Investment Information

At June 30, 2017, total investable assets of $21.11 billion included $19.17 billion managed by the Company and $1.93 billion attributable to Watford Re.

Available For Sale Investments

The following table summarizes the fair value and cost or amortized cost of the Company’s investments classified as available for sale:



	Estimated Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Cost or Amortized Cost		OTTI Unrealized Losses (2)
June 30, 2017
Fixed maturities (1):
Corporate bonds	$	4,262,411	$	42,142	$	(23,632	)	$	4,243,901	$	(468	)
Mortgage backed securities	331,082		4,650		(1,596		)	328,028		(3,102		)
Municipal bonds	2,618,827		29,728		(9,841		)	2,598,940		—
Commercial mortgage backed securities	521,272		3,448		(6,363		)	524,187		—
U.S. government and government agencies	3,425,196		4,673		(15,246		)	3,435,769		—
Non-U.S. government securities	1,375,796		30,114		(21,466		)	1,367,148		—
Asset backed securities	1,739,695		10,540		(4,494		)	1,733,649		(22		)
Total	14,274,279		125,295		(82,638		)	14,231,622		(3,592		)
Equity securities	467,870		79,953		(7,200		)	395,117		—
Other investments	248,661		39,748		(28		)	208,941		—
Short-term investments	914,356		446		(122		)	914,032		—
Total	$	15,905,166	$	245,442	$	(89,988	)	$	15,749,712	$	(3,592	)

December 31, 2016
Fixed maturities (1):
Corporate bonds	$	4,392,373	$	27,606	$	(46,905	)	$	4,411,672	$	(2,285	)
Mortgage backed securities	490,093		4,794		(8,357		)	493,656		(3,323		)
Municipal bonds	3,713,434		8,554		(29,154		)	3,734,034		(201		)
Commercial mortgage backed securities	536,051		2,876		(6,508		)	539,683		—
U.S. government and government agencies	2,804,540		9,319		(24,437		)	2,819,658		—
Non-U.S. government securities	1,096,440		19,036		(56,872		)	1,134,276		—
Asset backed securities	1,123,987		6,897		(6,526		)	1,123,616		(22		)
Total	14,156,918		79,082		(178,759		)	14,256,595		(5,831		)
Equity securities	532,680		62,627		(17,517		)	487,570		—
Other investments	167,970		21,358		(2,465		)	149,077		—
Short-term investments	612,005		272		(145		)	611,878		—
Total	$	15,469,573	$	163,339	$	(198,886	)	$	15,505,120	$	(5,831	)


(1)	In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See “—Securities Lending Agreements.”

(2)

Represents the total other-than-temporary impairments (“OTTI”) recognized in accumulated other comprehensive income (“AOCI”). It does not include the change in fair value subsequent to the impairment measurement date. At June 30, 2017, the net unrealized gain related to securities for which a non-credit OTTI was recognized in AOCI was $0.8 million, compared to a net unrealized gain of $2.8 million at December 31, 2016.

The following table summarizes, for all available for sale securities in an unrealized loss position, the fair value and gross unrealized loss by length of time the security has been in a continual unrealized loss position:



	Less than 12 Months					12 Months or More					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
June 30, 2017
Fixed maturities (1):
Corporate bonds	$	1,384,481	$	(22,572	)	$	15,198	$	(1,060	)	$	1,399,679	$	(23,632	)
Mortgage backed securities	189,816		(1,534		)	1,573		(62		)	191,389		(1,596		)
Municipal bonds	788,714		(9,329		)	39,912		(512		)	828,626		(9,841		)
Commercial mortgage backed securities	249,658		(6,232		)	3,383		(131		)	253,041		(6,363		)
U.S. government and government agencies	2,662,818		(15,246		)	—		—			2,662,818		(15,246		)
Non-U.S. government securities	1,017,781		(21,360		)	11,123		(106		)	1,028,904		(21,466		)
Asset backed securities	751,464		(4,220		)	12,282		(274		)	763,746		(4,494		)
Total	7,044,732		(80,493		)	83,471		(2,145		)	7,128,203		(82,638		)
Equity securities	167,176		(7,200		)	—		—			167,176		(7,200		)
Other investments	1,562		(28		)	—		—			1,562		(28		)
Short-term investments	22,941		(122		)	—		—			22,941		(122		)
Total	$	7,236,411	$	(87,843	)	$	83,471	$	(2,145	)	$	7,319,882	$	(89,988	)

