual results will differ from these estimates and such differences may be material.
The critical accounting policies that we believe affect significant estimates used in the preparation of our consolidated financial statements, as well as certain recent accounting pronouncements, are discussed under the heading “Management’s discussion and analysis of financial condition and results of operations-Critical accounting policies, estimates and recent accounting pronouncements” contained in our Annual Report on Form 10-K for the year ending December 31, 2019,2020, updated, where applicable, in the notes accompanying our consolidated financial statements included in this report, including Note 2, “Basis of presentation and significant accounting policies”.
Financial condition, liquidity and capital resources
General
We are a holding company whose assets primarily consist of the shares in our subsidiaries. Generally, we depend on our available cash resources, dividends or other distributions from subsidiaries to make payments, including the payment of interest on our senior notes, dividends on our preference shares and operating expenses we may incur. During the three months ended March 31, 20202021 and the year ended December 31, 2019,2020, we received dividends of $1.1$1.0 million and $13.4$15.7 million, respectively, from Watford Re, our Bermuda operating subsidiary.
The ability of our regulated operating subsidiaries to pay dividends or make distributions is dependent on their ability to meet applicable regulatory standards. Under Bermuda law, Watford Re is required to maintain an enhanced capital requirement, or ECR, which must equal or exceed its minimum solvency margin (in other words, the amount by which the value of its general business assets must exceed its general business liabilities). Watford Re is also required to maintain a minimum liquidity ratio whereby the value of its relevant assets is not less than 75% of the amount of its relevant liabilities for general business. Watford Re is prohibited from declaring or paying any dividends during any financial year if it is not in compliance with each of its ECR, minimum solvency margin and minimum liquidity ratio. In any financial year, Watford Re is prohibited from declaring or paying dividends of more than 25% of its total statutory capital and surplus (as shown on its previous financial year’s statutory balance sheet) unless it files, at least seven days before payment of such dividends, with the Bermuda Monetary Authority, or the BMA, an affidavit attesting that a dividend would not cause Watford Re to fail to meet its relevant margins. As of December 31, 2019,2020, as determined under Bermuda law, Watford Re had a statutory capital and surplus of $1.1$1.2 billion and was in compliance with its ECR, minimum solvency margin and minimum liquidity ratio. Accordingly, as of December 31, 2019,2020, Watford Re was able to pay dividends of up to $276.6$296.0 million to us during 20202021 without the requirement of filing such an affidavit with the BMA. ThisOur compliance with the relevant margins is subject to ongoing monitoring of our statutory capital throughout 2020.2021. In addition, Watford Re is prohibited, without prior approval of the BMA, from reducing by 15% or more its total statutory capital, as set out in its previous year’s statutory financial statements.

70


Our U.S. and Gibraltar insurance subsidiaries are subject to similar insurance laws and regulations in the jurisdictions in which they operate. The ability of these insurance subsidiaries to pay dividends or make distributions is also dependent on their ability to meet applicable regulatory standards.
Furthermore, the ability of our operating subsidiaries to pay dividends to us and to intermediate subsidiaries owned by us could be constrained by our dependence on financial strength ratings from independent rating agencies. Our ratings from these agencies depend to a large extent on the capitalization levels of our operating subsidiaries. We believe that we have sufficient cash resources and available dividend capacity to service our indebtedness, pay required dividends on our preference shares and satisfy other current outstanding obligations.
Financial condition
Shareholders’ equity
20202021 versus 2019:2020: Total shareholders’ equity was $564.1$977.0 million as of March 31, 2020,2021, compared to $872.4$941.3 million as of December 31, 2019, a decrease2020, an increase of $308.3$35.7 million or 35.3%3.8%. The decreaseincrease in shareholders’ equity was primarily driven by net investment income of $59.1 million, offset in part by an underwriting loss of $262.7$13.5 million, an other comprehensive loss of $37.8 million, an underwriting loss of $6.1$5.5 million, an interest expense of $2.9 million, and preference dividends of $1.2$1.0 million and other transaction costs of $0.7 million. In addition, the repurchase of 127,744 common shares during the 2020 first quarter under our $50 million share repurchase program reduced shareholders’ equity by $2.9 million.


71

Investment portfolios
The table below summarizes the credit quality of our total non-investment grade and investment grade portfolios as of March 31, 20202021 and December 31, 2019,2020, as rated by Standard & Poor’s Financial Services, LLC, or Standard & Poor’s, Moody’s Investors Service, or Moody’s, Fitch Ratings Inc., or Fitch, or Kroll Bond Rating Agency, or KBRA, DBRS Morningstar, or DBRS, as applicable:
Credit Rating (1)
Credit Rating (1)
March 31, 2020Fair Value AAA AA A BBB BB B CCC CC C D Not Rated
March 31, 2021March 31, 2021Fair ValueAAAAAABBBBBBCCCCCCNot Rated
($ in thousands)($ in thousands)
Non-Investment Grade Portfolio:                       Non-Investment Grade Portfolio:
Term loan investments$906,999
 $—
 $—
 $—
 $—
 $10,277
 $650,028
 $161,307
 $2,823
 $1,314
 $1,590
 $79,660
Term loan investments$790,186 $— $— $— $11,564 $34,507 $518,654 $174,552 $4,144 $1,283 $45,482 
Corporate bonds240,570
 —
 —
 —
 5,933
 14,447
 84,955
 118,847
 1,872
 —
 3,699
 10,817
Corporate bonds403,389 — — 1,435 4,782 64,492 252,327 52,415 9,765 — 18,173 
Asset-backed securities140,613
 —
 —
 3,339
 85,572
 19,727
 7,395
 1,418
 —
 —
 —
 23,162
Asset-backed securities134,524 — — — 66,101 28,459 9,085 5,770 262 — 24,847 
Mortgage-backed securities8,529
 —
 —
 —
 —
 1,190
 —
 —
 —
 —
 2,552
 4,787
Short-term investments269,768
 26,024
 133,548
 402
 62,091
 —
 40,000
 —
 —
 —
 —
 7,703
Short-term investments337,687 133,819 121,024 79,126 — — 3,163 555 — — — 
Total fixed income instruments and short-term investments1,566,479
 26,024
 133,548
 3,741
 153,596
 45,641
 782,378
 281,572
 4,695
 1,314
 7,841
 126,129
Total fixed income instruments and short-term investments1,665,786 133,819 121,024 80,561 82,447 127,458 783,229 233,292 14,171 1,283 88,502 
Other Investments30,682
                      
Equities121,260
                      Equities131,053 
Total Non-Investment Grade Portfolio$1,718,421
 $26,024
 $133,548
 $3,741
 $153,596
 $45,641
 $782,378
 $281,572
 $4,695
 $1,314
 $7,841
 $126,129
Total Non-Investment Grade Portfolio$1,796,839 $133,819 $121,024 $80,561 $82,447 $127,458 $783,229 $233,292 $14,171 $1,283 $88,502 
                       
Investment Grade Portfolio:                       Investment Grade Portfolio:
Corporate bonds$167,570
 $—
 $34,647
 $76,063
 $52,085
 $4,775
 $—
 $—
 $—
 $—
 $—
 $—
Corporate bonds$200,995 $— $18,674 $91,223 $87,363 $3,735 $— $— $— $— $— 
U.S. government and government agency bonds265,423
 —
 265,423
 —
 —
 —
 —
 —
 —
 —
 —
 —
U.S. government and government agency bonds165,683 — 165,683 — — — — — — — — 
Asset-backed securities113,583
 1,628
 —
 15,980
 95,975
 —
 —
 —
 —
 —
 —
 —
Asset-backed securities83,431 — 609 7,431 70,314 5,077 — — — — — 
Mortgage-backed securities21,785
 —
 —
 4,600
 17,185
 —
 —
 —
 —
 —
 —
 —
Mortgage-backed securities15,315 — — 1,516 13,799 — — — — — — 
Non-U.S. government and government agency bonds149,858
 —
 149,858
 —
 —
 —
 —
 —
 —
 —
 —
 —
Non-U.S. government and government agency bonds161,958 — 161,958 — — — — — — — — 
Municipal government and government agency bonds2,073
 1,023
 570
 480
 —
 —
 —
 —
 —
 —
 —
 —
Municipal government and government agency bonds1,779 782 588 409 — — — — — — — 
Short-term investments74,093
 4,150
 21,239
 —
 48,704
 —
 —
 —
 —
 —
 —
 —
Short-term investments145,913 9,622 66,783 20,014 49,494 — — — — — — 
Total Investment Grade Portfolio$794,385
 $6,801
 $471,737
 $97,123
 $213,949
 $4,775
 $—
 $—
 $—
 $—
 $—
 $—
Total Investment Grade Portfolio$775,074 $10,404 $414,295 $120,593 $220,970 $8,812 $— $— $— $— $— 
Total$2,512,806
 $32,825
 $605,285
 $100,864
 $367,545
 $50,416
 $782,378
 $281,572
 $4,695
 $1,314
 $7,841
 $126,129
Total$2,571,913 $144,223 $535,319 $201,154 $303,417 $136,270 $783,229 $233,292 $14,171 $1,283 $88,502 
(1) For individual fixed maturity investments, Standard & Poor’s ratings are used. In the absence of a Standard & Poor’s rating, ratings from Moody’s are used, followed by ratings from Fitch, followed by ratings from KBRA, followed by ratings from DBRS.


72

Credit Rating (1)
Credit Rating (1)
December 31, 2019Fair Value AAA AA A BBB BB B CCC CC C D Not Rated
December 31, 2020December 31, 2020Fair ValueAAAAAABBBBBBCCCCCCNot Rated
($ in thousands)($ in thousands)
Non-Investment Grade Portfolio                       Non-Investment Grade Portfolio
Term loan investments$1,061,934
 $—
 $—
 $—
 $—
 $9,617
 $761,168
 $215,909
 $6,823
 $2,119
 $—
 $66,298
Term loan investments$851,539 $— $— $— $11,352 $19,486 $588,215 $185,221 $7,406 $2,727 $37,132 
Corporate bonds213,841
 —
 —
 —
 —
 9,003
 58,345
 135,613
 —
 —
 —
 10,880
Corporate bonds312,620 — — — — 31,089 194,418 59,421 8,280 1,894 17,518 
Asset-backed securities190,738
 —
 —
 4,002
 105,706
 29,695
 18,381
 —
 —
 —
 —
 32,954
Asset-backed securities140,508 — — — 73,911 26,799 8,385 8,262 837 — 22,314 
Mortgage-backed securities7,706
 —
 —
 —
 —
 976
 —
 —
 —
 —
 2,497
 4,233
Short-term investments232,436
 —
 116,805
 34,903
 64,108
 —
 —
 8,359
 —
 —
 —
 8,261
Short-term investments301,390 83,308 124,830 89,577 — — 3,186 489 — — — 
Total fixed income instruments and short-term investments1,706,655
 —
 116,805
 38,905
 169,814
 49,291
 837,894
 359,881
 6,823
 2,119
 2,497
 122,626
Total fixed income instruments and short-term investments1,606,057 83,308 124,830 89,577 85,263 77,374 794,204 253,393 16,523 4,621 76,964 
Other Investments30,461
                      
