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Watford Holdings Ltd (NASDAQ:WTRE)
Q2 2020 Earnings Call
Jul 30, 2020, 4:00 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 Second Quarter Earnings Conference Call. As a reminder, this conference call is being recorded. Before the company gets started with its 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 assessments and assumptions that are subject to a 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 SEC from time to time. Additionally, certain 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 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 to 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, Dylan, and good afternoon, everyone. Thank you for joining the Watford Second Quarter 2020 Earnings Call. We hope that you are safe and well and appreciate you making time to listen. Joining me today on the call is Rob Hawley, 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 Axeria acquisition.

Then after some concluding remarks, we will answer questions from the equity analysts. If there are any individual investors with questions that aren't addressed 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 its 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 in 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 induced decline we booked in the first quarter. Starting with our underwriting results. Our adjusted combined ratio, which removes certain corporate and nonrecurring expenses and includes other underwriting income was 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, but we feel good about our aggregate reserve position.

Included in our underwriting results is a $5.2 million provision for COVID-related underwriting losses, almost exclusively arising from business interruption coverage in our property catastrophe line of business. This provision added approximately four points to this quarter's combined ratio. Net of the COVID 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, our net earned premium has dropped $9 million 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 as having 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 declined for certain insurance and reinsurance exposures as a result of the COVID-19 shutdowns and the associated reduced economic activity. For example, across our entire U.K. motor insurance portfolio, we currently expect a premium reduction of around 5% for the year from our initial estimates. In addition, we have reduced our premium estimates for certain U.S. commercial auto clients, whose 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's either reported lower revenues or canceled their policies altogether in the face of the economic shutdown. Partially offsetting these reductions are strengthening 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 U.K. Motor excess-of-loss reinsurance ratings continues to earn through at higher rates through the year in response to the revised Ogden rate set in 2019.

While property catastrophe is still a small part of our total writings, this line grew significantly for us in the quarter. Watford has a small participation on Arch's worldwide property catastrophe excess-of-loss reinsurance portfolio. And Arch has increased its own writings as rates in this line continue to rise. I'd now like to spend a few moments discussing the impact of COVID-19 on our loss and combined ratio. In general, we are not significant writers of lines of business that will respond directly to COVID losses. This quarter, we booked $5.2 million for business interruption losses stemming from our quota share participation in Arch's property catastrophe portfolio.

Our lost bookings reflect the Arch estimation process, and consider the underlying commercial risk covered, the jurisdiction of the students, the strength of the policy wording as well as the losses reported to date. There continues to be significant uncertainty with business interruption losses for the entire industry. Very few COVID-related claims have been reported to us to date. Accordingly, over 90% of our COVID-related reserve estimate is held in IBNR. In terms of our exposure to lines of business that are potentially indirectly affected by COVID, our largest lines are personal and commercial auto liability in the United States, the U.K. and Europe.

As expected, the frequency of auto claims appears to be down sharply during the lockdown as well as through the reopening of the world economies during the second quarter. However, given the uncertainty and potentially higher severities 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 U.K. Motor insurance that we write has sliding scale commission provisions with our producers. For these deals, downward movements and losses will at least be partially offset by increases in the commission we paid to those producers.

If the experience develops favorably, 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 COVID provision is for claims that have already occurred, consistent with all of our loss reserves, we have not included provisions for accidents or events that have not yet occurred. There is still considerable uncertainty of the potential COVID exposure across the industry.

As always, we will continue with our reserving philosophy of reacting to bad news quickly and to good news prudently. Turning to our investments. Net interest income was strong and steady at over $27 million. Coupon income continues to contribute to the stability of our business and is 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 are, 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 in the mark-to-market valuation in our investment-grade portfolio with an additional $23 million benefit in other comprehensive income. The investment-grade recovery was primarily related to a recovery in our CLO assets, reflecting the favorable structure and security of these investments. I would now like to make a few observations on the noninvestment-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 first applied 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. While some of these securities may be in the "COVID red industry classes," that each share some combination of significant collateral, shorter-dated maturities, BB or BBB ratings and very good market liquidity profiles.

