Q1 2020 Earnings Call
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Good day, ladies and gentlemen, and welcome to the Watchword Holdings first quarter earnings Conference call. As a reminder, this conference call is being recorded.
Well for the company gets started with its Duffy management would like to remind everyone that certain statements discussed on this call may constitute forward looking statements on the federal Securities law.
These statements are based upon management's current assessment and assumptions that are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from expressed or implied.
For more information on the risk factors that may cause future performance investors should review periodic reports and other filings that are filed by the company with the FCC from time to time.
Additionally, certain statements contained in this call or not based on historical facts are.
Looking statements within the meaning of this private Securities Litigation Reform Act of 1995.
The company intense the forward looking statements in this call to be subject to the safe Harbor created thereby.
Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP. The definition of underwriting income adjusted underwriting income and adjusted combined ratio and descriptions of non investment grade portfolio and investment grade prefer the components of the company's investments.
Returns can be found in the company's current report on form 8-K furnished by the FCC yesterday, which contains the company's earnings press release and is available on the company's website.
I'd now like to introduce your host for today's conference Mr., John Levy CEO of what for Holdings you May now begin.
Thank you Catherine.
Good afternoon, everyone. Thank you for joining the Watford 2021st quarter earnings call joining me on the call today as Rob Holly our Chief Financial Officer.
Before we discuss this quarter I'd like to make a few preliminary comments.
First and most importantly, we hope that you your families and your colleagues are safe and well.
They are challenging times for all the Cobot 19 endemic has had a significant impacts on the lives and wellbeing of people across the world.
We'd like to express our compassion for those who have suffered due to illness and convey our best wishes to all for your health and safety during these difficult times.
I'd also like to talk about the impact of Cobot 19 on our employees and business operations.
The wellbeing of our extended Watford and family is extremely important to us.
We and our business partners at arch and HBS responded quickly to institute work from home policies to enable them to continue operating and state conditions.
I'm proud of our team and how they continue to deliver despite these challenging dynamics.
We are keeping up and running.
As you mean policies paying claims and doing what we can to help economy to function in this period of stress.
I would also like to acknowledge the retirement of John Rathgeber.
John has led Watford census formation and brought a steady unflappable leadership to our company I.
I would like to thank him personally for smooth ineffective succession planning.
We're extremely pleased the John has agreed to remain as advisor to the company as well as continue as a member of our board of directors.
Turning now to the quarter.
Ill supply some high level commentary on our first quarter underwriting and investment results.
Described the composition of our investment and underwriting portfolios and provide our current view or the potential exposure to cobot 19 bosses.
Rob will then give a more detailed recap of the first quarter financials.
Following that we would be pleased to answer questions on the equity analysts.
At our individual investors with questions that aren't addressed today, we'll be happy to a range follow up calls with each of you.
For the first quarter of Twentytwenty walk the recorded a net loss of $267.8 million.
Our quarterly GAAP results were significantly impacted by cobot nineteens effect on the capital markets and the resulting redux reduce valuation on the asset side of our balance sheet.
As we described in more detail later, the vast majority of the loss is attributable to unrealized mark to market losses, and our non investment grade portfolio.
The impact of the cobot pandemic on our underwriting results for the quarter was immaterial I.
I will come to that as well.
Our adjusted combined ratio, which removes certainly corporate and non recurring expenses and other underwriting income was 102.2%.
Our loss reserves or prior accident years was essentially flat.
That would had only been one quarter the strengthening of our loss reserves, we did and 20 Nike appears to be holding up well.
Insurance market conditions are improving and we're pleased with the resulting premium growth in the quarter.
We grew in casualty reinsurance driven by UK motor excessive loss reinsurance writings, where rates have increased in response to the revised Ogden rate.
Our insurance portfolio also continues to grow particularly in the United States.
The rate environment is improving and we are expanding our ratings in the strengthening marketplace, particularly in commercial auto.
While only a small part of our total ratings our property catastrophe lines of business grew significantly in percentage terms.
We participate on arches worldwide property cat reinsurance portfolio and arch has increased its gross exposure.
As rates in this line continue to rise.
Overall, we're pleased with the progress and our underwriting growth.
Our investments in our US insurance companies are coming to fruition at a time of a hardening market.
We expect the benefit from these improving conditions in both our insurance and reinsurance companies.
We continue to see compelling opportunities to write insurance in the UK market through wife's our current European insurance company.
Lastly, we look forward to completing our acquisition of Exerial.
French property and casualty writer, we agreed to purchase late last year.
I'll comment on the status of the acquisition at the end of these remarks.
I'd now like to spend some time discussing our underwriting portfolio to supply a bit more color about the potential impact from cobot 19.
First Watford either has no our diminimus premium writings in life.
Accident and health.
Ben cancellation trade credit travel.
Or pandemic specific coverages, which are likely to respond directly to cobot 19 losses.
In regards to the potential exposure to business interruption losses, Watford writes a very limited amount of commercial property, which is consistent with our strategy to target longer duration lines of business.
We are a writer of casualty business throughout the United States internationally.
We believe the casualty lines, most likely to be adversely affected by covered losses, our professional and medical malpractice viability.
As we've noted on earlier calls we've reduced our exposure to professional liability over the last few years.
As for medical malpractice, we also have little exposure.
Turning to the significant lines of business. We currently do right our largest lines, our personal and commercial auto liability in the United States, the UK and Europe.
These lines could see a temporary decrease in the frequency of claims as a result of the shelter in place provisions for much of the world.
We also right us workers compensation risk.
Most of the exposure in our book is to employees, who are currently working from home during the pandemic such as teachers.
Our next largest lines of business, our primary and excess liability covering exposures in the United States and internationally.
While some losses could certainly emerge we did not at this time see exposures that would call for an increase in our current level by the NR.
We do believe that mortgage insurance may potentially be affected.
We write us mortgage risk to the GST credit risk transfer program and have some international mortgage exposure as well.
Most of our exposure is for mortgages, which were originated prior to 2018.
As part of our normal reserving process. This quarter, we added a reserve provision for the potential increase in default.
This provision amounted to less than one combined ratio point for the quarter.
Turning now to our investment results.
Net interest income continued to be strong at $27.8 million.
Steady coupon income contributes to the stability of our business and as a long term driver of value to the company.
As a reminder, walbridge investment focus is on credit quality not mark to market fluctuations, we have designed our company and our risk metrics to be able to weather sudden and significant changes in asset values.
Our net investment loss for the quarter was driven by unrealized losses.
Within our portfolio, we recognized a relatively modest amount of realized losses. It is also important to note that we were not a for stellar even in a period, that's all historically large and rapid increases in credit spreads.
This quarter in order to provide investors with more information on the composition of our investments we supplied breakdowns by asset class industry as well as rating for each of our investment grade and non investment grade portfolios.