Equities125,137
                      Equities118,201 
Total Non-Investment Grade Portfolio$1,862,253
 $—
 $116,805
 $38,905
 $169,814
 $49,291
 $837,894
 $359,881
 $6,823
 $2,119
 $2,497
 $122,626
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$158,632
 $—
 $36,128
 $81,401
 $41,103
 $—
 $—
 $—
 $—
 $—
 $—
 $—
Corporate bonds$197,247 $— $19,812 $82,379 $87,913 $7,143 $— $— $— $— $— 
U.S. government and government agency bonds285,609
 —
 285,609
 —
 —
 —
 —
 —
 —
 —
 —
 —
U.S. government and government agency bonds202,488 — 202,488 — — — — — — — — 
Asset-backed securities145,433
 2,006
 —
 25,177
 118,250
 —
 —
 —
 —
 —
 —
 —
Asset-backed securities80,258 — — 15,675 59,560 5,023 — — — — — 
Mortgage-backed securities24,750
 —
 —
 1,100
 23,650
 —
 —
 —
 —
 —
 —
 —
Mortgage-backed securities16,663 — — 2,092 14,571 — — — — — — 
Non-U.S. government and government agency bonds133,409
 —
 132,460
 —
 949
 —
 —
 —
 —
 —
 —
 —
Non-U.S. government and government agency bonds158,839 — 158,839 — — — — — — — — 
Municipal government and government agency bonds2,184
 1,135
 573
 476
 —
 —
 —
 —
 —
 —
 —
 —
Municipal government and government agency bonds1,788 783 592 413 — — — — — — — 
Short-term investments96,867
 25,783
 20,037
 —
 51,047
 —
 —
 —
 —
 —
 —
 —
Short-term investments117,300 6,211 43,870 19,328 47,891 — — — — — — 
Total Investment Grade Portfolio$846,884
 $28,924
 $474,807
 $108,154
 $234,999
 $—
 $—
 $—
 $—
 $—
 $—
 $—
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 
(1) For individual fixed maturity investments, Standard & Poor’s ratings are used. In the absence of a Standard & Poor’s rating, ratings from Moody’s are used, followed by ratings from Fitch, followed by ratings from KBRA, followed by ratings from DBRS.



73


The following tables summarize the composition of the Company’sour non-investment grade and investment grade portfolios by sector as of March 31, 20202021 and December 31, 2019:2020:
March 31, 2021
TotalFinancialsHealth CareTechnologyConsumer Discretionary (1)IndustrialsConsumer StaplesOil & GasAll Other (2)
($ in thousands)
Non-Investment Grade Portfolio:
Term loan investments$790,186 $133,545 $145,013 $149,263 $132,708 $115,863 $9,486 $28,808 $75,500 
Corporate bonds403,389 23,010 31,911 58,216 103,019 36,737 16,665 70,392 63,439 
Equities - sector specific114,689 66,679 22,982 3,291 9,734 3,207 3,368 2,086 3,342 
Short-term investments - sector specific3,720 — 557 — — — — — 3,163 
Subtotal1,311,984 223,234 200,463 210,770 245,461 155,807 29,519 101,286 145,444 
Equities - non-sector specific16,364 
Short-term investments - non-sector specific333,967 
Asset-backed securities134,524 
Total Non-Investment Grade Portfolio$1,796,839 $223,234 $200,463 $210,770 $245,461 $155,807 $29,519 $101,286 $145,444 
Investment Grade Portfolio:
Corporate bonds$200,995 $68,281 $10,565 $16,031 $27,381 $16,524 $26,906 $15,484 $19,823 
Short-term investments145,913 
U.S. government and government agency bonds165,683 
Non-U.S. government and government agency bonds161,958 
Asset-backed securities83,431 
Mortgage-backed securities15,315 
Municipal government and government agency bonds1,779 
Total Investment Grade Portfolio$775,074 $68,281 $10,565 $16,031 $27,381 $16,524 $26,906 $15,484 $19,823 
Total Investments$2,571,913 $291,515 $211,028 $226,801 $272,842 $172,331 $56,425 $116,770 $165,267 
(1) As of March 31, 2021, the industry classifications were revised and, as such, the investments classified as "Consumer Services" in previous quarters are now classified as "Consumer Discretionary." The presentation of information as of December 31, 2020 has not been changed.
(2) Includes telecommunications, utilities, basic materials and real estate.
74

March 31, 2020December 31, 2020
Total Financials Health Care Technology Consumer Services Industrials Consumer Goods Oil & Gas All Other (1)TotalFinancialsHealth CareTechnologyConsumer ServicesIndustrialsConsumer GoodsOil & GasAll Other (1)
($ in thousands)($ in thousands)
Non-Investment Grade Portfolio:                 Non-Investment Grade Portfolio:
Term loan investments$906,999
 $190,535
 $195,084
 $199,837
 $98,518
 $89,778
 $40,415
 $32,049
 $60,783
Term loan investments$851,539 $191,608 $162,255 $159,747 $79,477 $131,820 $24,079 $29,679 $72,874 
Corporate bonds240,570
 24,927
 43,028
 15,702
 49,761
 27,585
 19,947
 18,522
 41,098
Corporate bonds312,620 26,565 23,929 53,493 81,990 21,899 18,759 34,955 51,030 
Equities - sector specific95,112
 59,714
 27,174
 5,868
 —
 1,026
 —
 242
 1,088
Equities - sector specific101,464 71,574 22,463 2,724 — 2,822 — 479 1,402 
Short-term investments - sector specific47,703
 7,703
 —
 —
 —
 —
 —
 40,000
 —
Short-term investments - sector specific12,637 490 — 8,961 — — — 3,186 
Subtotal1,290,384
 282,879
 265,286
 221,407
 148,279
 118,389
 60,362
 90,813
 102,969
Subtotal1,278,260 289,747 209,137 215,964 170,428 156,541 42,838 65,113 128,492 
Equities - non-sector specific26,148
                Equities - non-sector specific16,737 
Short-term investments - non-sector specific222,065
                Short-term investments - non-sector specific288,753 
Asset-backed securities140,613
                Asset-backed securities140,508 
Other investments30,682
                
Mortgage-backed securities8,529
                
Total Non-Investment Grade Portfolio$1,718,421
 $282,879
 $265,286
 $221,407
 $148,279
 $118,389
 $60,362
 $90,813
 $102,969
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:                 Investment Grade Portfolio:
Corporate bonds$167,570
 $62,046
 $13,752
 $12,135
 $15,481
 $14,133
 $34,718
 $7,346
 $7,959
Corporate bonds$197,247 $55,430 $11,190 $17,863 $28,002 $13,989 $41,543 $14,473 $14,757 
Short-term investments74,093
                Short-term investments117,300 
U.S. government and government agency bonds265,423
                U.S. government and government agency bonds202,488 
Non-U.S. government and government agency bonds149,858
                Non-U.S. government and government agency bonds158,839 
Asset-backed securities113,583
                Asset-backed securities80,258 
Mortgage-backed securities21,785
                Mortgage-backed securities16,663 
Municipal government and government agency bonds2,073
                Municipal government and government agency bonds1,788 
Total Investment Grade Portfolio$794,385
 $62,046
 $13,752
 $12,135
 $15,481
 $14,133
 $34,718
 $7,346
 $7,959
Total Investment Grade Portfolio$774,583 $55,430 $11,190 $17,863 $28,002 $13,989 $41,543 $14,473 $14,757 
Total Investments$2,512,806
 $344,925
 $279,038
 $233,542
 $163,760
 $132,522
 $95,080
 $98,159
 $110,928
Total Investments$2,498,841 $345,177 $220,327 $233,827 $198,430 $170,530 $84,381 $79,586 $143,249 
(1) Includes telecommunications, utilities and basic materials.










75
 December 31, 2019
 Total Financials Health Care Technology Consumer Services Industrials Consumer Goods Oil & Gas All Other (1)
 ($ in thousands)
Non-Investment Grade Portfolio:                 
Term loan investments$1,061,934
 $212,800
 $221,982
 $232,659
 $121,434
 $111,912
 $46,827
 $52,200
 $62,120
Corporate bonds213,841
 17,547
 19,160
 10,972
 28,144
 13,822
 23,491
 27,632
 73,073
Equities - sector specific101,551
 55,946
 30,640
 11,263
 —
 1,283
 —
 1,040
 1,379
Short-term investments - sector specific16,620
 8,261
 —
 3,030
 —
 5,329
 —
 —
 —
Subtotal1,393,946
 294,554
 271,782
 257,924
 149,578
 132,346
 70,318
 80,872
 136,572
Equities - non-sector specific23,586
                
Short-term investments - non-sector specific215,816
                
Asset-backed securities190,738
                
Other investments30,461
                
Mortgage-backed securities7,706
                
Total Non-Investment Grade Portfolio$1,862,253
 $294,554
 $271,782
 $257,924
 $149,578
 $132,346
 $70,318
 $80,872
 $136,572
                  
Investment Grade Portfolio:                 
Corporate bonds$158,632
 $72,707
 $12,087
 $8,035
 $11,752
 $10,548
 $32,046
 $5,734
 $5,723
Short-term investments96,867
               
U.S. government and government agency bonds285,609
                
Non-U.S. government and government agency bonds133,409
                
Asset-backed securities145,433
                
Mortgage-backed securities24,750
                
Municipal government and government agency bonds2,184
                
Total Investment Grade Portfolio$846,884
 $72,707
 $12,087
 $8,035
 $11,752
 $10,548
 $32,046
 $5,734
 $5,723
Total Investments$2,709,137
 $367,261
 $283,869
 $265,959
 $161,330
 $142,894
 $102,364
 $86,606
 $142,295

(1) Includes telecommunications, utilities and basic materials.