You can see that our breakdown shows an increase in CCC 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 BB and single B-rated securities downgraded by the relevant rating agencies. Recall that the HPS portfolio level 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, the market valuation of 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, coupled with the valuation recovered in the credits already in this bucket explains the apparent increase in exposure. While we are pleased with the significant recovery in 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 into better-rated credits, we have withdrawn just over $100 million from our noninvestment-grade portfolio. The proceeds from this withdraw were used to pay down our borrowings for underwriting collateral. This further reduces our capital's 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, positions Watford well for the opportunities in front of us.

With this introduction, I will turn the call over to Rob, who will give a more detailed review of our financial results.

Robert Hawley -- Chief Financial Officer

Thank you, Jon. 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, debt plus preferred expenses of $4 million, a $2.7 million net foreign exchange gain and a deferred tax credit of $0.4 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 $0.3 million. Return on average equity for the quarter was 28.2%. Book value per diluted share at June 30 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 Jon 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% or $4.1 million versus the same quarter last year. Premium growth in insurance programs and coinsurance 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 nonrenewal of one multiline quota share contract as well as the continued impact of gradually reduced participations over time on one-cedant's professional liability reinsurance program, which was nonrenewed in the second quarter of 2020.

In addition, the multiline contract previously noted, included a $4 million negative premium adjustment for older underwriting years, and both contracts had premium written entered in 2019 with much less comparable premium in 2020 and due to the nonrenewal and reductions. Partially offsetting these premium decreases, the casualty line grew its U.K. 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 premium decreased as a result of the reduction in our exposure to U.S. 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. The premium estimate reductions were partially driven by reduced economic activity related to COVID-19. Property catastrophe gross premiums were up 90% over the prior year quarter. Our primary involvement in this line of business is a 7.5% quota share participation of Arch Re's 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 and coinsurance growth of 17% was due to the continued expansion of our European and U.S. businesses. We had growth in both the U.S. and 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 U.S. insurance program in which the underlying insured's either reported lower revenues or canceled their policies in the face of the economic shutdown.

Gross premium ceded grew $9.5 million to $52.1 million, a 22% year-over-year increase. We are purchasers of third-party reinsurance for our insurance programs and coinsurance lines. As our gross premiums written have grown in these insurance lines, the outward 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 in part by a $9.6 million insurance programs and coinsurance earned premium increase.

The reduction in casualty earned premium was driven by the two casualty contracts, partially offset by growth in one U.S. excess casualty contract. The decrease in other specialty reinsurance earned premium was 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 U.S. commercial auto writings. The Q2 combined ratio was 108% or 4.5 points higher than 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 a decrease in the acquisition expense ratio of one point versus the prior year quarter.

The increase in loss ratio was primarily driven by the previously mentioned provision for current period COVID-related losses at our property catastrophe business, equating to $5.2 million or four points. In comparison to the prior year's second quarter, the general and administrative expense ratio decreased 0.6 points to 5.9%. You'll recall, the prior year's 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 noninvestment-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%, in line with the first quarter's yield and slightly higher than the 1.2% yield achieved in the second quarter of 2019. Focusing now on our noninvestment-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 described by Jon, and to a lesser extent, 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 and slightly lower than the 0.6% second quarter 2019 yield. Our net investment income this quarter included $8.9 million of 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 redeployed 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 noninvestment-grade withdrawal and subsequent pay down mentioned by Jon earlier. As of the end of June, the ending balance sheet net unrealized loss position for the combined noninvestment-grade and investment-grade portfolios was $185.4 million. The net unrealized gain recovery this quarter was driven by a recovery in term loans, asset-backed securities and corporate bonds as the credit markets improved through the quarter.

Lastly, I'll touch on our capital and debt leverage management. Our debt to total capital ratio was 17.2% at June 30, 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-IG 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 withdrawal from the noninvestment-grade portfolio mentioned earlier. You'll recall with the onset of the COVID pandemic in March, we halted our share repurchase program. We did not purchase 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.

