Investment Information

9 Months Ended

Sep. 30, 2020

Disclosure Investment Information [Abstract]

At September 30, 2020, total investable assets of $28.42 billion included $25.72 billion held by the Company and $2.69 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
September 30, 2020
Fixed maturities (1):
Corporate bonds	$	7,965,599	$	390,839	$	(40,448)	$	(1,742)	$	7,616,950
Mortgage backed securities	717,081		12,456		(3,373)		(336)		708,334
Municipal bonds	527,410		26,980		(877)		(62)		501,369
Commercial mortgage backed securities	374,360		8,523		(4,660)		(256)		370,753
U.S. government and government agencies	4,861,349		39,350		(4,396)		—		4,826,395
Non-U.S. government securities	2,302,646		86,996		(18,294)		—		2,233,944
Asset backed securities	1,767,192		30,026		(21,729)		(1,537)		1,760,432
Total	18,515,637		595,170		(93,777)		(3,933)		18,018,177

Short-term investments	2,039,097		1,807		(954)		—		2,038,244
Total	$	20,554,734	$	596,977	$	(94,731)	$	(3,933)	$	20,056,421

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
September 30, 2020
Fixed maturities (1):
Corporate bonds	$	1,414,931	$	(38,353)	$	4,169	$	(2,095)	$	1,419,100	$	(40,448)
Mortgage backed securities	186,860		(3,262)		690		(111)		187,550		(3,373)
Municipal bonds	36,469		(877)		—		—		36,469		(877)
Commercial mortgage backed securities	179,780		(4,601)		2,850		(59)		182,630		(4,660)
U.S. government and government agencies	1,386,590		(4,396)		—		—		1,386,590		(4,396)
Non-U.S. government securities	921,890		(18,294)		—		—		921,890		(18,294)
Asset backed securities	636,373		(20,166)		39,368		(1,563)		675,741		(21,729)
Total	4,762,893		(89,949)		47,077		(3,828)		4,809,970		(93,777)

Short-term investments	81,964		(954)		—		—		81,964		(954)
Total	$	4,844,857	$	(90,903)	$	47,077	$	(3,828)	$	4,891,934	$	(94,731)

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)

At September 30, 2020, on a lot level basis, approximately 3,270 security lots out of a total of approximately 11,090 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. 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.


	September 30, 2020				December 31, 2019
Maturity	Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost
Due in one year or less	$	318,767	$	312,569	$	428,659	$	423,617
Due after one year through five years	9,937,129		9,698,743		10,126,403		9,996,206
Due after five years through 10 years	4,849,248		4,641,483		3,317,535		3,219,567
Due after 10 years	551,860		525,863		411,269		388,280
	15,657,004		15,178,658		14,283,866		14,027,670
Mortgage backed securities	717,081		708,334		562,309		553,571
Commercial mortgage backed securities	374,360		370,753		733,108		720,487
Asset backed securities	1,767,192		1,760,432		1,683,753		1,664,460
Total (1)	$	18,515,637	$	18,018,177	$	17,263,036	$	16,966,188

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 September 30, 2020, the fair value of the cash collateral received on securities lending was nil and the fair value of security collateral received was $64.3 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
September 30, 2020
U.S. government and government agencies	$	64,251	$	—	$	—	$	—	$	64,251
Corporate bonds	—		—		—		—		—
Equity securities	—		—		—		—		—
Total	$	64,251	$	—	$	—	$	—	$	64,251
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									$	64,251

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 September 30, 2020, the Company held $1.50 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:


	September 30, 2020		December 31, 2019
Term loan investments	$	1,202,526	$	1,326,018
Lending	575,623		602,841
Credit related funds	98,121		123,020
Energy	65,330		97,402
Investment grade fixed income	114,784		151,594
Infrastructure	60,579		61,786
Private equity	34,983		49,376
Real estate	17,951		17,279
Total	$	2,169,897	$	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:


	September 30, 2020		December 31, 2019
Credit related funds	$	687,178	$	428,437
Equities	323,670		293,686
Real estate	246,998		246,851
Lending	141,305		202,690
Private equity	214,357		144,983
Infrastructure	156,029		235,033
Energy	114,165		108,716
Total	$	1,883,702	$	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:


	September 30, 2020		December 31, 2019
Fixed maturities	$	1,019,529	$	754,452
Other investments	2,169,897		2,429,316
Short-term investments	468,704		377,014
Equity securities	91,445		102,695
Investments accounted for using the fair value option	$	3,749,575	$	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:


	September 30, 2020		December 31, 2019
Investments accounted for using the equity method (1)	1,883,702		1,660,396
Investments accounted for using the fair value option (2)	180,409		188,283
Total	$	2,064,111	$	1,848,679

(1) Aggregate unfunded commitments were $1.59 billion at September 30, 2020, compared to $1.36 billion at December 31, 2019.

