Q2 2020 Watford Holdings Ltd Earnings Call
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Good day, ladies and gentlemen, and welcome to the Waterboard Holdings second quarter earnings Conference call. As a reminder, this conference call is being recorded.
Before the company gets started would update management wants to first remind everyone that certain statements as discussed on this call may constitute forward looking statements under the federal Securities law.
These statements are based upon management's current assessments and assumptions that are subject to the number of risk and uncertainties.
Consequently, actual results may differ materially from those expressed or implied.
For more information on the risks and factors that may affect future performance investors should review periodic reports and other filings that have filed by the company with the FCC from time to time.
Additionally.
Statements contained in the call that are not based on historical facts are 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 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 portfolio components of the.
The company's investment returns can be found in the company's current report on form 8-K furnished to the FCC yesterday, which contains the Companys earnings press release and is available on the company's website.
I would now like to introduce your host for todays conference Mr., John Levy CEO of what foot Holdings, you may now begin.
Thank you Dylan and good afternoon, everyone.
Thank you for joining the water second quarter 2020 earnings call. We hope that you are safe and well and appreciate your making time to listen.
Joining me today on the call is Rob Holly, our Chief Financial Officer.
I will first give an overview of the quarter, including commentary on our underwriting and investment results.
Rob will then follow with a more detailed review of our financials.
Next I will give an update on our status with the rating agencies and our ex area acquisition.
Ben after some concluding remarks, we will answer questions from the equity analysts.
For any individual investors with questions that are to address today, we'd be happy to arrange a follow up call with each of you.
Despite the continued backdrop of significant economic and healthcare related turmoil.
Watford showed us resilience and delivered a strong financial performance.
For the second quarter of 2020, we recorded net income of $188.8 million.
Our GAAP results benefited significantly from the recovery and the credit investment markets and the resulting improved in valuation in our asset portfolio.
After including other comprehensive income of 23 million related to improvements in our investment grade portfolio.
Our book value grew by 38% or $10.61 per diluted share.
Largely recovering the mark to market induce decline, we booked in the first quarter.
Starting with our underwriting results.
Our adjusted combined ratio, which removes certain corporate and non recurring expenses and include other underwriting income was up 104.7%.
Our loss reserves for prior accident years held up well with essentially flat development for the quarter on an overall basis.
There were pockets of favorable and unfavorable development, we feel good about our aggregate reserve position.
Included in our underwriting results as a $5.2 million provision for cobot related underwriting losses.
Lets exclusively arising from business interruption coverage and our property catastrophe line of business.
This provision added approximately four points to this quarters combined ratio.
Net of the covered losses, our adjusted combined ratio would have been just under 101%.
Our premium revenues are down for the quarter as a result of the continued reshaping of our underwriting portfolio.
Plus the impact from a shrinking economy arising from the global pandemic.
These impacts were partially offset by increases in rates.
Further bolstered on a risk adjusted basis by improved terms and conditions.
For the quarter.
Net earned premium has dropped $9 billion relative to last quarter and by approximately 20 million in comparison with the second quarter of 2019.
Part of this reduction is attributable to the two large casualty reinsurance deals we have noted on prior calls.
Being a large impact on our premium and quarterly results.
We have gradually reduced our exposure to these transactions over the years.
So that they both contributed less and less premium revenue each quarter.
Exacerbating the impact one of these cedents reported a negative premium adjustment for older underwriting years, resulting in a reduction of approximately 4 million in casualty reinsurance premium for the quarter.
Our written premium has also decline for certain insurance and reinsurance exposures as a result of the cobot 19 shutdowns and the associated reduced economic activity.
For example across our entire UK motor insurance portfolio. We currently expect a premium reduction of around 5% for the year from our initial estimates.
In addition, we've reduced our premium estimates for certain us commercial auto clients as original premium projections contemplated more economic activity than we believe is now likely given the current environment.
Finally, our premium revenue was a bit lower due to a U.S. insurance program in which the underlying insured either reported lower revenues or cancer go policies altogether in the face of the economic shutdown.
Partially offsetting these reductions are strengthening premium rates.
Growth in our United States insurance platforms continues where we are seeing robust rate increases, particularly in commercial auto.
As noted last quarter, our UK motor excess of loss reinsurance ratings continues to earn through at higher rates through the year in response to the revised Arjun rates that 2019.
Well property catastrophe is still a small part of our total writings. This line grew significantly for us in the quarter.
Well it has a small participation on our just worldwide property catastrophe excess of loss reinsurance portfolio and arch has increased its own writing as rates and this line continue to rise.
I'd now like just spend a few moments discussing the impact of cobot 19 on our loss and combined ratio.
In general we're Nonsignificant writers of lines of business that will respond directly to cobot losses.
This quarter, we booked $5.2 million per business interruption losses stemming from our quota share participation in our just property catastrophe portfolio.
Our loss bookings reflect the arch estimation process and kids that are the underlying commercial risk covered.
The jurisdiction other students the strength of the policy wording as well as the losses recorded to date.
There continues to be significant uncertainty with business interruption losses for the entire industry.
Very few cobot related claims have been reported to us to date.
Accordingly over 90% of our Cobot related reserve estimate is held an I'd NR.
In terms of our exposure to lines of business that are potentially indirectly affected by cobot, our largest lines, our personal and commercial auto liability in the United States UK and Europe.
As expected the frequency auto claims appears to be down sharply during the locked down as well as to the reopening of the world economies during the second quarter.
However, given the uncertainty and potentially higher severity is caused by either driving at higher speeds or delays and claim settlement due to work disruptions. We have not moved from our initial loss picks for these businesses.
It is important to note a large portion of the primary UK motor insurance that we write a sliding scale commission provisions with our producers.
These deals downward movement and losses will be partially offset by increases in the commission, we pay to those producers.
If the experienced develops favorably.
This will make our estimated margin for these deals more certain but would not necessarily lower our overall combined ratio.
Finally, I'd like to note that our cobot provision is for claims that have already occurred consistent with all of our loss reserves. We have not include provisions for accidents or events that have not yet occurred.
There is still considerably uncertainty or the potential cobot exposure across the industry.
As always we will continue with our reserving philosophy of reacting to bad news quickly I think good news prudently.
Turning to our investments.
Net interest income was strong and steady at over $27 billion.
Coupon income continues to contribute to the stability of our business and as a long term driver of value to Watford stakeholders.
Fluctuations in Mark to market valuation have only a limited impact on our daily operations as we continue to underwrite a relatively stable portfolio of insurance and reinsurance exposures, coupled with a steady interest income from our investment portfolio.
That said we're of course very pleased to report our net investment income totaled almost $200 million for the quarter or a 10% return on net assets.
Realized and unrealized gains for the quarter totaled $172 million.
In addition, our book value increased from a recovery and the mark to market valuation and our investment grade portfolio with an additional 23 million benefit and other comprehensive income.
The investment grade recovery was primarily related to a recovery and our COO assets, reflecting the favorable structure and security of these investments.
I would now like to make a few observations on the non investment grade portfolio.
We believe that our overall portfolio continues to be well constructed and I will point to some shifts we have made in the quarter.