And with that, I'll hand it back to Jon.

Jon Levy -- Chief Executive Officer

Thank you, Rob. Before we open for analyst questions, I have a few concluding comments. First, a brief update on Axeria. We continue working on closing our acquisition of Axeria, 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. We will provide further disclosure when we have additional details to report. Next, a brief update on our ratings.

As you know, our A minus rating with AM Best was given an under review with negative implications designation in April, and our A rating with Kroll Bond Rating Agency, a watch downgrade designation in May. Both were a direct result of the mark-to-market investment losses we suffered because of the tremendous market turmoil related to the COVID pandemic and the worldwide economic shutdown. We are pleased to report that in June, our A rating was reaffirmed by Kroll, although with a negative outlook. The negative outlook is partially related to the uncertainty in the world economies due to the current pandemic.

We are not certain when AM Best will complete its review of our ratings, but expect that the situation will be resolved in the next few months. Recall that AM Best said in their press release that the under-review status was expected to resolve when our risk-adjusted capitalization was restored. While we cannot predict what AM Best will conclude, we believe that this quarter's significant increase in our capitalization, coupled with the reduction in mortgage exposure we noted on last quarter's earnings call, should be viewed as a positive from a credit standpoint. In conclusion, we are very pleased with this quarter's results. In the quarter, our investments substantially recovered 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 have taken steps to adjust the investment portfolio to continue to deliver steady coupon income with less downside risk to capital. Our COVID 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 and Bermuda reinsurance are well positioned in the fast improving underwriting market. Hopefully, from our discussion today, you have a sense for how the business is positioned.

With that, we are pleased to take questions from the analysts.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Pablo Singzon with JPMorgan. Your line is now open.

Pablo Singzon -- JPMorgan -- Analyst

Hi, John. I was wondering if you could address one of the concerns raised by some of your shareholders. So if you look at Watford's historical returns in recent years, taking out the impact of unrealized marks, you get somewhere in the range of a mid-single-digit ROE and the combined ratio has consistently been above 100, which compares unfavorably to reinsurance peers. I was hoping that you could speak to any actions you were contemplating or executing to bridge that gap, whether it's business mix, investment strategy, capital deployment, potentially reviewing your service agreements with Arch or HPS? And I guess more importantly, what you see is a sustainable long-term ROE for Watford.

Jon Levy -- Chief Executive Officer

Sure. Thank you, Pablo, and thank you for participating. We so the Watford strategy continues as it's been. We are strong believers that leveraging the expertise of Arch and HPS and balancing the opportunities on each side is going to are going to be key to driving long-term investor value. I mean just this quarter, within the HPS portfolio, you've seen that we have recovered a substantial portion of the first quarter's mark-to-market movements and reposition our portfolio while continuing to have the same level of coupon income, which is core to our strategy.

On the underwriting side, Watford is now facing the hardest assurance market since we started and possibly well before that. We think the investments we've made over the years in our reinsurance operations in Bermuda, developing our E&S and admitted carrier in the U.S. as well as developing the insurance platform in Europe, are 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, there's more than $5 billion of new capital that is seeking to develop the exact insurance platforms and business relationships that Watford already enjoys, and we're already writing today.

So overall, we see continued opportunities to expand our underwriting margins through 2020 and beyond. And lastly, the thing is who we're partnering with. Arch has demonstrated expertise in cycle management, and we believe they're the right partner to take advantage of the underwriting opportunities in front of us. So these are the reasons we believe this strategy will drive long-term investor value.

Pablo Singzon -- JPMorgan -- Analyst

Okay. And I guess as a follow-up to that, so Arch has a couple of other third-party capital vehicles like Premia and Missouri, neither as large as you or exactly in the same lines of business. But I guess, from your perspective, and obviously, you don't speak for Arch, but can you give us a sense of how you see yourself fitting into Arch overall third-party capital strategy? And should we assume that you remain their primary partner until your service agreement with them expires? And if not, sort of what are the puts and takes for revising or bringing that agreement in the midterm?

