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Investment Information
 6 Months Ended
Jun. 30, 2018
Disclosure Investment Information [Abstract]  
Investment Information
Investment Information

At June 30, 2018, total investable assets of $21.82 billion included $19.17 billion held by the Company and $2.65 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 securities classified as available for sale:
 
Estimated
Fair
Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Cost or
Amortized
Cost
 
OTTI
Unrealized
Losses (2)
June 30, 2018
 
 
 
 
 
 
 
 
 
Fixed maturities (1):
 
 
 
 
 
 
 
 
 
Corporate bonds
$
5,535,763

 
$
7,199

 
$
(103,978
)
 
$
5,632,542

 
$
(69
)
Mortgage backed securities
488,699

 
1,699

 
(4,742
)
 
491,742

 
(15
)
Municipal bonds
1,431,256

 
7,371

 
(22,047
)
 
1,445,932

 
—

Commercial mortgage backed securities
590,198

 
776

 
(13,222
)
 
602,644

 
—

U.S. government and government agencies
2,788,272

 
6,216

 
(19,577
)
 
2,801,633

 
—

Non-U.S. government securities
1,692,783

 
17,124

 
(27,480
)
 
1,703,139

 
—

Asset backed securities
1,820,489

 
3,310

 
(16,574
)
 
1,833,753

 
—

Total
14,347,460

 
43,695

 
(207,620
)
 
14,511,385

 
(84
)
Equity securities (3)
 
 
 
 
 
 
 
 
 
Other investments
—

 
—

 
—

 
—

 
—

Short-term investments
1,096,798

 
338

 
(72
)
 
1,096,532

 
—

Total
$
15,444,258

 
$
44,033

 
$
(207,692
)
 
$
15,607,917

 
$
(84
)
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
Fixed maturities (1):
 
 
 
 
 
 
 
 
 
Corporate bonds
$
4,434,439

 
$
30,943

 
$
(32,340
)
 
$
4,435,836

 
$
(73
)
Mortgage backed securities
316,141

 
1,640

 
(2,561
)
 
317,062

 
(15
)
Municipal bonds
2,158,840

 
20,285

 
(12,308
)
 
2,150,863

 
—

Commercial mortgage backed securities
545,817

 
2,131

 
(4,268
)
 
547,954

 
—

U.S. government and government agencies
3,484,257

 
2,188

 
(28,769
)
 
3,510,838

 
—

Non-U.S. government securities
1,612,754

 
48,764

 
(17,321
)
 
1,581,311

 
—

Asset backed securities
1,780,143

 
5,147

 
(8,614
)
 
1,783,610

 
—

Total
14,332,391

 
111,098

 
(106,181
)
 
14,327,474

 
(88
)
Equity securities
504,333

 
88,739

 
(5,583
)
 
421,177

 
—

Other investments
264,989

 
66,946

 
(120
)
 
198,163

 
—

Short-term investments
1,469,042

 
650

 
(563
)
 
1,468,955

 
—

Total
$
16,570,755

 
$
267,433

 
$
(112,447
)
 
$
16,415,769

 
$
(88
)
(1)
In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities 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, 2018, the net unrealized gain related to securities for which a non-credit OTTI was recognized in AOCI was $0.2 million, compared to a net unrealized gain of $0.3 million at December 31, 2017.
(3)
Effective January 1, 2018, the Company adopted new accounting guidance for financial instruments (see Note 2). As a result, equity securities are no longer accounted for as available for sale and are excluded from this table.

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, 2018
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities (1):
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
4,541,077

 
$
(94,563
)
 
$
236,332

 
$
(9,415
)
 
$
4,777,409

 
$
(103,978
)
Mortgage backed securities
296,876

 
(4,618
)
 
708

 
(124
)
 
297,584

 
(4,742
)
Municipal bonds
814,694

 
(16,888
)
 
109,913

 
(5,159
)
 
924,607

 
(22,047
)
Commercial mortgage backed securities
351,013

 
(9,067
)
 
56,382

 
(4,155
)
 
407,395

 
(13,222
)
U.S. government and government agencies
1,957,338

 
(18,470
)
 
41,069

 
(1,107
)
 
1,998,407

 
(19,577
)
Non-U.S. government securities
1,243,055

 
(24,034
)
 
160,434

 
(3,446
)
 