Referencing that information I'd like to spend a few moments commenting on our exposure to those industries that might be perceived as being more affected by the current economic crisis.
First as of the ended this quarter Whopper had no direct exposure to airline issuers in our non investment grade portfolio.
In addition, our gaming and leisure industry classification stands at less than 1% of this portfolio.
Our oil and gas industry, and consumer services industry classifications make up approximately 5% and 8% of our non investment grade assets respectively.
Our retail exposure is within our consumer services breakdown and makes up less than 5%.
Lastly on investments I'd like to share some information about our asset backed securities.
This segment is predominantly comprised of collateralized loan obligations or C.L. lows approximately 80% of this class is rated as investment grade.
We invest in selected Filos, because they generate higher yields and benefit from a diversified pool of underlying collateral of loans.
However, we recognize that these are relatively less liquid and our market valuation can trade off meaningfully in time distress.
These securities, particularly the investment grade has significant structural support and the underlying collateral and can withstand high levels of underlying defaults before suffering a principal loss.
Whether or not are unrealized losses this quarter ultimately turn into significant realized losses will depend on the size and duration of the worldwide economic downturn, which no one can predict with certainty.
We believe however that our investment portfolio is well constructed and diversified in ways that increase the odds of positive outcome.
While we did not provide monthly investment results you will have seen that credit market valuations have recovered somewhat since March 30, Onest as a concrete example that credit Suisse high yield indexes spreads have recovered almost 200 basis points at March from over 1000 to roughly 800 basis points as of Friday.
Next I'd like to talk a bit about capital management.
While we believe that our insurance and reinsurance businesses are well positioned in the Arctic marketplace and that the underlying credit in our investment portfolio are well underwritten. We're cognizant that the world is facing a highly uncertain economic outlook.
Accordingly, we have proactively made some moves to bolster our economic capital position and mitigate our downside exposure to an extremely severe prolonged recession.
First in April we significantly reduced our exposure to us mortgage risk by transferring part of that risk to other parties.
This action provides economic capital flexibility for us at the time of significant macroeconomic uncertainty.
While the transfer business had been profitable in the last few years given the unprecedented cobot related events. We believe this was a prudent and responsible course of action.
In addition, we have paused, our twentytwenty share repurchase program after a modest purchase amount earlier in the quarter.
Our repurchases dumped as news about the cobot virus became better understood and its impact on the investment markets was felt.
As there is visibility and certainty in the reopening of the global economies, we will reassess this decision.
Next I would like to talk briefly about the under review with negative implications designation that and best placed on Watford last week.
The first point to make is that the designation of being under review is not as severe as a receiving a negative outlook.
And best Ken and often users. It's under review designation when it ensure has had a recent events or abrupt change and financial condition.
As I noted earlier the reduction in our book value. This quarter was predominantly due to mark to market movements and Watford was thoughtfully designed to weather exactly this type of event.
However, we do acknowledge that the magnitude of the unrealized investment losses, sizeable and certainly understand and best need to closely watched not just offered by the entire industry. During these unprecedented times.
In an best press release. It has noted that the under review status is expected to resolve when our risk adjusted capitalization is restored.
Whopper management is confident that either by recovery and market valuations or by other levers that we had at our disposal. We can return to a stable outlook and am best size.
Finally, I'd like to provide a quick update on his area.
Our process to close the transaction continues to move forward.
Gary employees are currently working from home as effectively as they can for now the.
The shutdown in France has pushed back our timeline. We currently expect to close this transaction in the third quarter of this year.
As a reminder, exerial has an established French PNC writer with quality staffing operations.
It's area will give us an immediate presences brands as well as the ability to write business across the European Union.
We believe this acquisition should provide avenues of profitable future growth for us.
With these introductory comments I'd like to turn it over to Rob to go through our financial results in more detail.
Thank you John and good afternoon, everyone I'd like to provide you with some commentary and observation that our financial results for the first quarter 2020.
Net loss after tax and payment of preferred dividends for the quarter was 267.
7 million or $13.42 per diluted common share.
Net loss reflects in it and net investment lost 262.7 million.
An underwriting loss, including other underwriting income of 6 million.
Debt plus preferred expenses of 4.1 million.
And $5 million net foreign exchange gains.
It is important to note that within the statement of comprehensive income.
Thanks resides unrealized holding losses on the investment grade assets portfolio 37.9 million inclusive of an unrealized net foreign exchange loss for the quarter of 7.7 million.
Book value per diluted share the ended the first quarter was $28.21.
Representing a 35% decrease from year end 2018.
During the quarter in prior to the onset of recorded 19 pandemic the company repurchased approximately 128000 shares and an average price of $22.42 per share.
The remaining share repurchase authorization stands at 47.1 million.
In light of the uncertain economic outlook, we have temporarily halted the repurchase of shares.
Moving to our underwriting results for the quarter.
Gross premiums written for the first quarter 2020 were 234.9 billion, an increase of 26% 48.2 million versus the same quarter last year.
Premium growth was achieved across all lines of business.
As with the reinsurance and other specialty gross premiums were up 11%.
52%, respectively over the prior year quarter, primarily due to increased personal and commercial auto ratings.
As with the reinsurance increase is primarily due to increased UK motor excess of loss writings.
The other specialty premium increase is primarily attributed to UK and Irish motor proportional business ratings.
Property catastrophe gross premiums written were up 64% over the prior year quarter or primary involvement in this line of business is via 7% 40 share participation of arteries worldwide property catastrophe excess of loss portfolio recently arch has been increasing its involvement.
His line in response to an improving rate environment and as a results are premiums have grown in proportion.
Insurance programs in Coinsurance gross premiums written grew by 29% due to continued expansion of our us insurance business.
Ceded written premiums grew 6.9 billion to 48.2 million, a 17% year over year increase.
As our insurance gross premiums written have grown in our insurance programs and co insurance line. The outward ceded premiums starts have grown in proportion.
The first quarter combined ratio was one of 4.4.
0.3 points higher than the same quarter last year.
The slight increase in the combined ratio can be primarily attributed to a loss ratio increase of 3.1 points.
Offset impart by a decrease in the acquisition expense ratio of three points versus the prior year quarter.
The offsetting increase in loss ratio in corresponding decrease in acquisition ratio is primarily driven by a provision for Colgate related exposure in our international mortgage business.
Due to sliding scale commissions on this deal this had an equal in offsetting impact on the acquisition costs.
The remaining difference can be attributed to changes in the mix of business.
In comparison to the prior year first quarter, the general and administrative expense ratio increased.
2.5, 0.1%, reflecting additional ongoing public company expenses versus when we were private company.
Moving to our investment results for the quarter.
The first quarter net investment loss of 262.7 million was driven by unrealized losses in the non investment grade portfolio of 285.5 million.
Due to the investment market volatility caused by the economic dislocation, resulting from recorded 19 pandemic.