Jon Levy -- Chief Executive Officer

So we obviously can't comment on kind of what Arch's perception is of Watford relative to its other to the other vehicles that it sponsors. I think for us, we still continue to believe that we are core to the Arch strategy for many reasons we've articulated over the years. It's some of these are being able to having Arch being able to service kind of more clients with additional paper.

We think it's strategically important for them. And I think we continue to believe that with the platforms we've developed that Arch is the right partner for us. The service agreement that we have, it continues through, I believe, it's 2025. And I think we're relatively happy 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.

Pablo Singzon -- JPMorgan -- Analyst

Okay. And then last for me, on the investment portfolio, I think public high-yield and leverage loan indices are showing quarter-to-date, a return of about 3%. Is that sort of more or less consistent with what you're seeing internally?

Jon Levy -- Chief Executive Officer

So we can't give we only report our investment results quarterly. There's a lot of work we need to do to close the portfolios accurately. I think you're right, though, when we look at the public marks, I think the last I checked, the high-yield and lever loan indexes, the their spreads have shrunk somewhere between 70 and 100 basis points. So in general, kind of the high-yield market has continued to improve through the month.

Pablo Singzon -- JPMorgan -- Analyst

Okay. Thanks for your time.

Operator

Thank you. Our next question comes from Mike Phillips of Morgan Stanley. Your line is now open.

Mike Phillips -- Morgan Stanley -- Analyst

Hey, can you guys hear me OK.

Jon Levy -- Chief Executive Officer

Yes. Thanks, Mike.

Mike Phillips -- Morgan Stanley -- Analyst

Okay. So I heard your comments on my question is on the property category and comments on how, obviously, the Arch growth there is impacting you guys as well. But it's not just been this quarter. It's been a few quarters in a row of pretty strong growth there. And so I just want to double check, a, it's now not like serving 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 kind of your investment strategy or it's more casualty long-term focus on the investment side?

Jon Levy -- Chief Executive Officer

Yes. That's a good it's a good question, Mike. I think being partnered with Arch means that we end up following the exact Arch underwriting philosophy, which is trying to take advantage of market opportunities as they arise. We have and we'll continue to have a longer-tailed casualty focused portfolio, however, since we started back in 2014, the property cat market 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 just 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, is with the hardening 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 Watford is, unless market that property cat market is hard significantly more than where they are today. But what I'd say today is we're just taking advantage of what's in front of us, and if rates will continue to grow, you can maybe see us take some incrementally more cap.

Mike Phillips -- Morgan Stanley -- Analyst

Okay. Maybe even a higher level on investments. I guess given all the market volatility we've had this year, does it make you kind of rethink that the overall strategic view of how you invest and your sister strategy there? I mean it's been pretty volatile. And just thoughts on just your overall strategy there of HPS and what it means given the market turmoil we've seen.

Jon Levy -- Chief Executive Officer

Yes. That's a good question. And look, 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 some of it is moving into some of the higher-rated credits. Some of it was $100 million withdrawal that we did. I think we're certainly pleased with the recovery in the markets and the positions we own are we still continue to believe strongly that those positions will continue to deliver value.

But just within the quarter, given the economic uncertainty that we have here, we felt it was a good time for us to both take advantage of the mark-to-market increases as well as trying to reduce the kind of the mark-to-market risk to our capital base. So long-winded way of saying, I think 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 kind of the long-term driver of our thesis and our value to shareholders.

Mike Phillips -- Morgan Stanley -- Analyst

Okay. And you touched on this in your initial comments, but just 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 just more comments from you on your ability to take advantage and just overall your capital position and to take advantage of the current market?

Jon Levy -- Chief Executive Officer

Sure. So yes, there is considerable interest in the insurance marketplace today. And I think we quoted somewhere around $5 billion that is moving into the market. And I think where we sit today with our E&S U.S. carrier our admitted U.S. carrier and being partnered with Arch really positions us extremely well if there is a dislocation or continued market hardening, particularly in the U.S. I think we feel the same way on the reinsurance side as well as the European insurance side.