1,403,489

 
(27,480
)
Asset backed securities
1,377,269

 
(14,096
)
 
110,507

 
(2,478
)
 
1,487,776

 
(16,574
)
Total
10,581,322

 
(181,736
)
 
715,345

 
(25,884
)
 
11,296,667

 
(207,620
)
Equity securities (2)
 
 
 
 
 
 
 
 
 
 
 
Other investments
—

 
—

 
—

 
—

 
—

 
—

Short-term investments
53,937

 
(72
)
 
—

 
—

 
53,937

 
(72
)
Total
$
10,635,259

 
$
(181,808
)
 
$
715,345

 
$
(25,884
)
 
$
11,350,604

 
$
(207,692
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities (1):
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
2,320,716

 
$
(25,411
)
 
$
279,082

 
$
(6,929
)
 
$
2,599,798

 
$
(32,340
)
Mortgage backed securities
221,113

 
(1,715
)
 
28,380

 
(846
)
 
249,493

 
(2,561
)
Municipal bonds
1,030,389

 
(8,438
)
 
132,469

 
(3,870
)
 
1,162,858

 
(12,308
)
Commercial mortgage backed securities
225,164

 
(1,899
)
 
57,291

 
(2,369
)
 
282,455

 
(4,268
)
U.S. government and government agencies
2,646,415

 
(26,501
)
 
111,879

 
(2,268
)
 
2,758,294

 
(28,769
)
Non-U.S. government securities
1,218,514

 
(15,546
)
 
93,530

 
(1,775
)
 
1,312,044

 
(17,321
)
Asset backed securities
1,111,246

 
(5,915
)
 
209,207

 
(2,699
)
 
1,320,453

 
(8,614
)
Total
8,773,557

 
(85,425
)
 
911,838

 
(20,756
)
 
9,685,395

 
(106,181
)
Equity securities
166,562

 
(5,583
)
 
—

 
—

 
166,562

 
(5,583
)
Other investments
15,025

 
(120
)
 
—

 
—

 
15,025

 
(120
)
Short-term investments
109,528

 
(563
)
 
—

 
—

 
109,528

 
(563
)
Total
$
9,064,672

 
$
(91,691
)
 
$
911,838

 
$
(20,756
)
 
$
9,976,510

 
$
(112,447
)
(1)
In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities 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)
Effective January 1, 2018, the Company adopted new accounting guidance for financial instruments (see Note 2). As a result, equity securities are no longer accounted for as available for sale and are excluded from this table.

At June 30, 2018, on a lot level basis, approximately 5,440 security lots out of a total of approximately 7,450 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 $1.7 million. At December 31, 2017, on a lot level basis, approximately 3,830 security lots out of a total of approximately 7,450 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 $1.3 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, 2018
 
December 31, 2017
Maturity
 
Estimated
Fair
Value
 
Amortized
Cost
 
Estimated
Fair
Value
 
Amortized
Cost
Due in one year or less
 
$
344,007

 
$
343,938

 
$
550,711

 
$
548,771

Due after one year through five years
 
8,154,773

 
8,235,481

 
7,436,153

 
7,434,801

Due after five years through 10 years
 
2,703,341

 
2,756,097

 
3,369,635

 
3,369,750

Due after 10 years
 
245,953

 
247,730

 
333,791

 
325,526

 
 
11,448,074

 
11,583,246

 
11,690,290

 
11,678,848

Mortgage backed securities
 
488,699

 
491,742

 
316,141

 
317,062

Commercial mortgage backed securities
 
590,198

 
602,644

 
545,817

 
547,954

Asset backed securities
 
1,820,489

 
1,833,753

 
1,780,143

 
1,783,610

Total (1)
 
$
14,347,460

 
$
14,511,385

 
$
14,332,391

 
$
14,327,474


(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. Cash collateral primarily consists of short term investments. At June 30, 2018, the fair value of the cash collateral received on securities lending was $28.0 million and the fair value of security collateral received was $209.0 million. At December 31, 2017, the fair value of the cash collateral received on securities lending was $199.9 million, and the fair value of security collateral received was $276.7 million.
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, 2018
 
 
 
 
 
 
 
 
 