The fair value of our term loans, fixed maturities and short-term investments in our non-investment grade and investment grade portfolios, summarized by contractual maturity as of March 31, 20202021 and December 31, 20192020 were as follows:
Contractual Maturity
March 31, 2021Fair ValueDue in One Year or LessDue After One Through Two YearsDue After Three Through Five YearsDue After Five Through Ten YearsDue After Ten Years
($ in thousands)
Non-Investment Grade Portfolio:
Term loan investments$790,186 $21,873 $112,578 $377,280 $278,455 $— 
Corporate bonds403,389 — 21,874 204,944 159,563 17,008 
Short-term investments337,687 337,687 — — — — 
Subtotal1,531,262 359,560 134,452 582,224 438,018 17,008 
Asset-backed securities134,524 
Equities131,053 
Total Non-Investment Grade Portfolio$1,796,839 $359,560 $134,452 $582,224 $438,018 $17,008 
Investment Grade Portfolio:
Corporate bonds$200,995 $885 $41,736 $75,145 $69,526 $13,703 
U.S. government and government agency bonds165,683 644 143,984 14,786 6,269 — 
Non-U.S. government and government agency bonds161,958 16,378 31,010 53,926 60,644 — 
Municipal government and government agency bonds1,779 — 1,370 409 — — 
Short-term investments145,913 145,913 — — — — 
Subtotal676,328 163,820 218,100 144,266 136,439 13,703 
Asset-backed securities83,431 
Mortgage-backed securities15,315 
Total - Investment Grade Portfolio$775,074 $163,820 $218,100 $144,266 $136,439 $13,703 
Total$2,571,913 $523,380 $352,552 $726,490 $574,457 $30,711 


76

Contractual Maturity
Contractual Maturity
March 31, 2020Fair 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
December 31, 2020December 31, 2020Fair ValueDue in One Year or LessDue After One Through Two YearsDue After Three Through Five YearsDue After Five Through Ten YearsDue After Ten Years
($ in thousands)($ in thousands)
Non-Investment Grade Portfolio:           Non-Investment Grade Portfolio:
Term loan investments$906,999
 $16,371
 $298,644
 $219,701
 $372,283
 $—
Term loan investments$851,539 $21,035 $106,014 $465,153 $259,337 $— 
Corporate bonds240,570
 29
 31,289
 109,198
 100,054
 —
Corporate bonds312,620 28 32,778 203,390 67,847 8,577 
Short-term investments269,768
 269,768
 —
 —
 —
 —
Short-term investments301,390 301,390 — — — — 
Subtotal1,417,337
 286,168
 329,933
 328,899
 472,337
 —
Subtotal1,465,549 322,453 138,792 668,543 327,184 8,577 
Asset-backed securities140,613
          Asset-backed securities140,508 
Mortgage-backed securities8,529
          
Other Investments30,682
          
Equities121,260
          Equities118,201 
Total Non-Investment Grade Portfolio$1,718,421
 $286,168
 $329,933
 $328,899
 $472,337
 $—
Total Non-Investment Grade Portfolio$1,724,258 $322,453 $138,792 $668,543 $327,184 $8,577 
           
Investment Grade Portfolio:           Investment Grade Portfolio:
Corporate bonds$167,570
 $8,439
 $49,634
 $46,347
 $51,743
 $11,407
Corporate bonds$197,247 $4,290 $25,914 $67,785 $79,858 $19,400 
U.S. government and government agency bonds265,423
 329
 209,121
 46,740
 9,233
 —
U.S. government and government agency bonds202,488 820 180,324 20,945 399 — 
Non-U.S. government and government agency bonds149,858
 6,906
 43,861
 32,993
 66,098
 —
Non-U.S. government and government agency bonds158,839 23,476 29,027 54,428 51,908 — 
Municipal government and government agency bonds2,073
 —
 253
 1,341
 480
 —
Municipal government and government agency bonds1,788 — 1,375 413 — — 
Short-term investments74,093
 74,093
 —
 —
 —
 —
Short-term investments117,300 117,300 — — — — 
Subtotal659,017
 89,767
 302,869
 127,421
 127,554
 11,407
Subtotal677,662 145,886 236,640 143,571 132,165 19,400 
Asset-backed securities113,583
          Asset-backed securities80,258 
Mortgage-backed securities21,785
          Mortgage-backed securities16,663 
Total - Investment Grade Portfolio$794,385
 $89,767
 $302,869
 $127,421
 $127,554
 $11,407
Total - Investment Grade Portfolio774,583 $145,886 $236,640 $143,571 $132,165 $19,400 
Total$2,512,806
 $375,935
 $632,802
 $456,320
 $599,891
 $11,407
Total$2,498,841 $468,339 $375,432 $812,114 $459,349 $27,977 





 Contractual Maturity
December 31, 2019Fair 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$1,061,934
 $23,683
 $289,985
 $314,908
 $433,358
 $—
Corporate bonds213,841
 15,746
 21,879
 113,750
 61,933
 533
Short-term investments232,436
 232,436
 —
 —
 —
 —
Subtotal1,508,211
 271,865
 311,864
 428,658
 495,291
 533
Asset-backed securities190,738
          
Mortgage-backed securities7,706
          
Other Investments30,461
          
Equities125,137
          
Total Non-Investment Grade Portfolio$1,862,253
 $271,865
 $311,864
 $428,658
 $495,291
 $533
            
Investment Grade Portfolio:           
Corporate bonds$158,632
 $2,760
 $45,676
 $54,584
 $43,586
 $12,026
U.S. government and government agency bonds285,609
 1,490
 212,884
 41,976
 29,259
 —
Non-U.S. government and government agency bonds133,409
 6,745
 31,443
 32,213
 63,008
 —
Municipal government and government agency bonds2,184
 —
 253
 1,330
 601
 —
Short-term investments96,867
 96,867
 —
 —
 —
 —
Subtotal676,701
 107,862
 290,256
 130,103
 136,454
 12,026
Asset-backed securities145,433
          
Mortgage-backed securities24,750
          
Total - Investment Grade Portfolio846,884
 $107,862
 $290,256
 $130,103
 $136,454
 $12,026
Total$2,709,137
 $379,727
 $602,120
 $558,761
 $631,745
 $12,559


Actual maturities may differ from contractual maturities because some borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.




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The following chart shows the composition of our non-investment grade and investment grade portfolios as of March 31, 2020:2021:
chart-bd02ee9ddcd166c1c40.jpgwtre-20210331_g2.jpg
Total: $1,718.4$1,796.8 million
chart-39877cb3e15a9e1e52b.jpgwtre-20210331_g3.jpg
Total: $794.4$775.1 million
Liquidity and capital resources
Cash flows
Liquidity is a measure of our ability to access sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. Our most significant source of operating cash flow is from premiums received from our insureds and reinsureds. Our underwriting operations provide liquidity in that premiums are received in advance, sometimes substantially in advance, of the time losses are paid. The period of time from the occurrence of a claim through the settlement of the resulting liability may extend many years into the future. We expect that our liquidity needs, including our anticipated insurance and reinsurance obligations and operating and capital expenditure needs, for at least the next 12 months, will be met by funds generated from underwriting activities and investment income, as well as by our balance of cash, short-term investments, proceeds on the sale or maturity of our investments and our credit facilities. For a discussion of the risks related to the potential future impacts of the COVID-19 global pandemic on our liquidity and capital resources, see Part II, Item 1A, “Risk Factors” in this report.
Our most significant operating cash outflow is for claim payments. Because the payment of claims occurs after the receipt of the premium, often years later, we invest the cash in various fixed income investments that earn interest. We also use cash to pay commissions to brokers, as well as to pay for

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ongoing operating expenses such as salaries, rent and taxes, interest expense on our senior notes and dividends on our preference shares. We have reinsurance agreements with Arch and others through which we cede a portion of our business. In purchasing reinsurance, we pay part of our premiums to reinsurers and collect cash back when our reinsurers reimburse us for losses subject to our reinsurance coverage.
The timing of our cash flows from operating activities can vary among periods due to the timing by which payments are made or received. Some of our payments and receipts, including loss settlements and subsequent reinsurance receipts, can be significant, so their timing can influence cash flows from operating activities in any given period.
Sources of liquidity include cash flows from operations, financing arrangements and routine sales of investments. The following table summarizes our cash flows from operating, investing and financing activities for the three months ended March 31, 20202021 and 2019:2020:
Three Months Ended March 31,
20212020
($ in thousands)
Cash and cash equivalents provided by (used for):
Operating activities$6,984 $24,575 
Investing activities(17,498)(111,627)
Financing activities37,924 88,184 
Effects of exchange rate changes on foreign currency(2,697)(6,989)
Change in cash and cash equivalents$24,713 $(5,857)
 Three Months Ended March 31,
 2020 2019
 ($ in thousands)
Cash and cash equivalents provided by (used for):   
Operating activities$24,575
 $70,306
Investing activities(111,627) (31,877)
Financing activities88,184
 (45,918)
Effects of exchange rate changes on foreign currency(6,989) 261
Change in cash and cash equivalents$(5,857) $(7,228)
Results for the three months ended March 31, 20202021:
•Cash provided by operating activities for the three months ended March 31, 20202021 was lower than the same period in 2019. We continued2020. Operating cash flows reduced due to generate strong operating cash inflows, primarily driven by ourhigher claim payments and reduced premium receipts exceeding the level of our paid claims,written and interest income received.
•Cash used for investing activities for the three months ended March 31, 20202021 was higherlower than the same period in 2019,2020, due to an increase in purchases and a reduction in sales, redemptions and maturities, partially offset by an increase in 2020.
purchases of fixed maturities in 2021.
•Cash was provided by financing activities for the three months ended March 31, 2020, rather2021 was lower than being used for financing activitiesthe same period in 2019. During the 2020, first quarter, we increased withdrawalsdriven by lower borrowings from the secured credit facility and the custodian bank facility, rather than cash used for net repayments of borrowings in the same period for 2019. These withdrawals were driven by our investment strategy related to the timing and use of leverage in managing our non-investment grade portfolio. In addition, we purchased $2.9 million of our own common shares under our $50 million share repurchase program during the 2020 first quarter.
facilities.
Our investments in certain securities and loans may be illiquid due to contractual provisions or may prove to be illiquid in certain investment market conditions. Changes in general economic conditions could have a material adverse effect on the value and liquidity of the investments in our investment portfolios. The COVID-19 global pandemic has severely impacted the global economy and financial markets, which has had a material adverse effect on our non-investment grade portfolio in particular.2020. The valuations of the portfolio have recovered and there has been a gradual shift towards higher rated investments. However, there continues to be uncertainty which could adversely impact our investment portfolios. If we require significant amounts of cash on short notice in excess of our anticipated cash requirements, we may have difficulty selling these investments in a timely manner or may be forced to sell or otherwise liquidate them at unfavorable values.
The primary goals of our asset liability management process are to satisfy insurance liabilities and maintain sufficient liquidity to cover fluctuations in projected liability cash flows, including our debt


service obligations and payment of dividends on our preference shares. We do not explicitly implement an exact cash flow match in each period. However, the substantial degree by which the fair value of our investment portfolios exceeds the expected present value of the net underwriting
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liabilities, as well as the ongoing cash flow from premiums and contractual principal and interest payments received from our investment portfolios, strengthens our ability to fund the payment of claims and to service our other outstanding obligations without having to sell securities or loans at distressed prices. We believe that, generally, the combination of premium receipts and the expected principal and interest payments produced by our predominantly fixed income investment portfolios will adequately fund future claim payments and other liabilities when due.
Capital resources
In addition to the common shares and preference shares we issued in our initial funding, we have entered into credit facilities to support our business operations. Further, in July 2019, we issued our senior notes and used the net proceeds from the issuance to redeem 76.34% of our then outstanding preference shares, as described in more detail below.shares. We believe that we hold sufficient capital to allow us to continue our business operations and execute our strategy, as well as to comply with all applicable statutory regulations.
We monitor our capital adequacy on a regular basis and will seek to adjust our capital base (up or down) according to the needs of our business. As part of our capital management program, we may seek to raise additional capital or may seek to return capital to our shareholders through share repurchases, cash dividends or other methods (or a combination of such methods). Any such determination will be at the discretion of our board of directors and will be dependent upon our profits, financial requirements and other factors, including legal restrictions, rating agency requirements and such other factors as our board of directors deems relevant.
In the first quarter of 2020, our board of directors authorized a share repurchase program, which allows us to make repurchases of up to $50 million of our common shares from time to time in open market or privately negotiated transactions. During the first quarter of 2020, we repurchased 127,744 common shares at an average price of $22.42 per share for an aggregate cost of $2.9 million. With the onset of the COVID-19 global pandemic, we temporarily halted repurchases under the program following the first quarter of 2020, and we did not repurchase any of our common shares during the remainder of 2020. As of March 31, 2020,2021, approximately $47.1 million of unused share repurchase capacity remained available under the program. In light of the COVID-19 global pandemic and the uncertain economic outlook,However, we have temporarily halteddo not anticipate making any further repurchases under the program. Including the share repurchases under our initial $75 million share repurchase program authorized by the board of directors in 2019, we repurchased a total of approximately 2.9 million common shares for an aggregate cost of $77.9 million, excluding transaction costs between September 2019 and March 31, 2020. Any repurchases under our current share repurchase program will be in accordance with applicable laws, our organizational documents and the applicable terms of our outstanding securities. The timing and amount of the repurchase transactions under the share repurchase program will depend onas a varietyresult of factors, including market conditions,our entry into the levelMerger Agreement, which generally prohibits us from repurchasing our shares as well as certain other securities prior to the consummation of future earnings, and rating agency and regulatory considerations. Other than pursuant to our share repurchase program,the Merger or the earlier termination of the Merger Agreement. Accordingly, at the present time, we do not expect to repurchase common shares, declare or pay dividends on our common shares or otherwise return capital to our common shareholders for the foreseeable future.


