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Watford Holdings Ltd. (NASDAQ:WTRE)
Q1 2020 Earnings Call
May 05, 2020, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Watford Holdings first-quarter earnings conference call. As a reminder, this conference call is being recorded. Before the company gets started with its update, management would like to remind everyone that certain statements discussed on this call may constitute forward-looking statements under 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 risks and factors that may cause future performance, investors should review periodic reports and other filings that are filed by the company with the SEC from time to time. Additionally, certain statements contained in this call 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 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 noninvestment-grade portfolio and investment-grade portfolio components of the company's investment returns can be found in the company's current report on Form 8-K furnished by the SEC yesterday, which contains the company's earnings press release and is available on the company's website. I would now like to introduce your host for today's conference, Mr. Jon Levy, CEO of Watford Holdings.

You may now begin.

Jon Levy -- Chief Executive Officer

Thank you, Catherine. Good afternoon, everyone. Thank you for joining the Watford 2020 first-quarter earnings call. Joining me on the call today is Rob Hawley, our chief financial officer.

Before we discuss this quarter, I'd like to make a few preliminary comments: First and most important, we hope that you, your families and your colleagues are safe and well. These are challenging times for all, and the COVID-19 pandemic has had a significant impact on the lives and well-being of people across the world. We'd like to express our compassion for those who have suffered due to the 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 COVID-19 on our employees and business operations.

The well-being of our extended Watford family is extremely important to us. We and our business partners at Arch and HPS responded quickly to institute work-from-home policies to enable them to continue operating in safe conditions. I am proud of our team and how they continue to deliver despite these challenging dynamics. We are keeping Watford running, issuing policies, paying claims and doing what we can to help the economy to function in this period of stress.

I would also like to acknowledge the retirement of John Rathgeber. John has led Watford since its formation and brought a steady unflappable leadership to our company. I would like to thank him personally for a smooth and effective succession planning. We are extremely pleased that 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. I'll supply some high-level commentary on our first-quarter underwriting and investment results, describe the composition of our investment and underwriting portfolios and provide our current view of the potential exposure to COVID-19 losses. Rob will then give a more detailed recap of the first-quarter financials. Following that, we would be pleased to answer questions from the equity analysts.

If there are individual investors with questions that aren't addressed today, we'll be happy to arrange follow-up calls with each of you. For the first quarter of 2020, Watford recorded a net loss of $267.8 million. Our quarterly GAAP results were significantly impacted by COVID-19's effect on the capital markets and a resulting reduced valuation on the asset side of our balance sheet. As we'll describe in more detail later, the vast majority of the loss is attributable to unrealized mark-to-market losses in our noninvestment-grade portfolio.

The impact of the COVID pandemic on our underwriting results for the quarter was immaterial. I will come to that as well. Our adjusted combined ratio, which removes certain corporate and nonrecurring expenses and other underwriting income, was 102.2%. Our loss reserves for prior accident years was essentially flat.

That has only been one quarter, the strengthening of our loss reserves we did in 2019 appears to be holding up well. Insurance market conditions are improving, and we are pleased with the resulting premium growth in the quarter. We grew in casualty reinsurance, driven by U.K. Motor excess-of-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 writings in this strengthening marketplace, particularly in commercial auto. While only a small part of our total writings, our property catastrophe line of business grew significantly in percentage terms. We participate on Arch's worldwide property cat reinsurance portfolio, and Arch has increased its gross exposure, as rates in this line continue to rise.

Overall, we are pleased with the progress in our underwriting growth. Our investments in our U.S. insurance companies are coming to fruition at a time of a hardening market. We expect to benefit from these improving conditions in both our insurance and reinsurance companies.

We continue to see compelling opportunities to write insurance in the U.K. market through WICE, our current European insurance company. Lastly, we look forward to completing our acquisition of Axeria, 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 to supply a bit more color about the potential impact from COVID-19. First, Watford either has no or de minimis premium writings in life, accident and health, event cancellation, trade credit, travel or pandemic-specific coverages, which are likely to respond directly to COVID-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 and internationally.

We believe that casualty lines are most likely to be adversely affected by COVID losses, our professional and medical malpractice liability. As we've noted on earlier calls, we have 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 write.

Our largest lines are personal and commercial auto liability in the United States, the U.K. 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 write 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 are primary and excess liability, covering exposures in the United States and internationally. While some losses could certainly emerge, we do not, at this time, see exposures that would call for an increase in our current level of IBNR.