The core earnings provided by net interest income with 27.8 million.
As noted in prior calls net interest income is a long term driver of our book value growth.
The first quarter 2020, net interest income yield for the entire portfolio was 1.4% which is in line with.
The 1.5% yield achieved in the first quarter of 2019.
Focusing now just on our non investment grade portfolio net interest income in the quarter is 26.2 million versus $28.4 million year, though.
The net interest income yield of 1.7% was down slightly versus the first quarter 2019.
The decrease in yield was driven by a decrease in LIBOR rates and its impact on our floating rate assets as well as deliberate use of less investment leverage in the first quarter of 2020 versus the prior year quarter.
You'll also note gross interest income decreased 4.3 million to 32.8 million in the first quarter of 2020 versus the first quarter 2019.
The decrease can be attributed to the deliberate use of less investment leverage in the first quarter of $2020 lower LIBOR rates as mentioned above.
The non investment grade portfolio net unrealized loss of 285.5 million was driven by significant credit spread widening this quarter due to investor concerns, resulting from the sudden and precipitous decline in the economic activity worldwide.
In regard to our investment grade portfolio. The net interest income yield 0.5% in the quarter was in line with the yield of 0.6% recorded in first quarter of 2018.
As of the end of March the ending balance sheet net unrealized loss position for the combined Noninvestment grade in investment grade portfolios was 373.3 million.
Lastly, I will touch on our debt leverage management, our debt to total capital ratio was 21.8% at March 31st 2020, and the debt plus preferred to total capital ratio was 28.4%.
The increases in these ratios was driven by the unrealized investment losses recognized this quarter.
In conclusion, our balance sheet remains strong we believe we are well positioned for 2020 and beyond.
With that I'll hand, it back to John.
Thank you Rob.
Before we open the call to questions I would like to remind our shareholders to please register your boats for the proxy for upcoming annual meeting on June 12.
It is important that we received or boats in order to achieve a quorum. If you did not receive a proxy you can contact Rob Holly whose contact details are shown at the end of the earnings release.
And with that we'd be pleased to take your questions.
Thank you.
Illness, who would like to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
And our first question comes from Pablo Singzon with Jpmorgan. Your line is open.
Pablo Please check your mute button.
Hi, sorry about that can you hear me now.
Hello.
Yes public. Thank you, yes, sorry about that guys.
The first question was just for John I, just wanted to follow up with reinvest comment.
This is that those.
I guess can you just provide more color and the other levers that you had described the aside from the asset is still recovering the market are you and also related to that is there a way or maybe you can you provide us that we just think about risk. The just the gap is a retranslated your.
Via CR or maybe an overall asset silverscript measure.
Sure, let me try to address that Pablo Thanks for the question to just to provide a little more color on I invest.
We certainly understand the need to monitor the industry.
Over 19 had a large impact on investment markets and expected at a large impact on underwritings across the industry.
I think as on a positive and as we've noted on the call. We expected our underwriting footprint is less material than than some of our peers.
But we do recognize that we frankly invest a mark to market investment loss that we have a sizeable.
I think it is important to note again that the mark to market with losses that we suffered a well within our risk profile and from a pure capital standpoint, we met and best.
Risk adjusted capital requirements at the end of the year 2019, and we expect a muted again into year 2020.
One of the things we've done as a reduction in a mortgage exposure that I noted earlier has already had a sizable impactful and best capital adequacy model.
We already puts us in a position and meet the requirements and their framework.
And we obviously acknowledge that the capital capitalization is not the only not the only thing that and us looks that but we clearly view this as a positive.
In terms the other levers can't really go into other levers we have in this time, but were redo remain confident that we can be positioned to remove the under review designation of some pointing in the future.
Got it.
And then the second question so.
I appreciate your disclosure higher fully as well as opposed to covert claims but.
I guess can you speak how you see near term impacts on your margins is bringing growth evolving seems like.
You have a different exposure auto claims there could be lower.
Yes, there might be an offset in premiums maybe more of the lesson in the UK.
Sure, Yes, I think like we don't give forward looking guidance, but I think if we can probably provide a little bit of come more color on our on kind of within our book.
I think we can reasonably expected rooted have decrease in revenues of the rest of the year and I think as you pointed out I think where where drinkers who might come from will really depend on jurisdiction in class of business.
Now for auto we certainly do expect some sort of reduction in premium we write personal lines in the UK, one slight mitigant to that it obviously is personal line auto is compulsory both I mean, it we do expect to see some some sort of decreases going into future.
We do write a good amount of commercial auto.
Some of that cover a good portion the commercial auto book and we rights continued to operate through the shutdown.
But with any sort of decrease in economic activity.
There is obviously the potential for reduced premiums going forward.
I think I would point to maybe is going to be more material most material for us kind of a from a line of business standpoint, as we do write them nonsense small amount announced that auto in the us as well as in nonstandard auto in the UK and I think if I point to an area, where I think could have a kind of a most most impacted period and in terms of future revenues as the two I would probably point too.
Got it and third and last question for me. So just a couple and invest portfolio I was wondering could provide just some perspective of the following first on that you've seen a material change in recent interest payments in default trends in your loan portfolio and second just any material rating agency actions on your portfolio whether its Don.
Rates are negative outlooks in terms of the pivotal loans you're holding.
Okay in terms of.
Changes in defaults of.
We had to get to securities that that defaulted in Atlanta, and last month, or so I'd say what of that one of the securities as a first lien loan thats actually continuing to pay coupons and I think at the benefit of being in the first lien as it is going to pay coupons that we fully expect apart recovery, but does have a technical default.
The other one is going to fully reflected in kind of the market price.
What's kind of not unexpected given given what happened.
And in terms of kind of downgrades.
And our non investment grade portfolio, you have downgrades in another themselves doesn't isn't really going to be huge can have huge issue to us they'd be the thing we look mostly pay attention to is a fundamental credit analysis and so whether that that at risk is downgraded from a double b to b.
That doesn't affect kind of what we think of the underlying credit it's much more about their future cash flows and all the stresses that hps does so at least in that aspect going to downgrade within the non investment grade portfolio just aren't accident that significant.
Okay. Thank you.
Thank you. Our next question comes from Matt Carletti with JMP. Your line is open.
Hey, Thanks, good afternoon.
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Pablo covered a couple of question to having I got one left.
John I wanted to circle back on a couple of your mortgage insurance comments.
I think I caught the said it is about a point of loss ratio in the quarter.
For the some of the exposure you have there.
Also that.
There was a reinsurance transaction that you guys undertook to mitigate some of the potential for losses can you just give us a little bit more color there on what what we should expect going forward and I know that accounting there is quite different than traditional PMT accounting and.
Really can't put too much loss up before you have the delinquencies. So can you help us maybe from a ballpark around just kind of what exposure you guys have lapsed and how that might unfold in coming quarters.