The following table summarizes our consolidated capital position:
March 31, 2021December 31, 2020
Amount% of Total CapitalAmount% of Total Capital
($ in thousands)
Debt:
Senior notes$172,757 14.4 %$172,689 14.8 %
Shareholders’ equity:
Preference shares52,421 4.3 %52,398 4.5 %
Shareholders’ equity
976,996 81.3 %941,344 80.7 %
Total shareholders’ equity
1,029,417 85.6 %993,742 85.2 %
Total capital available to Watford$1,202,174 100.0 %$1,166,431 100.0 %
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 March 31, 2020 December 31, 2019
 Amount % of Total Capital Amount % of Total Capital
 ($ in thousands)
Debt:       
Senior notes$172,486
 21.9% $172,418
 15.7%
Shareholders’ equity:
       
Preference shares52,328
 6.6% 52,305
 4.8%
Shareholders’ equity
564,054
 71.5% 872,353
 79.5%
Total shareholders’ equity
616,382
 78.1% 924,658
 84.3%
Total capital available to Watford$788,868
 100.0% $1,097,076
 100.0%

The future capital requirements of our business will depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. Our ability to underwrite is largely dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. In particular, we require (1) sufficient capital to maintain our financial strength ratings, as issued by ratings agencies, at a level considered necessary by management to enable our key operating subsidiaries to compete; (2) sufficient capital to enable our underwriting subsidiaries to meet the capital adequacy tests mandated by regulatory agencies in Bermuda, the United States and other key markets; and (3) sufficient letter of credit and other credit facilities to enable Watford Re to post regulatory and commercially required letters of credit and other forms of collateral that are necessary for it to write business. For more information regarding the current status of our ratings, see "-Ratings"“-Ratings” below.
To the extent that our existing capital is insufficient to fund our future operating requirements or maintain such ratings, we may need to raise additional funds through financings or limit our growth. However, we can provide no assurance that, if needed, we would be able to obtain additional funds through financing on satisfactory terms or at all. Adverse developments in the financial markets, such as disruptions, uncertainty or volatility in the capital and credit markets may result in realized and unrealized capital losses that could have a material adverse effect on our results of operations, financial position and our businesses, and may also limit our access to capital required to operate our business.
If we are not able to obtain adequate capital, our business, results of operations and financial condition could be adversely affected, which could include, among other things, the following possible outcomes: (1) potential downgrades in the financial strength ratings assigned by ratings agencies to our operating subsidiaries, which could place those operating subsidiaries at a competitive disadvantage compared to higher-rated competitors; (2) reductions in the amount of business that our operating subsidiaries are able to write in order to meet capital adequacy-based tests enforced by regulatory agencies; and (3) any resultant ratings downgrades could, among other things, affect our ability to write business and increase the cost of bank credit and letters of credit. In addition, under certain of the reinsurance agreements assumed by our reinsurance operations, upon the occurrence of a ratings downgrade or other specified triggering event with respect to our reinsurance operations, such as a reduction in surplus by specified amounts during specified periods, our ceding company clients may be provided with certain rights, including, among other things, the right to terminate the subject reinsurance agreement and/or to require that our reinsurance operations post additional collateral.
Prior to August 1, 2019, we hadWe have a total of 9,065,2002,145,202 preference shares that were issued and outstanding, and, on August 1, 2019, we redeemed 76.34% of these preference shares as described


below.with dividends accruing at a floating rate. The holders of our remaining preference shares have the option, at any time on or after June 30, 2034, to redeem their preference shares at the liquidation price of $25.00 per share. We have the right to redeem any or all of our remaining preference shares at the original purchase price of $25.00 per share. On June 28, 2019, we completed a direct listing of ourshare at any time. The preference shares are listed on the Nasdaq Global Select Market. Prior to June 30, 2019, dividends on our preference shares accrued at a fixed rate of 8½% per annum. On June 30, 2019, dividends on our preference shares began accruing at a floating rate. As noted above, on August 1, 2019, we redeemed 6,919,998 of our then outstanding preference shares. The preference shares were redeemed at a total redemption price of $25.19748 per share, inclusive of all declared and unpaid dividends, with accumulation of any undeclared dividends on or after June 30, 2019.
On July 2, 2019, we completed a private offering of $175.0 million in aggregate principal amount of our 6.5% senior notes due July 2, 2029. The aggregate principal amount was in line with our then-current limit on Tier 3 capital credit under the BMA’s regulatory framework. Interest on our senior notes is paid semi-annually in arrears on each January 2 and July 2, which commenced on January 2, 2020. Affiliates of ACGL purchased $35.0 million in aggregate principal amount of our senior notes. The $172.3 million net proceeds from the offering were used to redeem a portion of our outstanding preference shares, as described above.shares.
As a result of the issuance of our senior notes and the redemption of our preference shares, we incur interest expenses and a reduction of preference dividends, with the cumulative effect resulting in substantial savings in our combined interest and preference dividend expense.
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In addition to the capital provided by the sale of our common shares, preference shares and senior notes, we may depend on external sources of financing to support our underwriting activities, such as bank credit facilities providing loans and/or letters of credit, as well as additional note issuances. As noted above, additional equity or debt financing, if available at all, may be on terms that are unfavorable to us. In the case of equity financings, dilution to our shareholders could result, and, in any case, such securities might have rights, preferences and privileges that are senior to those of our outstanding securities.
Ratings
Our operating subsidiaries, Watford Re, WICE, WIC and WSIC, each carry a financial strength rating of “A-” (Excellent) from A.M. Best. A.M. Best assigns 16 ratings to insurance companies, which currently range from “A++” (Superior) to “F” (In Liquidation). “A-” (Excellent) is the fourth highest rating issued by A.M. Best. The “A-” (Excellent) rating is assigned to insurers that have, in A.M. Best’s opinion, an excellent ability to meet their ongoing obligations to policyholders. Each of our operating subsidiaries also carries a financial strength rating of “A” from KBRA. KBRA assigns 22 ratings to insurance companies, which currently range from “AAA” to “D”.“D.” The “A” rating, KBRA’s sixth highest rating category, is assigned to insurers for which, in KBRA’s opinion, the insurer’s financial condition is sound and the entity is likely to meet its policyholder obligations under difficult economic, financial and business conditions. These respective ratings are intended to provide an independent opinion of an insurer’s ability to meet its obligation to policyholders and neither is an evaluation directed at investors.
The financial strength ratings assigned by A.M. Best and KBRA, respectively, have an impact on the ability of Watford Re to attract reinsurance clients, and also on the ability of our insurance subsidiaries to attract and retain program administrators, agents, brokers and insureds. The A.M. Best “A-” (Excellent) rating and KBRA “A” rating obtained by Watford Re, WICE, WIC, and WSIC are each consistent with our business plan and allow us to actively pursue relationships with the types of cedants, program administrators, agents, brokers and insureds targeted in our marketing plan.
In response to the unrealized, adverse mark-to-market impact on the valuation of our investment portfolios caused by the economic shutdown related to the COVID-19 global pandemic, A.M. Best and KBRA have issued press releases noting potential future rating actions. In particular, on May 1,


2020, A.M. Best announced that it had placed the “A-” financial strength ratings of our operating subsidiaries “under review with negative implications.” In addition, A.M. Best also placed “under review with negative implications” the long-term issuer credit rating of “BBB-” and the long-term issuer credit rating of “BB” on our cumulative contingently-redeemable preference shares. On November 19, 2020, A.M. Best announced that it had maintained its “under review with negative implications” status for the “A-” financial strength rating of our operating subsidiaries. The designation of being “under review with negative implications” indicates that a previously-published rating has the potential for a near-term change (typically within six months) due to a recent event or abrupt change in the financial condition of the entity to which the rating applies. The rating remains under review until A.M. Best is able to determine the implications of the circumstances that facilitated the under review status, before making its final opinion. Similarly,In addition, on May 7,June 17, 2020, after previously putting our ratings on “watch” status following the COVID-19 global pandemic-related impact to our investment portfolios, KBRA reaffirmed the “A” insurance financial strength ratings of our operating subsidiaries and revised the outlook for all of our ratings to negative. Further, following and as a result of our announcement that we had entered into the Merger Agreement, on October 9, 2020, KBRA announced that it had placed on “watch-negative” the “A” insurer financial strength ratingsall of our operating companies as well as our “BBB+” issuer rating and the credit ratings of our “BBB+” senior unsecured notes and “BBB-” cumulative contingently redeemable preference shares. Placement of a KBRA rating on “watch” status indicates that KBRA believes that there is a meaningful potential for the rating to change in the direction of the watch indicator.“watch developing” status.
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Underwriting, natural and man-made catastrophic events
The broader P&C insurance and reinsurance market in which we operate has long been subject to market cycles. “Soft” markets occur when the supply of insurance capital in a given market or territory is greater than the amount of insurance capital necessary to meet the coverage needs of the insureds in that market. When this occurs, insurance prices tend to decline and policy terms and conditions become more favorable to the insured. Conversely, there are periods when there is not enough insurance capital in the market to meet insureds’ needs, leading to a “hard” market during which insurance prices generally rise and policy terms and conditions become more favorable to the insurer.
In general, not withstandingnotwithstanding the prevailing global economic uncertainty related to the COVID-19 global pandemic, the current insurance and reinsurance market environment overall remains extremely competitive and reflects a prolonged periodbut is starting to show signs of low prices and continued pressure to broaden terms and conditions.hardening. Over the past several years, the industry has witnessed a gradual rate softening in response to a surplus of industry capital and a number of years of benign catastrophe activity. While the insurance and reinsurance market historically has been subject to pricing and capacity cycles, the overall market has not experienced true cyclicality in the period since the inception of our operations in 2014. However, due to recent property catastrophe losses, along with a higher perceived social inflation, the reduction in risk free rates, and the uncertainty for the P&C business created by the COVID-19 global pandemic, pricing on certain product lines appears to beare firming and becoming more attractive on a risk adjusted basis. Nevertheless, in the near term, we believe the COVID-19 global pandemic has created significant areas of uncertainty for the P&C insurance business, with the casualty lines most likely to be adversely affected by the pandemic being professional and medical malpractice liability.
In recent years, there have however, been certain product lines that have experienced a favorable hardening, such as U.K. and European motor insurance. The rates for these particular lines have been rising as a result of several years of higher than expected losses, as well as regulatory changes impacting loss costs. As rates and commensurate risk-adjusted returns have risen, we have increased our writings in those lines.
Since the formation of WICE, we have grown our EuropeanU.K. motor insurance business. Gross premiums written generated by WICE for the three months ended March 31, 2021 and 2020 and 2019 were $51.7$54.3 million and $54.8$51.7 million, respectively. The majority of such premiums relate to U.K. motor insurance.
In addition, certain “new” product lines, such as mortgage reinsurance (having historically been written by captive insurers allied with primary mortgage insurers or mortgage lenders), are now more widely available due to risk transfer programs initiated over the past few years by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Prior to the COVID-19 global pandemic, we believed the pricing for mortgage reinsurance was attractive on a


