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Variable Interest Entities and Noncontrolling Interests
 6 Months Ended
Jun. 30, 2020
Noncontrolling Interest [Abstract]  
Variable Interest Entity and Noncontrolling Interests
Variable Interest Entities and Noncontrolling Interests
Watford
In March 2014, the Company invested $100.0 million and acquired 2,500,000 common shares, approximately 11% of Watford’s outstanding common equity. Watford’s common shares are listed on the Nasdaq Select Global Market under the ticker symbol “WTRE”. As of June 30, 2020, the Company owns approximately 13% of Watford’s outstanding common equity.
In July 2019, Watford completed an offering of $175.0 million in aggregate principal amount of its 6.5% senior notes, due July 2, 2029 (“Watford Senior Notes”). Interest on the Watford Senior Notes is payable semi-annually in arrears on each January 2 and July 2 commencing on January 2, 2020. The $172.4 million net proceeds from the offering were used to redeem a portion of Watford’s outstanding preference shares (“Watford Preference Shares”). The Company purchased $35.0 million in aggregate principal amount of the Watford Senior Notes.
Watford is considered a VIE and the Company concluded that it is the primary beneficiary of Watford. As such, the results of Watford are included in the Company’s consolidated financial statements.
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.
The following table provides the carrying amount and balance sheet caption in which the assets and liabilities of Watford are reported:
 
June 30,
 
December 31,

 
2020
 
2019
Assets
 
 
 
Investments accounted for using the fair value option
$
1,886,676

 
$
1,898,091

Fixed maturities available for sale, at fair value
690,225

 
745,708

Equity securities, at fair value
62,443

 
65,338

Cash
107,653

 
102,437

Accrued investment income
14,364

 
14,025

Premiums receivable
258,178

 
273,657

Reinsurance recoverable on unpaid and paid losses and LAE
229,746

 
170,973

Ceded unearned premiums
131,919

 
132,577

Deferred acquisition costs
64,149

 
64,044

Receivable for securities sold
31,314

 
16,287

Goodwill and intangible assets
7,650

 
7,650

Other assets
63,441

 
60,070

Total assets of consolidated VIE
$
3,547,758

 
$
3,550,857

 
 
 
 
Liabilities
 
 
 
Reserve for losses and loss adjustment expenses
$
1,353,049

 
$
1,263,628

Unearned premiums
456,170

 
438,907

Reinsurance balances payable
72,776

 
77,066

Revolving credit agreement borrowings
335,587

 
484,287

Senior notes
172,554

 
172,418

Payable for securities purchased
67,272

 
18,180

Other liabilities (1)
261,267

 
171,714

Total liabilities of consolidated VIE
$
2,718,675

 
$
2,626,200

 
 
 
 
Redeemable noncontrolling interests
$
52,351

 
$
52,305


(1)
Includes certain borrowings related to investing activities.
For the six months ended June 30, 2020, Watford generated $87.3 million of cash provided by operating activities, $78.0 million of cash provided by investing activities and $153.8 million of cash used for financing activities, compared to $115.9 million of cash provided by operating activities, $135.7 million of cash used for investing activities and $25.6 million of cash provided by financing activities for the six months ended June 30, 2019.
Non-redeemable noncontrolling interests
The Company accounts for the portion of Watford’s common equity attributable to third party investors in the shareholders’ equity section of its consolidated balance sheets. The noncontrolling ownership in Watford’s common shares was approximately 87% at June 30, 2020. The portion of Watford’s income or loss attributable to third party investors is recorded in the consolidated statements of income in ‘net (income) loss attributable to noncontrolling interests.’
The following table sets forth activity in the non-redeemable noncontrolling interests:
 
June 30,
 
2020
 
2019
Three Months Ended
 
 
 
Balance, beginning of period
$
492,785

 
$
838,081

Additional paid in capital attributable to noncontrolling interests
595

 
2,074

Amounts attributable to noncontrolling interests
165,598

 
12,301

Other comprehensive income (loss) attributable to noncontrolling interests
20,111

 
2,891

Balance, end of period
$
679,089

 
$
855,347

 
 
 
 
Six Months Ended
 
 
 
Balance, beginning of year
$
762,777

 
$
791,560

Additional paid in capital attributable to noncontrolling interests
472

 
2,074

Repurchases attributable to non-redeemable noncontrolling interests (1)
(2,867
)
 
—

Amounts attributable to noncontrolling interests
(68,346
)
 
54,683

Other comprehensive income (loss) attributable to noncontrolling interests
(12,947
)
 
7,030

Balance, end of period
$
679,089

 
$
855,347


(1) During 2020, Watford’s board of directors authorized the investment in Watford’s common shares through a share repurchase program.