(2) Aggregate unfunded commitments were $36.7 million at September 30, 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:


	September 30,
	2020		2019
Three Months Ended
Fixed maturities	$	98,344	$	126,889
Term loans	22,459		24,236
Equity securities	6,659		3,992
Short-term investments	1,332		3,834
Other (1)	22,060		22,704
Gross investment income	150,854		181,655
Investment expenses	(22,342)		(20,167)
Net investment income	$	128,512	$	161,488

Nine Months Ended
Fixed maturities	$	318,582	$	381,706
Term loans	66,141		73,582
Equity securities	18,885		11,348
Short-term investments	9,611		11,872
Other (1)	57,926		62,423
Gross investment income	471,145		540,931
Investment expenses	(65,995)		(67,456)
Net investment income	$	405,150	$	473,475

(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:


	September 30,
	2020		2019
Three Months Ended
Available for sale securities:
Gross gains on investment sales	$	104,733	$	73,685
Gross losses on investment sales	(16,862)		(30,561)
Change in fair value of assets and liabilities accounted for using the fair value option:
Fixed maturities	34,115		(3,895)
Other investments	61,622		(21,778)
Equity securities	4,048		(1,231)
Short-term investments	3,377		(1,941)
Equity securities, at fair value:
Net realized gains (losses) on sales during the period	26,549		5,217
Net unrealized gains (losses) on equity securities still held at reporting date	33,562		(1,206)
Allowance for credit losses:
Investments related	1,332		—
Underwriting related	351		—
Net impairment losses	—		(1,163)
Derivative instruments (1)	20,369		42,893
Other	7,303		1,335
Net realized gains (losses)	$	280,499	$	61,355

Nine Months Ended
Available for sale securities:
Gross gains on investment sales	$	515,086	$	192,140
Gross losses on investment sales	(98,654)		(77,498)
Change in fair value of assets and liabilities accounted for using the fair value option:
Fixed maturities	(25,370)		38,682
Other investments	(67,608)		(37,363)
Equity securities	5,803		9,449
Short-term investments	(1,936)		(2,613)
Equity securities, at fair value:
Net realized gains (losses) on sales during the period	7,760		9,503
Net unrealized gains (losses) on equity securities still held at reporting date	3,682		58,562
Allowance for credit losses:
Investments related	(4,763)		—
Underwriting related	(8,753)		—
Net impairments losses	(533)		(2,521)
Derivative instruments (1)	146,722		142,730
Other	(1,309)		(8,703)
Net realized gains (losses)	$	470,127	$	322,368

(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 $126.7 million of equity in net income related to investment funds accounted for using the equity method in the 2020 third quarter, compared to income of $17.1 million for the 2019 third quarter, and $57.4 million for the nine months ended September 30, 2020, compared to

$96.5 million for the nine months ended September 30, 2019. 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:


	September 30, 2020
	Structured Securities (1)		Municipal Bonds		Corporate Bonds		Short Term Investments		Total
Three Months Ended
Balance at beginning of period	$	1,726	$	28	$	4,115	$	—	$	5,869
Cumulative effect of accounting change	—		—		—		—		—
Additions for current-period provision for expected credit losses	27		—		202		—		229
Additions (reductions) for previously recognized expected credit losses	403		33		(1,996)		—		(1,560)
Reductions due to disposals	(28)		—		(577)		—		(605)
Write-offs charged against the allowance	—		—		—		—		—
Balance at end of period	$	2,128	$	61	$	1,744	$	—	$	3,933

Nine Months Ended
Balance at beginning of period	$	—	$	—	$	—	$	—	$	—
Cumulative effect of accounting change	517		—		117		—		634
Additions for current-period provision for expected credit losses	2,868		67		7,643		—		10,578
Additions (reductions) for previously recognized expected credit losses	(903)		8		(4,920)		—		(5,815)
Reductions due to disposals	(354)		(14)		(1,096)		—		(1,464)
Write-offs charged against the allowance	—		—		—		—		—
Balance at end of period	$	2,128	$	61	$	1,744	$	—	$	3,933

(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:


	September 30, 2020		December 31, 2019
Assets used for collateral or guarantees:
Affiliated transactions	$	4,829,252	$	4,526,761
Third party agreements	2,636,097		2,278,248
Deposits with U.S. regulatory authorities	942,480		797,371
Deposits with non-U.S. regulatory authorities	179,726		119,238

Total restricted assets	$	8,587,555	$	7,721,618

In addition, Watford maintains secured credit facilities 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, 2020 and December 31, 2019, Watford held $1.19 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:


	September 30, 2020		December 31, 2019
Cash	$	976,398	$	726,230
Restricted cash (included in ‘other assets’)	$	210,575	$	177,468
Cash and restricted cash	$	1,186,973	$	903,698