Sure. Let me also a thanks and thanks for the question Alex I'll try to address.
The.
For the first on the first.
First one just didn't clarify we we put up.
Probably a point or two in loss on mortgage but as Rob noted in his prepared remarks.
Some of that mortgage is kind of is offset by can have a reduced acquisition acquisition expenses sliding scale. So thats why had the overall impact our combined ridge was it was one point, but you had some ups and downs in other areas.
The other kind of comment I would have on mortgage reinsurance with a different than more primary mortgage insurance is on the reinsurance side and we try to book to ultimate losses expected I do I do understand on the primary side that there is because there is any of this theres gap and regulatory reasons why you can't can protect your ultimate you have to wait till delinquencies come in but.
The reinsurance side, we do we do try to kind of pick our ultimate based off of the information we have in front of us.
And then to the lack of mortgage question I think that you had is the we did reduce our us mortgage exposure by a significant amount.
And so going to may be the reinsurance or the the exposure that we that we offload it was much more concentrated in the us it wasnt within every much international aspects to it at all.
Great all very helpful. Thanks answers.
Great. Thank you.
Thank you.
And we have a question for Michael Phillips with Morgan Stanley. Your line is open.
Thank you Hey, guys good afternoon.
John first question for you I guess, we where do you see just because we have CV growth potential for margin expansion over the coming I guess year by line of business.
Good question.
I think.
There is.
Given what given where we're seeing given we have right. Now there you are you there it's reasonably likely to expect a significant drop off in frequencies and auto.
And potentially even comp and even potentially even TL I think they because of the tougher question answer with that is is what sort of either ex gratia payments or other kind of government mandated returns of premium that you might see.
The one thing I would note with our portfolio and I think we've mentioned this before particularly with our insurance programs. We do have sliding scale commissions. So the benefit of the give a benefit for us a decrease in frequency is going be partially offset by a kind of an increase in commissions and they will make our loss pick more solid and I'll make our margin more solid.
But it wouldn't be necessarily one one for one for us.
The broader question I think it's kind of is what with what has what's happening with the rates and underlying rate Tonight. I think there is still a hardening casualty market in the Harding property market.
And I in my personal view, I think and Akovaz will maybe even going to make this makes us stronger as carriers going to reassess capital, but it's a little bit harder one little bit hard to want to answer and I think I think kind of where we're positioned right. Now I think we're optimistic about us being able to grow in Harbin casualty market.
But at the that little bit harder to to address specifically.
Okay. Thanks, you must know of a lot recently the growth in your commercial auto it gets what's driving the personal auto growth on a reinsurance side.
Who are on the we don't have a huge amount of personal auto exposure on the reinsurance side. The personal auto that we do have in the reinsurance side is it is generally international as opposed to domestic and and on that we we.
Yeah, there's pockets of opportunity that we participate on both on the insurance side as well the reinsurance side, where we see kind of overall market is either hardening or it has an attractive returns.
And we'll be relatively indifferent as to whether we take it on the insurance of the reinsurance side.
At least I would domestically we don't have we don't have a huge portfolio of personal auto in the reinsurance side most of the most of the auto we take on the domestically is is on the commercial side.
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Okay. Thanks, Let me, let me switch gears to the investments I mean, you guys gave us some nice new disclosure there appreciate the in your comments on oil and retail and in different segments. So minimal exposure I guess, if you look back at and your exposure today, where do you know where would you see them I guess what areas with the greatest concern for you were now in your portfolio.
Yes, I think.
Yeah, I think we built this this portfolio had been built.
Relatively defensively over the last couple of years I think we've noted on previous calls that we position most of our portfolio into term loans and the reason we are doing that as stringent credit spreads have been at historically low as for the last couple of years and taking a position that when spreads are tied as they are we're going to invest in assets that have a higher positions occur.
Capital structure more underlying collateral and it kind of stress situations in places, where we kind of a seat at the table things start to go wrong and as you can see almost half of our of our non investment grade portfolio right. Now is in loans that does provide kind of a certain level protection for for kind of unfortunate events like where like we're sitting in today.
Yes for oil and gas while while it is 5% for exposure I mean could.
For the note that our exposure really is concentrated within two separate positions. One is very senior loans to an issuer that service at the energy industry that I wanted to a very large oil refinery.
So the revenue stream for both of these are somewhat influenced our somewhat insulated from fluctuations in the price of oil and we've all seen kind of the havoc with the price of oil is causing the market recently.
Okay for retail retail I think it's kind of is a concern for green for the entire high yield market. As we've noted the our exposure is less than 5% and then sizable portion of this is good to issuers, who either run pharmacies or to services provided to provide it provides services to retailers such as groceries and noted.
Not to say that these these kind of art art.
Our under threat, but those those entities that are going to remade opened throughout the shutdown.
The the one thing and we mentioned this on the prepared remarks is the close I think the Filos definitely had an ally outsized influence on a quarterly results.
And one has been.
I want to cover that's a little bit b.
So close in terms of kind of the underlying collateral the feel at a fairly well diversified by industry.
Across and when we look across all the feel of collateral base.
Underlying collateral as the roughly 3% for oil and grass, 5% lodging casinos, 3% automotive, 5% retail I think there number over the carrier to provide us some disclosures on the underlying collateral and I think Marcello portfolio compares favourably to them.
And then we'd also like to add just a little bit of color on the stress. These can withstand I think we've mentioned that roughly 80% of our clothes are investment grade.
And just to give kind of context in the in the market today, It's typical triple B Siloed security can absorb the annual default rates in the underlying collateral of over 12% per year year over year through the securities maturity before it suffers a principal loss and just to provide some context and every crisis is different than this one is clearly different than the great financial.
Recession, but a peak default rate in 2008 was around 9% support for single year before fell off dramatically.
Hopefully that gives a little more detail into the portfolio and I think we're happy to provide this this level detail going forward.
Okay. Great. Thanks, that's very helpful. I guess last one from me.
Clinics area I guess did have you have you ever said the purchase price. There and then also do you have the ability to cancel that if need be before closes. Thanks.
So we have not that we have not to the purchase price we had said that.
Based up a bit the information that we have we do expect the we do expected to be mildly accretive when we do when we do execute the purchase.
We're continuing to we're continuing to looking to close this closings area. We think it offers lots of strategic benefits for us.
Where we like the ability to expand in Europe.
We'd like the we'd like to underlying business itself, we like the underwriters, we like the people I.
I think there for us we're looking we're looking forward to closing the transaction and we're hoping to do it in the third quarter.
Alright, great. Thanks, John.
Thank you and I'm showing no further questions Tom I'd like to turn it back to Mr., John maybe for any closing remarks.
Thanks.
Thank you.
If the thank you all for participating.
Stay sale see safe to say healthy and we look forward to speaking with all of you again next quarter have a terrific afternoon. Thanks all.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
Thank you.
Oh.