Referencing the breakdown by asset class industry and rating that we are supplied last quarter, you could know a general increase in bonds as well as a higher allocation to better rated instruments.
In the quarter Hps has repositioning a portion of the portfolio to what we believe is a better overall risk profile.
Opportunities erosion in the quarter to buy investment grade and near investment grade bonds with very attractive risk adjusted yields.
Well some of these securities maybe in the quote unquote cobot red industry classes. These each share some combination of significant collateral.
Shorter dated maturities.
Double b or triple B ratings, and very good market liquidity profiles.
You can see that our breakdown shows an increase in triple C and lower rated instruments.
Which might seem to indicate a deliberate shift into riskier assets.
However, this is not really the case.
During the quarter, we did have some of our double B and single B rated securities downgraded by the relevant rating agencies.
Recall that the hps portfolio managers do their own deep fundamental analysis on each issuer and therefore the rating agency grade does not necessarily reflect hbss view of the underlying credit quality.
In fact, despite the rating downgrades the market valuation most of these instruments rose during the quarter.
A combination of the shifting of these assets to a lower rating bucket at higher market valuation coupled with the valuation recovered in the credit is already in this bucket explains the apparent increase in exposure.
While we are pleased with the significant recovery and valuation along with the opportunity to deploy assets into a better credit spread environment. We believe that the current economic climate is still highly uncertain.
Accordingly in addition to the Opportunistically redeploying assets into better rated credits, we have withdrawn just over $100 million from our non investment grade portfolio.
The proceeds from this withdraw we're used to pay down our borrowings for underwriting collateral.
This further reduces our capitals exposure to another shock and the investment markets as well as allows for savings and our cost of underwriting collateral.
We believe that this shift in the asset side of our portfolio combined with the hardening insurance marketplace physicians, Watford well for the opportunities in front us.
With this introduction I will turn the call over to Rob It will give a more detailed review of our financial results.
Thank you John Good afternoon, everyone and thank you for joining us today I'd like to provide you with some commentary and observations on our financial results for the second quarter 2020.
Net income after payment of taxes and preferred dividends for the quarter was 188.8 million or $9 at 51 cents per diluted common share.
The net income reflects net investment income of 199.5 million, an underwriting loss of 9.7 million, including other underwriting income.
Debt plus preferred expenses of 4 million.
The 2.7 million net foreign exchange gain and the deferred tax credit of point 4 million.
As discussed on prior calls it's important to note that within the statement of comprehensive income or loss resides unrealized holding gains on the investment grade available for sale portfolio, which this quarter was 23 million inclusive of an unrealized net foreign exchange gain for the quarter of point Threemillion.
Return on average equity for the quarter was 28.2%.
Book value per diluted share at June Thirtyth was $38.82, which represents a 37.6% increase from March 31 2020.
The book value growth can be attributed to the second quarter Mark to market recovery in our investment portfolio as John detailed earlier.
Moving to our underwriting results for the quarter gross premiums written for the second quarter of 2020 157.9 million a decrease of 3% were 4.1 million versus the same quarter last year.
Premium growth in insurance programs in co insurance in property catastrophe reinsurance was offset in part by reductions in casualty and other specialty reinsurance.
Casualty and other specialty reinsurance gross premiums written were down, 23% and 44% respectively over the prior year quarter.
The casualty reinsurance decrease is primarily due to the continued impact of the 2019 first quarter non renewal of the one multi line quota share contract as well as the continued impact gradually reduced participations overtime on one cedents professional liability reinsurance program, which was non renewed.
In the second quarter of 2020.
In addition, the multiline contract previously noted included a $4 million negative premium adjustment for older underwriting years in both contracts had premium written and earned in 2019 with much less comfortable premium in 2020 due to the Nonrenewal and reductions.
Partially offsetting these premium decreases the casualty line grew its UK motor excess of loss writings as a result of significant rate increases.
The other specialty reinsurance premium year over year decrease is attributed to a 6.2 million contract written and earned in the prior year quarter with no comparable written premium this quarter.
In addition, mortgage reinsurance premiums decreased as a result of the reduction in our exposure to us more mortgage risk that we noted on our last earnings call, which became effective this quarter lastly, we reduced our premium estimates on certain commercial auto quota share programs.
Premium estimate reductions with partially driven by reduced economic activity related to coded 19.
Property catastrophe gross premiums were up 90% over the prior year quarter. Our primary involvement in this line of business is a 7% quota share participation of arch Reis will worldwide property catastrophe excess of loss portfolio.
Recently arch has been increasing their property catastrophe writings in response to an improving rate environment. As a result, our premiums have grown in proportion.
Insurance programs in coinsurance growth of 17% was due to the continued expansion of our European in U.S. businesses.
We had growth in both the us in European platforms this quarter.
Premium growth in the U.S. was driven by increased writings for commercial auto where we are seeing significant rate improvement.
This growth was partially offset by premium reductions in one us insurance program in which the underlying insured side the reported lower revenues or cancel their policies in the face of economic shutdown.
Gross premiums ceded grew 9.5 million to 52.1 million at 22% year over year increase we are purchasers of third party reinsurance for insurance programs and co insurance lines as our gross premiums written have grown in these insurance lines. The outwards ceded premiums have grown.
In proportion.
Earned premiums decreased 19.8 million or 13% to 131.5 million.
The decrease was driven by earned premium reductions in casualty and other specialty reinsurance totaling 32.1 million.
Offset impart by 9.6 million insurance programs and co insurance earned premium increase.
The reduction in casualty earned premium.
It was driven by the two casualty contracts, partially offset by growth in one use excess casualty contract.
The decrease in other specialty reinsurance or premium is driven by the 6.2 million nonrecurring contract and reduction in mortgage exposure previously mentioned.
The insurance earned premium increase can largely be attributed to increased us commercial auto writings.
The Q2 combined ratio was 108%.
4.5 points higher in the same quarter last year the increase in the combined ratio can primarily be attributed to a loss ratio increase of 6.1 points.
Offset in part by decrease in the acquisition expense ratio of one point versus the prior year quarter.
The increase in loss ratio is primarily driven by the previously mentioned provision for current period Kobin related losses that are property catastrophe business equating to 5.2 million or four points.
In comparison to the prior second quarter, the general and administrative expense ratio decreased 2.6 points to 5.9%.
You'll recall the prior year second quarter General and administrative expense figure included certain long term incentive compensation expenses, including a onetime accelerated compensation expense with no comparable amount this quarter.
Moving to our investment results for the quarter.
The second quarter net investment income of 199.5 million was driven by unrealized gains in the non investment grade portfolio of 178.1 million as the credit markets, partially recovered through the quarter.
The earnings provided by net interest income was 27.4 million as noted in prior calls net interest income is an important long term driver of our book value growth.
The second quarter 2020, net interest income yield for the entire portfolio was 1.4%.
Inline with the first quarters yield and slightly higher than the 1.2% yield achieved in the second quarter of 2019.
Focusing now.
On a non investment grade portfolio.
Net interest income in the quarter was 25.7 million versus 26.2 million last quarter.
The slight decrease in net interest income this quarter can be attributed to the portfolio shift just described by John into a lesser extend a decrease in LIBOR through the second quarter.
