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Variable Interest Entity and Noncontrolling Interests | 12 Months Ended
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Dec. 31, 2020
Variable Interest Entity and Noncontrolling Interest Disclosure [Abstract] |
Variable Interest Entity and Noncontrolling Interests | Watford Holdings Ltd. In March 2014, Watford raised approximately $1.1 billion of capital consisting of $907.3 million in common equity ($895.6 million net of issuance costs) and $226.6 million in preference equity ($219.2 million net of issuance costs and discount). The Company invested $100.0 million and acquired 2,500,000 common shares. Watford’s common shares are listed on the Nasdaq Select Global Market under the ticker symbol “WTRE”. As of December 31, 2020, the Company owned approximately 13% of Watford’s outstanding common equity and, as of February 16, 2021, Arch Re Bermuda owned approximately 10.3% of Watford’s common equity. Subsidiaries of the Company act as Watford’s reinsurance and insurance underwriting managers. HPS Investment Partners, LLC (“HPS”) manages Watford’s non-investment grade credit portfolios, and the Company manages Watford’s investment grade portfolios, each under separate long term services agreements. Maamoun Rajeh and Nicolas Papadopoulo, both officers of the Company, serve on the board of directors of Watford. The Company concluded that Watford is a VIE and that the Company is the primary beneficiary. The Company includes the results of Watford in its consolidated financial statements. The Company concluded that Watford should be reflected in a separate operating segment (‘other’) and provides the income statement and total investable assets, total assets and total liabilities of Watford within Note 4. Because Watford is an independent company, the assets of Watford can be used only to settle obligations of Watford and Watford is solely responsible for its own liabilities and commitments. The Company’s financial exposure to Watford is limited to its investment in Watford’s senior notes, common shares and preferred shares and counterparty credit risk (mitigated by collateral) arising from the reinsurance transactions. In the 2020 fourth quarter, Arch Capital, Watford Holdings Ltd. and Greysbridge Ltd., a wholly-owned subsidiary of Arch Capital, entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”) pursuant to which, among other things, Arch Capital agreed to acquire all of the common shares of Watford Holdings Ltd. not owned by Arch for a cash purchase price of $35.00 per common share. Arch Capital has assigned its rights under the Merger Agreement to Greysbridge Holdings Ltd., a wholly-owned subsidiary of Arch Capital (“Greysbridge”). The transaction is expected to close in the first half of 2021 and remains subject to customary closing conditions, including regulatory and shareholder approvals. Upon closing of the transaction, Watford will be wholly owned by Greysbridge and Greysbridge will be owned 40% by Arch Re Bermuda, 30% by certain investment funds managed by Kelso & Company and 30% by certain investment funds managed by Warburg Pincus LLC. The following table provides the carrying amount and balance sheet caption in which the assets and liabilities of Watford are reported:
| December 31,
| 2020 |  | 2019
Assets |  |  |
Investments accounted for using the fair value option (1) | $ | 1,790,385 |  |  | $ | 1,898,091 |
Fixed maturities available for sale, at fair value | 655,249 |  |  | 745,708 |
Equity securities, at fair value | 52,410 |  |  | 65,338 |
Cash | 211,451 |  |  | 102,437 |
Accrued investment income | 14,679 |  |  | 14,025 |
Premiums receivable | 224,377 |  |  | 273,657 |
Reinsurance recoverable on unpaid and paid losses and LAE | 286,590 |  |  | 170,973 |
Ceded unearned premiums | 122,339 |  |  | 132,577 |
Deferred acquisition costs, net | 53,705 |  |  | 64,044 |
Receivable for securities sold | 37,423 |  |  | 16,287 |
Goodwill and intangible assets | 7,650 |  |  | 7,650 |
Other assets | 75,801 |  |  | 60,070 |
Total assets of consolidated VIE | $ | 3,532,059 |  |  | $ | 3,550,857 |
Liabilities |  |  |
Reserves for losses and loss adjustment expenses | $ | 1,519,583 |  |  | $ | 1,263,628 |
Unearned premiums | 407,714 |  |  | 438,907 |
Reinsurance balances payable | 63,269 |  |  | 77,066 |
Revolving credit agreement borrowings | 155,687 |  |  | 484,287 |
Senior notes | 172,689 |  |  | 172,418 |
Payable for securities purchased | 25,881 |  |  | 18,180 |
Other liabilities | 193,494 |  |  | 171,714 |
Total liabilities of consolidated VIE | $ | 2,538,317 |  |  | $ | 2,626,200 |
Redeemable noncontrolling interests | $ | 52,398 |  |  | $ | 52,305 |
(1) Included in “other investments” on the Company’s balance sheet. The following table summarizes Watford’s cash flow from operating, investing and financing activities.