Redeemable noncontrolling interests
The Company accounts for redeemable noncontrolling interests in the mezzanine section of its consolidated balance sheets in accordance with applicable accounting guidance. Such redeemable noncontrolling interests primarily relate to the Watford Preference Shares issued in late March 2014 with a par value of $0.01 per share and a liquidation preference of $25.00 per share. The Watford Preference Shares were issued at a discounted amount of $24.50 per share. Preferred dividends, including the accretion of the discount and issuance costs, are included in ‘net (income) loss attributable to noncontrolling interests’ in the Company’s consolidated statements of income.
In August 2019, Watford redeemed 6,919,998 of its 9,065,200 issued and outstanding Watford Preference Shares. The Watford Preference Shares were redeemed at a total redemption price of $25.19748 per share, inclusive of all declared and unpaid dividends, with accumulation of any undeclared dividends on or after June 30, 2019. In addition, the Company received $11.5 million pursuant to the redemption of Watford Preference Shares.
The following table sets forth activity in the redeemable non-controlling interests:
 
June 30,
 
2020
 
2019
Three Months Ended
 
 
 
Balance, beginning of period
$
55,376

 
$
206,383

Accretion of preference share issuance costs
23

 
92

Other
587

 
—

Balance, end of period
$
55,986

 
$
206,475

 
 
 
 
Six Months Ended
 
 
 
Balance, beginning of year
$
55,404

 
$
206,292

Accretion of preference share issuance costs
46

 
183

Other
536

 
—

Balance, end of period
$
55,986

 
$
206,475


The portion of income or loss attributable to third party investors, recorded in the Company’s consolidated statements of income in ‘net (income) loss attributable to noncontrolling interests,’ are summarized in the table below:
 
June 30,
 
2020
 
2019
Three Months Ended
 
 
 
Amounts attributable to non-redeemable noncontrolling interests
$
(165,598
)
 
$
(12,301
)
Amounts attributable to redeemable noncontrolling interests
(1,970
)
 
(4,590
)
Net (income) loss attributable to noncontrolling interests
$
(167,568
)
 
$
(16,891
)
 
 
 
 
Six Months Ended
 
 
 
Amounts attributable to non-redeemable noncontrolling interests
$
68,346

 
$
(54,683
)
Amounts attributable to redeemable noncontrolling interests
(3,123
)
 
(9,178
)
Net (income) loss attributable to noncontrolling interests
$
65,223

 
$
(63,861
)

Bellemeade Re
The Company has entered into various aggregate excess of loss mortgage reinsurance agreements with various special purpose reinsurance companies domiciled in Bermuda (the “Bellemeade Agreements”). At the time the Bellemeade Agreements were entered into, the applicability of the accounting guidance that addresses VIEs was evaluated. As a result of the evaluation of the Bellemeade Agreements, the Company concluded that these entities are VIEs. However, given that the ceding insurers do not have the unilateral power to direct those activities that are significant to their economic performance, the Company does not consolidate such entities in its consolidated financial statements.
The following table presents the total assets of the Bellemeade entities, as well as the Company’s maximum exposure to loss associated with these VIEs, calculated as the maximum historical observable spread between the one month LIBOR, the basis for the contractual payments to bond holders, and short term invested trust asset yields.
 
 
 
Maximum Exposure to Loss
Bellemeade Entities (Issue Date)
Total VIE Assets
 
On-Balance Sheet (Asset) Liability
 
Off-Balance Sheet
 
Total
Jun 30, 2020
 
 
 
 
 
 
 
Bellemeade 2017-1 Ltd. (Oct-17)
$
145,573

 
$
(295
)
 
$
2,469

 
$
2,174

Bellemeade 2018-1 Ltd. (Apr-18)
250,095

 
(1,244
)
 
5,597

 
4,353

Bellemeade 2018-2 Ltd. (Aug-18)
272,685

 
(1,206
)
 
4,210

 
3,004

Bellemeade 2018-3 Ltd. (Oct-18)
302,563

 
(1,883
)
 
8,387

 
6,504

Bellemeade 2019-1 Ltd. (Mar-19)
219,256

 
(83
)
 
10,251

 
10,168

Bellemeade 2019-2 Ltd. (Apr-19)
398,316

 
54

 
13,088

 
13,142

Bellemeade 2019-3 Ltd. (Jul-19)
528,084

 
(248
)
 
10,649

 
10,401

Bellemeade 2019-4 Ltd. (Oct-19)

468,737

 
257

 
14,687

 
14,944

Bellemeade 2020-1 Ltd. (Jun-20) (1)
450,040

 
(60
)
 
8,984

 
8,924

Total
$
3,035,349

 
$
(4,708
)
 
$
78,322

 
$
73,614

Dec 31, 2019
 
 
 
 
 
 
 
Bellemeade 2017-1 Ltd. (Oct-17)
$
216,429

 
$
(442
)
 
$
2,794

 
$
2,352

Bellemeade 2018-1 Ltd. (Apr-18)
328,482

 
(1,574
)
 
5,757

 
4,183

Bellemeade 2018-2 Ltd. (Aug-18)
437,009

 
(877
)
 
2,524

 
1,647

Bellemeade 2018-3 Ltd. (Oct-18)
426,806

 
(1,113
)
 
3,937

 
2,824

Bellemeade 2019-1 Ltd. (Mar-19)
257,358

 
(226
)
 
3,027

 
2,801

Bellemeade 2019-2 Ltd. (Apr-19)
525,959

 
(78
)
 
2,579

 
2,501

Bellemeade 2019-3 Ltd. (Jul-19)
656,523

 
(585
)
 
9,273

 
8,688

Bellemeade 2019-4 Ltd. (Oct-19)
577,267

 
(302
)
 
12,193

 
11,891

Total
$
3,425,833

 
$
(5,197
)
 
$
42,084

 
$
36,887


(1)  An additional $78.5 million capacity was provided directly to Arch MI U.S. by a separate panel of reinsurers and is not reflected in this table.