XML 31 R18.htm IDEA: XBRL DOCUMENT v3.20.2
Variable Interest Entities and Noncontrolling Interests
 9 Months Ended
Sep. 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 September 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:
September 30,December 31,
20202019
Assets
Investments accounted for using the fair value option$1,937,037 $1,898,091 
Fixed maturities available for sale, at fair value649,781 745,708 
Equity securities, at fair value52,807 65,338 
Cash195,333 102,437 
Accrued investment income16,234 14,025 
Premiums receivable263,748 273,657 
Reinsurance recoverable on unpaid and paid losses and LAE263,293 170,973 
Ceded unearned premiums131,885 132,577 
Deferred acquisition costs58,583 64,044 
Receivable for securities sold1,730 16,287 
Goodwill and intangible assets7,650 7,650 
Other assets75,139 60,070 
Total assets of consolidated VIE$3,653,220 $3,550,857 
Liabilities
Reserve for losses and loss adjustment expenses$1,429,656 $1,263,628 
Unearned premiums459,476 438,907 
Reinsurance balances payable68,339 77,066 
Revolving credit agreement borrowings210,687 484,287 
Senior notes172,621 172,418 
Payable for securities purchased76,567 18,180 
Other liabilities (1)316,599 171,714 
Total liabilities of consolidated VIE$2,733,945 $2,626,200 
Redeemable noncontrolling interests$52,375 $52,305 
(1)    Includes certain borrowings related to investing activities.
For the nine months ended September 30, 2020, Watford generated $133.6 million of cash provided by operating activities, $242.0 million of cash provided by investing activities and $279.7 million of cash used for financing activities, compared to $177.2 million of cash provided by operating activities, $181.2 million of cash used for investing activities and $22.2 million of cash provided by financing activities for the nine months ended September 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 September 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:
September 30,
 20202019
Three Months Ended
Balance, beginning of period$679,089 $855,347 
Additional paid in capital attributable to noncontrolling interests243 205 
Amounts attributable to noncontrolling interests67,768 136 
Other comprehensive income (loss) attributable to noncontrolling interests10,820 (764)
Balance, end of period$757,920 $854,924 
Nine Months Ended
Balance, beginning of year$762,777 $791,560 
Additional paid in capital attributable to noncontrolling interests715 2,279 
Repurchases attributable to non-redeemable noncontrolling interests (1)
(2,867)— 
Amounts attributable to noncontrolling interests(578)54,819 
Other comprehensive income (loss) attributable to noncontrolling interests(2,127)6,266 
Balance, end of period$757,920 $854,924 
(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:
September 30,
 20202019
Three Months Ended
Balance, beginning of period$55,986 $206,475 
Redemption of noncontrolling interests— (157,709)
Accretion of preference share issuance costs23 23 
Other1,826 — 
Balance, end of period$57,835 $48,789 
Nine Months Ended
Balance, beginning of year$55,404 $206,292 
Redemption of noncontrolling interests— (157,709)
Accretion of preference share issuance costs70 206 
Other2,361 — 
Balance, end of period$57,835 $48,789 
The portion of income or loss attributable to third party investors, recorded in the Company’s consolidated statements of income in ‘net (income) loss attributable to noncontrolling interests,’ are summarized in the table below:
September 30,
 20202019
Three Months Ended
Amounts attributable to non-redeemable noncontrolling interests$(67,768)$(136)
Amounts attributable to redeemable noncontrolling interests(1,875)(6,600)
Net (income) loss attributable to noncontrolling interests$(69,643)$(6,736)
Nine Months Ended
Amounts attributable to non-redeemable noncontrolling interests$578 $(54,819)
Amounts attributable to redeemable noncontrolling interests(4,998)(15,778)
Net (income) loss attributable to noncontrolling interests$(4,420)$(70,597)
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 AssetsOn-Balance Sheet (Asset) LiabilityOff-Balance SheetTotal
Sep 30, 2020
Bellemeade 2017-1 Ltd. (Oct-17)$145,573 $(432)$2,104 $1,672 
Bellemeade 2018-1 Ltd. (Apr-18)250,095 (1,592)4,821 3,229 
Bellemeade 2018-2 Ltd. (Aug-18)187,362 (641)1,695 1,054 
Bellemeade 2018-3 Ltd. (Oct-18)302,563 (2,477)7,261 4,784 
Bellemeade 2019-1 Ltd. (Mar-19)219,256 (1,062)8,944 7,882 
Bellemeade 2019-2 Ltd. (Apr-19)398,316 (1,090)11,369 10,279 
Bellemeade 2019-3 Ltd. (Jul-19)528,084 (975)9,156 8,181 
Bellemeade 2019-4 Ltd. (Oct-19)468,737 (1,179)12,722 11,543 
Bellemeade 2020-1 Ltd. (Jun-20) (1)406,534 (701)7,590 6,889 
Bellemeade 2020-2 Ltd. (Sep-20) (2)423,420 (322)9,081 8,759 
Total$3,329,940 $(10,471)$74,743 $64,272 
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 $79 million capacity was provided directly to Arch MI U.S. by a separate panel of reinsurers and is not reflected in this table.
(2)  An additional $26 million capacity was provided directly to Arch MI U.S. by a separate panel of reinsurers and is not reflected in this table.