We do believe that mortgage insurance may potentially be affected. We write U.S. mortgage risk to the GSE 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 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 is a long-term driver of value to the company. As a reminder, Watford's 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 foreseller even in a period that saw 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 have supplied breakdowns by asset class, industry, as well as rating for each of our investment-grade and noninvestment-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 end of this quarter, Watford had no direct exposure to airline issuers in our noninvestment-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 noninvestment-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 CLOs. Approximately 80% of this class is rated as investment grade. We invest in selected CLOs because they generate higher yields and benefit from a diversified pool of underlying collateral of loans; however, we recognized that these are relatively less liquid and our market valuation can trade-off meaningfully in times of stress.

These securities, particularly the investment grade, has significant structural support in the underlying collateral and can withstand high levels of underlying defaults before suffering a principal loss. Whether or not our 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 a positive outcome. While we did not provide monthly investment results, you will have seen that credit market valuations have recovered somewhat since March 31.

As a concrete example, that Crédit Suisse High-Yield Indexes spreads have recovered almost 200 basis points since March from over 1,000 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 credits in our investment portfolio are well underwritten, we are 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 U.S. mortgage risk by transferring part of that risk to other parties. This action provides economic capital flexibility for us at a time of significant macroeconomic uncertainty. While the transport business has been profitable in the last few years, given the unprecedented COVID-related events, we believe this was a prudent and responsible course of action.

In addition, we have paused our 2020 share repurchase program after a modest purchase amount earlier in the quarter. Our repurchases stopped as news about the COVID virus became better understood and its impact on the investment markets was felt. As there's 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 the AM Best placed on Watford last week.

The first point to make is that the designation of being under review is not as severe as receiving a negative outlook. AM Best can and often uses its under review designation when an insurer has had a recent event or rough change in 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 loss is sizable and certainly understand AM Best need to closely watch not just Watford, but the entire industry during these unprecedented times.

In AM Best press release, it is noted that the under review status is expected to resolve when our risk-adjusted capitalization is restored. Watford management is confident either by recovery and market valuations or by other levers that we have at our disposal, we can return to a stable outlook in AM Best size. Finally, I'd like to provide a quick update on Axeria. Our process to close this transaction continues to move forward.

The Axeria employees are currently working from home as effectively as they can for now. The shutdown in France has pushed back our time line. We currently expect to close this transaction in the third quarter of this year. As a reminder, Axeria is an established French P&C writer with quality staff and operations.

Axeria will give us an immediate presence in France, 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.

Rob Hawley -- Chief Financial Officer

Thank you, Jon, and good afternoon, everyone. I'd like to provide you with some commentary and observations on 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. The net loss reflects a net investment loss of $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 or loss resides unrealized holding losses on the investment-grade AFS portfolio of $37.9 million, inclusive of an unrealized net foreign exchange loss for the quarter of $7.7 million. Book value per diluted share at the end of the first quarter was $28.21, representing a 35% decrease from year-end 2019. During the quarter and prior to the onset of the COVID-19 pandemic, the company repurchased approximately 128,000 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 of 2020 were $234.9 million, an increase of 26% or $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% and 52%, respectively, over the prior-year quarter, primarily due to increased personal and commercial auto writings. The casualty reinsurance increase is primarily due to increased U.K. motor excess-of-loss writings, while the other specialty premium increase is primarily attributed to U.K. and Irish motor proportional business writings.

Property catastrophe gross premiums written were up 64% over the prior-year quarter. Our primary involvement in this line of business is via 7.5% quota share participation of Arch Re's 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 result, our premiums have grown in proportion.

Insurance programs and coinsurance gross premiums written grew by 29% due to the continued expansion of our U.S. insurance business. Ceded written premiums grew $6.9 million to $48.2 million, a 17% year-over-year increase. As our insurance gross premiums written have grown in our insurance programs and coinsurance line, the outward ceded premium starts have grown in proportion.

The first quarter combined ratio was 104.4%, 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 in part by a decrease in the acquisition expense ratio of three points versus the prior-year quarter. The offsetting increase in loss ratio and corresponding decrease in acquisition ratio is primarily driven by a provision for COVID-related exposure in our international mortgage business. Due to sliding scale commissions on this deal, this had an equal and 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 0.2 points to 5.1%, 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 noninvestment-grade portfolio of $285.5 million due to the investment market volatility caused by the economic dislocation resulting from the COVID-19 pandemic.

The core earnings provided by net interest income was $27.8 million. As noted in prior calls, net interest income is the 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 noninvestment-grade portfolio.