December 31, 2016
Fixed maturities (1):
Corporate bonds	$	1,700,813	$	(43,011	)	$	46,902	$	(3,894	)	$	1,747,715	$	(46,905	)
Mortgage backed securities	402,699		(8,134		)	6,105		(223		)	408,804		(8,357		)
Municipal bonds	1,513,308		(28,504		)	29,636		(650		)	1,542,944		(29,154		)
Commercial mortgage backed securities	231,374		(6,331		)	5,635		(177		)	237,009		(6,508		)
U.S. government and government agencies	1,888,018		(24,437		)	—		—			1,888,018		(24,437		)
Non-U.S. government securities	807,598		(56,872		)	—		—			807,598		(56,872		)
Asset backed securities	627,557		(5,465		)	65,723		(1,061		)	693,280		(6,526		)
Total	7,171,367		(172,754		)	154,001		(6,005		)	7,325,368		(178,759		)
Equity securities	269,381		(17,517		)	—		—			269,381		(17,517		)
Other investments	39,299		(2,465		)	—		—			39,299		(2,465		)
Short-term investments	29,146		(145		)	—		—			29,146		(145		)
Total	$	7,509,193	$	(192,881	)	$	154,001	$	(6,005	)	$	7,663,194	$	(198,886	)


(1)	In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See “—Securities Lending Agreements.”

At June 30, 2017, on a lot level basis, approximately 3,150 security lots out of a total of approximately 7,610 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity portfolio was $2.5 million. At December 31, 2016, on a lot level basis, approximately 3,540 security lots out of a total of approximately 7,240 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity portfolio was $4.6 million.

The contractual maturities of the Company’s fixed maturities are shown in the following table. Expected maturities, which are management’s best estimates, will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



	June 30, 2017				December 31, 2016
Maturity	Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost
Due in one year or less	$	580,006	$	579,694	$	560,830	$	557,675
Due after one year through five years	7,240,600		7,222,772		6,158,148		6,211,099
Due after five years through 10 years	3,542,222		3,528,439		4,676,847		4,710,017
Due after 10 years	319,402		314,853		610,962		620,849
	11,682,230		11,645,758		12,006,787		12,099,640
Mortgage backed securities	331,082		328,028		490,093		493,656
Commercial mortgage backed securities	521,272		524,187		536,051		539,683
Asset backed securities	1,739,695		1,733,649		1,123,987		1,123,616
Total (1)	$	14,274,279	$	14,231,622	$	14,156,918	$	14,256,595


(1)	In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See “—Securities Lending Agreements.”

Securities Lending Agreements

The Company enters into securities lending agreements with financial institutions to enhance investment income whereby it loans certain of its securities to third parties, primarily major brokerage firms, for short periods of time through a lending agent. The Company maintains legal control over the securities it lends, retains the earnings and cash flows associated with the loaned securities and receives a fee from the borrower for the temporary use of the securities. An indemnification agreement with the lending agent protects the Company in the event a borrower becomes insolvent or fails to return any of the securities on loan from the Company.

The Company receives collateral in the form of cash or securities. At June 30, 2017, the fair value of the cash collateral received on securities lending was $36.7 million and the fair value of security collateral received was $591.1 million. At December 31, 2016, the fair value of the cash collateral received on securities lending was $212.5 million, and the fair value of security collateral received was $550.1 million. Cash collateral is reinvested in short-term investments.

The Company’s securities lending transactions were accounted for as secured borrowings with significant investment categories as follows:



	Remaining Contractual Maturity of the Agreements
	Overnight and Continuous		Less than 30 Days		30-90 Days		90 Days or More		Total
June 30, 2017
U.S. government and government agencies	$	406,753	$	10,175	$	133,449	$	29,984	$	580,361
Corporate bonds	40,488		—		—		—		40,488
Equity securities	7,003		—		—		—		7,003
Total	$	454,244	$	10,175	$	133,449	$	29,984	$	627,852
Gross amount of recognized liabilities for securities lending in offsetting disclosure in Note 9									$	—
Amounts related to securities lending not included in offsetting disclosure in Note 9									$	627,852

December 31, 2016
U.S. government and government agencies	$	556,015	$	31,244	$	126,093	$	5,140	$	718,492
Corporate bonds	29,078		—		—		—		29,078
Equity securities	14,984		—		—		—		14,984
Total	$	600,077	$	31,244	$	126,093	$	5,140	$	762,554
Gross amount of recognized liabilities for securities lending in offsetting disclosure in Note 9									$	—
Amounts related to securities lending not included in offsetting disclosure in Note 9									$	762,554

Other Investments

The following table summarizes the Company’s other investments, including available for sale and fair value option components:



	June 30, 2017		December 31, 2016
Available for sale:
Asian and emerging markets	$	114,594	$	84,778
Investment grade fixed income	52,266		33,923
Credit related funds	14,632		7,469
Other	67,169		41,800
Total available for sale	248,661		167,970
Fair value option:
Term loan investments (par value: $1,367,178 and $1,208,537)	1,334,590		1,190,799
Mezzanine debt funds	141,066		127,943
Credit related funds	197,144		218,298
Investment grade fixed income	86,389		75,468
Asian and emerging markets	245,866		178,568
Other (1)	138,710		129,717
Total fair value option	2,143,765		1,920,793
Total	$	2,392,426	$	2,088,763


(1)	Includes fund investments with strategies in mortgage servicing rights, transportation, infrastructure and other.

