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Investment Information
 3 Months Ended
Mar. 31, 2020
Disclosure Investment Information [Abstract]  
Investment Information Investment Information

At March 31, 2020, total investable assets of $24.88 billion included $22.38 billion held by the Company and $2.50 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
 
Allowance for Expected Credit Losses (2)
 
Cost or
Amortized
Cost
March 31, 2020
 
 
 
 
 
 
 
 
 
Fixed maturities (1):
 
 
 
 
 
 
 
 
 
Corporate bonds
$
6,552,825

 
$
176,246

 
$
(118,340
)
 
$
(7,233
)
 
$
6,502,152

Mortgage backed securities
466,045

 
16,006

 
(6,208
)
 
(208
)
 
456,455

Municipal bonds
862,415

 
27,287

 
(7,550
)
 
(23
)
 
842,701

Commercial mortgage backed securities
780,358

 
11,657

 
(18,410
)
 
(306
)
 
787,417

U.S. government and government agencies
4,574,630

 
143,987

 
(300
)
 
—

 
4,430,943

Non-U.S. government securities
2,035,459

 
57,289

 
(105,533
)
 
—

 
2,083,703

Asset backed securities
1,747,281

 
12,155

 
(91,668
)
 
(2,139
)
 
1,828,933

Total
17,019,013

 
444,627

 
(348,009
)
 
(9,909
)
 
16,932,304

Short-term investments
944,531

 
2,461

 
(2,779
)
 
(29
)
 
944,878

Total
$
17,963,544

 
$
447,088

 
$
(350,788
)
 
$
(9,938
)
 
$
17,877,182

 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
Fixed maturities (1):
 
 
 
 
 
 
 
 
 
Corporate bonds
$
6,406,591

 
$
191,889

 
$
(12,793
)
 
 
 
$
6,227,495

Mortgage backed securities
562,309

 
9,669

 
(931
)
 
 
 
553,571

Municipal bonds
881,926

 
24,628

 
(2,213
)
 
 
 
859,511

Commercial mortgage backed securities
733,108

 
14,951

 
(2,330
)
 
 
 
720,487

U.S. government and government agencies
4,916,592

 
36,600

 
(10,134
)
 
 
 
4,890,126

Non-U.S. government securities
2,078,757

 
48,549

 
(20,330
)
 
 
 
2,050,538

Asset backed securities
1,683,753

 
24,017

 
(4,724
)
 
 
 
1,664,460

Total
17,263,036

 
350,303

 
(53,455
)
 
 
 
16,966,188

Short-term investments
956,546

 
811

 
(1,548
)
 
 
 
957,283

Total
$
18,219,582

 
$
351,114

 
$
(55,003
)
 
 
 
$
17,923,471

(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, 2020, the Company adopted ASU 2016-13 and as a result any credit impairment losses on the Company’s available-for-sale investments are recorded as an allowance, subject to reversal. See note 1.
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
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities (1):
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
2,377,206

 
$
(116,795
)
 
$
7,865

 
$
(1,545
)
 
$
2,385,071

 
$
(118,340
)
Mortgage backed securities
99,108

 
(6,183
)
 
116

 
(25
)
 
99,224

 
(6,208
)
Municipal bonds
278,557

 
(7,550
)
 
—

 
—

 
278,557

 
(7,550
)
Commercial mortgage backed securities
419,028

 
(18,075
)
 
2,342

 
(335
)
 
421,370

 
(18,410
)
U.S. government and government agencies
216,620

 
(300
)
 
2,000

 
—

 
218,620

 
(300
)
Non-U.S. government securities
1,484,987

 
(105,533
)
 
—

 
—

 
1,484,987

 
(105,533
)
Asset backed securities
1,003,251

 
(86,283
)
 
28,724

 
(5,385
)
 
1,031,975

 
(91,668
)
Total
5,878,757

 
(340,719
)
 
41,047

 
(7,290
)
 
5,919,804

 
(348,009
)
Short-term investments
83,196

 
(2,779
)
 
—

 
—

 
83,196

 
(2,779
)
Total
$
5,961,953

 
$
(343,498
)
 
$
41,047

 
$
(7,290
)
 
$
6,003,000

 
$
(350,788
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities (1):
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
675,131

 
$
(12,350
)
 
$
37,671

 
$
(443
)
 
$
712,802

 
$
(12,793
)
Mortgage backed securities
102,887

 
(927
)
 
203

 
(4
)
 
103,090

 
(931
)
Municipal bonds
220,296

 
(2,213
)
 
—

 
—

 
220,296

 
(2,213
)
Commercial mortgage backed securities
147,290

 
(2,302
)
 
2,683

 
(28
)
 
149,973

 
(2,330
)
U.S. government and government agencies
1,373,127

 
(10,089
)
 
32,058

 
(45
)
 
1,405,185

 
(10,134
)
Non-U.S. government securities
1,224,243

 
(20,163
)
 