Oh.
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Good day, ladies and gentlemen, and welcome to the Watford Holdings first quarter earnings Conference call.
Yeah.
<unk> This conference call is being recorded.
Before the company gets started with it stopped <unk> management would like to remind everyone that certain statements discussed on this call may constitute forward looking statements on the federal Securities law.
These statements are based upon management's current assessment and assumptions.
That is subject to a number of risks and uncertainties. Consequently, actual results may differ materially from expressed or implied.
For more information on the risk of factors that may cause future performance investors should review periodic reports and other filings that are filed by the company what the FCC from time to time.
Additionally, certain statements contained in this call or not based on historical facts.
Forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
The company intends to forward looking statements in this call to be subject to the safe Harbor created thereby.
Management also well make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP. The definition of underwriting income, but just the underwriting income and adjusted combined ratio and descriptions of non investment grade portfolio and the best me great prefer the components of the company's investment.
Returns can be found in the company's current report on form 8-K furnished by the FCC yesterday, which contains the company's earnings press release and is available on the company's website.
I'd now like to introduce your host for today's conference Mr. Dror Levy CEO of what for coatings you may now begin.
Thank you Catherine.
Good afternoon, everyone. Thank you for joining the whopper 2021st quarter earnings call joining me on the call today, There's Raleigh, our Chief Financial Officer.
Before we discuss this quarter I'd like to make a few preliminary called much.
First and most important we hope that you your families and your colleagues are safe and well.
They are challenging times for the Cobot 19 endemic has had a significant impact on the lives and wellbeing of people across the world.
We'd like to express our compassion, but those who have suffered due to illness and convey our best wishes to all for your health and safety during these difficult times.
I'd also like to talk about the Intacta cobot 19 on our employees and business operations.
Well being of our extended Whopper does family, it's extremely important to us.
We and our business partners at arch and H.B.S. responded quickly Institute work from home policies to enable them to continue operating and state conditions.
I'm proud of our team and how they continue to deliver despite these challenging dynamics.
We are keeping up and running it's really policies paying claims and doing what we can to help the economy to function in this period of stressed.
I would also like to acknowledge the retirement of John Rathgeber.
John has led whopper since its formation and bought a steady unflappable leadership to our company I would like to thank him personally first food and effective succession planning.
We're extremely pleased the John has agreed to remain at the advisor to the company.
Well, let's continue as a member of our board of directors.
Turning now to the quarter.
Oh supply some high level commentary on our first quarter underwriting and investment results.
Described the composition of our investment under rank portfolios and provide our current view or the potential exposure to cobot 19 bosses.
Rob will then give a more detailed recap the first quarter financials.
Following that we wouldn't be pleased to answer questions on the equity analysts.
If the our individual investors with questions that are addressed today well be happy to arrange follow up calls with each of you.
For the first quarter of 2020 Watt the recorded a net loss of $267.8 million.
Our quarterly GAAP results were significantly impacted by Copel nineteens effect on the capital markets and the resulting riddock reduced valuation on the asset side of our balance sheet.
As will describe in more detail later, the vast majority of the loss is attributable to unrealized mark to market losses at our non investment grade portfolio.
Impacted the cobot pandemic on our underwriting results for the quarter was immaterial.
We'll come to that as well.
Our adjusted combined ratio, which removes certainly corporate and non recurring expenses and other underwriting income was 102.2%.
Our loss reserves or prior accident years was essentially flat.
That would had only been one quarter the strengthening of our loss reserves, we did and 20 Nike appears to be holding up well.
Insurance market conditions are improving and we're pleased with the resulting premium growth in the quarter.
We grew in casualty reinsurance driven by UK motor excess of loss reinsurance writings, where rates have increased in response to the revised opt in rate.
Our insurance portfolio also continues to grow particularly in the United States.
The rate environment is improving and we are expanding our writings in this strengthening marketplace, particularly in commercial auto.
Well only a small part of our total writings are property catastrophe lines of business grew significantly in percentage terms.
We participate but arches worldwide property cat reinsurance portfolio and arch has increased its gross exposure.
As rates in this line continue to rise.
Overall, we're pleased with the progress and our underwriting growth.
Our investment in our U.S. insurance companies are coming to fruition at a time hardening market.
We expect the benefit from these improving conditions in both our insurance and reinsurance companies.
We continue to see compelling opportunities to write insurance in the UK market through wife's our current European insurance company.
Lastly, we look forward to completing our acquisition of Exerial, the French property and casualty writer, we agreed to purchase late last year.
I'll comment on the status of the acquisition at the end of these remarks.
I'd now like to spend some time discussing our underwriting portfolio just apply a bit more color about the potential impact from Kobin 19.
First whopper to either has no or de Minimis premium writings and light.
It didn't help.
Ben cancellation trade credit travel.
Or pandemic specific coverages, which are likely to respond directly to cobot 19 losses.
In regards to the potential exposure to business interruption losses, Wofford writes a very limited amount of commercial property, which is consistent with our strategy to target longer duration lines of business.
We are a writer of casualty business throughout the United States internationally.
We believe the casualty lines, most likely to be adversely affected by cobot losses, our professional and medical malpractice viability.
As we've noted on earlier calls we've reduced our exposure to professional liability over the last few years.
As for medical malpractice, we also have little exposure.
Turning to the significant lines of business. We currently do right our largest lines, our personal and commercial auto liability in the United States, the UK and Europe.
These lines could see a temporary decrease in the frequency of claims as a result of the shelter and placed provisions for much of the world.
We also right U.S. workers compensation risk.
Most of the exposure in our book is to employees, who are currently working from home during the pandemic such as teachers.
Our next largest lines of business, our primary and excess liability covering exposures in the United States and internationally.
Well I'm losses could certainly emerge we did not at this time see exposures that would call for an increase in our current level up by the NR.
We do believe that mortgage insurance may potentially be affected.
Right U.S. mortgage risk to the G.I.E. credit risk transfer program and have some international mortgage exposure as well.
Most of our exposure is for mortgages, which were originated prior to 28.
As part of our normal reserving process. This quarter, we added a reserve provision for the potential increase and defaults.
This provision amounted to less than one combined ratio point for the quarter.
Turning now to our investment results.
Net interest income continued to be strong at $27.8 million.
Steady coupon income contributes to the stability of our business and as a long term driver a value to the company.
As a reminder, wofford's investment focus is on credit quality not mark to market fluctuations, we have designed our company and a risk metrics to be able to weather sudden and significant change it an asset values.
Our net investment loss for the quarter was driven by unrealized losses.
Within our portfolio, we recognized a relatively modest amount of realized losses. It is also important to note that we were not for stellar even in a period, that's all historically large and rapid increases in credit spreads.
This quarter in order to provide investors with more information on the composition of our investments we supplied breakdowns by asset class industry as well as rating for each of our investment grade and non investment grade portfolios.