In regard to our investment grade portfolio. The net interest income yield of 0.4% in the quarter was in line with the prior quarter interest income yield is slightly lower than the 0.6% second quarter 2018 yield.
Our net investment income this quarter included 8.9 million.
Of net realized gains on investments.
The investment great results reflect collateral management actions in the quarter.
We sold certain assets that were held in collateral trust as the collateral requirements had changed given the interest rate movements in the quarter. These assets were sold in a realized gain position.
We utilized a portion of the proceeds to pay down borrowings for underwriting collateral.
And then redeploy the remaining proceeds into different portfolios in a lower rate environment.
To be clear this pay down of borrowings for underwriting collateral is in addition to the non investment grade withdrawal subsequent paydown mentioned by John earlier.
As of the ended June the ending balance sheet net unrealized loss position for the combined non investment grade and investment portfolios was 185.4 million.
The net unrealized gain recovery this quarter was driven by recovery in term loans asset backed securities and corporate bonds as the credit markets improved through the quarter.
Lastly, I will touch on our capital and debt leverage management.
Debt to total capital ratio was 17.2% at June Thirtyth 2020.
And the debt plus preferred to total capital ratio was 22.4%.
The significant improvement in these ratios versus the prior quarter was driven by unrealized investment gains recognized this quarter.
Borrowings overall decreased by 104 million to 472 million versus the prior quarter.
The borrowing balance for underwriting collateral decreased 165 million to 163.7 million, while non IBG borrowings have increased 60.9 million to 308 million.
The borrowing for underwriting collateral balanced decrease reflected both investment grade collateral management actions and the withdrawal from the non investment grade portfolio mentioned earlier.
You'll recall that the onset of the cobot pandemic in March we halted or share repurchase program.
We did not purchased any shares in the second quarter and our repurchase authorization remains at 47.1 million.
When there is visibility and more certainty in the global economies, we will reassess this decision.
In conclusion.
Our balance sheet capital and leverage position is strong and 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 for analysts questions I have a few concluding comments.
First a brief update on eggs area.
We continue working on closing our acquisition of Big area, the French property and casualty writer that we entered into a purchase agreement to acquire late last year.
The acquisition is subject to regulatory approval, which had not yet then received.
We will provide further disclosure when we have.
Details to report.
Next a brief update on our ratings.
You know are a minus rating with and best with given an under review with negative implications designation view with negative implications designation in April and our a rating with Kroll Bond rating agency, a watch downgrade designation and bag.
Both were direct result of the Mark to market investment losses, we suffered because of the tremendous market turmoil related to the cobot pandemic and the worldwide economic shutdown.
We're pleased to report that in June our a rating was reaffirmed micrel, although with a negative outlook.
The negative outlook as partially related to the uncertainty in the world economies due to the current pandemic.
We are not certain when and best will complete this review of our ratings, but expect that the situation will be resolved and the next few months.
Recall that and best and their press release that the under review status was expected to resolve when our risk adjusted capitalization was restored.
While we cannot predict what they invest will conclude we believed that this quarter's significant increase in our capitalization coupled with a reduction and mortgage exposure. We noted on last quarters earnings call.
Should be viewed as a positive from a credit standpoint.
In conclusion, we're very pleased with this quarter's results in the quarter.
Our investments substantially recover their market value, while continuing to deliver the stable interest income that is core to our strategy.
Next our book value rebounded significantly and we've taken steps to adjust the investment portfolio to continue to deliver steady coupon income with less downside risk to capital.
Our cobot underwriting loss exposure has thus far been limited that we continue to be cautious with our estimates.
And finally, we believe our platforms in the United States insurance.
European insurance, Bermuda reinsurance are well positioned and fast improving underwriting market.
Hopefully from our discussion today, you have a sense for how the business is positioned.
With that we're pleased to take questions from the Atlas.
Thank you as a reminder to ask a question you will need some press Star then one on your touched on telephone to withdraw your question from the Q. Please press the pound key.
Please standby will become part of the Q in a roster.
Our first question comes from public things on with JP Morgan. Your line is now open.
Hi, John.
I was wondering if you could address one of the concerns raised by some of your shareholders. So if you look at Watfords historical recurrence in recent years, taking out the impact of realize marks you get somewhere the range of a mid single digit Ari and the combined ratio has consistently been above 100, which compares unfavorably do reinsurance tier.
Yes.
I was hoping that you could speak to any actions youre contemplating are executing to bridge that gap, whether its business mix and that's the strategy capital deployment potentially reviewing your service agreements are tranche B us and I guess more importantly, what you see is sustainable long term already for Watford.
Sure. Thank you Paula and thank you for to participating.
We added into the Watford strategy continue that it's been we strong believers that leveraging the expertise of arts and hps and balancing the opportunities on each side are you going to be key to driving long term investor value.
I mean, just this quarter within the hps portfolio, you've seen that we've acquired or we have recovered a substantial portion the first quarters mark to market movements and reposition our portfolio, while continuing to have the same level of coupon income, which is core to our to our strategy.
On the underwriting side whoppers now facing the hardest insurance market since we started and possibly well before that.
I think the investments we've made over the years in a reinsurance operations in Bermuda.
Developing our DNS and admitted carrier in the us.
As well as developing the insurance platform in Europe, really well positioned that allows us to take to capitalize on insurance market in front of us.
And as you know and just as a reminder, that more than $5 billion, a new capital that is seeking to develop the exact insurance platforms and business relationships that Watford already enjoys and we're already writing today.
Overall, we see continued opportunity to expand our underwriting margins through 2020 and beyond.
And lastly, the thing is is who were partnering with.
Arch is that it has a demonstrated expertise and cycle management and we believe that the right partner to take advantage on a rig opportunities in front of us.
So these are the reasons, we believe the strategy will drive long term investor value.
Okay, and I guess as a fall to that so arch has a couple of other third party capital vehicles like Premia anniversary. Neither as large as you are exactly in the same lines of business.
I guess from your perspective, and obviously Thats before argument can you give us a sense of how you see yourself fitting into our show overall third party capital strategy and should we assume that youre remain.
Our primary partner until your service agreement for them expires, and if not sort of letter the puts and takes a fair revising our bringing that agreement that the mid term.
So we obviously can't comment on kind of an arduous perception as.
Watford relative to other to the other.
Vehicles that as sponsors.
I think for US we still continue to believe that we are core to the art strategy.
For many reasons, we've articulated over the years.
Some of the that being able to.
Having arts being able to service kind of more clients with additional paper, we think is strategically important for them.
I think we continue to believe that within platforms we've developed.
At this year that arts is the right partner for us.
The service agreement that we have.
And you through leaves 2025.
And I think were relatively happy with the with the performance than in a given insurance markets in front of US we anticipate.
The ability to drive underwriting margins better than we've been able to do historically.
Okay, and then last for me on the investment portfolio.
I think public high yield and leverage loan indices are showing quarter to date return for about 3% is that sort of more or less consistent with what you're seeing internally.
We.
We were we can't give we only report on our investment results quarterly.
Lot of work, we need to do to close the portfolios accurately I think you're right that when we look at the public to public marks.
I think last I checked the to high yield unlevered on indexes the spreads have shrunk somewhere between 7100 basis points.
