Investment Information

6 Months Ended

Jun. 30, 2021

Disclosure Investment Information [Abstract]

At June 30, 2021, total investable assets of $30.2 billion included $27.3 billion held by the Company and $2.9 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
June 30, 2021
Fixed maturities (1):
Corporate bonds	$	7,129,768	$	217,061	$	(34,751)	$	(1,232)	$	6,948,690
Mortgage backed securities	389,041		4,480		(3,479)		(269)		388,309
Municipal bonds	415,483		23,153		(1,660)		(6)		393,996
Commercial mortgage backed securities	266,733		4,017		(611)		(3)		263,330
U.S. government and government agencies	5,091,183		14,814		(14,013)		—		5,090,382
Non-U.S. government securities	2,449,782		108,823		(18,441)		(128)		2,359,528
Asset backed securities	2,487,845		16,460		(4,056)		(486)		2,475,927
Total	18,229,835		388,808		(77,011)		(2,124)		17,920,162

Short-term investments	2,248,613		1,404		(1,406)		—		2,248,615
Total	$	20,478,448	$	390,212	$	(78,417)	$	(2,124)	$	20,168,777

December 31, 2020
Fixed maturities (1):
Corporate bonds	$	7,856,571	$	414,247	$	(34,388)	$	(896)	$	7,477,608
Mortgage backed securities	630,001		8,939		(5,028)		(278)		626,368
Municipal bonds	494,522		27,291		(3,835)		(11)		471,077
Commercial mortgage backed securities	389,900		8,722		(2,954)		(122)		384,254
U.S. government and government agencies	5,557,077		22,612		(12,611)		—		5,547,076
Non-U.S. government securities	2,433,733		153,891		(8,060)		—		2,287,902
Asset backed securities	1,634,804		19,225		(10,715)		(1,090)		1,627,384
Total	18,996,608		654,927		(77,591)		(2,397)		18,421,669

Short-term investments	1,924,922		2,693		(2,063)		—		1,924,292
Total	$	20,921,530	$	657,620	$	(79,654)	$	(2,397)	$	20,345,961

(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.

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
June 30, 2021
Fixed maturities (1):
Corporate bonds	$	2,264,801	$	(32,733)	$	22,895	$	(2,018)	$	2,287,696	$	(34,751)
Mortgage backed securities	196,765		(2,893)		13,632		(586)		210,397		(3,479)
Municipal bonds	24,711		(1,612)		2,859		(48)		27,570		(1,660)
Commercial mortgage backed securities	20,039		(180)		7,961		(431)		28,000		(611)
U.S. government and government agencies	2,920,944		(14,013)		—		—		2,920,944		(14,013)
Non-U.S. government securities	1,282,422		(17,562)		16,885		(879)		1,299,307		(18,441)
Asset backed securities	781,596		(2,364)		93,923		(1,692)		875,519		(4,056)
Total	7,491,278		(71,357)		158,155		(5,654)		7,649,433		(77,011)

Short-term investments	531,130		(1,406)		—		—		531,130		(1,406)
Total	$	8,022,408	$	(72,763)	$	158,155	$	(5,654)	$	8,180,563	$	(78,417)

December 31, 2020
Fixed maturities (1):
Corporate bonds	$	747,442	$	(33,086)	$	3,934	$	(1,302)	$	751,376	$	(34,388)
Mortgage backed securities	284,619		(4,788)		3,637		(240)		288,256		(5,028)
Municipal bonds	67,937		(3,835)		—		—		67,937		(3,835)
Commercial mortgage backed securities	126,624		(2,916)		2,655		(38)		129,279		(2,954)
U.S. government and government agencies	1,285,907		(12,611)		—		—		1,285,907		(12,611)
Non-U.S. government securities	543,844		(7,658)		2,441		(402)		546,285		(8,060)
Asset backed securities	634,470		(9,110)		57,737		(1,605)		692,207		(10,715)
Total	3,690,843		(74,004)		70,404		(3,587)		3,761,247		(77,591)

Short-term investments	97,920		(2,063)		—		—		97,920		(2,063)
Total	$	3,788,763	$	(76,067)	$	70,404	$	(3,587)	$	3,859,167	$	(79,654)

At June 30, 2021, on a lot level basis, approximately 3,240 security lots out of a total of approximately 10,890 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 $2.4 million. At December 31, 2020, on a lot level basis, approximately 2,320 security lots out of a total of approximately 11,180 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.


