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Investment Information
 9 Months Ended
Sep. 30, 2019
Disclosure Investment Information [Abstract]  
Investment Information Investment Information

At September 30, 2019, total investable assets of $24.30 billion included $21.57 billion held by the Company and $2.73 billion attributable to Watford.
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)
September 30, 2019
 
 
 
 
 
 
 
 
 
Fixed maturities (1):
 
 
 
 
 
 
 
 
 
Corporate bonds
$
6,269,993

 
$
198,742

 
$
(18,420
)
 
$
6,089,671

 
$
—

Mortgage backed securities
544,033

 
11,185

 
(918
)
 
533,766

 
(6
)
Municipal bonds
653,346

 
27,095

 
(379
)
 
626,630

 
—

Commercial mortgage backed securities
754,306

 
27,523

 
(158
)
 
726,941

 
—

U.S. government and government agencies
5,127,290

 
67,957

 
(6,671
)
 
5,066,004

 
—

Non-U.S. government securities
1,873,856

 
48,212

 
(52,767
)
 
1,878,411

 
—

Asset backed securities
1,657,494

 
29,838

 
(5,931
)
 
1,633,587

 
—

Total
16,880,318

 
410,552

 
(85,244
)
 
16,555,010

 
(6
)
Short-term investments
751,989

 
227

 
(445
)
 
752,207

 
—

Total
$
17,632,307

 
$
410,779

 
$
(85,689
)
 
$
17,307,217

 
$
(6
)
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
Fixed maturities (1):
 
 
 
 
 
 
 
 
 
Corporate bonds
$
5,537,548

 
$
14,476

 
$
(105,428
)
 
$
5,628,500

 
$
(69
)
Mortgage backed securities
541,193

 
3,991

 
(3,216
)
 
540,418

 
(6
)
Municipal bonds
1,013,395

 
5,380

 
(11,891
)
 
1,019,906

 
—

Commercial mortgage backed securities
729,442

 
2,650

 
(10,751
)
 
737,543

 
—

U.S. government and government agencies
3,758,698

 
27,189

 
(8,474
)
 
3,739,983

 
—

Non-U.S. government securities
1,771,338

 
14,477

 
(50,948
)
 
1,807,809

 
—

Asset backed securities
1,600,896

 
8,060

 
(14,798
)
 
1,607,634

 
—

Total
14,952,510

 
76,223

 
(205,506
)
 
15,081,793

 
(75
)
Short-term investments
955,880

 
36

 
(394
)
 
956,238

 
—

Total
$
15,908,390

 
$
76,259

 
$
(205,900
)
 
$
16,038,031

 
$
(75
)
(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 September 30, 2019 the net unrealized loss related to securities for which a non-credit OTTI was recognized in AOCI was $0.01 million, compared to net unrealized loss of $0.04 million at December 31, 2018.
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
September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities (1):
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
538,471

 
$
(11,128
)
 
$
113,987

 
$
(7,292
)
 
$
652,458

 
$
(18,420
)
Mortgage backed securities
97,288

 
(905
)
 
200

 
(13
)
 
97,488

 
(918
)
Municipal bonds
43,627

 
(379
)
 
—

 
—

 
43,627

 
(379
)
Commercial mortgage backed securities
47,219

 
(151
)
 
1,872

 
(7
)
 
49,091

 
(158
)
U.S. government and government agencies
1,592,232

 
(6,531
)
 
47,416

 
(140
)
 
1,639,648

 
(6,671
)
Non-U.S. government securities
1,214,128

 
(51,742
)
 
47,576

 
(1,025
)
 
1,261,704

 
(52,767
)
Asset backed securities
375,936

 
(4,600
)
 
48,743

 
(1,331
)
 
424,679

 
(5,931
)
Total
3,908,901

 
(75,436
)
 
259,794

 
(9,808
)
 
4,168,695

 
(85,244
)
Short-term investments
43,007

 
(445
)
 
—

 
—

 
43,007

 
(445
)
Total
$
3,951,908

 
$
(75,881
)
 
$
259,794

 
$
(9,808
)
 
$
4,211,702

 
$
(85,689
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities (1):
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
2,983,195

 
$
(68,910
)
 
$
1,234,865

 
$
(36,518
)
 