So in general kind of high yield market is continue to improve through to the did a month.
Okay. Thanks.
Thank you and our next question comes.
At Morgan Stanley airline is now open.
Thanks, Hey can you guys have me okay.
Yes, thanks, Nick Okay. Good thank goodness.
I heard your comments on my questions on the property cat reinsurance comments and.
I will see the arch growth areas.
Is impacting you guys as well but.
It's not just on this quarter, it's been a few quarters in a row.
Pretty strong kidney pretty strong growth area. So.
Doug just double check.
Hey is it's now.
Volume being part of your book, but it's much harder that was just a year ago. So.
Anything more strategic there that you think about as a longer term that's in our you want to focus on or is it more just the seasonality in the current environment for reinsurance and if it's not that if it is more strategic how that affects your how your investment strategy. That's more casualty long term focus on the only investments.
Yes, that's a good it's a good question, Mike I think.
Being partnered with Arts means that we end up following the exact under arch underwriting philosophy, which is trying to take advantage of market opportunities as they arise.
We have we have and will continue to have a longer tail. The casualty focused portfolio. However, since we started back in 2014 that property cat market has has gotten harder and harder and that's particularly over the last couple of years.
So we have grown our book in property Cat.
And I think we still have our own self imposed guidelines as to how much overall property cat risk we have will take.
And we still actually quite a bit of room before we kind of hit those guidelines. So what I would say is overall as you know with Harding property Cat market. You can continue you can expect us to continue to grow.
May be significantly relative to where we are but it will never be kind of a dominant piece of what Robert is.
Yes.
In the market the property cat market hard.
Significantly more on where the where they are today, but when I say today as we're just taking advantage of what's in front of us.
And as rates can if rates will continue to grow you can maybe see us take some incrementally more cap.
Okay. Thanks, maybe even a higher level on on the investments.
I guess given all the market volatility we've had this year because it does it make you kind of re thanks, if the overall strategic view of how you invest and your sister strategy, there and it's been it's been pretty volatile on.
Just thoughts on just overall strategy there.
PS and what it means given the market term what we've seen.
Yes, that's a good question indicated.
You can see we've taken some actions just within the quarter and it's much more about kind of the mark to market.
Impact on capital and in some of it is moving into some of the higher rated credits submitted with 100 million dollar withdraw that we note that we did.
I think we're we're certainly pleased with the the recovery in the markets and the physicians we own our yet we still continue to believe it believes strongly into those positions will continue to deliver value.
But you have just within the quarter given the economic uncertainty that we have here we felt it was it.
Good time for US do both take advantage of the Mark to market increases as well as you know trying to reduce the committee the mark to market restore capital base. So long winded way of thing I think where we've made some incremental movements in the quarter in the face of the economic environment that we have but still pleased with the kind of current level of coupon income, which really is.
One of the long term driver of our of our thesis and our value to shareholders.
Okay. Thanks, and you touched on this and you're in your answer comments, maybe a little more detail we've seen.
Given the markets. We're in now that we've seen some peers do some capital raising and I guess, maybe more comments from you on your ability to take advantage and just overall your capital position to take advantage of the current market.
Sure.
So yes, there is considerable interest in the insurance marketplace today, and I think quite it somewhere around 5 billion.
Moving into the market I think where we sit today.
With our our Ns.
US give us carrier, our admitted UN carrier and being partner with arch really position does extremely well.
If there is a dislocation our continued market hardening, particularly in the us.
I think we feel the same way on the reinsurance buy side as well as a your European insurance side, and then last thing to point in terms or kind of our capitalization on a rating is.
One of the key competitive and and advantages of Watford is being able to sit behind arch in certain instances where business may flow to arch.
Because of their a plus rated paper.
There will be there's opportunities for us to participate on that sort of business, particularly in insurance hardening insurance marketplace, which we difficult for us to do more as a standalone carrier. So we think we're very well positioned.
To take advantage of this marketplace and present itself and frankly, we're looking forward to being active participants.
Okay. Thanks, John appreciate.
Okay. Thank you Mike.
Thank you and we have follow up question from Pablo things along with JP Morgan. Your line is now open.
Hey, Pablo.
Right.
It does look like maybe he dropped as it.
Oh, sorry about that can you hear me now.
Yes, we can thank you.
Perfect sorry about that so the first question I had was picked can you quantify how much of a drag LIBOR has been for your interest income and I guess, how much if I had been do you see going forward. So I.
I think you said in the past or floating rate assets are subject to floor and is it seem that most of them reach minimum then the second part just given the dramatic decline in LIBOR.
That's right. So I think if this is from memory if I'm LIBOR I think was close to 180 190 basis points at the beginning in the year LIBOR, certainly going to well less than one at this point most of the most of the security that we own.
Do you have LIBOR floors of about 100 basis points. So they want to hit those and a probably still sitting at the 100 basis points. This plant.
Got it.
And then John I, just wanted pop in your comments about the sliding commissions on a personal auto book.
And I guess my question is if you take a look up the primary base use of writers and you're seeing a couple of hundred basis point improvement in their combines year over year bixler frequency I presume that somewhat similar in Europe.
It seems like from your comments at most of that incremental value will be at retained by the primary companies is that correct.
By the print.
By the producers and I'm not sure if we call. It necessarily retained there we will be will pay them higher ceding commission RC or higher sliding admission.
For producing that I've got to.
Lower loss ratio.
Got it okay. Thank you.
Okay.
Thank you are our next question comes in Matt Carletti with JMP Securities. Your line is now open.
Hey, Thanks, good afternoon.
Just how well you have just want to fall, but your comments about the share repurchases and I. Appreciate that you pause thing given the heightened uncertainty in the current environment.
But as we move forward as.
Certainty kind of returns with time.
Can you help us understand kind of how you evaluate the two options in terms of.
The insurance and reinsurance market opportunities that are available to you and what those returns look like against kind of what that lease on the surface looks like pretty significant returns buying back your stock at least at what the moment is less than half of book value and how you how you balance those two items.
Matt This is John I'll try and take a first stab at this one.
One of things, we do believe it taking advantage of this hardening insurance marketplace with arch.
Is going to be a key driver of future franchise value and that will be a key driver, but kind of long term shareholder value that we that we'd like to be able to deliver.
Sitting here today, we're very cognizant of the insurance ratings and client perception are important pieces on for us to be able to deliver that value.
So given the economic uncertainty and I think we've mentioned that we didn't take what we've made some incremental improvement on our investment portfolio to reduce our mark to market risk.
Yeah, I think we feel currently today, given the economic uncertainty that pausing the buyback program makes sense.
And I think it will allow us to really kind of deliver the value that we're hoping to deliver when things get a little more certain.
It is kind of the shares of prior trading where they are I think they were I want my kind of continue to present compelling value for us and we'll reevaluate than when we get there.
Okay, great. Thank you.
Thank you.
Thank you I'm showing no further questions in the queue at this time I'd like to turn the call back the speakers for any closing remarks.
Terrific. Thank you all for listening participating our call today on behalf of Whopper team with you in your families. All the best of health.
They enjoy was left in the summer and we look forward to reconnecting with the fall. Thank you have a great day.