	June 30, 2021				December 31, 2020
Maturity	Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost
Due in one year or less	$	452,065	$	439,855	$	348,200	$	339,951
Due after one year through five years	10,114,276		9,942,182		10,629,959		10,340,819
Due after five years through 10 years	4,148,538		4,055,318		4,881,564		4,654,754
Due after 10 years	371,337		355,241		482,180		448,139
	15,086,216		14,792,596		16,341,903		15,783,663
Mortgage backed securities	389,041		388,309		630,001		626,368
Commercial mortgage backed securities	266,733		263,330		389,900		384,254
Asset backed securities	2,487,845		2,475,927		1,634,804		1,627,384
Total (1)	$	18,229,835	$	17,920,162	$	18,996,608	$	18,421,669

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 June 30, 2021, the fair value of the cash collateral received on securities lending was $0.8 million and the fair value of security collateral received was $171.3 million. At December 31, 2020, the fair value of the cash collateral received on securities lending was nil, and the fair value of security collateral received was $301.1 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
June 30, 2021
U.S. government and government agencies	$	15,745	$	137,713	$	—	$	—	$	153,458
Corporate bonds	5,800		—		—		—		5,800
Equity securities	12,851		—		—		—		12,851
Total	$	34,396	$	137,713	$	—	$	—	$	172,109
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									$	172,109

December 31, 2020
U.S. government and government agencies	$	142,317	$	—	$	139,290	$	—	$	281,607
Corporate bonds	3,021		—		—		—		3,021
Equity securities	16,461		—		—		—		16,461
Total	$	161,799	$	—	$	139,290	$	—	$	301,089
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									$	301,089

Equity Securities, at Fair Value

At June 30, 2021, the Company held $1.7 billion of equity securities, at fair value, compared to $1.4 billion at December 31, 2020. 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 and other investable assets:


	June 30, 2021		December 31, 2020
Fixed maturities	$	995,980	$	843,354
Other investments	2,370,472		2,331,885
Short-term investments	610,114		557,008
Equity securities	94,931		92,549
Investments accounted for using the fair value option	$	4,071,497	$	3,824,796

Other investable assets (1)	500,000		500,000
Total other investments	$	4,571,497	$	4,324,796

(1) Participation interests in a receivable of a reverse repurchase agreement.

The following table summarizes the Company’s other investments, as detailed in the previous table, by strategy:


	June 30, 2021		December 31, 2020
Term loan investments	$	1,333,014	$	1,231,731
Lending	638,786		572,636
Credit related funds	73,171		90,780
Energy	84,891		65,813
Investment grade fixed income	110,375		138,646
Infrastructure	32,109		165,516
Private equity	70,878		48,750
Real estate	27,248		18,013
Total	$	2,370,472	$	2,331,885

Investments Accounted For Using the Equity Method

The following table summarizes the Company’s investments accounted for using the equity method, by strategy:


	June 30, 2021		December 31, 2020
Credit related funds	$	883,279	$	740,060
Equities	403,003		343,058
Real estate	323,566		258,518
Lending	295,228		179,629
Private equity	305,662		235,289
Infrastructure	210,174		175,882
Energy	118,212		115,453
Total	$	2,539,124	$	2,047,889

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.

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:


	June 30, 2021		December 31, 2020
Investments accounted for using the equity method (1)	2,539,124		2,047,889
Investments accounted for using the fair value option (2)	182,260		184,720
Total	$	2,721,384	$	2,232,609

(1) Aggregate unfunded commitments were $2.0 billion at June 30, 2021, compared to $1.8 billion at December 31, 2020.

(2) Aggregate unfunded commitments were $26.3 million at June 30, 2021, compared to $35.6 million at December 31, 2020.

Net Investment Income

The components of net investment income were derived from the following sources:


	June 30,
	2021		2020
Three Months Ended
Fixed maturities	$	88,625	$	105,391
Term loans	16,879		20,512
Equity securities	8,584		6,219
Short-term investments	1,138		3,383
Other (1)	19,950		16,460
Gross investment income	135,176		151,965
Investment expenses	(23,563)		(20,480)
Net investment income	$	111,613	$	131,485

Six Months Ended
Fixed maturities	$	179,251	$	220,238
Term loans	31,607		43,682
Equity securities	14,234		12,226
Short-term investments	1,745		8,279
Other (1)	34,305		35,866
Gross investment income	261,142		320,291
Investment expenses	(50,673)		(43,653)
Net investment income	$	210,469	$	276,638

(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:


	June 30,
	2021		2020
Three Months Ended
Available for sale securities:
Gross gains on investment sales	$	115,541	$	232,153
Gross losses on investment sales	(50,627)		(49,824)
Change in fair value of assets and liabilities accounted for using the fair value option:
Fixed maturities	10,912		68,181
Other investments	60,884		178,570
Equity securities	5,492		6,664
Short-term investments	(104)		3,368
Equity securities, at fair value:
Net realized gains (losses) on sales during the period	33,570		(18,250)
Net unrealized gains (losses) on equity securities still held at reporting date	65,847		145,686
Allowance for credit losses:
Investments related	896		3,225
Underwriting related	1,381		(5,834)

Derivative instruments (1)	(51,109)		(836)
Other	10,224		(6,515)
Net realized gains (losses)	$	202,907	$	556,588

