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Variable Interest Entities and Noncontrolling Interests | 6 Months Ended
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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.

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- Definition The entire disclosure for noncontrolling interest in consolidated subsidiaries, which could include the name of the subsidiary, the ownership percentage held by the parent, the ownership percentage held by the noncontrolling owners, the amount of the noncontrolling interest, the location of this amount on the balance sheet (when not reported separately), an explanation of the increase or decrease in the amount of the noncontrolling interest, the noncontrolling interest share of the net Income or Loss of the subsidiary, the location of this amount on the income statement (when not reported separately), the nature of the noncontrolling interest such as background information and terms, the amount of the noncontrolling interest represented by preferred stock, a description of the preferred stock, and the dividend requirements of the preferred stock. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -URI http://asc.fasb.org/topic&trid=2197479 + Details
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