| Year Ended December 31,
| 2020 |  | 2019 |  | 2018
Total cash provided by (used for): |  |  |  |
Operating activities | 181,736 |  |  | 239,284 |  |  | 229,315 |
Investing activities | 258,589 |  |  | (140,620) |  |  | (285,281) |
Financing activities | (335,776) |  |  | (61,433) |  |  | (2,406) |
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 December 31, 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:
| December 31,
| 2020 |  | 2019
Balance, beginning of year | $ | 762,777 |  |  | $ | 791,560 |
Additional paid in capital attributable to noncontrolling interests | 1,334 |  |  | (2,929) |
Repurchases attributable to non-redeemable noncontrolling interests (1) | (2,867) |  |  | (75,056) |
Amounts attributable to noncontrolling interests | 53,076 |  |  | 40,072 |
Other amounts attributable to noncontrolling interests | (375) |  |  | — |
Other comprehensive (income) loss attributable to noncontrolling interests | 9,062 |  |  | 9,130 |
Balance, end of year | $ | 823,007 |  |  | $ | 762,777 |
(1) During 2020 and 2019, 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. Holders of the Watford Preference Shares will be entitled to receive, if declared by Watford’s board, quarterly cash dividends on the last day of March, June, September, and December. Dividends accrued from the closing date to June 30, 2019 at a fixed rate of 8.5% per annum. From June 30, 2019 and subsequent, dividends will accrue based on a floating rate equal to the 3 month U.S. dollar LIBOR (with a 1% floor) plus a margin based on the difference between the fixed rate and the 5 year mid swap rate to the floating rate. 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. Because the redemption features are not solely within the control of Watford, the Company accounts for the redeemable noncontrolling interests in the Watford Preference Shares in the mezzanine section of its consolidated balance sheets. On August 1, 2019, Watford redeemed 6,919,998 of its 9,065,200 issued and outstanding preference shares (“Watford Preference Shares”) at a total redemption price of $25.19748 per share, inclusive of all declared and unpaid dividends. The Company received $11.5 million pursuant to the redemption of Watford Preference Shares. Preferred dividends on the Watford Preference Shares, including the accretion of the discount and issuance costs, was $4.4 million for 2020, compared to $17.8 million for 2019 and $19.6 million for 2018. The following table sets forth activity in the redeemable noncontrolling interests:
| December 31,
| 2020 |  | 2019 |  | 2018
Balance, beginning of year | $ | 55,404 |  |  | $ | 206,292 |  |  | $ | 205,922 |
Redemption of noncontrolling interests | — |  |  | (157,709) |  |  | — |
Accretion of preference share issuance costs | 93 |  |  | 244 |  |  | 370 |
Other | 3,051 |  |  | 6,577 |  |  | — |
Balance, end of year | $ | 58,548 |  |  | $ | 55,404 |  |  | $ | 206,292 |
The portion of income or loss attributable to third party investors is recorded in the consolidated statements of income in ‘net (income) loss attributable to noncontrolling interests’ as summarized in the table below:
| December 31,
| 2020 |  | 2019 |  | 2018
Amounts attributable to non-redeemable noncontrolling interests | $ | (53,076) |  |  | $ | (40,072) |  |  | $ | 48,507 |
Amounts attributable to redeemable noncontrolling interests | (7,114) |  |  | (16,909) |  |  | (18,357) |
Net (income) loss attributable to noncontrolling interests | $ | (60,190) |  |  | $ | (56,981) |  |  | $ | 30,150 |
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
Dec 31, 2020 |  |  |  |  |  |  |
Bellemeade 2017-1 Ltd. (Oct-17) | $ | 145,573 |  |  | $ | (245) |  |  | $ | 844 |  |  | $ | 599 |
Bellemeade 2018-1 Ltd. (Apr-18) | 250,095 |  |  | (903) |  |  | 2,245 |  |  | 1,342 |
Bellemeade 2018-2 Ltd. (Aug-18) | 108,395 |  |  | (138) |  |  | 280 |  |  | 142 |
Bellemeade 2018-3 Ltd. (Oct-18) | 302,563 |  |  | (1,320) |  |  | 3,262 |  |  | 1,942 |
Bellemeade 2019-1 Ltd. (Mar-19) | 219,256 |  |  | (1,361) |  |  | 8,461 |  |  | 7,100 |
Bellemeade 2019-2 Ltd. (Apr-19) | 398,316 |  |  | (730) |  |  | 5,201 |  |  | 4,471 |
Bellemeade 2019-3 Ltd. (Jul-19) | 528,084 |  |  | (861) |  |  | 5,079 |  |  | 4,218 |
Bellemeade 2019-4 Ltd. (Oct-19) | 468,737 |  |  | (890) |  |  | 6,676 |  |  | 5,786 |
Bellemeade 2020-1 Ltd. (Jun-20) (1) | 275,068 |  |  | (178) |  |  | 1,012 |  |  | 834 |
Bellemeade 2020-2 Ltd. (Sep-20) (2) | 423,420 |  |  | (556) |  |  | 6,839 |  |  | 6,283 |
Bellemeade 2020-3 Ltd. (Nov-20) (3) | 418,158 |  |  | (631) |  |  | 9,605 |  |  | 8,974 |
Bellemeade 2020-4 Ltd. (Dec-20) (4) | 321,393 |  |  | (156) |  |  | 6,816 |  |  | 6,660 |
Total | $ | 3,859,058 |  |  | $ | (7,969) |  |  | $ | 56,320 |  |  | $ | 48,351 |
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. (3) An additional $34 million capacity was provided directly to Arch MI U.S. by a separate panel of reinsurers and is not reflected in this table. (4) An additional $16 million capacity was provided directly to Arch MI U.S. by a separate panel of reinsurers and is not reflected in this table. See Note 8, “Reinsurance.”

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- Definition Variable Interest Entity and Noncontrolling Interest Disclosure [Abstract] + References No definition available. + Details
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- Definition The entire disclosure for a variable interest entity (VIE), including but not limited to, judgments and assumptions in determining whether to consolidate and in identifying the primary beneficiary, gain (loss) recognized on the initial consolidation of the VIE, terms of arrangements, amounts and classification of the VIE's assets and liabilities, and the entity's maximum exposure to loss, and 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 No definition available. + Details
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