Ladies and gentlemen, thank you for your participation on today's conference.
Include your program and you may now disconnect.
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Good day, ladies and gentlemen, and welcome to the Walport Holdings second quarter earnings Conference call. As a reminder, this conference call is being recorded.
Before the company gets started with an update management wants to first remind everyone that certain statements discussed on this call may constitute forward looking statements under the federal Securities law.
These statements are based upon management's current assessment and assumptions that are subject to the number of risks and uncertainties.
Consequently, actual results may differ materially from those expressed or implied.
For more information on the risks and factors that may affect 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 the call that are not based on historical facts.
Our 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 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 portfolio components.
The company's investment returns can be found in the company's current report on form 8-K furnished to the FCC yesterday, which contains the Companys earnings press release and is available on the company's website.
I would not like to introduce your host for todays conference Mr., John Levy CEO of what foot Holdings, you may now begin.
Thank you Dylan.
Good afternoon, everyone.
Thank you for joining the water second quarter 2020 earnings call. We hope that you are safe and well and appreciate your making time to lessen.
Joining me today on the call, it's Rob Holly, our Chief Financial Officer.
I will first give an overview of the quarter, including commentary on our underwriting and investment results.
Rob will then follow with a more detailed review of our financials.
Next I will give an update on our status with the rating agencies and our ex area acquisition.
Then after some concluding remarks, we will answer questions from the equity analysts.
There are any individual investors with questions that are to address today, we'd be happy to arrange a follow up calls with each of you.
Despite the continued backdrop of significant economic and healthcare related turmoil.
Watford show, just resilience and delivered a strong financial performance.
But the second quarter of 2020, we recorded net income of $188.8 million.
Our GAAP results benefited significantly from the recovery and the credit investment markets and the resulting in improved in valuation and our asset portfolio.
After including other comprehensive income of 23 million related to improvements in our investment grade portfolio.
Our book value grew by 38% or $10.61 per diluted share.
Recently recovery the mark to market induce decline, we booked in the first quarter.
Starting with our underwriting results.
Our adjusted combined ratio, which removes certainly corporate and nonrecurring expenses and include other underwriting income was up 104.7%.
Our loss reserves for prior accident years held up well with essentially flat development for the quarter on an overall basis.
There were pockets of favorable an unfavorable development, we feel good about our aggregate reserve position.
Included in our underwriting results as a 5.2 million dollar provision for cobot related underwriting losses, almost exclusively arising from business interruption coverage and our property catastrophe lineup business.
This provision added approximately four points to this quarters combined ratio.
Net of the covered losses, our adjusted combined ratio would have been just under 101%.
Our premium revenues are down for the quarter as a result of the continued reshaping our underwriting portfolio.
Plus the impact from a shrinking economy arising from the global pandemic.
These impacts were partially offset by increases in rates.
Further bolstered on a risk adjusted basis by improved terms and conditions.
For the quarter.
Net earned premium has dropped $9 billion relative to last quarter and by approximately 20 million in comparison with the second quarter of 2019.
Part of this reduction is attributable to the two large casualty reinsurance deals we have noted on prior calls.
Being a large impact on our premium and quarterly results.
We had gradually reduced our exposure to these transactions over the years.
So that they both contributed less and less premium revenue each quarter.
Exacerbating the impact one of these events reported negative premium adjustment for older underwriting years, resulting in a reduction of approximately 4 million in casualty reinsurance premium for the quarter.
Our written premium has also declined for certain insurance and reinsurance exposures as a result of the cobot 19 shutdowns and the associated reduced economic activity.
For example across our entire UK motor insurance portfolio. We currently expect a premium reduction of around 5% for the year from our initial estimates.
In addition, we've reduced our premium estimates for certain U.S. commercial auto clients as original premium projections contemplated more economic activity and we believe is now likely given the current environment.
Finally, our premium revenue was a bit lower due to a U.S. insurance program in which the underlying and charge either reported lower revenues or cancer go policies altogether in the face of the economic shutdown.
Partially offsetting these reductions are strengthening premium rates.
Growth in our United States insurance platforms continues where you're seeing robust rate increases, particularly in commercial auto.
As noted last quarter, our UK motor excess of loss reinsurance writings continues to earn through at higher rates through the year in response to the revised Ogden rates that 2019.
Well property catastrophe is still a small part of our total writings. This line grew significantly for us in the quarter.
A lot, but has a small participation on our just worldwide property catastrophe excess of loss reinsurance portfolio and arch has increased its own writing as rates and this line continue to rise.
I'd now like just spend a few moments discussing the impact of cobot 19 on our loss and combined ratio.
In general we're Nonsignificant writers of lines of business that will respond directly to cope with losses.
This quarter, we booked $5.2 million for business interruption losses stemming from our quota share participation in our just property catastrophe portfolio.
Our last bookings reflect the arts estimation process kits that are the underlying commercial risk covered.
The jurisdiction other students the strength of the policy wording as well as the losses recorded to date.
Continues to be significant uncertainty with business interruption losses for the entire industry.
Very few covered related claims have been reported to us to date.
Accordingly over 90% of our Cobot related reserve estimate is held an I'd NR.
In terms of our exposure to lines of business that are potentially indirectly affected by cobot, our largest lines, our personal and commercial auto liability.
It is dates UK and Europe.
As expected the frequency auto claims appears to be down sharply during the lock down as well as to the reopening other world economies during the second quarter.
However, given the uncertainty and potentially higher severity is caused by either driving at higher speeds or delays in claims settlement due to work disruptions. We have not moved from our initial loss picks for these businesses.
It is important to note a large portion of the primary UK motor insurance that we write a sliding scale commission provisions with our producers.
These deals downward movement losses, well at least be partially offset by increases in the commission we paid to those producers.
If the experienced a belts favourably.
This will make our estimated margin for these deals more certain but will not necessarily lower our overall combined ratio.
Finally, I'd like to note that our cobot provision as Rick claims that have already occurred consistent with all of our loss reserves. We have not include provisions for accidents or events that up not yet occurred.
There is still considerably uncertainty or the potential cobot exposure across the industry as always we will continue with our reserving philosophy of reacting to bad news quickly and the good news prudently.
Turning to our investments.
Net interest income is strong and steady at over $27 billion.
Coupon income continues to contribute to the stability of our business and as a long term driver of value to Watford stakeholders.
Fluctuations and Mark to market valuation have only a limited impact on our daily operations as we continue to underwrite a relatively stable portfolio of insurance and reinsurance exposures, coupled with a steady interest income from our investment portfolio.
That said we're of course very pleased to report our net investment income totaled almost $200 million for the quarter or a 10% return on net assets.
Realized and unrealized gains for the quarter totaled $172 million.
In addition, our book value increased from a recovery and the mark to market valuation and our investment grade portfolio with an additional 23 million benefit and other comprehensive income.
The investment grade recovery was primarily related to a recovery and our COO assets, reflecting the favorable structure and security of these investments.
I would now like to make a few observations on the non investment grade portfolio.
We believe that our overall portfolio continues to be well constructed and I will point to some shifts we have made in the quarter.
Referencing the breakdown by asset class industry and rating that we are supplied last quarter. You can note a general increase in bonds as well as a higher allocation to better rated instruments.