$
4,218,060

 
$
(105,428
)
Mortgage backed securities
84,296

 
(695
)
 
109,009

 
(2,521
)
 
193,305

 
(3,216
)
Municipal bonds
233,081

 
(2,074
)
 
408,155

 
(9,817
)
 
641,236

 
(11,891
)
Commercial mortgage backed securities
223,341

 
(2,831
)
 
193,956

 
(7,920
)
 
417,297

 
(10,751
)
U.S. government and government agencies
635,049

 
(1,354
)
 
391,102

 
(7,120
)
 
1,026,151

 
(8,474
)
Non-U.S. government securities
1,028,340

 
(35,524
)
 
389,671

 
(15,424
)
 
1,418,011

 
(50,948
)
Asset backed securities
533,592

 
(8,832
)
 
368,095

 
(5,966
)
 
901,687

 
(14,798
)
Total
5,720,894

 
(120,220
)
 
3,094,853

 
(85,286
)
 
8,815,747

 
(205,506
)
Short-term investments
122,878

 
(394
)
 
—

 
—

 
122,878

 
(394
)
Total
$
5,843,772

 
$
(120,614
)
 
$
3,094,853

 
$
(85,286
)
 
$
8,938,625

 
$
(205,900
)
(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.”

At September 30, 2019, on a lot level basis, approximately 1,980 security lots out of a total of approximately 9,260 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 $3.0 million. At December 31, 2018, on a lot level basis, approximately 5,870 security lots out of a total of approximately 8,450 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 $2.6 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.
 
 
September 30, 2019
 
December 31, 2018
Maturity
 
Estimated
Fair
Value
 
Amortized
Cost
 
Estimated
Fair
Value
 
Amortized
Cost
Due in one year or less
 
$
545,056

 
$
538,903

 
$
276,682

 
$
279,135

Due after one year through five years
 
10,096,867

 
9,971,896

 
8,666,297

 
8,738,944

Due after five years through 10 years
 
3,075,318

 
2,952,478

 
2,919,232

 
2,951,582

Due after 10 years
 
207,244

 
197,439

 
218,768

 
226,537

 
 
13,924,485

 
13,660,716

 
12,080,979

 
12,196,198

Mortgage backed securities
 
544,033

 
533,766

 
541,193

 
540,418

Commercial mortgage backed securities
 
754,306

 
726,941

 
729,442

 
737,543

Asset backed securities
 
1,657,494

 
1,633,587

 
1,600,896

 
1,607,634

Total (1)
 
$
16,880,318

 
$
16,555,010

 
$
14,952,510

 
$
15,081,793


(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 September 30, 2019, the fair value of the cash collateral received on securities lending was $12.0 million and the fair value of security collateral received was $418.2 million. At December 31, 2018, the fair value of the cash collateral received on securities lending was $19.0 million, and the fair value of security collateral received was $255.1 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
September 30, 2019
 
 
 
 
 
 
 
 
 
 
U.S. government and government agencies
 
$
257,979

 
$
—

 
$
156,541

 
$
—

 
$
414,520

Corporate bonds
 
4,820

 
—

 
—

 
—

 
4,820

Equity securities
 
10,915

 
—

 
—

 
—

 
10,915

Total
 
$
273,714

 
$
—

 
$
156,541

 
$
—

 
$
430,255

Gross amount of recognized liabilities for securities lending in offsetting disclosure in note 8
 
$
—

Amounts related to securities lending not included in offsetting disclosure in note 8
 
$
430,255

 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
U.S. government and government agencies
 
$
219,276

 
$
—

 
$
32,583

 
$
—

 
$
251,859

Corporate bonds
 
7,129

 
—

 
—

 
—

 
7,129

Equity securities
 
15,137

 
—

 
—

 
—

 
15,137

Total
 
$
241,542

 
$
—

 
$
32,583

 
$
—

 
$
274,125

Gross amount of recognized liabilities for securities lending in offsetting disclosure in note 8
 
$
—

Amounts related to securities lending not included in offsetting disclosure in note 8
 
$
274,125


Equity Securities, at Fair Value
At September 30, 2019, the Company held $550.5 million of equity securities, at fair value, compared to $338.9 million at December 31, 2018. Such holdings include publicly traded common stocks in the natural resources, energy, consumer staples and other sectors and exchange-traded funds.
Other Investments
The following table summarizes the Company’s other investments which are included in investments accounted for using the fair value option, by strategy:
 