Net interest income in the quarter was $26.2 million versus $28.4 million a year ago. The net interest income yield of 1.7% was down slightly versus the first quarter of 2019. The decrease in yield was driven by a decrease in LIBOR rates and its impact on our floating rate assets, as well as the 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 of 2019.

The decrease can be attributed to the deliberate use of less investment leverage in the first quarter of 2020 and lower LIBOR rates, as mentioned above. The noninvestment-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 regards to our investment-grade portfolio, the net interest income yield of 0.5% in the quarter was in line with the yield of 0.6% recorded in the first quarter of 2019. As of the end of March, the ending balance sheet net unrealized loss position for the combined noninvestment-grade and 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 31, 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, and we believe we are well-positioned for 2020 and beyond.

With that, I'll hand it back to Jon.

Jon Levy -- Chief Executive Officer

Thank you, Rob. Before we open the call to questions, I would like to remind our shareholders to please register your votes for the proxy for our upcoming annual meeting on June 12. It is important that we receive your votes in order to achieve a quorum. If you did not receive a proxy, you can contact Rob Hawley, whose contact details are shown at the end of the earnings release.

And with that, we will be pleased to take your questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] And our first question comes from Pablo Singzon with J.P. Morgan. Your line is open.

Pablo Singzon -- J.P. Morgan -- Analyst

Hi. Sorry about that. Can you hear me now? Hello?

Jon Levy -- Chief Executive Officer

Yes, Pablo. Thank you.

Pablo Singzon -- J.P. Morgan -- Analyst

Yes. Sorry about that, guys. So the first question was just for Jon. I just wanted to follow-up with AM Best comment and risk-adjusted capitalization.

I guess, can you just provide more color on the other levers that you have described aside from the assets that you're covering the market value? And also related to that, is there a way -- or maybe can you provide us a way to think about risk-adjusted capital? Is there a way to translate your BSCR or maybe an overall assets over service measure?

Jon Levy -- Chief Executive Officer

Sure. Let me try and address that, Pablo. Thanks for the question. So just to provide a little more color on A.M.

Best, we certainly understand the need to monitor the industry. COVID-19 had a large impact on investment markets and is expected to have a large impact on underwritings and also the industry. I think on a positive and as we've noted on the call, we expect that our underwriting footprint is less material than some of our peers. But we do recognize that we frankly -- the mark-to-market investment loss that we have was sizable.

I think it's important to note again that the mark-to-market losses that we suffered are well within our risk profile. And from a pure capital standpoint, we've met AM Best's risk-adjusted capital requirements at the end of the year 2019, and we expect to meet it again at the end of year 2020. One of the things we've done is the reduction in the mortgage exposure that I noted earlier has already had a sizable impact on AM Best capital adequacy model. And it actually already puts us in a position to meet the requirements and their framework.

And we obviously acknowledge that capitalization is not the only thing that AM Best looks at, but we clearly view this as a positive. In terms of the other levers, I can't really go into other levers we have in this time. But we do remain confident that we can be in a position to remove the under review designation at some point into the future.

Pablo Singzon -- J.P. Morgan -- Analyst

Got it. And then the second question, so I appreciate your disclosure on how your portfolio is less exposed to COVID claims. But I guess, could you speak how you see near-term impacts on your margins and premium growth evolving? It seems like you do have a different exposure to auto claims. There could be lower, there might be an offset in premiums, maybe more in the U.S.

than in the U.K.?

Jon Levy -- Chief Executive Officer

Sure. Yeah. I think, look, we don't give forward-looking guidance, but I think we can probably provide a little bit of more color on kind of what's in our book. I think we can reasonably expect that we'll have decrease in revenues for the rest of the year.

And I think as you pointed out, I think where deceases might come from will really depend on jurisdiction and class of business. Now for auto, we certainly do expect some sort of reduction in premium. We write personal lines in the U.K. One slight mitigant to that, obviously, is personal line.

Auto is compulsory. But I mean, we do expect to see some sort of decreases going in the future. We do write a good amount of commercial auto. Some of the -- a good portion in the commercial auto book that we write continue to operate through the shutdown.

But with any sort of decrease in economic activity, there's obviously the potential for reduced premiums going forward. And the thing I would point to maybe is kind of maybe a more material -- most material for us kind of from a line of business standpoint is, we do write some non -- small amount of nonstandard auto in the U.S., as well as some nonstandard auto in the U.K. And I think if I point to an area where I think could have a kind of a most -- kind of most impact in terms of future revenues, those are the two I would probably point to.