In the quarter Hps has repositioned a portion of the portfolio to what we believe is a better overall risk profile.
Opportunities arose in the quarter to buy investment grade and near investment grade bonds with very attractive risk adjusted yields.
Well some of these securities maybe in the quote unquote cobot red industry glasses beat each share some combination of significant collateral.
Shorter dated maturities.
Double b or triple B ratings, and very good market liquidity profiles.
You can see that our breakdown shows an increase in triple C and lower rated instruments.
Which might seem to indicate a deliberate shift into riskier assets.
However, this is not really the case.
During the quarter, we did have some of our double B and single B rated securities downgraded by the relevant rating agencies.
Recall that the hps portfolio managers do their own deep fundamental analysis on each issuer and therefore the rating agency grade does not necessarily reflect hps view of the underlying credit quality.
In fact, despite the rating downgrades that market valuation most of these instruments rose during the quarter.
A combination of the shifting of these assets to a lower rating bucket at a higher market valuation.
But the valuation recovered and the credits already in this bucket explains the apparent increase in exposure.
While we are pleased with the significant recovery and valuation along with the opportunity to deploy assets into a better credit spread environment. We believe that the current economic climate is still highly uncertain.
Accordingly in addition to Opportunistically redeploying assets and a better rated credits we have withdrawn just over $100 million from our non investment grade portfolio.
The proceeds from this withdraw for used to pay down our borrowings for underwriting collateral.
This further reduces our capitals exposure to another shock in the investment markets as well as allows for savings and our cost of underwriting collateral.
We believe that this shift in the asset side of our portfolio combined with the hardening insurance marketplace positioned swap pretty well, but the opportunities in front us.
With this introduction I will turn the call over to Rob will give a more detailed review of our financial results.
Thank you John Good afternoon, everyone and thank you for joining us today I'd like to provide you with some commentary and observations on our financial results for the second quarter 2020.
Net income after payment of taxes and preferred dividends for the quarter was 188.8 million or $9.51 per diluted common share. The net income reflects net investment income of 199.5 million, an underwriting loss of 9.7 million, including other underwriting income.
Plus preferred expenses of 4 million.
At 2.7 million net foreign exchange gain and the deferred tax credit of point 4 million.
As discussed on prior calls it's important to note that within this statement of comprehensive income or loss resides unrealized holding gains on the investment grade available for sale portfolio, which this quarter was 23 million inclusive of an unrealized net foreign exchange gain for the quarter of point Threemillion.
Return on average equity for the quarter was 28.2%.
Book value per diluted share at June Thirtyth was $38.82, which represents a 37.6% increase from March 31 2020.
The book value growth can be attributed to the second quarter Mark to market recovery in our investment portfolio as John detailed earlier.
Moving to our underwriting results for the quarter gross premiums written for the second quarter of 2020 were 157.9 million a decrease of 3% were 4.1 million versus the same quarter last year.
Premium growth in insurance programs and co insurance and property catastrophe reinsurance was offset in part by reductions in casualty and other specialty reinsurance.
Casualty and other specialty reinsurance gross premiums written were down, 23% and 44% respectively over the prior year quarter.
The casualty reinsurance decrease is primarily due to the continued impact of the 2019 first quarter non renewal of the one multi line quota share contract as well as the continued impact gradually reduce participations overtime and when Cedents professional liability reinsurance program, which was non renewed.
In the second quarter 2020.
In addition, the multi line contract previously noted included a $4 million negative premium adjustment for older underwriting years in both contracts had premium written and earned in 2019 with much less comfortable premium in 2020 due to the non renewal and reductions.
Partially offsetting these premium decreases the casualty line grew its UK motor excess of loss writings as a result of significant rate increases.
The other specialty reinsurance premium year over year decrease is attributed to a 6.2 million contracts written and earned in the prior year quarter with no comparable written premium this quarter.
In addition, mortgage reinsurance premiums decreased as a result of the reduction in our exposure to us more mortgage risk that we noted on our last earnings call, which became effective this quarter lastly, we reduced our premium estimates on certain commercial auto quota share programs.
Premium estimate reductions were partially driven by reduced economic activity related to Covidien 18.
Property catastrophe gross premiums were up 90 per say over the prior year quarter. Our primary involvement in this line of business is a 7% quota share participation of arteries worldwide property catastrophe excess of loss portfolio.
Recently arch has been increasing their property catastrophe writings in response to an improving rate environment. As a result, our premiums have grown in proportion.
Insurance programs in coinsurance growth of 17% was due to continued expansion of our European and us businesses.
We had growth in both the us in European platforms this quarter.
Premium growth in the US was driven by increased writings for commercial auto where we are seeing significant rate improvement.
This growth was partially offset by premium reductions in one us insurance program, which the underlying insurance either reported lower revenues or cancel their policies in the face of the economics shutdown.
Gross premiums ceded grew 9.5 million to 52.1 million at 22% year over year increase we are purchasers of third party reinsurance for insurance programs and co insurance lines as our gross premiums written have grown in these insurance lines. The outwards ceded premiums have grown.
In proportion.
Earned premiums decreased 19.8 million or 13% to 131.5 million.
The decrease was driven by earned premium reductions in casualty and other specialty reinsurance totaling 32.1 million.
Offset impart by a 9.6 million insurance programs and co insurance earned premium increase.
The reduction in casualty earned premium.
I was driven by the two casualty contracts, partially offset by growth in one use excess casualty contract.
The decrease and other specialty reinsurance earned premium is driven by the 6.2 million nonrecurring contract and reduction in mortgage exposure previously mentioned.
The insurance earned premium increase can largely be attributed to increased us commercial auto writings.
The Q2 combined ratio is 108%.
4.5 points higher in the same quarter last year the increase in the combined ratio can primarily be attributed to a loss ratio increase of 6.1 points.
Offset in part by decrease in the acquisition expense ratio of one point versus the prior year quarter.
The increase in loss ratio is primarily driven by the previously mentioned provision for current period Kobin related losses that are property catastrophe business equating to 5.2 million or four points.
In comparison to prior second quarter, the general and administrative expense ratio decreased 2.6 points to 5.9%.
You'll recall the prior year second quarter General and administrative expense figure included certain long term incentive compensation expenses, including a onetime accelerated compensation expense with no comparable amount this quarter.
Moving to our investment results for the quarter.
The second quarter net investment income of 199.5 million was driven by unrealized gains in the non investment grade portfolio of 178.1 million as the credit markets, partially recovered through the quarter.
The earnings provided by net interest income was 27.4 million as noted in prior calls net interest income is an important long term driver of our book value growth.
The second quarter 2020, net interest income yield for the entire portfolio was 1.4%.
Inline with the first quarters yield is slightly higher than the 1.2% yield achieved in the second quarter of 2019.
Focusing now on.
On a non investment grade portfolio.
Net interest income in the quarter was 25.7 million versus 26.2 million last quarter.
A slight decrease in net interest income this quarter can be attributed to the portfolio shift just described by John into a lesser extend a decrease in LIBOR through the second quarter.
In regard to our investment grade portfolio. The net interest income yield a 0.4% in the quarter was in line with the prior quarter interest income yield is slightly lower than the 0.6% second quarter 2018 yield.