September 30,
2019
 
December 31,
2018
Term loan investments (par value: $1,434,328 and $1,369,216)
$
1,330,886

 
$
1,282,287

Lending
624,699

 
524,112

Credit related funds
165,444

 
202,123

Energy
113,791

 
117,509

Investment grade fixed income
83,649

 
101,902

Infrastructure
49,602

 
45,371

Private equity
54,609

 
24,383

Real estate
17,440

 
14,252

Total
$
2,440,120

 
$
2,311,939


Investments Accounted For Using the Equity Method
The following table summarizes the Company’s investments accounted for using the equity method, by strategy:
 
September 30,
2019
 
December 31,
2018
Credit related funds
$
428,353

 
$
429,402

Equities
284,465

 
375,273

Real estate
265,502

 
232,647

Lending
200,112

 
125,041

Private equity
141,343

 
114,019

Infrastructure
149,005

 
113,748

Energy
107,052

 
103,661

Total
$
1,575,832

 
$
1,493,791


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 which are accounted for using the fair value option:
 
September 30,
2019
 
December 31,
2018
Fixed maturities
$
908,802

 
$
1,245,562

Other investments
2,440,120

 
2,311,939

Short-term investments
390,980

 
322,177

Equity securities
98,341

 
103,893

Investments accounted for using the fair value option
$
3,838,243

 
$
3,983,571


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:
 
September 30,
2019
 
December 31,
2018
Investments accounted for using the equity method (1)
1,575,832

 
1,493,791

Investments accounted for using the fair value option (2)
189,186

 
162,398

Total
$
1,765,018

 
$
1,656,189

(1)
Aggregate unfunded commitments were $1.44 billion at September 30, 2019, compared to $1.22 billion at December 31, 2018.
(2)
Aggregate unfunded commitments were $51.1 million at September 30, 2019, compared to $117.5 million at December 31, 2018.
Net Investment Income
The components of net investment income were derived from the following sources:
 
September 30,
 
2019
 
2018
Three Months Ended
 
 
 
Fixed maturities
$
126,889

 
$
120,516

Term loans
24,236

 
21,903

Equity securities
3,992

 
3,165

Short-term investments
3,834

 
4,547

Other (1)
22,704

 
17,195

Gross investment income
181,655

 
167,326

Investment expenses
(20,167
)
 
(23,302
)
Net investment income
$
161,488

 
$
144,024

 
 
 
 
Nine Months Ended
 
 
 
Fixed maturities
$
381,706

 
$
343,513

Term loans
73,582

 
62,430

Equity securities
11,348

 
10,510

Short-term investments
11,872

 
13,799

Other (1)
62,423

 
52,210

Gross investment income
540,931

 
482,462

Investment expenses
(67,456
)
 
(76,046
)
Net investment income
$
473,475

 
$
406,416

(1)
Includes income distributions from investment funds and other items.
Net Realized Gains (Losses)
Net realized gains (losses) were as follows, excluding net impairment losses recognized in earnings:
 
September 30,
 
2019
 
2018
Three Months Ended
 
 
 
Available for sale securities:
 

 
 

Gross gains on investment sales
$
73,685

 
$
10,990

Gross losses on investment sales
(30,561
)
 
(34,879
)
Change in fair value of assets and liabilities accounted for using the fair value option:
 
 
 
Fixed maturities
(3,895
)
 
(6,604
)
Other investments
(21,778
)
 
(7,950
)
Equity securities
(1,231
)
 
2,752

Short-term investments
(1,941
)
 
(471
)
Equity securities, at fair value:
 
 
 
Net realized gains (losses) on sales during the period
5,217

 
(2,012
)
Net unrealized gains (losses) on equity securities still held at reporting date
(1,206
)
 
10,798

Derivative instruments (1)
42,893

 
(17,556
)
Other (2)
1,335

 
(6,773
)
Net realized gains (losses)
$
62,518

 
$
(51,705
)
 
 
 
 
Nine Months Ended
 
 
 
Available for sale securities:
 
 
 
Gross gains on investment sales
$
192,140

 
$
44,732

Gross losses on investment sales
(77,498
)
 
(175,141
)
Change in fair value of assets and liabilities accounted for using the fair value option:
 