risk-adjusted basis. However, we also believe that mortgage insurance may potentially be affected by the COVID-19 global pandemic and have reduced our exposure to this risk.
We target a medium- to long-term, lower volatility underwriting portfolio with tightly managed natural catastrophe exposure in order to reduce the likelihood that our capital and/or liquidity position would be adversely affected by a catastrophe event. We seek to limit our modeled net PML, for property catastrophe exposures for each peak peril and peak zone from a modeled 1-in-250 year occurrence to no more than 10% of our total capital, which is less than most of our principal reinsurance competitors. As of March 31, 2020,2021, our largest modeled peak peril and zone net occurrence PML was 6.7%4.1% of our total capital. Our conscious effort to limit our catastrophe exposure is designed to lower the volatility of our overall underwriting portfolio and to provide greater certainty as to future claims-related payout patterns and timing. Our casualty-focused underwriting portfolio’s payout pattern is slower than that of most competitors due to the longer tail lines of business we write, and that slower payout pattern provides us with the potential for greater investment income on those premiums.
While we seek to limit our exposure to catastrophic events to a level we believe is acceptable, given the liquidity profile of our underwriting portfolio and investment portfolios, we do assume meaningful aggregate exposures to natural and man-made catastrophic events. Catastrophes can be caused by various events, including hurricanes, floods, windstorms, earthquakes, hailstorms, tornadoes, explosions, severe winter weather, fires, droughts and other natural disasters. Catastrophes can also cause losses in non-property business such as workers’ compensation or general liability. In addition to the general nature of the risks inherent in writing property business, we believe that economic and geographic trends affecting insured property, including inflation, property value appreciation and geographic concentration, tend to generally increase the size of losses from catastrophic events over time.
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We monitor our exposure to catastrophic events, including earthquake and wind and periodically reevaluate the estimated PML for such exposures. Our estimated PML is determined through the use of modeling techniques, but such estimate does not represent our total potential loss for such exposures. Net PML estimates are net of expected reinsurance recoveries, before income tax and before excess reinsurance reinstatement premiums. Such modeled loss estimates are reflective of the zone indicated and not the entire portfolio. Since hurricanes and windstorms can affect more than one zone and make multiple landfalls, our loss estimates include clash estimates from other zones. Our loss estimates do not represent our maximum exposures and it is highly likely that our actual incurred losses would vary materially from the modeled estimates. There can be no assurances that we will not suffer pre-tax losses greater than 10% of total capital from one or more catastrophic events due to several factors, including the inherent uncertainties in estimating the frequency and severity of such events and the margin of error in making such determinations resulting from potential inaccuracies and inadequacies in the data provided by clients and brokers, the modeling techniques and the application of such techniques or as a result of a decision to change the percentage of shareholders’ equity exposed to a single catastrophic event. In addition, our actual losses may increase if our reinsurers fail to meet their obligations to us or the reinsurance protections purchased by us are exhausted or are otherwise unavailable. Depending on business opportunities and the mix of business that may comprise our underwriting portfolio, we may seek to adjust our self-imposed limitations on PML for catastrophe-exposed business.
For more information regarding our current outlook related to the impact of the COVID-19 global pandemic on the insurance and reinsurance industry and our business, see "-Current outlook"“-Current outlook” above.


Contractual obligations and commitments
Lloyds letter of credit facility
On May 14, 2019,15, 2020, Watford Re renewed its letter of credit facility with Lloyds Bank Corporate Markets Plc, New York Branch (the “Lloyds Facility”). The Lloyds Facility amount is $100.0 million and was renewed through to May 16, 2020.2021. Under the renewed Lloyds Facility, we may request an increase in the facility amount, up to an aggregate of $50.0 million. The principal purpose of the Lloyds Facility is to issue, as required, evergreen standby letters of credit in favor of primary insurance or reinsurance counterparties with which we have entered into reinsurance arrangements to ensure that such counterparties are permitted to take credit for reinsurance obtained from us as required under insurance regulations in the United States. The amount of letters of credit issued is driven by, among other things, the timing and payment of catastrophe losses, loss development of existing reserves, the payment pattern of such reserves, the further expansion of our business and the loss experience of such business. When issued, the letters of credit are secured by certificates of deposit or cash. In addition, the Lloyds Facility also requires the maintenance of certain covenants, with which we were in compliance as of March 31, 20202021 and December 31, 2019.2020. At such dates, we had approximately $48.7$49.5 million and $51.0$47.9 million, respectively, in restricted assets as collateral for outstanding letters of credit issued from the Lloyds Facility, which were secured by certificates of deposit. These collateral amounts are reflected as short-term investments in our consolidated balance sheets.
Unsecured letter of credit facility
On September 20, 2019,17, 2020, Watford Re signed arenewed and amended its 364-day letter of credit agreement with Lloyds Bank Corporate Markets Plc and BMO Capital Markets Corp. (the “Unsecured Facility”). The Unsecured Facility amount iswas reduced from $100.0 million to $50.0 million, and will be automatically extended for a period of one year unless canceled or not renewed by either counterparty prior to expiration. The principal purpose of the Unsecured Facility is to issue, as required, evergreen standby letters of credit in favor of primary insurance or reinsurance counterparties with which we have entered into reinsurance arrangements to ensure that such counterparties are permitted to take credit for reinsurance obtained from us as required under
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insurance regulations in the United States. The amount of letters of credit issued is driven by, among other things, the timing and payment of catastrophe losses, loss development of existing reserves, the payment pattern of such reserves, the further expansion of our business and the loss experience of such business. The Unsecured Facility requires the maintenance of certain covenants, as well as the making of certain representations and warranties that are customary for facilities of this type. At March 31, 20202021 and December 31, 2019,2020, we had $25.2$48.1 million and $19.3$49.9 million, respectively, in outstanding letters of credit issued from the Unsecured Facility, and were in compliance with the Unsecured Facility covenants.requirements.
Bank of America secured credit facility
On November 30, 2017, Watford Re amended and restated its $800.0 million secured credit facility (the “Secured Facility”) with Bank of America, N.A. through Watford Trust, which had originally been entered into in June 2015. On November 9, 2020, Watford Re elected to reduce the borrowing capacity to $440.0 million, under the terms of the amended and restated agreement. Watford Re owns all of the beneficial interests of Watford Trust. The Secured Facility expires on November 30, 2021 and is backed by a portion of Watford Re’s non-investment grade portfolio which has been transferred to Watford Trust and which continues to be managed by HPS pursuant to an investment management agreement between HPS and Watford Trust. The purpose of the Secured Facility is to provide borrowing capacity, including for the purchase of loans, securities and other assets and to distribute cash or any such loans, securities or other assets to Watford Re. Pursuant to this Secured Facility, the bank assigns borrowing or letter of credit capacity (or “advance rate”) for each eligible asset type held in the trust. Under our credit agreement, advance rates range from 100% for cash and 80% for certain first-lien loans to 40% for certain small-issue unsecured bonds.


Borrowings under the Secured Facility may be made at LIBOR or an alternative base rate at our option, in either case plus an applicable margin. The applicable margin varies based on the applicable base rate and, in the case of LIBOR rate borrowings, the currency in which the borrowing is denominated. In addition, the Secured Facility allows for us to issue up to $400.0$220.0 million in evergreen standby letters of credit in favor of primary insurance or reinsurance counterparties with which we have entered into reinsurance arrangements. We pay a fee on each letter of credit equal to the amount available to be drawn under such letter of credit multiplied by an applicable percentage. The applicable percentage varies based on the currency in which the letter of credit is denominated.
The borrowings and outstanding letters of credit from the Secured Facility were as follows:
March 31, December 31,March 31,December 31,
2020 201920212020
($ in thousands)($ in thousands)
Borrowings to purchase investments$171,837
 $155,537
Borrowings to purchase investments$130,937 $130,937 
Borrowings to purchase collateral328,750
 328,750
Borrowings for underwriting collateralBorrowings for underwriting collateral24,750 24,750 
Total secured credit facility borrowings500,587
 484,287
Total secured credit facility borrowings155,687 155,687 
Outstanding letters of credit52,533
 52,533
Outstanding letters of credit28,156 28,156 
The Secured Facility contains various affirmative and negative covenants. As of March 31, 20202021 and December 31, 2019,2020, Watford Re was in compliance with all covenants contained in the Secured Facility.
Custodian bank facilityfacilities
As of March 31, 20202021 and December 31, 2019,2020, we had borrowings of $75.9$94.9 million and $Nil,$56.0 million, respectively, from our custodian bankbanks to purchase U.S. dollar denominatedinvestment securities. We pay interest based on 3-month LIBOR or the Overnight Bank Funding Rate (“OBFR”), plus a margin and the borrowed amount is payable upon demand.
As of March 31, 2020,2021, the total borrowed amount of $75.9$94.9 million included 0.6
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4.8 million Euros, or EUR, (U.S. dollar equivalent of $0.7$5.7 million) to purchase EUR-denominated securities. We pay interest based on 3-month LIBOR plus a margin and the borrowed amount is payable upon demand. The foreign exchange gain or loss on revaluation on the non-U.S. dollar-denominated borrowed funds is included as a component of foreign exchange gains (losses) included in the consolidated statements of net income (loss).
The custodian bank requiresbanks require us to hold cash and investments on deposit, or in an investment account with respect to the borrowed funds. At March 31, 20202021 and December 31, 2019,2020, we were required to hold $108.2$167.9 million and $Nil,$96.3 million, respectively, in such deposits and investment accounts.
Senior notes
On July 2, 2019, we completed a private offering of $175.0 million in aggregate principal amount of our 6.5% senior notes, due July 2, 2029. Interest on the senior notes is paid semi-annually in arrears on each January 2 and July 2, which commenced on January 2, 2020. The senior notes are Watford Holding’s senior unsecured and unsubordinated obligations and rank equally with all of the other existing and future obligations of Watford Holdings that are unsecured and unsubordinated. We may redeem the senior notes at any time, in whole or in part, prior to July 2, 2024, at “make-whole” redemption price, subject to BMA requirements. The senior notes are redeemable, in whole or in part, at a redemption price equal to 100% of the principal amount, subject to BMA requirements, at any time after July 2, 2024. At March 31, 2021, the carrying amount of the senior notes was $172.8 million, presented net of unamortized debt issuance costs of $2.2 million. At December 31, 2020, the carrying amount of the senior notes was $172.5$172.7 million, presented net of unamortized debt issuance costs of $2.5$2.3 million.