Six Months Ended
Available for sale securities:
Gross gains on investment sales	$	180,543	$	410,353
Gross losses on investment sales	(113,625)		(81,792)
Change in fair value of assets and liabilities accounted for using the fair value option:
Fixed maturities	27,465		(59,485)
Other investments	107,739		(129,230)
Equity securities	7,557		1,755
Short-term investments	632		(5,313)
Equity securities, at fair value:
Net realized gains (losses) on sales during the period	71,419		(18,789)
Net unrealized gains (losses) on equity securities still held at reporting date	85,555		(29,880)
Allowance for credit losses:
Investments related	(752)		(6,095)
Underwriting related	6,649		(9,104)
Net impairments losses	—		(533)
Derivative instruments (1)	(14,993)		126,353
Other	(12,821)		(8,612)
Net realized gains (losses)	$	345,368	$	189,628

(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 $122.2 million of equity in net income related to investment funds accounted for using the equity method in the 2021 second quarter, compared to loss of $65.1 million for the 2020 second quarter, and an income of $193.9 million for the six months ended June 30, 2021, compared to a loss of $69.3 million for six months ended June 30, 2020. 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.

Investments in Operating Affiliates

Investments in which the Company has significant influence over the operating and financial policies are classified as ‘investments in operating affiliates’ on the Company’s balance sheets and are accounted for under the equity method. Such investments primarily include the Company’s investment in Coface and Premia Holdings Ltd. (“Premia”) and are generally recorded on a three month lag.

In 2021, the Company completed the share purchase agreement with Natixis to purchase 29.5% of the common equity of Coface, a France-based leader in the global trade credit insurance market. The consideration paid was €9.95 per share, or an aggregate €453 million (approximately $546 million) including related fees. Income (loss) from operating affiliates reflected a one-time gain of $74.5 million realized from the acquisition. As a result of equity method accounting rules, approximately $36 million of additional gain was deferred and will generally be recognized over the next five years. At June 30, 2021 the Company’s carrying value in Coface was $601.9 million.

Income from operating affiliates for the 2021 second quarter was $24.5 million, compared to a loss of $3.2 million, for the 2020 second quarter, and income of $99.9 million for the six months ended June 30, 2021, compared to $5.3 million for the six months ended June 30, 2020. The income from operating affiliates for the 2021 period, primarily related to the Company’s recent acquisition of a 29.5% stake in Coface.

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:



	Structured Securities (1)		Municipal Bonds		Corporate Bonds		Short Term Investments		Total
Three Months Ended June 30, 2021
Balance at beginning of period	$	1,207	$	2	$	2,621	$	—	$	3,830

Additions for current-period provision for expected credit losses	52		—		7		—		59
Additions (reductions) for previously recognized expected credit losses	(383)		4		(412)		—		(791)
Reductions due to disposals	(117)		—		(857)		—		(974)

Balance at end of period	$	759	$	6	$	1,359	$	—	$	2,124

Three Months Ended June 30, 2020
Balance at beginning of period	$	2,654	$	23	$	7,232	$	29	$	9,938

Additions for current-period provision for expected credit losses	695		44		290		(29)		1,000
Additions (reductions) for previously recognized expected credit losses	(1,304)		(25)		(2,903)		—		(4,232)
Reductions due to disposals	(319)		(14)		(504)		—		(837)

Balance at end of period	$	1,726	$	28	$	4,115	$	—	$	5,869


Six Months Ended June 30, 2021
Balance at beginning of period	$	1,490	$	11	$	896	$	—	$	2,397

Additions for current-period provision for expected credit losses	234		—		2,428		—		2,662
Additions (reductions) for previously recognized expected credit losses	(765)		(5)		(952)		—		(1,722)
Reductions due to disposals	(200)		—		(1,013)		—		(1,213)

Balance at end of period	$	759	$	6	$	1,359	$	—	$	2,124

Six Months Ended June 30, 2020
Balance at beginning of period	$	—	$	—	$	—	$	—	$	—
Cumulative effect of accounting change (2)	517		—		117		—		634
Additions for current-period provision for expected credit losses	2,841		67		7,441		—		10,349
Additions (reductions) for previously recognized expected credit losses	(1,306)		(25)		(2,924)		—		(4,255)
Reductions due to disposals	(326)		(14)		(519)		—		(859)

Balance at end of period	$	1,726	$	28	$	4,115	$	—	$	5,869

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

(2) Adoption of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)”.

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 18, “Commitments and Contingencies,” of the notes to consolidated financial statements in the Company’s 2020 Form 10-K.

The following table details the value of the Company’s restricted assets:


	June 30, 2021		December 31, 2020
Assets used for collateral or guarantees:
Affiliated transactions	$	5,041,190	$	4,643,334
Third party agreements	3,441,929		3,083,324
Deposits with U.S. regulatory authorities	814,084		827,552
Deposits with non-U.S. regulatory authorities	428,132		179,099

Total restricted assets	$	9,725,335	$	8,733,309

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 June 30, 2021 and December 31, 2020, Watford held $1.1 billion and $954.6 million, 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:


	June 30, 2021		December 31, 2020
Cash	$	1,234,059	$	906,448
Restricted cash (included in ‘other assets’)	$	584,404	$	384,096
Cash and restricted cash	$	1,818,463	$	1,290,544