37,610

 
(167
)
 
1,261,853

 
(20,330
)
Asset backed securities
441,522

 
(3,334
)
 
48,313

 
(1,390
)
 
489,835

 
(4,724
)
Total
4,184,496

 
(51,378
)
 
158,538

 
(2,077
)
 
4,343,034

 
(53,455
)
Short-term investments
95,777

 
(1,548
)
 
—

 
—

 
95,777

 
(1,548
)
Total
$
4,280,273

 
$
(52,926
)
 
$
158,538

 
$
(2,077
)
 
$
4,438,811

 
$
(55,003
)
(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 March 31, 2020, on a lot level basis, approximately 5,420 security lots out of a total of approximately 9,960 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 $6.3 million. At December 31, 2019, on a lot level basis, approximately 2,230 security lots out of a total of approximately 9,590 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 $0.9 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.
 
 
March 31, 2020
 
December 31, 2019
Maturity
 
Estimated
Fair
Value
 
Amortized
Cost
 
Estimated
Fair
Value
 
Amortized
Cost
Due in one year or less
 
$
445,134

 
$
445,701

 
$
428,659

 
$
423,617

Due after one year through five years
 
9,622,046

 
9,558,975

 
10,126,403

 
9,996,206

Due after five years through 10 years
 
3,435,903

 
3,358,574

 
3,317,535

 
3,219,567

Due after 10 years
 
522,246

 
496,249

 
411,269

 
388,280

 
 
14,025,329

 
13,859,499

 
14,283,866

 
14,027,670

Mortgage backed securities
 
466,045

 
456,455

 
562,309

 
553,571

Commercial mortgage backed securities
 
780,358

 
787,417

 
733,108

 
720,487

Asset backed securities
 
1,747,281

 
1,828,933

 
1,683,753

 
1,664,460

Total (1)
 
$
17,019,013

 
$
16,932,304

 
$
17,263,036

 
$
16,966,188


(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 (shown as ‘Securities pledged under securities lending, at fair value’ on the Company’s balance sheet), 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 (shown as ‘Collateral received under securities lending, at fair value’ on the Company’s balance sheet) in the form of cash or U.S. government and government agency securities. At March 31, 2020, the fair value of the cash collateral received on securities lending was $26.2 million and the fair value of security collateral received was $156.1 million. At December 31, 2019, the fair value of the cash collateral received on securities lending was $81.2 million, and the fair value of security collateral received was $307.2 million.
The carrying value of collateral held under the Company’s securities lending transactions by significant investment category and remaining contractual maturity of the underlying agreements is as follows:
 
 
Remaining Contractual Maturity of the Agreements
 
 
Overnight and Continuous
 
Less than 30 Days
 
30-90 Days
 
90 Days or More
 
Total
March 31, 2020
 
 
 
 
 
 
 
 
 
 
U.S. government and government agencies
 
$
144,375

 
$
—

 
$
14,316

 
$
—

 
$
158,691

Corporate bonds
 
11,715

 
—

 
—

 
—

 
11,715

Equity securities
 
11,868

 
—

 
—

 
—

 
11,868

Total
 
$
167,958

 
$
—

 
$
14,316

 
$
—

 
$
182,274

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
 
$
182,274

 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
U.S. government and government agencies
 
$
240,332

 
$
—

 
$
115,973

 
$
—

 
$
356,305

Corporate bonds
 
2,570

 
—

 
—

 
—

 
2,570

Equity securities
 
29,491

 
—

 
—

 
—

 
29,491

Total
 
$
272,393

 
$
—

 
$
115,973

 
$
—

 
$
388,366

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
 
$
388,366


Equity Securities, at Fair Value
At March 31, 2020, the Company held $1.18 billion of equity securities, at fair value, compared to $838.9 million at December 31, 2019. Such holdings include publicly traded common stocks primarily in the consumer cyclical and non-cyclical, technology, communication and financial sectors and exchange-traded funds in fixed income, equity and other sectors.
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:
 
March 31,
2020
 
December 31,
2019
Term loan investments
$
1,135,584

 
$
1,326,018

Lending
544,308

 
602,841

Credit related funds
111,874

 
123,020

Energy
63,057

 
97,402

Investment grade fixed income
137,370

 
151,594

Infrastructure
33,644

 
61,786

Private equity
51,284

 
49,376

Real estate
14,296

 
17,279

Total
$
2,091,417

 
$
2,429,316


Investments Accounted For Using the Equity Method
The following table summarizes the Company’s investments accounted for using the equity method, by strategy:
 
March 31,
2020
 
December 31,
2019
Credit related funds
$
421,943

 
$
428,437

Equities
256,249

 
293,686

Real estate
254,957

 
246,851

Lending
194,132

 
202,690

Private equity
154,322

 
144,983

Infrastructure
283,147

 
235,033

Energy
111,305

 
108,716

Total
$
1,676,055

 
$
1,660,396


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:
 