Master confirmation of total return swap transactions
On August 13, 2018, Watford Re executed a Master Confirmation of Total Return Swap Transactions (the “Master TRS”) with Credit Suisse International (“CSI”), under the ISDA Master Agreement between Watford Re and CSI dated as of April 24, 2014. Under the Master TRS, we can from time to time execute total return swap transactions referencing loan obligations. The purpose of the Master TRS is to allow us to obtain leveraged exposure to loan obligations in a cash efficient manner. Since each transaction will be confirmed separately, the Master TRS is uncommitted and does not have a maximum facility size. Each confirmed transaction executed under the Master TRS will expire on the earlier of (i) the repayment date of the underlying reference loan or (ii) the date specified in the confirmation, which cannot be later than 360 days after the date of the confirmation, provided that each transaction will automatically extend for a further 360 days unless certain events have occurred. Under the terms of the Master TRS, we are required to post collateral to CSI under our ISDA Credit Support Annex with CSI to support our obligations under each transaction. The collateral will comprise an initial amount, determined on a transaction-by-transaction basis, plus an amount calculated on the basis of the daily mark-to-market value of the transaction. Under each transaction, CSI will pay to us an amount equal to the amounts received by a lender of the specified principal amount under the relevant reference loan and, if the transaction is terminated before the loan is repaid, an amount based on the change in market value of the loan. We have the option to terminate any transaction at will, subject to paying a break fee, and CSI can terminate transactions if certain events occur, including the unavailability of market prices for the relevant loan, CSI being unable to hedge the relevant transaction or certain changes of law or regulation.
Pledged and restricted assets
For the benefit of certain Arch entities and other third parties that cede business to us, we are required to post and maintain collateral to support our potential obligations under reinsurance contracts that we write. This collateral can be in the form of either investment assets held in collateral trust accounts or letters of credit. Under our credit facilities, in order for us to have the bank issue a letter of credit to our reinsurance contract counterparty, we must post investment
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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. See Note 13, “Commitments and contingencies” in our consolidated financial statements in Part I, Item 1 of this report for further details.
As of March 31, 20202021 and December 31, 2019,2020, we held $2.1$2.0 billion and $2.1$2.0 billion, respectively, in pledged assets in support of insurance and reinsurance liabilities as well as to collateralize our credit facilities. Included within total pledged assets, we held $5.1$7.7 million and $6.4$7.8 million, respectively, in deposits with U.S. regulatory authorities.
The following table summarizes our assets pledged as collateral for credit and letter of credit facilities and total return swap transactions, assets held in trust for underwriting transactions and regulatory deposits as of March 31, 20202021 and December 31, 2019:2020:
March 31,December 31,
20212020
($ in thousands)
Total investments held in trust as collateral for underwriting transactions and regulatory deposits$974,389 $988,145 
Total investments pledged for Secured Facility776,194 791,230 
Total investments pledged for custodian banks167,853 96,260 
Total investments pledged for Lloyds Facilities49,494 47,891 
Total investments pledged for Master TRS67,742 67,116 
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 March 31, December 31,
 2020 2019
 ($ in thousands)
Total investments held in trust as collateral for underwriting transactions and regulatory deposits$966,077
 $1,087,707
Total investments pledged for Secured Facility888,536
 935,132
Total investments pledged for custodian bank108,225
 —
Total investments pledged for Lloyds Facility48,704
 51,047
Total investments pledged for Master TRS62,091
 64,107



Contractual obligations and commitments
The following table illustrates our contractual obligations and commitments by due date as of March 31, 20202021 and December 31, 2019:2020:
Payments Due by Period
Payments Due by PeriodTotalLess Than One YearOne Year to Less Than Three YearsThree Years to Less Than Five YearsMore 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)
March 31, 2020 
March 31, 2021March 31, 2021
Estimated gross payments for losses and loss adjustment expenses (1)$1,300,249
 $330,977
 $429,372
 $228,761
 $311,139
Estimated gross payments for losses and loss adjustment expenses (1)$1,568,243 400,258 533,811 269,597 364,577 
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)576,486
 576,486
 —
 —
 —
Revolving credit agreement borrowings (3)250,579 250,579 — — — 
Operating lease obligations967
 283
 566
 118
 —
Operating lease obligations684 283 401 — — 
Total$2,160,796
 $919,121
 $452,688
 $251,629
 $537,358
Total$2,091,194 $662,495 $556,962 $292,347 $579,390 
December 31, 2019 
December 31, 2020December 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 (2)484,287
 484,287
 —
 —
 —
Revolving credit agreement borrowings (3)Revolving credit agreement borrowings (3)211,640 211,640 — — — 
Operating lease obligations1,038
 283
 566
 189
 —
Operating lease obligations755 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 
(1) The estimated expected contractual commitments related to the reserves for loss and loss adjustment expenses are presented on a gross basis (not reflecting any corresponding reinsurance recoverable amounts that would be due to us). As of March 31, 2020,2021, the modeled duration of our claims reserves was approximately 4.54.2 years.
(2) On July 2, 2019 we completed a private offering of $175.0 million aggregate principal amount of our 6.5% senior notes due July 2, 2029. Interest on the senior notes is paid semi-annually in arrears on each January 2 and July 2, which commenced on January 2, 2020.
(3) Revolving credit agreement borrowings include borrowings from our custodian bank to purchase securities, which is payable on demand. Therefore we have assumed that these payments will be made within one year, but payment may occur over a longer period of time.
Reserves for losses and loss adjustment expenses represent our best estimate of the ultimate cost of settling reported and unreported claims and related expenses. As discussed previously, the estimation of loss and loss expense reserves is based on various complex and subjective judgments. Actual losses and settlement expenses we are ultimately required to pay may deviate, perhaps substantially, from the reserve estimates reflected in our financial statements. Similarly, the timing for payment of our estimated losses is not fixed and is not determinable on an individual or aggregate basis. The assumptions used in estimating the payments due by period are based on industry and peer-group claims payment experience. Due to the uncertainty inherent in the process of estimating the timing of such payments, there is a risk that the amounts paid in any period can be significantly different than the amounts discussed above. Amounts discussed above are gross of anticipated amounts recoverable from reinsurers. Reinsurance balances recoverable on reserves for


losses and loss adjustment expenses are reported separately as assets, instead of being netted with
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the related liabilities, since having purchased reinsurance does not discharge us of our liability to policyholders. Reinsurance balances recoverable on reserves for paid and unpaid losses and loss adjustment expenses as of March 31, 20202021 and December 31, 20192020 totaled $197.5$291.5 million and $171.0$286.6 million, respectively.
Inflation
The effects of inflation are considered implicitly in pricing our contracts and policies through the modeled components such as demand surge. Loss reserves are established to recognize likely loss settlements at the date payment is made. Those reserves inherently recognize the effects of inflation. The actual effects of inflation on our results cannot be accurately known, however, until claims are ultimately resolved.
Off-balance sheet arrangements
We are not party to any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party that management believes is reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

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Item 3. Quantitative and qualitative disclosures about market risk
We believe we are principally exposed to the following types of market risk:
•foreign currency risk;
•interest rate risk;
•credit spread risk;
•credit risk;
•liquidity risk; and
•political risk.
Foreign currency risk
Underwriting contracts and policies
Foreign currency rate risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. We have foreign currency exposure related to non-U.S. dollar denominated contracts and policies. Of our gross premiums written from inception, $1.5$1.8 billion, or 40.0%42.3%, were written in currencies other than the U.S. dollar. For these contracts, non-U.S. dollar assets generally offset liabilities in the same non-U.S. dollar currencies resulting in minimal net exposure. As of March 31, 20202021 and December 31, 2019,2020, net loss and loss adjustment expense reserves included $405.3$562.8 million and $413.7$537.0 million, respectively, in foreign currencies.
Investments
We are exposed to foreign currency risk through cash and investments in loans and securities denominated in foreign currencies. Foreign currency exchange rate risk is the potential for adverse changes in the U.S. dollar value of investments (long and short) and foreign currency derivative instruments, which we may employ from a risk management perspective, due to a change in the exchange rate of the foreign currency in which cash and financial instruments are denominated. As of March 31, 20202021 and December 31, 2019,2020, our total net long exposure to foreign denominated investments represented 13.3%13.4% and 11.5%13.6% of our total investment portfolios of $2.5$2.6 billion and $2.7$2.5 billion, respectively.

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The following table summarizes the net impact that a 10% increase and decrease in the value of the U.S. dollar against select foreign currencies in which we have written contracts and policies would have had on the value of our shareholders’ equity as of March 31, 20202021 and December 31, 2019:2020:
March 31,December 31,
March 31, December 31,20212020
2020 2019(U.S. dollars in thousands, except per share data)
(U.S. dollars in thousands, except per share data)   
Assets, net of insurance liabilities, denominated in foreign currencies, excluding shareholders’ equity and derivatives$90,119
 $56,382
Assets, net of insurance liabilities, denominated in foreign currencies, excluding shareholders’ equity and derivatives$107,762 $72,082 
Shareholders’ equity denominated in foreign currencies (1)(23,072) (26,529)Shareholders’ equity denominated in foreign currencies (1)(34,391)(33,889)
Net assets denominated in foreign currencies$67,047
 $29,853
Net assets denominated in foreign currencies$73,371 $38,193 
Pre-tax impact of a hypothetical 10% appreciation of the U.S. dollar against foreign currencies:   Pre-tax impact of a hypothetical 10% appreciation of the U.S. dollar against foreign currencies:
Shareholders’ equity$(6,705) $(2,985)Shareholders’ equity$(7,337)$(3,819)
Book value per diluted common share$(0.34) $(0.15)Book value per diluted common share$(0.37)$(0.19)
Pre-tax impact of a hypothetical 10% decline of the U.S. dollar against foreign currencies:   Pre-tax impact of a hypothetical 10% decline of the U.S. dollar against foreign currencies:
Shareholders’ equity$6,705
 $2,985
Shareholders’ equity$7,337 $3,819 
Book value per diluted common share$0.34
 $0.15
Book value per diluted common share$0.37 $0.19 
(1) Represents capital contributions held in the foreign currency of WICE.
Although we generally attempt to match the currency of our projected liabilities with investments in the same currencies, from time to time we may elect to over or underweight one or more currencies, which could increase our exposure to foreign currency fluctuations and increase the volatility of our shareholders’ equity. Historical observations indicate a low probability that all foreign currency exchange rates would shift against the U.S. dollar in the same direction and at the same time and, accordingly, the actual effect of foreign currency rate movements may differ materially from the amounts set forth above.
Interest rate risk
Our investment portfolios include interest rate sensitive securities, such as corporate and sovereign debt instruments and asset-backed securities. One key market risk exposure for any debt instrument is interest rate risk. As interest rates rise, the market value of our fixed income portfolio may fall, and the opposite is generally true when interest rates fall. Based on historical observations, there is a low probability that all interest rate yield curves would shift in the same direction at the same time. Furthermore, at times interest rate movements in certain credit sectors exhibit a much lower correlation to changes in U.S. Treasury yields. Accordingly, the actual effect of interest rate movements may differ materially from the amounts set forth in the following tables.