Pablo Singzon -- J.P. Morgan -- Analyst

Got it. And third and last question for me. So just a couple on the investment portfolio. I was wondering if you could provide just some perspective on the following: First, have you seen a material change in recent interest payment and default trends in your loan portfolio? And second, just any material rating agency actions on your portfolio, whether it's downgrades or negative outlooks in terms of the individual loans you're holding?

Jon Levy -- Chief Executive Officer

In terms of changes in defaults, we've got two securities that defaulted in the last month or so. I'd say one of the securities, there's a first lien loan that's actually continuing to pay coupons. And I think that's the benefit of being in the first lien is it's going to pay coupons, and we fully expect a par recovery, but it does have a technical default. The other one is kind of fully reflected in kind of the market price and it was kind of not unexpected given what happened.

And in terms of kind of downgrades, within our noninvestment-grade portfolio, downgrades in and of themselves doesn't, isn't really going be huge -- kind of huge issue to us. The thing we look -- mostly pay attention to is the fundamental credit analysis. And so whether that risk is downgraded from BB to B, that doesn't affect kind of what we think of the underlying credit. It's much more about our future cash flows and all the stresses that HPS does.

So at least in that aspect, downgrades within the noninvestment-grade portfolio just aren't sort of that significant.

Pablo Singzon -- J.P. Morgan -- Analyst

OK. Thank you.

Operator

Thank you. Our next question comes from Matt Carletti with JMP. Your line is open.

Matt Carletti -- JMP Securities -- Analyst

Hey. Thanks. Good afternoon. Pablo has covered a couple of questions I have.

I got one left. Jon, I wanted to circle back on a couple of your mortgage insurance comments. I think I caught that you said it was about one point of loss ratio in the quarter for some of the exposure you have there. And also that there is 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 we should expect going forward? I mean I know that accounting there is quite different than traditional P&C accounting and you 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 left and how that might unfold in coming quarters?

Jon Levy -- Chief Executive Officer

Sure. And thanks for the question, Matt. I'll try to address. The first point I want to clarify, we put up probably one point or two in loss on mortgage.

But as Rob noted in his prepared remarks, some of that mortgage is kind of offset by kind of a reduced acquisition expense, so it's a sliding scale. So that's why the overall impact to our combined ratio was one point, but you had some ups and downs in other areas. The other kind of comment I'd have on mortgage reinsurance, which is different than primary mortgage insurance is on the reinsurance side, we try to book to ultimate loss as expected. I do understand the primary side that there's gap in regulatory reasons why you can't project your ultimate.

You have to wait till delinquencies come in. But on the reinsurance side, we do try to kind of pick our ultimate based on the information we have in front of us. And then the last kind of mortgage question, I think that you had is the -- we did reduce our U.S. mortgage exposure by a significant amount.

And so kind of the reinsurance or the exposure that we offloaded was much more concentrated in the U.S. It didn't have very much international aspects to it at all.

Matt Carletti -- JMP Securities -- Analyst

Great. All very helpful. Thanks for your interest.

Operator

Thank you. And we have a question from Michael Phillips with Morgan Stanley. Your line is open.

Michael Phillips -- Morgan Stanley -- Analyst

Thank you. Hey, guys. Good afternoon. Jon, first question for you.

I guess, where do you see -- I'm just curious where do you see the greatest potential for margin expansion over the coming, I guess, year by line of business?

Jon Levy -- Chief Executive Officer

That's a good question. I think there is -- given what we're seeing, given what we have right now there, it's reasonably likely to expect a significant drop-off in frequencies in auto and potentially even comp and even potentially even GL. I think the kind of the tougher question to answer with that 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 for us of a decrease in frequencies can be partially offset by kind of an increase in commissions, and that will make our loss, I think, more solid and it'll make our margin more solid, but it wouldn't be necessarily one-for-one for us.

I think the broader question, I think, is kind of is, what's happening with the rates and underlying rates? And I think there is still a hardening casualty market and a hardening property market. And in my personal view, I think COVID will maybe even got to make this stronger as carriers kind of to reassess capital. But that's a little bit harder one to answer. And I think kind of where we're positioned right now, I think we're optimistic about us being able to grow in a hardening casualty market, but that's a little bit harder to address specifically.

Michael Phillips -- Morgan Stanley -- Analyst

OK. Thanks. You've mentioned a lot recently the growth in your commercial auto, I guess, what's driving the personal auto growth on the reinsurance side?