Certain of the Company’s other investments are in investment funds for which the Company has the option to redeem at agreed upon values as described in each investment fund’s subscription agreement. Depending on the terms of the various subscription agreements, investments in investment funds may be redeemed daily, monthly, quarterly or on other terms. Two common redemption restrictions which may impact the Company’s ability to redeem these investment funds are gates and lockups. A gate is a suspension of redemptions which may be implemented by the general partner or investment manager of the fund in order to defer, in whole or in part, the redemption request in the event the aggregate amount of redemption requests exceeds a predetermined percentage of the investment fund’s net assets which may otherwise hinder the general partner or investment manager’s ability to liquidate holdings in an orderly fashion in order to generate the cash necessary to fund extraordinarily large redemption payouts. A lockup period is the initial amount of time an investor is contractually required to hold the security before having the ability to redeem. If the investment funds are eligible to be redeemed, the time to redeem such fund can take weeks or months following the notification.

Fair Value Option

The following table summarizes the Company’s assets and liabilities which are accounted for using the fair value option:



	June 30, 2017		December 31, 2016
Fixed maturities	$	1,074,961	$	1,099,116
Other investments	2,143,765		1,920,793
Short-term investments	527,384		373,669
Equity securities	81,298		27,642
Investments accounted for using the fair value option	$	3,827,408	$	3,421,220

Limited partnership interests

In the normal course of its activities, the Company invests in limited partnerships as part of its overall investment strategy. Such amounts are included in ‘investments accounted for using the equity method’ and ‘investments accounted for using the fair value option.’ The Company has determined that it is not required to consolidate these investments because it is not the primary beneficiary of the funds. The Company’s maximum exposure to loss with respect to these investments is limited to the investment carrying amounts reported in the Company’s consolidated balance sheet and any unfunded commitment.

The following table summarizes investments in limited partnership interests where the Company has a variable interest by balance sheet line item:



	June 30, 2017		December 31, 2016
Investments accounted for using the equity method (1)	$	948,856	$	800,970
Investments accounted for using the fair value option (2)	86,888		90,804
Total	$	1,035,744	$	891,774


(1)	Aggregate unfunded commitments were $961.0 million at June 30, 2017, compared to $776.6 million at December 31, 2016.


(2)	Aggregate unfunded commitments were $67.7 million at June 30, 2017, compared to $16.7 million at December 31, 2016.

Net Investment Income

The components of net investment income were derived from the following sources:



	June 30,
	2017			2016
Three Months Ended
Fixed maturities	$	94,270		$	77,994
Term loan investments	19,105			18,608
Equity securities (dividends)	3,654			3,663
Short-term investments	2,016			816
Other (1)	14,971			8,260
Gross investment income	134,016			109,341
Investment expenses	(22,892		)	(21,003		)
Net investment income	$	111,124		$	88,338

Six Months Ended
Fixed maturities	$	188,663		$	151,667
Term loan investments	40,275			38,620
Equity securities (dividends)	6,297			7,098
Short-term investments	3,775			1,312
Other (1)	33,381			22,003
Gross investment income	272,391			220,700
Investment expenses	(43,393		)	(38,627		)
Net investment income	$	228,998		$	182,073


(1)	Includes income distributions from investment funds and other items.

Net Realized Gains (Losses)

Net realized gains (losses) were as follows, excluding other than-temporary impairment provision.



	June 30,
	2017			2016
Three Months Ended
Available for sale securities:
Gross gains on investment sales	$	76,730		$	74,695
Gross losses on investment sales	(52,619		)	(43,293		)
Change in fair value of assets and liabilities accounted for using the fair value option:
Fixed maturities	9,656			18,632
Other investments	637			13,136
Equity securities	2,829			401
Short-term investments	3,328			(621		)
Derivative instruments (1)	(4,770		)	20,334
Other (2)	(14,056		)	(15,066		)
Net realized gains (losses)	$	21,735		$	68,218

Six Months Ended
Available for sale securities:
Gross gains on investment sales	$	145,905		$	182,514
Gross losses on investment sales	(113,981		)	(106,424		)
Change in fair value of assets and liabilities accounted for using the fair value option:
Fixed maturities	30,197			18,299
Other investments	17,885			(8,412		)
Equity securities	6,374			437
Short-term investments	3,332			(1,043		)
Derivative instruments (1)	(13,951		)	41,066
Other (2)	(19,873		)	(20,895		)
Net realized gains (losses)	$	55,888		$	105,542


(1)	See Note 9 for information on the Company’s derivative instruments.