Wrapping that information I'd like to spend a few moments commenting on our exposure to those industries that might be perceived as being more affected by the current economic crisis.
First as of the ended this quarter Whopper had no direct exposure to airline issuers and our non investment grade portfolio.
In addition, our gaming and leisure industry classification stands at less than 1% of this portfolio.
Our oil and gas industry and consumer services industry classifications make up approximately 5% an 8% of our non investment grade assets respectively.
Our retail exposure is within our consumer services breakdown and makes up less than 5%.
Lastly on investments I'd like to share some information about our asset backed securities.
This segment is predominantly comprised of collateralized loan obligations or C.L. those approximately 80% of this class is rated investment grade.
We invest in selected Filos, because they generate higher yields and benefit from a diversified pool of underlying collateral of loans.
However, we recognize that these are relatively less liquid and that market valuation can trade up meaningfully and time distress.
These securities, particularly the investment grade have significant structural support and the underlying collateral and can withstand high levels of underlying defaults or suffering a principal loss.
Whether or not are unrealized losses this quarter ultimately turn into significant realized losses will depend on the size and duration of the worldwide economic downturn, which no one can predict with certainty.
We believe however that our investment portfolio as well constructed and diversified in ways that increase the odds of a positive outcome.
While we did not provide monthly investment results you have seen that credit market valuations have recovered somewhat since March 31st as a concrete example that credit Suisse high yield indexes spreads have recovered almost 200 basis points at March from over 1000 to roughly 800 basis points as of Friday.
Next I'd like to talk a bit about capital management.
While we believe that our insurance and reinsurance businesses are well positioned in a hardening marketplace and that the underlying credit and our investment portfolio are well underwritten. We're cognizant that the world is facing a highly uncertain economic outlook.
Accordingly, we have proactively made some moves to bolster our economic capital position and mitigate our downside exposure to an extremely severe prolonged recession.
First in April we significantly reduced our exposure to us mortgage risk by transferring part about risk to other parties.
This action provides economic capital flexibility for us at a time up significant macroeconomic uncertainty.
While the transfer business had been profitable in the last few years.
Given the unprecedented cobot related events. We believe this was a prudent and responsible of course of action.
In addition, we have paused, our twentytwenty share repurchase program after a modest purchase amount earlier in the quarter.
Our repurchases stopped as news about the cobot virus became better understood and its impact on the investment markets was belt.
As there is visibility and certainty in the reopening of the global economies, we will reassess this decision.
Next I'd like to talk briefly about the under review with negative implications designation.
And best placed on board last week.
The first point to make is that the designation of being under review is not as severe as a receiving a negative outlook.
And as Ken and often use is under review designation when it ensure has had a recent events are abrupt change and financial condition.
As I noted earlier the reduction in our book value. This quarter was predominantly due to mark to market movements and Watford was thoughtfully designed to weather exactly this type of event.
However, we do acknowledge that the magnitude of the unrealized investment losses, sizeable and certainly understand and best need to closely watched not just offered by the entire industry. During these unprecedented times.
And Thats press release. It has noted that the under review status is expected to resolve when our risk adjusted capitalization is restored.
Whopper management as confident that either by recovery and market valuations or by other levers that we had at our disposal. We can return to a stable outlook and best size.
Finally, I'd like to provide a quick update on his area.
Our process to close the transaction continues to move forward.
Gary employees are currently working from home as effectively as they can for now the.
The shutdown in France has pushed back our timeline. We currently expect to close this transaction in the third quarter of this year.
As a reminder, exerial has an established French PNC writer with quality staffing operations.
Jerry I will give us an immediate presence in the brands as well as the ability to write business across the European Union.
We believe this acquisition should provide avenues of profitable future growth for us.
With the introductory comments I'd like to turn it over to Rob to go through our financial results in more detail.
Thank you John and good afternoon, everyone I'd like to provide you with some commentary observation that our financial results for the first quarter 2020.
Net loss after tax and payment of preferred dividends for the quarter was 267.
7 million or $13.42 per diluted common share.
Net loss reflects in it and net investment lost 262.7 million.
An underwriting loss, including other underwriting income of 6 million.
Debt plus preferred expenses of 4.1 million.
And 5 million of net foreign exchange gains.
It is important to note that within the statement of comprehensive income.
Resides unrealized holding losses on the investment grade Fs portfolio 37.9 million inclusive of an unrealized foreign exchange loss for the quarter of 7.7 billion.
Book value per diluted share. The ended the first quarter was $28 in 21 cents.
Representing a 35% decrease from year end 2018.
During the quarter prior to the onset of recorded 19 pandemic the company repurchased approximately 128000 shares at an average price of $22.42 per share.
The remaining share repurchase authorization stands at 47.1 million.
In light of the uncertain economic outlook, we have temporarily halted the repurchase of shares.
Moving to our underwriting results for the quarter.
Gross premiums written for the first quarter 2020 were 234.9 billion, an increase of 26% were 48.2 million versus the same quarter last year.
Premium growth was achieved across all lines of business.
Casualty reinsurance and other specialty gross premiums were up 11%.
52%, respectively over the prior year quarter, primarily due to increased personal and commercial auto writings.
As you'll see reinsurance increase is primarily due to increased UK motor excess of loss writings, while the other specialty premium increase is primarily attributed to UK and Irish motor proportional business ratings.
Property catastrophe gross premiums written were up 64% over the prior year quarter.
Primary involvement in this line of business is via dividend.
Percent 40 share participation of arteries worldwide property catastrophe excess of loss portfolio recently arch has been increasing its involvement in this line in response to an improving rate environment and as a results are premiums have grown in proportion.
Insurance programs and Coinsurance gross premiums written grew by 29% due to continued expansion of our us insurance business.
Ceded written premiums grew 6.9 billion to 48.2 million, a 17% year over year increase.
As our insurance gross premiums written have grown in our insurance programs and co insurance line the outward ceded premium starts of growing proportion.
The first quarter combined ratio was one of 4.4.
0.3 points higher than the same quarter last year.
The slight increase in the combined ratio can be primarily attributed to a loss ratio increase of 3.1 points.
Offset impart by decrease in the acquisition expense ratio of three points versus the prior year quarter.
The offsetting increase the loss ratio in corresponding decrease in acquisition ratio is primarily driven by a provision for Colgate related exposure in our international mortgage business.
Due to sliding scale commissions on this deal this had an equal in offsetting impacts on the acquisition costs.
The remaining difference can be attributed to changes in the mix of business.
In comparison to the prior year first quarter general and administrative expense ratio increased.
2.5, 0.1%, reflecting additional ongoing public company expenses versus when we are private company.
Moving to our investment results for the quarter.
First quarter net investment loss 262.7 million was driven by unrealized losses in the non investment grade portfolio.
285.5 billion.
Due to the investment market volatility caused by the economic dislocation, resulting from the cold in 19 pandemic.