Our net investment income this quarter included 8.9 million.
A net realized gains on investments.
The investment grade results reflect collateral management actions in the quarter.
We sold certain assets that were held in collateral trust as the collateral requirements had changed given the interest rate movements in the quarter. These assets were sold in a realized gain position.
We utilized a portion of the proceeds to pay down borrowings for underwriting collateral.
And then redeploy the remaining proceeds into different portfolios in a lower rate environment.
To be clear this paydown of borrowings for underwriting collateral is in addition to the non investment grade withdraw subsequent paydown mentioned by John earlier.
As of the ended June the ending balance sheet net unrealized loss position for the combined non investment grade and investment grade portfolios was 185.4 million.
The net unrealized gain recovery this quarter was driven by recovery in term loans asset backed securities and corporate bonds as the credit markets improved through the quarter.
Lastly, I will touch on our capital and debt leverage management.
The total capital ratio was 17.2% at June Thirtyth 2020.
And the debt plus preferred to total capital ratio was 22.4%.
The significant improvement in these ratios versus the prior quarter was driven by unrealized investment gains recognized this quarter.
Borrowings overall decreased by 104 million to 472 million versus the prior quarter.
The borrowing balance for underwriting collateral decreased 165 million to 163.7 million, while non IBG borrowings have increased 60.9 million to 308 million.
The borrowing for underwriting collateral balance decrease reflected both investment grade collateral management actions and the withdraw from the non investment grade portfolio mentioned earlier.
You will recall with the onset of the coven pandemic in March we halted our share repurchase program.
We do not purchased any shares in the second quarter and our repurchase authorization remains at 47.1 million.
When there is visibility and more certainty in the global economies, we will reassess this decision.
In conclusion.
Our balance sheet capital leverage position is strong and 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 for analysts questions I have a few concluding comments.
First a brief update on eggs area.
We continue working on closing our acquisition of Big area, the French property and casualty writer that we entered into a purchase agreement to acquire late last year.
The acquisition is subject to regulatory approval, which has not yet been received.
I will provide further disclosure when we have.
Details to report.
Next a brief update on our ratings.
As you know are a minus rating with and best with given an under review with negative implications designation view with negative implications designation in April and our a rating, but Kroll bond rating agency, a watch downgrade designation and bag.
Both were direct result of the Mark to market investment losses, we suffered because of the tremendous market turmoil related to the cobot pandemic and the worldwide economic shutdown.
We're pleased to report that in June our a rating was reaffirmed micrel, although with a negative outlook.
The negative outlook as partially related to the uncertainty in the world economies due to the current pandemic.
We are not certain when an best will complete its review of our ratings, but expect that the situation will be resolved and the next few months.
Recall that and best and their press release that the under review status was expected to resolve when our risk adjusted capitalization was restored.
While we cannot predict what they invest will conclude we believed that this quarter's significant increase in our capitalization coupled with a reduction and mortgage exposure. We noted on last quarters earnings call.
Should be viewed as a positive from a credit standpoint.
In conclusion, we're very pleased with this quarter's results in the quarter.
Our investments substantially recover their market value, while continuing to deliver the stable interest income that is core to our strategy.
Next our book value rebounded significantly and we've taken steps to adjust the investment portfolio to continue to deliver steady coupon income with less downside risk to capital.
Our cobot underwriting loss exposure has thus far been limited that we continued to be cautious with our estimates.
And finally, we believe our platforms in the United States insurance.
European insurance, Bermuda reinsurance are well positioned and the fast improving underwriting market.
Hopefully from our discussion today, you have a sense for how the business is positioned.
With that we're pleased to take questions from the Atlas.
Thank you as a reminder to ask a question you will need to press Star then one on your touched on telephone to withdraw your question from the Q. Please press the pound key.
Please standby will become part of the Q nay roster.
Our first question comes from Pablo things on with JP Morgan. Your line is now open.
Hi, John.
I was wondering if you could address one of the concerns raised by some of your shareholders. So if you look at Watfords historical recurrence in recent years, taking out the impact of or realize marks you get somebody the range of a mid single digit Ari and the combined ratio has consistently been above 100, which compares unfavorably do reinsurance tier.
Yes.
I was hoping that you could speak to any actions youre contemplating are executing the bridge that gap, whether its business mix and that's the strategy capital deployment potentially reviewing your service agreements and Partridge vs and I guess more importantly, what do you see is sustainable long term already for Watford.
Sure. Thank you Pablo and thanks for participating.
We ended so the Watford strategy continue that it's been leased or strong believers that leveraging the expertise of arts and hps and balance and the opportunities on each side are you going to be key to driving long term investor value.
Let me just this quarter within the Hps portfolio, you've seen that require we have recovered a substantial portion the first quarters mark to market movements and reposition our portfolio, while continuing to have the same level of coupon ankrum, which is core to our to our strategy.
On the underwriting sidewalk right now based in the hardest insurance market since we started and possibly well before that.
I think the investments we've made over the years in our reinsurance operations in Bermuda.
Developing our DNS and admitted carrier in the us.
As well as developing the insurance platform in Europe, I really well positioned that allows us to take to capitalize on the insurance market in front of us.
And as you know and just as a reminder, that more than $5 billion that new capital that is seeking to develop the exact insurance platforms and business relationships that Watford already enjoys and we're already writing today.
Overall, we see continued opportunities to expand our underwriting margins through 2020 and beyond.
And lastly, the thing is is who were partnering with.
Arch is that it has demonstrated expertise and cycle management and we believe that the right partner to take advantage on a rig opportunities in front of us.
So these are the reasons, we believe the strategy will drive long term investor value.
Okay, and I guess as a fall to that so arch has a couple of other third party capital vehicles like Premia anniversary. Neither as large as you are exactly in the same lines of business.
I guess from your perspective, and obviously the speaker argument can you give us a sense of how you see yourself that into our show overall third party capital strategy and should we assume that you remain.
Our primary partner until your service agreement to them expires, and if not sort of letter the puts and takes a fair revising our bringing that agreement that the mid term.
So we obviously can't comment on kind of an arduous perception is.
Watford relative to other to the other.
Vehicles that as sponsors.
I think for US we still continue to believe that we are core to the art strategy.
For many reasons, we particularly that over the years.
Somebody that being able to.
Having arts being built to serve as kind of more clients with additional paper, we think is strategically important for them.
I think we continue to believe that within platforms, who developed.
At this year than ours is the right partner for us.
The service agreement that we have.
Continue through 2025.
And I think were relatively happy with the with the performance and given the insurance markets in front of US we anticipate.
The ability to drive underwriting margins better than we've been able to do historically.
Yeah.
Okay, and then last for me on the investment portfolio.
I think in a public high yield and leverage loan indices are showing quarter to date, a return for about 3% is that sort of more or less consistent with what you're seeing internally.
We.
Week, where we can't give we only report encore our investment results quarterly.
A lot of work, we need to do to close the portfolios accurately I think you're right that when we look at the public the public marks.
I think last I checked the the high yielding levered on indexes the spreads have shrunk somewhere between 7100 basis points.
So in general kind of high yield market is continue to improve through through the did a month.
Okay. Thanks rich.
