In March 2014, ARL invested $100.0 million in the Company and acquired approximately 11% of its common equity.

AUL acts as the insurance and reinsurance manager for Watford Re and WICE while AUI acts as the insurance and reinsurance manager for WSIC and WIC, all under separate long-term services agreements. HPS manages the Company’s non-investment grade portfolio and a portion of the Company’s investment grade portfolio as Investment Manager and AIM manages a portion of the Company’s investment grade portfolio as Investment Manager, each under separate long-term services agreements. ARL and HPS were granted warrants to purchase additional common equity based on performance criteria. In recognition of the sizable ownership interest, two senior executives of ACGL were appointed to the Company’s board of directors. The services agreements with AUL and AUI and the investment management agreements with HPS and AIM provide for services for an extended period of time with limited termination rights by the Company. In addition, these agreements allow for AUL, AUI and HPS to participate in the favorable results of the Company in the form of performance fees.

ACGL and affiliates

At June 30, 2020, ARL held approximately 12.6% of the Company’s common equity. Affiliates of ACGL held approximately 6.6% of the Company’s preference shares.

On July 2, 2019, affiliates of ACGL purchased $35 million in aggregate principal amount of the Company’s 6.5% senior notes due July 2, 2029. On August 1, 2019, affiliates of ACGL received $11.5 million in connection with the Company’s redemption of its preference shares.

Certain directors, executive officers and management of ACGL own common and preference shares of the Company.

The related balances presented in the consolidated statements of income (loss) for the three and six months ended June 30, 2020 and 2019 were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	($ in thousands)
Consolidated statements of income (loss) items:
Interest expense	$	582	$	—	$	1,164	$	—
Preference dividends	73		325		151		650

AUL and AUI

Watford Re and WICE entered into services agreements with AUL. WSIC and WIC entered into services agreements with AUI. AUL and AUI provide services related to the management of the underwriting portfolio for a term ending in December 2025. The services agreements perpetually renew automatically in five-year increments unless either the Company or Arch gives notice to not renew at least 24 months before the end of the then-current term.

As part of the services agreements, AUL and AUI make available to the Companies, on a non-exclusive basis, certain designated employees who serve as officers of the Companies and underwrite business on behalf of the Companies (the “Designated Employees”). AUL and AUI also provide portfolio management, Designated Employee supervision, exposure modeling, loss reserve recommendations, claims-handling, accounting and other related services as part of the services agreements.

In return for their services, AUL and AUI receive fees from the Companies, including an underwriting fee and profit commission, as well as reimbursement for the services of the Designated Employees and reimbursements for an allocated portion of the expenses related to seconded employees, plus other expenses incurred on behalf of the Company.

The related AUL and AUI fees and reimbursements incurred in the consolidated statements of income (loss) for the three and six months ended June 30, 2020 and 2019 were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	($ in thousands)
Consolidated statements of income (loss) items:
Acquisition expenses	$	6,942	$	5,861	$	13,505	$	10,809
General and administrative expenses	1,148		2,008		2,136		4,019
Total	$	8,090	$	7,869	$	15,641	$	14,828

Reinsurance transactions with ACGL affiliates

The Company reinsures ARL and other ACGL subsidiaries and affiliates for property and casualty risks on a quota share basis. ACGL cedes business to the Company pursuant to inward retrocession agreements the Company’s operating subsidiaries have entered into with ACGL. Pursuant to these inward retrocession agreements, the Company pays a ceding fee based on the business ceded and the terms of the applicable retrocession agreement. Such fees, in addition to origination fees, are reflected in “acquisition expenses” on the Company’s consolidated statements of income (loss).

The related consolidated statements of income (loss) for the three and six months ended June 30, 2020 and 2019 were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	($ in thousands)
Consolidated statements of income (loss) items:
Gross premiums written	$	30,371	$	38,890	$	111,719	$	110,895
Net premiums earned	51,067		66,913		109,853		128,751
Losses and loss adjustment expenses	40,759		54,894		87,300		100,263
Acquisition expenses (1)	13,153		20,890		27,006		40,805

(1) Acquisition expenses relating to the ACGL inward quota share agreements referred to above. For the three months ended June 30, 2020 and 2019, the Company incurred ceding fees to Arch, in aggregate, of $3.8 million and $4.8 million, respectively, under these inward retrocession agreements. For the six months ended June 30, 2020 and 2019, the Company incurred ceding fees to Arch, in aggregate, of $7.8 million and $9.0 million, respectively, under these inward retrocession agreements.

Separately, the Company’s operating subsidiaries have entered into outward quota share retrocession or reinsurance agreements with ACGL subsidiaries. Specifically, each of Watford Re and WICE has entered into a separate outward quota share retrocession or reinsurance agreement with ARL, and each of WSIC and WIC has entered into a separate outward quota share reinsurance agreement with ARC.

The related consolidated statements of income (loss) for the three and six months ended June 30, 2020 and 2019 for the outward retrocession transactions were as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
	($ in thousands)
Consolidated statements of income (loss) items:
Gross premiums ceded	$	(17,174	)	$	(15,844	)	$	(37,002	)	$	(32,834	)
Net premiums earned	(20,261		)	(14,411		)	(40,049		)	(27,351		)
Losses and loss adjustment expenses	(17,558		)	(15,784		)	(33,373		)	(24,921		)
Acquisition expenses (1)	(3,319		)	(3,584		)	(7,857		)	(6,688		)

(1) Acquisition expenses relating to the ACGL outward quota share agreements referred to above.