Core earnings provided by net interest income with 27.8 million as noted in prior calls net interest income is a long term driver of our book value growth.
The first quarter 2020, net interest income yield for the entire portfolio was 1.4% which is in line with.
The 1.5% yield achieved in the first quarter of 2019.
Focusing now just on our non investment grade portfolio net interest income in the quarter is 26.2 million versus 28.4 billion a year ago.
The net interest income yield at 1.7% was down slightly versus the first quarter 2019.
Decreasing yield was driven by a decrease in LIBOR rates and its impact our floating rate assets as well as deliberate use of less investment leverage in the first quarter of 2020 versus the prior year quarter.
You'll also note gross interest income decreased 4.3 million to 32.8 million in the first quarter of 2020 versus the first quarter 2019.
The decrease can be attributed to the deliberate use of less investment leverage in the first quarter 2020, and lower LIBOR rates as mentioned above.
The non investment grade portfolio net unrealized loss of 285.5 million was driven by significant credit spread widening this quarter due to investor concerns, resulting from the sudden precipitous decline in the economic activity worldwide.
In regard to our investment grade portfolio. The net interest income yield 0.5% in the quarter was in line with the yield of 0.6% recorded in first quarter of 2018.
As of the end of March the ending balance sheet net unrealized loss position for the combined Noninvestment grade an investment grade portfolios was 373.3 million.
Lastly, I'll touch on our debt leverage management, our debt to total capital ratio was 21.8% at March 31st 2020, and the debt plus preferred to total capital ratio was 28.4%.
The increases in these ratios was driven by the unrealized investment losses recognized this quarter.
In conclusion, our balance sheet remains strong we believe we're well positioned for 2020 and beyond.
With that I'll hand, it back to John.
Thank you Rob.
Before we open the call to questions I would like to remind our shareholders to please register your boats for the proxy for upcoming annual meeting on June 12.
It is important that we receive your boats in order to achieve a quorum. If you did not receive a proxy you can contact Rob Holly whose contact details are shown at the end of the earnings release.
And with that we'd be pleased to take your questions.
Thank you.
Illness wed like to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
And our first question comes from Pablo Singzon with Jpmorgan. Your line is open.
Pablo Please check your mute button.
Hi, sorry about that gave him now.
Hello.
Yes public. Thank you, yes, sorry about that guys.
The first question was just for John I, just wanted to follow up with reinvest comment or risk it doesn't that those.
I guess can you just provide more color and the other levers that you have described the aside from the asset is still recovering to market are you and also related to that is there a way or maybe you can provide some of you think about risk that just a gap is a reach against your.
Yes, CR or maybe an overall asset silverscript measure.
Sure, let me try to address that Pablo Thanks for the question just to provide a little more color on A.M. best.
Certainly understand the need to monitor the industry.
Over 19 had a large impact on investment markets an expected at a large impacted underwritings helps the industry.
I think as on a positive and as we've noted on the call. We expect that our underwriting footprint is less material than than some of our peers, but we do recognize that we frankly invest a mark to market investment loss that we have a sizeable.
I think it is important to note again that the mark to market, we bought losses that we suffered a well within our risk profile and from a pure capital standpoint, we met and best.
Risk adjusted capital requirements at the end of the year 2019, and we expect a muted again into year 2020.
One of the things we've done as a reduction in a mortgage exposure that I noted earlier has already had a sizable impact I invest capital adequacy model.
We already puts us in a position and meet the requirements and their framework.
And we obviously acknowledge that capital capitalization is not the only not the only thing that I invest looks that but we clearly view this as a positive.
In terms of other levers can't really go into other levers we have in this time, but were redo remain confident that we can be positioned to remove the under review designation of some pointing in the future.
Got it.
And then the second question so.
I appreciate your disclosure higher fully as well as opposed to covert claims but.
I guess can you speak how you see near term impacts on your margins in premium growth evolving seems like.
You do have a different exposure auto claims there could be little.
Yes, there might be an offset in premiums maybe more in the lesson in the UK.
Sure, Yes, I think like we don't give forward looking guidance, but I think if we can probably provide a little bit a couple more color on our on kind of within our book.
I think we can reasonably expected to have decrease in revenues for the rest of the year to think as you pointed out I think that were working interest that it might come from will really depend on jurisdiction in class of business.
Now for auto we certainly do you expect some sort of reduction in premium we write personal lines in the UK one slight mitigant to that is obviously his personal line auto is compulsory both I mean, it we do expect to see some some sort of decrease is going and the future.
We do write a good amount of commercial auto.
Some of that cover a good portion that commercial auto book and we rights continued to operate through the shutdown.
But you have with any sort of decrease in economic activity.
There is obviously the potential for these premiums going forward.
I think I would point to maybe it's got a bit more material most material for us kind of a from a line of business standpoint, as we do write them nonsense small amount announced that auto in the us as well as an nonstandard auto and UK and I think if I point to an area, where I think could have a kind of a most most impacted period and in terms of future revenues as led to I would probably point too.
Got it and third and last question for me. So just a couple and invest portfolio I was wondering could provide just some perspective of the following first on that you've seen a material change in recent interest payment default trends in your loan portfolio and second just any material rating agency actions on your portfolio whether its Don.
Rates are negative outlooks in terms of the individual loans you're holding.
Okay, then in terms of.
Changes in default.
There, we had to get to securities that that defaulted in Atlanta, and last month, or so I'd say what of that one of the securities as a first they know that actually continuing to pay coupons and I think at the benefit of being in the first lien as it is going to pay coupons that we fully expect apart recovery, but does have a technical default.
The other one is kind of fully reflected in kind of the market price.
What's kind of not unexpected given given what happened.
And in terms of kind of downgrades.
And our non investment grade portfolio downgrades in another themselves doesn't isn't really going to be huge kind of huge issue to us they'd be the thing we look mostly pay attention to is a fundamental credit analysis and so whether that that at risk is downgraded from a double b to b.
That doesn't affect kind of what we think of the underlying credit it's much more about their future cash flows and all the stresses that hps does so at least in that aspect going to downgrade within the non investment grade portfolio, just aren't I'm, sorry, thats significant.
Okay. Thank you.
Thank you. Our next question comes from Matt Carletti with JMP. Your line is open.
Hi, Thanks, good afternoon.
[music].
Pablo covered a couple of question to having I got one left.
John I wanted to circle back on a couple of your mortgage insurance comments.
I think I caught the said it is about a point of loss ratio in the quarter.
For the somebody exposure you have there.
Also that.
There was a reinsurance transaction that you guys undertook to mitigate some of the potential for losses can you just give us a little bit more color there on what what we should expect going forward and I know that accounting there is quite different than.
Additional PMT accounting and.
Really can't put too much loss up before you have the delinquencies. So can you help us maybe put a ballpark around just kind of what exposure you guys have last and how that might unfold in coming quarters.