 
 
Fixed maturities
38,682

 
(47,082
)
Other investments
(37,363
)
 
(14,578
)
Equity securities
9,449

 
10,650

Short-term investments
(2,613
)
 
(758
)
Equity securities, at fair value:
 
 
 
Net realized gains (losses) on sales during the period
9,503

 
(13,298
)
Net unrealized gains (losses) on equity securities still held at reporting date
58,562

 
(4,063
)
Derivative instruments (1)
142,730

 
(23,665
)
Other (2)
(8,703
)
 
(16,111
)
Net realized gains (losses)
$
324,889

 
$
(239,314
)

(1)
See note 8 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 $17.1 million of equity in net income related to investment funds accounted for using the equity method in the 2019 third quarter, compared to $16.0 million for the 2018 third quarter, and $96.5 million for the nine months ended September 30, 2019, compared to $52.5 million for the 2018 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 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:
 
September 30,
 
2019
 
2018
Three Months Ended
 
 
 
Fixed maturities:
 

 
 

Mortgage backed securities
$
(284
)
 
$
(73
)
Corporate bonds
(666
)
 
(270
)
Non-U.S. government securities
—

 
(149
)
Asset backed securities
(213
)
 
—

Net impairment losses recognized in earnings
$
(1,163
)
 
$
(492
)
 
 
 
 
Nine Months Ended
 
 
 
Fixed maturities:
 
 
 
Mortgage backed securities
$
(839
)
 
$
(196
)
Corporate bonds
(1,256
)
 
(631
)
Non-U.S. government securities
—

 
(149
)
Asset backed securities
(426
)
 
(148
)
Net impairment losses recognized in earnings
$
(2,521
)
 
$
(1,124
)
 
Net impairment losses recognized in earnings in the 2019 periods were primarily related to foreign currency fluctuations and other impairments on corporate bonds and other securities.
The Company believes that the minimal amount of OTTI included in accumulated other comprehensive income at September 30, 2019 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 September 30, 2019, 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:
 
September 30,
 
2019
 
2018
Three Months Ended
 
 
 
Balance at start of period
$
346

 
$
698

Credit loss impairments recognized on securities not previously impaired
—

 
—

Credit loss impairments recognized on securities previously impaired
—

 
—

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
—

 
(47
)
Balance at end of period
$
346

 
$
651

 
 
 
 
Nine Months Ended
 
 
 
Balance at start of year
$
637

 
$
767

Credit loss impairments recognized on securities not previously impaired
—

 
—

Credit loss impairments recognized on securities previously impaired
—

 
—

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
(291
)
 
(116
)
Balance at end of period
$
346

 
$
651


Restricted Assets
The Company is required to maintain assets on deposit, which primarily consist of fixed maturities, with various regulatory authorities to support its underwriting operations. The Company’s subsidiaries maintain assets in trust accounts as collateral for 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 2018 Form 10-K. The following table details the value of the Company’s restricted assets:
 
September 30,
2019
 
December 31,
2018
Assets used for collateral or guarantees:
 

 
 

Affiliated transactions
$
4,629,369

 
$
4,623,483

Third party agreements
2,605,587

 
2,181,682

Deposits with U.S. regulatory authorities
788,295

 
689,114

Deposits with non-U.S. regulatory authorities
71,800

 
59,624

Total restricted assets
$
8,095,051

 
$
7,553,903


In addition, Watford maintains a secured credit facility to provide borrowing capacity for investment purposes and a total return swap agreement and maintains assets pledged as collateral for such purposes. The Company does not guarantee or provide credit support for Watford, and the Company’s financial exposure to Watford is limited to its investment in Watford’s senior notes, common and preferred shares and counterparty credit risk (mitigated by collateral) arising from reinsurance transactions. As of September 30, 2019 and December 31, 2018, Watford held $1.06 billion and $1.30 billion, respectively, in pledged assets to collateralize the credit facility mentioned above.
Reconciliation of Cash and Restricted Cash
The following table details reconciliation of cash and restricted cash within the Consolidated Balance Sheets:
 
September 30,
2019
 
December 31,
2018
Cash
$
880,099

 
$
646,556

Restricted cash (included in ‘other assets’)
$
82,376

 
$
78,087

Cash and restricted cash
$
962,475

 
$
724,643