The related consolidated balance sheet account balances as of June 30, 2020 and December 31, 2019 were as follows:



	June 30,		December 31,
	2020		2019
	($ in thousands)
Consolidated balance sheet items:
Total investments	$	775,016	$	815,528
Premiums receivable	96,475		106,462
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	101,356		79,597
Prepaid reinsurance premiums	71,578		75,249
Deferred acquisition costs, net	29,894		31,609
Funds held by reinsurers	29,629		29,867
Reserve for losses and loss adjustment expenses	680,444		693,861
Unearned premiums	139,632		143,852
Losses payable	47,812		39,619
Reinsurance balances payable	53,387		62,301
Senior notes	34,511		34,484
Amounts due to affiliates	4,542		4,467
Other liabilities - contingent commissions	4,033		5,516
Contingently redeemable preference shares	3,465		3,462

AIM

Watford Re, WSIC, WICE and WIC entered into investment management agreements with AIM pursuant to which AIM manages a portion of our investment grade portfolio. Each of the Watford Re, WICE, WSIC and WIC investment management agreements with AIM has a one-year term, with the terms ending annually on March 31, July 31, January 31 and July 31, respectively. The terms will continue to renew for successive one-year periods; provided, however, that either party may terminate any of the investment management agreements with AIM at any time upon 45 days prior written notice. To date, there has been no such notice filed under such agreements.

In return for its investment management services, AIM receives a monthly management fee. The management fee is based on a percentage of the aggregate asset value of the AIM managed portfolio. For the purposes of calculating the management fees, asset value is determined by AIM in accordance with the investment management agreements and is measured before deduction of any management fees or expense reimbursement. The Company has also agreed to reimburse AIM for additional services related to investment consulting and oversight services, administrative operations and risk analytic support services related to the management of the Company’s portfolio, as set forth in the investment management agreements.

The related consolidated statements of income (loss) for the three and six months ended June 30, 2020 and 2019 were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Consolidated statements of income (loss) items:	($ in thousands)
Investment management fees - related parties	$	223	$	273	$	476	$	535

HPS

Certain HPS principals and management own common and preference shares of the Company.

In return for its investment services, HPS receives a management fee, a performance fee and allocated operating expenses. The management fee is calculated at an annual rate of 1.0% of the aggregate net asset value of the assets that are managed by HPS for the first $1.5 billion in net asset value, and 0.75% of the aggregate net value of assets exceeding $1.5 billion, payable quarterly in arrears. For purposes of calculating the management fees, net asset value is determined by HPS in accordance with the investment management agreements and is measured before reduction for any management fees, performance fees or any expense reimbursement and is adjusted for any non-routine intra-month withdrawals. The Company has also agreed to reimburse HPS for certain expenses related to the management of the Company’s investment portfolios as set forth in the investment management agreements.

The base performance fee is equal to 10% of the Income (as defined in the investment management agreements relating to Watford Re, WICE and Watford Trust) or Aggregate Income (as defined in the investment management agreements relating to WSIC and WIC), as applicable, if any, on the assets managed by HPS, calculated and payable as of each fiscal year-end and the date on which the investment management agreements are terminated and not renewed, and HPS is eligible to earn an additional performance fee equal to 25% of any Excess Income (as defined in the investment management agreements) in excess of a net 10% return to Watford after deduction for paid and accrued management fees and base performance fees, with the total performance fees not to exceed 17.5% of the Income or Aggregate Income, as applicable. No performance fees will be paid to HPS if the high water mark (as described in the investment management agreements with HPS) is not met.

During 2017, the Company invested $50.0 million in a private fund (“Master Fund”) as part of HPS’s investment strategy. HPS acts as the Trading Manager and provides certain administrative management services to the Master Fund. During 2019, the Company fully redeemed its investment in the Master Fund.

During 2019, the Company invested $28.7 million in a limited partnership as part of HPS’s investment strategy. HPS acts as the general partner and manager of the limited partnership. At June 30, 2020, the Company’s investment had a fair value of $34.1 million and represented approximately 12% of the outstanding partnership interests. The management fees and performance fees on the limited partnership will be subject to the existing fee structure of the existing investment management agreement between the Company and HPS, as discussed above.

The related consolidated statements of income (loss) for the three and six months ended June 30, 2020 and 2019, and consolidated balance sheet account balances for HPS management fees and performance fees as of June 30, 2020 and December 31, 2019 were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	($ in thousands)
Consolidated statements of income (loss) items:
Investment management fees - related parties	$	4,039	$	4,297	$	8,138	$	8,444
Investment performance fees - related parties	—		1,692		—		7,492
	$	4,039	$	5,989	$	8,138	$	15,936



	June 30,		December 31,
	2020		2019
	($ in thousands)
Consolidated balance sheet items:
Other investments, at fair value	$	34,142	$	30,461
Investment management and performance fees payable	5,511		17,762

Artex

In 2015, WICE and AUL entered into an insurance management services agreement with Artex Risk Solutions (Gibraltar) Limited, or Artex, pursuant to which Artex provides services to WICE relating to management, secretarial, governance, underwriting, claims, reinsurance, financial management, investment, regulatory, compliance, risk management and Solvency II. In addition, two principals of Artex have been appointed directors of WICE. In exchange for these services, the Company pays Artex fees based on WICE’s gross premiums written, subject to a minimum amount of £150,000 per annum and a maximum amount of £400,000 per annum, in each case subject to an inflation increase on an annual basis. The insurance management services agreement may be terminated by either Artex or WICE upon twelve months prior written notice; provided that the agreement is subject to earlier termination by WICE or Artex upon the occurrence of certain events.

The table below provides the aggregate fees the Company paid to Artex under the insurance management services agreement for the three and six months ended June 30, 2020 and 2019.



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	($ in thousands)
Fees paid to Artex under insurance management services agreement	$	166	$	45	$	252	$	176

For the three and six months ended June 30, 2020 and 2019, the Company paid no fees to Arch under this insurance management services agreement.