Sure.
Thanks, and thanks for the question, Alex I'll try to address.
The.
For the for the first the first one is and clarify we we put up.
Probably a point or two and loss on mortgage but as Rob noted in his prepared remarks.
Some of that mortgage is kind of is offset by kind of a reduced acquisition acquisition expenses sliding scale. So thats why I had the overall impact our combined ratio was one point, but you had some ups and downs other areas.
The other kind of comment I would have on mortgage reinsurance, which is different than more primary mortgage insurance is reinsurance side and we try to book to ultimate losses expected I do I do understand on the primary side that there is too there is any of this theres gap and regulatory reasons why you can't can't project. Your ultimate you have to wait delinquencies come in but.
The reinsurance side, we do we do try to kind of pick our ultimate based off of the information we have in front of us.
And then to last had a mortgage question I think that you had is the we did reduce our us mortgage exposure by a significant amount.
And so going into the the reinsurance or the the exposure that we that we offload it was much more concentrated than us it wasnt, what didnt have very much international aspects to it at all.
Okay very helpful. Thanks answers.
Thank you.
Thank you.
And we have a question for Michael Philips with Morgan Stanley. Your line is open.
Thank you Hey, guys good afternoon.
John first question for you I guess, where where do you see just because when you see the great potential for margin expansion over the coming I guess year by line of business.
Good question.
I think.
There is.
Given were given where we're seeing given we have right now there you.
The likely to expect a significant drop off in frequencies and auto.
And potentially even comp and even potentially you've NGL I think they because of the tougher question and answer with that is is what sort of either ex gratia payments or other kind of government mandated returns of premium that you might see.
The one thing I would note with our portfolio and I think we've mentioned this before particularly with our insurance programs. We do have sliding scale commissions. So the benefit of the benefit for US a decrease in frequency is going to be partially offset by kind of an increase in commissions and that will make our loss pick more solid and ill make our margin more solid.
But it wouldn't be necessarily one one for one for us.
The broader question I think it's kind of is what ways what has what's happening with the rates and underlying rate Tonight. I think there is still a hardening casualty market in Harding property market.
And I in my and my personal view I think I covered well, maybe you've got to make this make the stronger as carriers kind of to reassess capital.
Thats, a little bit harder one little bit hard I wanted to answer and I think I think kind of where we're positioned right. Now I think we're optimistic about us being able to grow in Harbin casualty market.
But at the that little bit harder to to address specifically.
Okay. Thanks, you must know of a lot recently the growth in your commercial auto I guess, what's driving the.
Personal auto growth on a reinsurance side.
Who are on the we don't have a huge amount of personal auto exposure on the reinsurance side. The personal auto that we do have in the reinsurance side is it is generally international as opposed to domestic and and on that we we.
Yes, there's pockets of opportunity that we participate on both on the insurance side as well the reinsurance side, where we see kind of overall market is either hardening or it has some attractive returns.
And we'll be relatively indifferent as to whether we take it on the insurance of the reinsurance side.
At least domestically we don't have we don't have a huge portfolio of personal auto in the reinsurance side most of the most of the auto we take on the domestically is is on the commercial side.
Yes.
Okay. Thanks, Let me, let me switch gears investments I mean, you guys give us some nice new disclosure there appreciate the in your comments on oil and retail and and different segments. So minimal exposure I guess.
If you look back at.
And your exposure today, where do you see where would you see the I guess than what areas with the greatest concern for you right now in your portfolio.
Yes, I think.
Yes, I think we built this this portfolio has been built relatively defensively over the last couple of years I think we've noted on previous calls that we position most of our portfolio into term loans and the reason we are doing that as stringent credit spreads have been at historically low as for the last couple of years and taking a position.
When spreads are tied as they are we going invested assets that have a higher position to the capital structure more underlying collateral and it got a stress situations of places, where we kind of a seat at the table things start to go wrong and as you can see almost half of our of our non investment grade portfolio right. Now is in loans that does provide kind of a certain level protection for.
For I kind of unfortunate events like where like we're sitting on today.
Yes for oil and gas well, while it is 5% of our exposure I think it's.
It's important to note that our exposure really is concentrated within two separate positions. One is very senior loans to an issuer that service at the energy industry that one is a very large oil refinery.
So the revenue streams for both of these a somewhat influenced our somewhat insulated from fluctuations in the price of oil and we've all seen kind of the having but the price of oil is causing the market recently.
For retail retail I think it's kind of is a concern for written for the entire high yield market. As we've noted the our exposure is less than 5% and then it was sizable portion of this is good to issuers are either run pharmacies or to service the service providers to provide.
Provides services to retailers such as groceries and.
Not to say that these these kind of art art.
Our under threat, but those those entities that are going to remain open throughout the shutdown.
The the one thing and we mentioned that on the prepared remarks at the close I think the Filos definitely had an ally outsized influence on a quarterly results.
And what has been.
When it covered thats a little bit b.
Zelos in terms of kind of the underlying collateral steel at a fairly well diversified by industry.
Across that when we look across all the feel of collateral base the underlying collateral as the roughly 3% for oil and grass, 5% lodging casinos, 3% automotive, 5% retail I think there are number of the carrier to provide us and disclosures on the underlying collateral and I think our CLL portfolio compares favourably to them.
And then we'd also like to add just little bit of color on the stress. These can withstand I think we've mentioned that roughly 80% of our clothes are investment grade.
And just give kind of context in the in the market today, it's typical triple B C. A low security can absorb annual default rates in the underlying collateral of over 12% for year year over year through that securities maturity before it suffers a principal loss and just to provide some context and every crisis is different than this one is clearly different than the great financial.
Session, but a peak default rate in 2008 was around 9% before for single year before fell off dramatically.
So hopefully it gives a little more detail into the portfolio and I think we're happy to provide this this level detail going forward.
Okay. Great. Thanks, that's very helpful. I guess last ones from me.
Our next area I guess did have you have you ever said the purchase price. There and then also do you have the ability to cancel that.
Maybe before closes thanks.
So we have not we're not the purchase price we had said that.
Based off of it the information that we have we do expect the we do expected to be mildly accretive when we do when we do execute the purchase.
We're continuing to we're continuing to looking to close this codecs area. We think it offers lots of strategic benefits for us.
Where we like the ability to expand in Europe.
We'd like the we'd like to underlying business itself, we like the underwriters, we'd like to people I.
I think there for us we're looking we're looking forward to closing this transaction and we're hoping to do it in the third quarter.
Alright, great. Thanks, John.
Thank you and Im showing no further questions and at this time I'd like to turn it back to Mr., John Levy for any closing remarks.
Thanks.
Thank you.
Thank you all for participating.
Stay sale safe to say healthy and we look forward to speaking with all of you again next quarter have a terrific afternoon. Thanks all.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.