Jon Levy -- Chief Executive Officer

So we don't have a huge amount of personal auto exposure on the reinsurance side. The personal auto that we do have on the reinsurance side is generally international as opposed to domestic. And on that, 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 will be relatively indifferent as to whether we take it on the insurance or the reinsurance side. At least domestically, we don't have a huge portfolio of personal auto on the reinsurance side.

Most of the auto we take on domestically is on the commercial side.

Michael Phillips -- Morgan Stanley -- Analyst

OK. Thanks. Let me switch gears to the investments. I mean, you guys gave some nice new disclosure there.

I appreciate that and your comments on oil and retail and different segments of minimal exposure. I guess, if you look back at your exposure today, where would you see the -- I guess, what areas would be the greatest concern for you right now in your portfolio?

Jon Levy -- Chief Executive Officer

Yeah. I think we've built -- this portfolio has been built relatively defensively over the last couple of years. I think we've noted on previous calls that we positioned most of our portfolio into term loans. And the reason we're doing that is, credit spreads have been at historically lows for the last couple of years and taking a position that when spreads are as tight as they are, we're going to invest in assets that have a higher position in the capital structure, more underlying collateral and in any kind of stress situations and places where we kind of a seat at the table, things start to go wrong.

And as you can see, almost half of our noninvestment-grade portfolio right now is in loans, and it does provide kind of a certain level of protection for kind of unfortunate events like we're sitting in today. For oil and gas, while it is 5% of our exposure, I think it's important to note that our exposure really is concentrated within two separate positions. One is very senior loans to an issuer that services the energy industry. The other one is to a very large oil refinery.

So the revenue streams for both of these are somewhat influenced -- are somewhat insulated from fluctuations in the price of oil, and we've all seen kind of the havoc that the price of oil has caused in the market recently. For retail, retail, I think is kind of -- is a concern for the entire high-yield market. As we've noted, our exposure is less than 5%. And then a sizable portion of this is to issuers who either run pharmacies or to service providers who provide services to retailers such as groceries.

And it's not to say that these kind of are kind of under threat, but those entities have kind of remained open throughout the shutdown. The one thing -- and we mentioned this on the prepared remarks is the CLOs. I think the CLOs definitely had an outsized influence on our quarterly results. And one has been -- I just want to cover that just a little bit.

The CLOs in terms of kind of the underlying collateral, the CLOs are fairly well diversified by industry across -- and when we look across all the CLO collateral base, the underlying collateral is to be roughly like 3% for oil and gas, 5% lodge and casinos, 3% automotive, 5% retail. I think there are a number of other carriers who provide us some disclosures on the underling collateral, and I think kind of our CLO portfolio compares favorably to them. And then I would 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 CLOs are investment grade.

And just to give kind of context, in the markets day, a typical BBB CLO security can absorb 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, every crisis is different, and this one is clearly different than the great financial recession. But a peak default rate in 2008 was around 9% before -- for a single year before it fell off dramatically. So hopefully, that gives a little more detail into the portfolio, and I think we're happy to provide this level of detail going forward.

Michael Phillips -- Morgan Stanley -- Analyst

OK. Great. No, thanks. That's very helpful.

I guess last one for me. On Axeria, I guess, have you ever said the purchase price there? And then also, do you have the ability to cancel that if need be before it closes? Thanks.

Jon Levy -- Chief Executive Officer

So we have not said the purchase price. We have said that based off the information that we have, we do expect it to be mildly accretive when we do execute the purchase. We're continuing to -- we continue to looking to close this, close the Axeria. We think it offers lots of strategic benefits for us, where we like the ability to expand in Europe.

We like the underlying business itself. We like the underwriters. We like the people. I think, for us, we're looking forward to closing this transaction, and we're hoping to do it in the third quarter.

Michael Phillips -- Morgan Stanley -- Analyst

All right. Great. Thanks, Jon.

Operator

And I'm showing no further questions at this time. I'd like to turn it back to Mr. Jon Levy for any closing remarks.

Jon Levy -- Chief Executive Officer

Thank you. Just thank you all for participating. Stay safe, stay healthy, and we look forward to speaking with all of you again next quarter. Have a terrific afternoon.

Thanks all.

Operator

[Operator signoff]

Duration: 39 minutes

Call participants:

Jon Levy -- Chief Executive Officer

Rob Hawley -- Chief Financial Officer

Pablo Singzon -- J.P. Morgan -- Analyst

Matt Carletti -- JMP Securities -- Analyst

Michael Phillips -- Morgan Stanley -- Analyst

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