The following table estimates the impact that a 50 basis point and 100 basis point increase or decrease in interest rates would have had on the value of our investment portfolios as of March 31, 20202021 and December 31, 2019:2020:
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Interest Rate Shift in Basis PointsInterest Rate Shift in Basis Points
(U.S. dollars in millions)-100 -50 0 +50 +100(U.S. dollars in millions)-100-500+50+100
March 31, 2020         
March 31, 2021March 31, 2021
Total fair value$2,548
 $2,532
 $2,513
 $2,493
 $2,476
Total fair value$2,618 $2,595 $2,572 $2,550 $2,531 
Change from base1.4% 0.8% —% (0.8)% (1.5)%Change from base1.8 %0.9 %— %(0.9)%(1.6)%
Change in unrealized value$35
 $19
 $—
 $(20) $(37)Change in unrealized value$46 $23 $— $(22)$(41)
         
December 31, 2019         
December 31, 2020December 31, 2020
Total fair value$2,739
 $2,724
 $2,709
 $2,693
 $2,679
Total fair value$2,546 $2,522 $2,499 $2,478 $2,459 
Change from base1.1% 0.6% —% (0.6)% (1.1)%Change from base1.9 %0.9 %— %(0.9)%(1.6)%
Change in unrealized value$30
 $15
 $—
 $(16) $(30)Change in unrealized value$47 $23 $— $(21)$(40)
Credit spread risk
We invest in credit spread sensitive assets, primarily debt assets. We consider the effect of credit spread movements on the market value of our fixed maturity investments, short-term investments, and certain of our other investments and the corresponding change in market value. As credit spreads widen, the fair value of our fixed income investments falls, and the converse is also true. Based upon historical observations, there is a low probability that credit spreads would change in the same magnitude across asset classes, industries, credit ratings, jurisdictions and individual instruments. Accordingly, the actual effect of credit spread movements may differ materially from the amounts set forth in the following tables.
The following table summarizes the effect that an immediate, parallel shift in credit spreads in a static interest rate environment would have had on the value of our investment portfolios as of March 31, 20202021 and December 31, 2019:2020:
Percentage Shift in Credit Spreads
(U.S. dollars in millions)-50%-10%0+10%+50%
March 31, 2021
Total fair value$2,660 $2,593 $2,572 $2,548 $2,441 
Change from base3.4 %0.8 %— %(0.9)%(5.1)%
Change in unrealized value$88 $21 $— $(24)$(131)
December 31, 2020
Total fair value$2,600 $2,523 $2,499 $2,473 $2,362 
Change from base4.0 %0.9 %— %(1.0)%(5.5)%
Change in unrealized value$101 $24 $— $(26)$(137)







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 Percentage Shift in Credit Spreads
(U.S. dollars in millions)-50% -10% 0 +10% +50%
March 31, 2020         
Total fair value$2,748
 $2,559
 $2,513
 $2,466
 $2,283
Change from base9.4% 1.8% —% (1.9)% (9.2)%
Change in unrealized value$235
 $46
 $—
 $(47) $(230)
          
December 31, 2019         
Total fair value$2,836
 $2,735
 $2,709
 $2,681
 $2,569
Change from base4.7% 1.0% —% (1.0)% (5.2)%
Change in unrealized value$127
 $26
 $—
 $(28) $(140)

Credit risk
Underwriting contracts and policies
We are exposed to credit risk from our clients relating to premiums receivable under our contracts and policies, and the possibility that counterparties may default on their obligations to us. The risk of counterparty default is partially mitigated by the fact that any amount owed to us from an


insurance or reinsurance counterparty would be netted against any losses we would pay in the future. We monitor the collectability of these premiums on a regular basis.
Investments
Our investment strategy is to invest primarily in the debt obligations of non-investment grade corporate issuers. We rely upon our Investment Managers to invest our funds in debt instruments that provide an attractive risk-adjusted return, but the value we ultimately receive from these debt instruments is dependent upon the performance of the issuers of such obligations. In addition, the securities and cash in our investment portfolios are held with several custodians and prime brokers, subjecting us to the related credit risk from the possibility that one or more of them may default on their obligations to us. Our Investment Managers regularly monitor the concentration of credit risk with each broker and if necessary, transfer cash or securities among brokers to diversify and mitigate our credit risk.
Liquidity risk
Certain of our investments are, or may become, illiquid. Disruptions in the credit markets may materially affect the liquidity of certain investments including our Level 3 (non-quoted) assets, which, as of March 31, 20202021 and December 31, 2019,2020, represented 5.9% and 5.4%6.2% of our total investments, respectively. If we require significant amounts of cash on short notice in excess of anticipated cash requirements, which could include the payment of claims expenses or to satisfy a requirement of rating agencies in a period of market illiquidity, certain of our investments may be difficult to sell in a timely manner and may have to be sold or otherwise liquidated for less than what may otherwise have been possible under normal market conditions.
Political risk
We are exposed to political risk to the extent that we underwrite business from entities located in foreign markets; we operate through subsidiaries located in Bermuda, the United States and Gibraltar, and to the extent that HPS or AIMour Investment Managers trade securities or assets that are originated, listed or traded in various U.S. and foreign markets. The governments in any of these jurisdictions could impose restrictions, regulations or other measures which may have a material impact on our investment strategy, the value of our investments and our underwriting operations.
We do not currently write political risk coverage in our insurance or reinsurance contracts; however, changes in government law and regulation may impact our underwriting operations.

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Item 4. Controls and procedures
Evaluation of Disclosure Controls and Procedures
We maintainIn connection with the filing of this Quarterly Report on Form 10-Q, our management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of disclosure controls and procedures that are designed to ensure that information required to be disclosedas defined in the reports we file under the Securities Exchange Act on 1934, as amended, orRules 13a-15(b) and 15d-15(b) of the Exchange Act, isas of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of and during the period covered by this report with respect to information being recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and with respect to timely communication to them and other members of management responsible for preparing periodic reports of all material information required to be disclosed in this report as it relates to Watford Holdings and its consolidated subsidiaries.
We continue to enhance our operating procedures and internal controls to effectively support our business and our regulatory and reporting requirements. Our management does not expect that such information is accumulatedour disclosure controls or our internal controls will prevent all errors and communicated to our management, including our Chief Executive Officerall fraud. A control system, no matter how well conceived and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure.
Asoperated, can provide only reasonable, not absolute, assurance that the objectives of the endcontrol system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the period coveredinherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issuances and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgements in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by this report, we carried out an evaluation,the individual acts of some persons or by collusion of two or more people. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the supervision anddegree of compliance with the participation of our management, including our Chief Executive Officer and Chief Financial Officer,policies or procedures may deteriorate. As a result of the effectiveness of the designinherent limitations in a cost-effective control system, misstatement due to error or fraud may occur and operation ofnot be detected. Accordingly, our disclosure controls and procedures defined under Rules 13a-15(e) and 15d-15(e) underare designed to provide reasonable, not absolute, assurance that the Exchange Act. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.are met.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended March 31, 20202021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that most employees of the Company and of our service providers have had to work from home during the COVID-19 global pandemic, though we will continue to assess the impact on the design and operating effectiveness of our internal controls.
Inherent Limitations on Effectiveness of Controls
The effectiveness of any system of controls and procedures is subject to certain limitations, and, as a result, there can be no assurance that our controls and procedures will detect all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be attained.
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Part II. Other information
Item 1. Legal proceedings
We,Two lawsuits challenging the Merger have been filed in the Supreme Court of the State of New York, New York County. The first action was filed on January 20, 2021, captioned Canh v. Watford Holdings Ltd., et al., No. 650415/2021 (N.Y. Sup. Ct.) (which we refer to as the “Canh Action”). The second action was filed on January 25, 2021, captioned Ciccotelli v. Watford Holdings Ltd., et al., No.650544/2021 (N.Y. Sup. Ct.) (which we refer to as the “Ciccotelli Action”). Both lawsuits name us and our directors as defendants.
The Canh Action is a putative shareholder class action. The plaintiff claims to be a shareholder of our company. He asserts that our directors breached their fiduciary duties in connection with the Merger by, among other things, (i) agreeing to the merger and allegedly failing to obtain maximum value for our company in connection therewith; and (ii) allegedly failing to disclose certain purportedly material information relating to the Merger. The plaintiff alleges that we aided and abetted the directors’ purported breaches of fiduciary duty. The plaintiff seeks, among other relief: (i) an injunction barring the Merger and ordering our directors to obtain an un-specified different transaction “in the best interest” of our company and our shareholders; (ii) rescission or rescissory damages in the event the Merger is consummated; (iii) a declaration that the directors have breached their fiduciary duties; (iv) an order directing us and our directors to account for damages; and (v) costs and fees in connection with the lawsuit.
The Ciccotelli Action is brought solely on behalf of the named plaintiff, who claims to be a shareholder of our company. The plaintiff asserts that our directors breached their fiduciary duties by allegedly failing to disclose certain purportedly material information relating to the Merger. The plaintiff alleges that we aided and abetted the directors’ purported breaches of fiduciary duty. The plaintiff seeks, among other relief: (i) a preliminary and permanent injunction barring the Merger and directing the defendants to disseminate additional information relating to the Merger; (ii) rescission or rescissory damages in the event the Merger is consummated; (iii) a declaration that the directors have breached their fiduciary duties; and (iv) costs and fees in connection with the lawsuit.
Other potential plaintiffs may also file additional lawsuits challenging the Merger. The outcome of Canh Action, the Ciccotelli Action, and any additional future litigation is uncertain. Such litigation, if not resolved, could prevent or delay completion of the Merger and result in substantial costs to us, including any costs associated with the indemnification of directors and officers. One of the conditions to the closing of the Merger is the absence of any law, injunction or order by any governmental entity enjoining or otherwise prohibiting the consummation of the Merger. Therefore, if a plaintiff were successful in obtaining an injunction prohibiting the consummation of the Merger on the agreed-upon terms, then such injunction may prevent the Merger from being completed, or from being completed within the expected timeframe. The defense or settlement of any lawsuit or claim that remains unresolved at the time the Merger is completed may adversely affect our business, financial condition, results of operations and cash flows.
In addition, we, in common with the insurance industry in general, are subject to litigation and arbitration in the normal course of our business. AsExcept as described above, as of March 31, 2020,2021, we were not a party to any litigation or arbitration which is expected by management to have a material adverse effect on our results of operations and financial condition and liquidity.
Item 1A. Risk factors
Investing in our securities involves risks. For a discussion of the these potential risks or uncertainties, please see Part I—Item 1A—“Risk Factors” and Part II—Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year endingended December 31, 20192020 filed with the SEC (or our 20192020 Annual Report), and Part I—Item
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2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report, in each case as updated by our subsequent periodic filings with the SEC.
Other than as described below, thereThere have been no material changes from the risk factors previously disclosed in Part I—Item 1A, “Risk Factors” of our 20192020 Annual Report.
The impact of the COVID-19 global pandemic and related risks could materially affect our results of operations, financial position and/or liquidity.
The continuing, global pandemic related to the novel coronavirus COVID-19 has impacted the global economy, financial markets and our results of operations. In addition, the COVID-19 global pandemic could materially disrupt the business operations of Arch, HPS or other third parties with whom we interact. Because of the size and breadth of this pandemic, all of the direct and indirect consequences of the COVID-19 global pandemic are not yet known and may not emerge for some time.
The pandemic could have a significant effect on our business, results of operations, and current and future financial performance. We may experience higher levels of loss and claims activity in certain lines of business and our premiums written and earned could also be adversely affected by a suppression of global commercial activity that results in a reduction in insurable assets and other exposure. Conditions of the financial markets resulting from the COVID-19 global pandemic also have had and may continue to have a negative effect on the value and quality of the assets we hold within our investment portfolios, thereby adversely affecting our investment income and increasing our credit and related risk. Certain lines of our business may require additional forms of collateral in the event of a decline in the fair value of investments and benchmarks to which those repayment mechanisms are linked. The continued impacts of the pandemic to the financial markets may also adversely affect our ability to fund through public or private equity offerings, debt financings, and through other means at acceptable terms. In addition, in connection with our pending acquisition of Axeria IARD, we are also evaluating Axeria's potential exposure to COVID-19 related losses.
In particular, disruption in the financial markets related to the COVID-19 global pandemic has contributed to net realized and unrealized losses, due to the impact of changes in fair value on our non-investment grade investment portfolio, and, to a lesser extent, our investment grade investment portfolio. Our investment portfolios may be adversely impacted by ratings downgrades, increased bankruptcies and credit spread widening in distressed industries, such as energy, gaming, lodging and leisure, autos, airlines and retail. Our investment portfolios also include mortgage-backed securities, which could be adversely impacted by declines in real estate valuations and/or financial market disruption, including a heightened collection risk on the underlying mortgages and