March 31,
2020
 
December 31,
2019
Fixed maturities
$
734,694

 
$
754,452

Other investments
2,091,417

 
2,429,316

Short-term investments
396,409

 
377,014

Equity securities
87,997

 
102,695

Investments accounted for using the fair value option
$
3,310,517

 
$
3,663,477


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:
 
March 31,
2020
 
December 31,
2019
Investments accounted for using the equity method (1)
1,676,055

 
1,660,396

Investments accounted for using the fair value option (2)
170,515

 
188,283

Total
$
1,846,570

 
$
1,848,679

(1)
Aggregate unfunded commitments were $1.30 billion at March 31, 2020, compared to $1.36 billion at December 31, 2019.
(2)
Aggregate unfunded commitments were $40.2 million at March 31, 2020, compared to $41.7 million at December 31, 2019.
Net Investment Income
The components of net investment income were derived from the following sources:
 
March 31,
 
2020
 
2019
Three Months Ended
 
 
 
Fixed maturities
$
114,847

 
$
129,799

Term loans
23,170

 
24,616

Equity securities
6,007

 
2,988

Short-term investments
4,896

 
4,179

Other (1)
19,406

 
21,196

Gross investment income
168,326

 
182,778

Investment expenses
(23,173
)
 
(25,829
)
Net investment income
$
145,153

 
$
156,949

(1)
Includes income distributions from investment funds and other items.
Net Realized Gains (Losses)
Net realized gains (losses) (which include changes in the allowance for credit losses on financial assets and net impairment losses recognized in earnings) were as follows:
 
March 31,
 
2020
 
2019
Three Months Ended
 
 
 
Available for sale securities:
 

 
 

Gross gains on investment sales
$
178,200

 
$
43,365

Gross losses on investment sales
(31,968
)
 
(31,656
)
Change in fair value of assets and liabilities accounted for using the fair value option:
 
 
 
Fixed maturities
(127,666
)
 
31,148

Other investments
(307,800
)
 
18,195

Equity securities
(4,909
)
 
4,266

Short-term investments
(8,681
)
 
720

Equity securities, at fair value:
 
 
 
Net realized gains (losses) on sales during the period
(539
)
 
10,930

Net unrealized gains (losses) on equity securities still held at reporting date
(175,566
)
 
37,136

Allowance for credit losses:
 
 
 
Investments related
(9,320
)
 
—

Underwriting related
(3,270
)
 
—

Net impairment losses
(533
)
 
(1,309
)
Derivative instruments (1)
127,189

 
35,871

Other
(2,097
)
 
(8,410
)
Net realized gains (losses)
$
(366,960
)
 
$
140,256


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

Equity in Net Income (Loss) of Investment Funds Accounted for Using the Equity Method
The Company recorded a loss of $4.2 million related to investment funds accounted for using the equity method in the 2020 first quarter, compared to an income of $46.9 million for the 2019 first quarter. 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.
Allowance for Expected Credit Losses
The following table provides a roll forward of the allowance for expected credit losses of the Company’s securities classified as available for sale:
 
 
March 31, 2020
 
 
Structured Securities (1)
 
Municipal
Bonds
 
Corporate
Bonds
 
Short Term Investments
 
Total
Three Months Ended
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Cumulative effect of accounting change
 
517

 
—

 
117

 
—

 
634

Additions for current-period provision for expected credit losses
 
2,146

 
23

 
7,151

 
29

 
9,349

Additions (reductions) for previously recognized expected credit losses
 
(2
)
 
—

 
(21
)
 
—

 
(23
)
Reductions due to disposals
 
(7
)
 
—

 
(15
)
 
—

 
(22
)
Write-offs charged against the allowance
 
—

 
—

 
—

 
—

 
—

Balance at end of period
 
$
2,654

 
$
23

 
$
7,232

 
$
29

 
$
9,938

(1)
Includes asset backed securities, mortgage backed securities and commercial mortgage backed securities.

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 17, “Commitments and Contingencies,” of the notes to consolidated financial statements in the Company’s 2019 Form 10-K.
The following table details the value of the Company’s restricted assets:
 
March 31,
2020
 
December 31,
2019
Assets used for collateral or guarantees:
 

 
 

Affiliated transactions
$
4,540,455

 
$
4,526,761

Third party agreements
2,277,298

 
2,278,248

Deposits with U.S. regulatory authorities
831,411

 
797,371

Deposits with non-U.S. regulatory authorities
162,336

 
119,238

Total restricted assets
$
7,811,500

 
$
7,721,618




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 March 31, 2020 and December 31, 2019, Watford held $1.06 billion and $1.0 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:
 
March 31,
2020
 
December 31,
2019
Cash
$
882,284

 
$
726,230

Restricted cash (included in ‘other assets’)
$
188,153

 
$
177,468

Cash and restricted cash
$
1,070,437

 
$
903,698