And the last thing to point in terms of kind of our capitalization and our 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 because of their A+ rated paper, there'll be there's opportunities for us to participate on that sort of business, particularly in insurance in a hardening insurance marketplace, which would be difficult for us to do more as a stand-alone carrier. So we think we are very well positioned to take advantage of this marketplace as it presents itself. And frankly, we're looking forward to being active participants.

Mike Phillips -- Morgan Stanley -- Analyst

Okay, good. Thanks, John. Appreciate it.

Jon Levy -- Chief Executive Officer

No problem. Thank you.

Operator

Thank you. And we have a follow-up question from Pablo Singzon with JPMorgan. Your line is now open.

Pablo Singzon -- JPMorgan -- Analyst

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 of a headwind do you see going forward. So I think you said in the past, your floating rate assets are subject to a floor, and it seems that most of them will reach at minimum in the second quarter, just given the dramatic decline in LIBOR.

Jon Levy -- Chief Executive Officer

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 of the year. LIBOR is certainly kind of well less than one at this point. Most of the securities that we own do have LIBOR floors of about 100 basis points. So they would have hit those, and I'm probably still sitting at the 100 basis points floor at this point.

Pablo Singzon -- JPMorgan -- Analyst

Got it. And then, Jon, I just wanted to follow-up on your comments about the sliding commissions in the personal auto book. And I guess my question is, if you take a look at the primary based U.S. writers, they're seeing a couple of hundred basis point improvement in their combined year-over-year because of lower frequency. I presume it's somewhat similar in Europe. But it seems like from your comments that most of that incremental value will be retained by the primary companies. Is that correct?

Jon Levy -- Chief Executive Officer

By the producers, and I'm not sure I would call it necessarily retained. We will pay them a higher ceding commission or higher sliding scale commission for producing that. That's a lower loss ratio.

Pablo Singzon -- JPMorgan -- Analyst

Got it, OK. Thank you.

Jon Levy -- Chief Executive Officer

Thank you.

Operator

And our next question comes from Matt Carletti with JMP Securities. Your line is now open.

Matt Carletti -- JMP Securities -- Analyst

Okay, thanks, good afternoon. Just Rob, I just want to follow up on your comments about the share repurchases, and I appreciate that you've paused things given the heightened uncertainty in the current environment. But as we move forward and 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 stock, at least at what the moment is less than half of book value? And how you balance those two items?

Jon Levy -- Chief Executive Officer

Matt, this is Jon. I'll try and take a first stab at this one. One of the things we do believe is taking advantage of this hardening insurance marketplace with Arch. It is going to be a key driver of future franchise value. And that will be a key driver of kind of long-term shareholder value 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 did take we've made some incremental improvements on our investment portfolio to reduce our mark-to-market risk. 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, if kind of the shares are trading where they are, I think they very well might kind of continue to present compelling value for us, and we'll reevaluate that when we get there.

Matt Carletti -- JMP Securities -- Analyst

Yeah. Great, thank you.

Jon Levy -- Chief Executive Officer

Thank you.

Operator

Thank you. And I'm showing no further questions in the queue at this time. I'd like to turn the call back to the speakers for any closing remarks.

Jon Levy -- Chief Executive Officer

Terrific. Thank you all for listening and participating in our call today. On behalf of the Watford team, we wish you and your families all the best of health. Stay safe, enjoy what's left of the summer, and we look forward to reconnecting you with the fall. Thank you. Have a great day.

Operator

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program, and you may now disconnect.

Duration: 42 minutes

Call participants:

Jon Levy -- Chief Executive Officer

Robert Hawley -- Chief Financial Officer

Pablo Singzon -- JPMorgan -- Analyst

Mike Phillips -- Morgan Stanley -- Analyst

Matt Carletti -- JMP Securities -- Analyst

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