Thank you My next question comes.
Morgan Stanley airline is now open.
Thanks, Hey can you guys hear me okay.
Yes, Thanks, Nick Okay, Hey, guys.
So I heard your comments on my questions on the property Cat Reentering comments and.
Obviously, the arch growth there is.
Is that impacting you guys as well but.
It's not just on this quarter, it's been a few quarters in a row.
Pretty strong digitally pretty strong growth there and so.
Someone does this double check.
No.
Hey is it's now.
Well, it's part of your book, but it's much higher than it was just a year ago. So.
Anything more strategic there that you think about as a longer term. That's an area you want to focus on or is it more just the seasonality in the current environment for reinsurance and if it's not that if it is more strategic how that affects your pay your investment strategy. That's more casualty long term focus on the only investments.
Yes, thats good it's a good question, Mike I think.
Being partnered with ARX means that we end up following the exact under our underwriting philosophy, which is trying to take advantage of market opportunities as they arise.
We have we have and will continue to have a longer tailed casualty focused portfolio. However, since we started back in 2014 and property cat market has had gotten harder and harder and that's particularly over the last couple of years.
We have grown our book in property Cat.
And I think we still have our own self imposed guidelines as to how much overall property cat risk we have will take.
And we still like to quite a bit of room before we kind of hit those guidelines. So what I would say is overall as you know with Harding property Cat market. You can continue you can expect us to continue to grow.
Maybe significantly relative to where we are but it will never be kind of a dominant piece of what Robert is.
Let's.
Market that property cap markets hard.
Significantly more on whether where they are today, but what I'd say today is we're just taking advantage of what's in front of us.
And as racing if rates will continue to grow you can maybe I'll take some incrementally more cap has.
Okay. Thanks, maybe even a higher level on on investments.
I guess given all the market volatility we've had this year because it does that make you kind of re thanks for the overall strategic view of how you invest in your sister strategy. There has been it's been pretty volatile on.
Just thoughts on just overall strategy there of Hps and what it means given the market term what we've seen.
Yes, that's a good question and that it.
You can see we've taken some actions just within the quarter and it's much more about kind of the mark to market.
In fact on capital and in some of it is moving into some of the higher rated credits submitted with 100 million dollar withdrawal that we though that we did.
I think we're we're certainly pleased with the the recovery in the markets and positioned we own our yet we still continue to believe strongly into those positions will continue to deliver value.
But just within the quarter given the economic uncertainty that we have here we've got it wasn't.
Good time for US do both take advantage of the Mark to market increases as well as you know trying to reduce the study the mark to market restore capital base. So long winded way of thing I think where we've made some incremental movements in the quarter in the face of the economic environment that we have but still pleased with the kind of current level of coupon income, which really is.
Long term driver of our of our thesis and our value to shareholders.
Okay. Thanks, and you touched on this and you're in your and your comments was maybe a little more detail of we've seen.
Given the markets. We're in now that we've seen some peers do some capital raising and I guess, maybe more comments from you on your ability to take advantage and just overall your capital position to take advantage of the current market.
Sure.
So yes, there is considerable interest in the insurance marketplace today, and I think quite as some around 5 billion.
Moving into the market and I think.
Where we sit today.
With our our even ask us.
Carrier, our admitted us carrier and being partnered with arch really positions us extremely well.
If there is a dislocation our continued market Harding, particularly in the us.
I think we feel the same way on the reinsurance spas side as well to your European insurance side, and then last thing to point in terms or kind of our capitalization on a rating is.
One of the key competitive advantages of Watford is being able to sit behind arch in certain instances, where our business may flow to arch.
It would be because of their a plus rated paper.
There will be there's opportunities for us to participate on that sort of business, particularly in insurance hardening insurance marketplace.
Which would be difficult for us to do more as a standalone carrier. So we think we're very well positioned to.
To take advantage of this marketplace as it presents itself and frankly, we're looking forward to being active participants.
Okay. Thanks, John appreciate it.
No problem. Thank you Mike.
Thank you and we have follow up question from public things along with JP Morgan. Your line is now open.
Hey, Pablo.
Right.
It does look like maybe he dropped as a.
Oh, sorry about that can you hear me now.
Yes, we can thank you.
Sorry about that so the first question I had was can you quantify how much of a drag LIBOR has been for your interest income and I guess, how much if I had been DC going forward. So.
I think you said in the past our floating rate assets are subject to floor and doesn't seem that most of them reach at minimum then the second quarter, just given the dramatic decline in LIBOR.
That's right. So I think if this is from memory if I am.
LIBOR I think was close to 180 190 basis point at the beginning of the year.
LIBOR, certainly kind of well less than one at this point most of the most of the security that we own.
Do you have LIBOR floors of about 100 basis points. So they would have hit those and it probably still sitting at the 100 basis points for at this point.
Got it.
And then John I, just wanted pop in your comments about the citing commissions on a personal auto book.
And I guess my question is if you take a look at the primary base you have to writers and they're seeing a couple hundred basis point improvement in their combines year over year Bixler frequency I assume it's somewhat similar in Europe.
It seems like from your comments that most of that incremental value will be retained by the primary companies is that correct.
By the positive.
By the producers and Im not sure that we call it necessarily retained there and we we what we will pay them higher ceding commission or higher sliding admission.
For producing that got.
Over the loss ratio.
Got it okay. Thank you.
Okay.
Thank you Sir our next question comes from Matt Carletti with JMP Securities. Your line is now open.
Hey, Thanks, good afternoon.
Yes.
Just want to pop of your comments about the share repurchases and I. Appreciate that you pause thing given the heightened uncertainty in the current environment.
But as we as we move forward as certainty kind of returns with time.
Can you help us understand kind of how you evaluate the two options in terms of.
The insurance and reinsurance market opportunities that are available to you and what those returns look like against kind of what the lease on the surface looks like pretty significant returns buying back your socket at least at what the moment is less than half of book value and how you how you balance those two items.
Matt This is John I'll try and take a first ever this one.
What are the things we do believe it taking advantage of this hardening insurance marketplace with arch.
Is going to be a key driver of future franchise value and that will be a key driver, but kind of long term shareholder value that we that we'd like to be able to deliver.
Sitting here today, we're very cognizant the insurance ratings and client perception are important pieces for us to be able to deliver that value.
So given the economic uncertainty and I think we've mentioned that we didn't take we've made some incremental improvement on our investment portfolio to reduce our mark to market risk.
Yeah, I think we feel currently today, given the economic uncertainty that pausing the buyback program makes sense.
And I think it allow us to really kind of deliver the value that we're hoping to deliver when things get a little more certain.
It's kind of the shares or prior trading where they are I think they write one like kind of continue to present compelling value for us and we'll reevaluate that when we get there.
Okay, great. Thank you.
Thank you.
Thank you and I'm showing no further questions in the queue. At this time I can turn the call back the speakers for any closing remarks.
Terrific. Thank you all for listening participating our call today on behalf of Whopper team with you and your families all the best of health.
They enjoy what's left of this summer and we look forward to reconnecting with the fall. Thank you have a great day.
Ladies and gentlemen, thank you for your participation on today's conference. This does concludes your programming you may now disconnect.