 
U.S. government and government agencies
 
$
147,509

 
$
—

 
$
48,268

 
$
—

 
$
195,777

Corporate bonds
 
29,265

 
—

 
—

 
—

 
29,265

Equity securities
 
11,906

 
—

 
—

 
—

 
11,906

Total
 
$
188,680

 
$
—

 
$
48,268

 
$
—

 
$
236,948

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
 
$
236,948

 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
U.S. government and government agencies
 
$
343,425

 
$
20,309

 
$
76,086

 
$
—

 
$
439,820

Corporate bonds
 
28,003

 
—

 
—

 
—

 
28,003

Equity securities
 
8,782

 
—

 
—

 
—

 
8,782

Total
 
$
380,210

 
$
20,309

 
$
76,086

 
$
—

 
$
476,605

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
 
$
476,605


Other Investments
The following table summarizes the Company’s other investments, including available for sale and fair value option components:
 
June 30,
2018
 
December 31,
2017
Available for sale securities:
 
 
 
Asian and emerging markets
$
—

 
$
135,140

Investment grade fixed income
—

 
53,878

Credit related funds
—

 
18,365

Other
—

 
57,606

Total available for sale (1)
—

 
264,989

Fair value option:
 
 
 
Term loan investments (par value: $1,321,154 and $1,223,453)
$
1,286,305

 
$
1,200,882

Mezzanine debt funds
257,750

 
252,160

Credit related funds
199,437

 
175,422

Investment grade fixed income
98,240

 
102,347

Asian and emerging markets
350,308

 
258,541

Other (2)
136,864

 
147,029

Total fair value option
2,328,904

 
2,136,381

Total
$
2,328,904

 
$
2,401,370


(1)
The Company reviewed the accounting treatment for three limited partnership investments which were accounted for as available for sale at December 31, 2017 during the 2018 first quarter and determined, based on reconsideration during the period of the Company’s percentage ownership, that the equity method of accounting was appropriate for such investments.
(2)
Includes fund investments with strategies in mortgage servicing rights, transportation, infrastructure assets 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,
2018
 
December 31,
2017
Fixed maturities
$
1,428,503

 
$
1,642,855

Other investments
2,328,904

 
2,136,381

Short-term investments
217,066

 
297,426

Equity securities
137,138

 
139,575

Investments accounted for using the fair value option
$
4,111,611

 
$
4,216,237


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,
2018
 
December 31,
2017
Investments accounted for using the equity method (1)
$
1,292,573

 
$
1,041,321

Investments accounted for using the fair value option (2)
130,471

 
130,471

Total
$
1,423,044

 
$
1,171,792

(1)
Aggregate unfunded commitments were $994.7 million at June 30, 2018, compared to $1.02 billion at December 31, 2017.
(2)
Aggregate unfunded commitments were $91.0 million at June 30, 2018, compared to $100.4 million at December 31, 2017.
Net Investment Income
The components of net investment income were derived from the following sources:
 
June 30,
 
2018
 
2017
Three Months Ended
 
 
 
Fixed maturities
$
115,110

 
$
94,270

Equity securities
4,777

 
3,654

Short-term investments
4,392

 
2,016

Other (1)
38,168

 
34,076

Gross investment income
162,447

 
134,016

Investment expenses
(26,779
)
 
(22,892
)
Net investment income
$
135,668

 
$
111,124

 
 
 
 
Six Months Ended
 
 
 
Fixed maturities
$
222,997

 
$
188,663

Equity securities
7,345

 
6,297

Short-term investments
9,252

 
3,775

Other (1)
75,542

 
73,656

Gross investment income
315,136

 
272,391

Investment expenses
(52,744
)
 
(43,393
)
Net investment income
$
262,392

 
$
228,998

(1)
Includes income distributions from investment funds, term loan investments and other items.
Equity in Net Income (Loss) of Investment Funds Accounted for Using the Equity Method
The Company recorded $8.5 million of equity in net income related to investment funds accounted for using the equity method in the 2018 second quarter, compared to $32.7 million for the 2017 second quarter, and $36.5 million for the six months ended June 30, 2018, compared to $80.8 million for the 2017 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.