(2)	Includes the re-measurement of contingent consideration liability amounts.

Equity in Net Income (Loss) of Investment Funds Accounted for Using the Equity Method

The Company recorded $32.7 million of equity in net income related to investment funds accounted for using the equity method in the 2017 second quarter, compared to $8.7 million for the 2016 second quarter, and $80.8 million for the six months ended June 30, 2017, compared to $15.4 million for the 2016 period. In applying the equity method, investments are initially recorded at cost and are subsequently adjusted based on the Company’s proportionate share of the net income or loss of the funds (which include changes in the market value of the underlying securities in the funds). Such investments are generally recorded on a one to three month lag based on the availability of reports from the investment funds.

Other-Than-Temporary Impairments

The Company performs quarterly reviews of its available for sale investments in order to determine whether declines in fair value below the amortized cost basis were considered other-than-temporary in accordance with applicable guidance.

The following table details the net impairment losses recognized in earnings by asset class:



	June 30,
	2017			2016
Three Months Ended
Fixed maturities:
Mortgage backed securities	$	(92	)	$	(82	)
Corporate bonds	(1,401		)	(775		)
Non-U.S. government securities	—			(51		)
Asset backed securities	—			(2,500		)
Municipal bonds	(173		)	—
Total	(1,666		)	(3,408		)
Equity securities	—			(1,935		)
Other investments	(64		)	—
Net impairment losses recognized in earnings	$	(1,730	)	$	(5,343	)

Six Months Ended
Fixed maturities:
Mortgage backed securities	$	(1,411	)	$	(555	)
Corporate bonds	(1,402		)	(5,655		)
Non-U.S. government securities	(198		)	(232		)
Asset backed securities	—			(2,506		)
Municipal bonds	(173		)	—
Total	(3,184		)	(8,948		)
Equity securities	(186		)	(3,037		)
Other investments	(167		)	(997		)
Net impairment losses recognized in earnings	$	(3,537	)	$	(12,982	)

Net impairment losses recognized in earnings in the 2017 second quarter were primarily related to foreign currency fluctuations on corporate bonds. For the six months ended June 30, 2017, net impairment losses recognized in earnings reflected the Company’s decision to liquidate a portfolio of mortgage backed securities in April 2017. The Company recorded impairment losses on securities in such portfolio that were in an unrealized loss position at March 31, 2017.

The Company believes that the $3.6 million of OTTI included in accumulated other comprehensive income at June 30, 2017 on the securities which were considered by the Company to be impaired was due to market and sector-related factors (i.e., not credit losses). At June 30, 2017, the Company did not intend to sell these securities, or any other securities which were in an unrealized loss position, and determined that it is more likely than not that the Company will not be required to sell such securities before recovery of their cost basis.

The following table provides a roll forward of the amount related to credit losses recognized in earnings for which a portion of an OTTI was recognized in accumulated other comprehensive income:



	June 30,
	2017			2016
Three Months Ended
Balance at start of period	$	12,537		$	18,291
Credit loss impairments recognized on securities not previously impaired	31			287
Credit loss impairments recognized on securities previously impaired	172			—
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security	—			—
Reductions for securities sold during the period	(8,303		)	(3,731		)
Balance at end of period	$	4,437		$	14,847

Six Months Ended
Balance at start of year	$	13,138		$	26,875
Credit loss impairments recognized on securities not previously impaired	31			1,350
Credit loss impairments recognized on securities previously impaired	195			522
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security	—			—
Reductions for securities sold during the period	(8,927		)	(13,900		)
Balance at end of period	$	4,437		$	14,847

Restricted Assets

The Company is required to maintain assets on deposit, which primarily consist of fixed maturities, with various regulatory authorities to support its insurance and reinsurance operations. The Company’s insurance and reinsurance subsidiaries maintain assets in trust accounts as collateral for insurance and reinsurance transactions with affiliated companies and also have investments in segregated portfolios primarily to provide collateral or guarantees for letters of credit to third parties. See Note 10 for further details.

The following table details the value of the Company’s restricted assets:



	June 30, 2017		December 31, 2016
Assets used for collateral or guarantees:
Affiliated transactions	$	4,003,009	$	3,871,971
Third party agreements	1,672,159		1,513,079
Deposits with U.S. regulatory authorities	618,448		472,890
Deposits with non-U.S. regulatory authorities	45,493		44,399
Total restricted assets	$	6,339,109	$	5,902,339