on rent receivables. Further disruptions in global financial markets due to the continuing impact of COVID-19 could result in additional net realized and unrealized investment losses, including potential impairments in our investment portfolios. In addition, declines in fixed income yields would result in decreases in net investment income from future investment activity, including re-investments.
For further discussion of certain of the risks related to our underwriting and investment portfolios, see “Claims for natural catastrophic events or unanticipated losses from war, pandemic, terrorism and political instability could cause large losses and substantial volatility in our results of operations and could have a material adverse effect on our financial position and results of operations,” “Emerging claim and coverage issues may adversely affect our business,” “The performance of our investments is highly dependent upon conditions in the global economy or financial markets that are outside of our Investment Managers’ control and can be difficult to predict,” and “The determination of the amount of allowances and impairments taken on our investments is highly subjective and could materially impact our results of operations or financial position.” included in Part I—Item 1A—“Risk Factors” in our 2019 Form 10-K.
Governmental, and regulatory actions in response to the COVID-19 global pandemic may adversely affect our financial performance and our ability to conduct our businesses as we have in the past.
Federal, state and local government actions in the United States and other countries where we do business to address and mitigate the impact of COVID-19 may adversely affect us. For example, we are potentially subject to legislative and/or regulatory action that seeks to retroactively mandate coverage for losses which our insurance policies were not designed or priced to cover. Currently, in some states there is proposed legislation to require insurers to cover business interruption claims irrespective of terms, exclusions or other conditions included in the policies that would otherwise preclude coverage. In addition, a number of states have instituted, and other states are considering instituting, changes designed to effectively expand workers’ compensation coverage by creating presumptions of compensability of claims for certain types of workers. Regulatory restrictions or requirements could also impact pricing, risk selection and our rights and obligations with respect to our policies and insureds, including our ability to cancel policies or our right to collect premiums. At least one state regulator has issued an order requiring insurers to issue partial premium refunds, and regulators in other states could take similar actions. Many insurers, including us, have also voluntarily provided, and may further provide, partial premium refunds to their customers. It is also possible that changes in economic conditions and steps taken by federal, state and local governments in response to the COVID-19 global pandemic could require an increase in taxes at the federal, state and local levels, which could adversely impact our results of operations. In addition, in connection with our pending acquisition of Axeria IARD, we are also evaluating the potential impact such governmental actions, restrictions and requirements could have on Axeria's business.
The disruption and other effects caused by the COVID-19 global pandemic could adversely affect our business operations, financial performance and results.
To protect our employees and in response to the global and regional restrictions on interpersonal contact and travel because of the COVID-19 global pandemic, our work force is working remotely, placing increased demands on our IT systems. Remote working arrangements may increase the risk of cyber-security attacks or data security incidents. While we believe we have continued to conduct our business effectively, there is no assurance that our ability to continue to function in this new environment will not be adversely affected by an extended period of limited access to our physical facilities or by other developments such as an extended disruption to our systems that support our remote work capability. We also depend on Arch, HPS and other third-party platforms and infrastructure to operate our business and provide certain of our products and services, and such third-party infrastructures face similar risks. In addition, the continuation of the COVID-19 global pandemic may continue to adversely affect our business operations, including our ability to carry on business development activities and unavailability of employees due to illness or quarantines,


among others. In addition, in connection with our pending acquisition of Axeria IARD, we are also evaluating the potential impact of such disruptions and restrictions could have on Axeria's operations. For a further discussion, see “We depend on our ability to maintain effective operating procedures, and our operational structure remains under development.” “Any acquisitions, growth or expansion of our operations may expose us to risks.” and “Technology breaches or failures, including those resulting from a cyberattack on us or our service providers and program administrators, could disrupt or otherwise negatively impact our business.” included in Part I-Item 1A-“Risk Factors” in our 2019 Form 10-K.
As a result of the above risks, the COVID-19 global pandemic could materially and adversely impact our results of operations, financial position and/or liquidity.
A ratings downgrade or other negative action by a rating agency could materially affect our business, financial condition and results of operations. 
Various rating agencies review the financial performance and condition of insurance and reinsurance companies, including our operating subsidiaries, and publish their financial strength ratings as indicators of an insurer’s or reinsurer's ability to fulfill its contractual obligations. These ratings are important to maintaining public confidence in our insurance and reinsurance products. A downgrade or other negative action by a rating agency with respect to the financial strength ratings of our operating subsidiaries could negatively affect us by limiting or restricting the ability of our operating subsidiaries to pay dividends to us and reducing our revenues by adversely affecting our ability to write insurance and reinsurance business.
Rating agencies also publish credit ratings for us. Credit ratings are indicators of a debt issuer’s ability to meet the terms of debt obligations in a timely manner. These ratings are important to our overall ability to access certain types of capital. Actual or anticipated downgrades in our credit ratings, or an announcement that our ratings are under further review for a downgrade, could potentially have a negative effect on our financial condition and results of operations. Such an event could limit our access to capital markets, increase the cost of debt, or impair our ability to raise capital to refinance maturing debt obligations, thereby potentially limiting our capacity to support growth at our operating subsidiaries or making it more difficult to maintain or improve the current financial strength ratings of our operating subsidiaries.
In particular, in May 2020, A.M. Best announced that it had placed the financial strength ratings of our operating subsidiaries and our credit ratings under review with negative implications, and KBRA similarly announced that it had placed the financial strength ratings of our operating companies and our credit ratings on watch status. For more information, see Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition, Liquidity and Capital Resources- Liquidity and Capital Resources-Ratings” in this report.
Ratings reflect only a rating agency’s views and are not recommendations to buy, sell or hold our securities. Rating agencies assign ratings based upon several factors. While most of the factors relate to the rated company, some of the factors relate to the views of the rating agency, general economic conditions and circumstances outside the rated company’s control. In addition, rating agencies use various models and formulas to assess the strength of a rated company, and from time to time rating agencies have, in their discretion, altered the models. Changes to the models could impact a rating agency's judgment of the rating to be assigned to the rated company. There can be no assurance that our current financial strength and credit ratings will remain in effect for any given period of time, particularly in light of the recent announcements by A.M. Best and KBRA, or that these ratings will not be lowered, suspended or withdrawn entirely by the rating agencies. We cannot predict what actions A.M. Best, KBRA or other rating agencies may take, or what actions we may take in response to the actions of the rating agencies, which could negatively affect our business, financial condition and results of operations.

Item 2. Unregistered sales of equity securities and use of proceeds
The following table summarizes our purchases of common shares for the 2020 first quarter:
  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)
1/1/2020 - 1/31/2020 —
 $—
 —
 $—
2/1/2020 - 2/29/2020 —
 —
 —
 —
3/1/2020 - 3/31/2020 127,744
 22.42
 127,744
 47,136
Total 127,744
 $22.42
 127,744
 $47,136
(1) In the first quarter of 2020, our board of directors authorized a new share repurchase program, under which we may repurchaseallows us to make repurchases of up to $50 million of our common shares.shares from time to time in open market or privately negotiated transactions. For more information, see Part I Item 2 “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources—Capital resources.”
During the three months ended March 31, 2021, we did not repurchase any of our common shares under our share repurchase program and approximately $47.1 million of unused share repurchase capacity remained available under our share repurchase program. However, we do not anticipate making any further repurchases under the share repurchase program due to the pending acquisition by HoldCo. In particular, the Merger Agreement generally prohibits us from repurchasing our shares as well as certain other securities prior to the consummation of the Merger or the earlier termination of the Merger Agreement.
Issuer Purchases of Common Shares
PeriodTotal Number of Shares PurchasedAverage Price Paid Per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsApproximate Dollar Value of Shares that May Yet be Purchased Under the Plan or Program
Beginning dollar amount available to be repurchased$47,136 
1/1/2021 - 1/31/2021— $— — — 
2/1/2021 - 2/28/2021— — — — 
3/1/2021 - 3/31/2021— — — — 
Total— $— — $47,136 
Item 3. Defaults upon senior securities
None.
Item 4. Mine safety disclosures
None.
Item 5. Other information
None.

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Item 6. Exhibit index
Incorporated by Reference
Exhibit

Number
Exhibit DescriptionFormOriginal Exhibit NumberDate FiledFiled Herewith
10.4231.1X
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
31.2X
32.1X
32.2X
101The following financial information from Watford Holdings Ltd.’s Quarterly Report for the quarter ended March 31, 20202021 formatted in XBRL: (i) Consolidated Balance Sheets at March 31, 20202021 and December 31, 2019;2020; (ii) Consolidated Statements of Income for the three months ended March 31, 20202021 and 2019;2020; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 20202021 and 2019;2020; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 20202021 and 2019;2020; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 20202021 and 2019;2020; and (vi) Notes to Consolidated Financial Statements.
104Cover Page Interactive Data File (embedded within the Inline XBRL document)




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Signatures
Pursuant to the requirements 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:May 10, 2021Jonathan D. Levy, Chief Executive Officer
Date:May 10, 2021WATFORD HOLDINGS LTD.
(REGISTRANT)
/s/ Jonathan D. Levy
Date:May 11, 2020Jonathan D. Levy, Chief Executive Officer
Date:May 11, 2020/s/ Robert L. Hawley
Robert L. Hawley, Chief Financial Officer





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