Net Realized Gains (Losses)
Net realized gains (losses) were as follows, excluding net impairment losses recognized in earnings:
 
June 30,
 
2018
 
2017
Three Months Ended
 
 
 
Available for sale securities:
 

 
 

Gross gains on investment sales
$
18,777

 
$
76,730

Gross losses on investment sales
(57,711
)
 
(52,619
)
Change in fair value of assets and liabilities accounted for using the fair value option:
 
 
 
Fixed maturities
(22,927
)
 
9,656

Other investments
(254
)
 
637

Equity securities
1,230

 
2,829

Short-term investments
(136
)
 
3,328

Equity securities, at fair value (1):
 
 
 
Net realized gains (losses) on sales during the period
(5,918
)
 
—

Net unrealized gains (losses) on equity securities still held at reporting date
(7,278
)
 
—

Derivative instruments (2)
(2,146
)
 
(4,770
)
Other (3)
(248
)
 
(14,056
)
Net realized gains (losses)
$
(76,611
)
 
$
21,735

 
 
 
 
Six Months Ended
 
 
 
Available for sale securities:
 
 
 
Gross gains on investment sales
$
33,742

 
$
145,905

Gross losses on investment sales
(140,262
)
 
(113,981
)
Change in fair value of assets and liabilities accounted for using the fair value option:
 
 
 
Fixed maturities
(40,478
)
 
30,197

Other investments
(6,628
)
 
17,885

Equity securities
7,898

 
6,374

Short-term investments
(287
)
 
3,332

Equity securities, at fair value (1):
 
 
 
Net realized gains (losses) on sales during the period
(11,286
)
 
—

Net unrealized gains (losses) on equity securities still held at reporting date
(14,861
)
 
—

Derivative instruments (2)
(6,109
)
 
(13,951
)
Other (3)
(9,338
)
 
(19,873
)
Net realized gains (losses)
$
(187,609
)
 
$
55,888

(1)
Pursuant to new accounting guidance (see Note 2), changes in fair value on equity securities are recorded through net income effective January 1, 2018.
(2)
See Note 9 for information on the Company’s derivative instruments.
(3)
Includes the re-measurement of contingent consideration liability amounts.


Net Impairment Losses Recognized in Earnings
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,
 
2018
 
2017
Three Months Ended
 
 
 
Fixed maturities:
 

 
 

Mortgage backed securities
$
(81
)
 
$
(92
)
Corporate bonds
(241
)
 
(1,401
)
Asset backed securities
(148
)
 
—

Municipal bonds
—

 
(173
)
Total
(470
)
 
(1,666
)
Other investments
—

 
(64
)
Net impairment losses recognized in earnings
$
(470
)
 
$
(1,730
)
 
 
 
 
Six Months Ended
 
 
 
Fixed maturities:
 
 
 
Mortgage backed securities
$
(123
)
 
$
(1,411
)
Corporate bonds
(361
)
 
(1,402
)
Non-U.S. government securities
—

 
(198
)
Asset backed securities
(148
)
 
—

Municipal bonds
—

 
(173
)
Total
(632
)
 
(3,184
)
Equity securities
—

 
(186
)
Other investments
—

 
(167
)
Net impairment losses recognized in earnings
$
(632
)
 
$
(3,537
)
 
Net impairment losses recognized in earnings in the 2018 periods were primarily related to foreign currency fluctuations on corporate bonds and asset backed securities.
The Company believes that the $0.1 million of OTTI included in accumulated other comprehensive income at June 30, 2018 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, 2018, 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,
 
2018
 
2017
Three Months Ended
 
 
 
Balance at start of period
$
767

 
$
12,537

Credit loss impairments recognized on securities not previously impaired
—

 
31

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
(69
)
 
(8,303
)
Balance at end of period
$
698

 
$
4,437

 
 
 
 
Six Months Ended
 
 
 
Balance at start of year
$
767

 
$
13,138

Credit loss impairments recognized on securities not previously impaired
—

 
31

Credit loss impairments recognized on securities previously impaired
—

 
195

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
(69
)
 
(8,927
)
Balance at end of period
$
698

 
$
4,437


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 16, “Commitments and Contingencies,” of the notes to consolidated financial statements in the Company’s 2017 Form 10-K.
The following table details the value of the Company’s restricted assets:
 
June 30,
2018
 
December 31,
2017
Assets used for collateral or guarantees:
 

 
 

Affiliated transactions
$
4,549,122

 
$
4,323,726

Third party agreements
1,537,336

 
1,674,304

Deposits with U.S. regulatory authorities
701,026

 
616,987

Deposits with non-U.S. regulatory authorities
58,371

 
55,895

Total restricted assets
$
6,845,855

 
$
6,670,912