Investment Information

3 Months Ended

Mar. 31, 2021

Disclosure Investment Information [Abstract]

At March 31, 2021, total investable assets of $29.1 billion included $26.3 billion held by the Company and $2.7 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
March 31, 2021
Fixed maturities (1):
Corporate bonds	$	8,072,883	$	242,832	$	(83,961)	$	(2,569)	$	7,916,581
Mortgage backed securities	571,071		7,066		(11,165)		(325)		575,495
Municipal bonds	457,329		19,942		(4,814)		(2)		442,203
Commercial mortgage backed securities	255,373		2,755		(1,721)		(5)		254,344
U.S. government and government agencies	5,042,208		15,102		(30,545)		—		5,057,651
Non-U.S. government securities	2,425,882		127,886		(19,267)		(51)		2,317,314
Asset backed securities	2,028,441		18,817		(4,962)		(878)		2,015,464
Total	18,853,187		434,400		(156,435)		(3,830)		18,579,052

Short-term investments	1,269,631		920		(601)		—		1,269,312
Total	$	20,122,818	$	435,320	$	(157,036)	$	(3,830)	$	19,848,364

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
March 31, 2021
Fixed maturities (1):
Corporate bonds	$	3,253,030	$	(82,735)	$	15,894	$	(1,226)	$	3,268,924	$	(83,961)
Mortgage backed securities	383,760		(10,271)		20,648		(894)		404,408		(11,165)
Municipal bonds	90,634		(4,737)		1,827		(77)		92,461		(4,814)
Commercial mortgage backed securities	39,863		(759)		23,421		(962)		63,284		(1,721)
U.S. government and government agencies	3,920,377		(30,545)		—		—		3,920,377		(30,545)
Non-U.S. government securities	911,609		(18,433)		16,841		(834)		928,450		(19,267)
Asset backed securities	502,300		(2,391)		142,331		(2,571)		644,631		(4,962)
Total	9,101,573		(149,871)		220,962		(6,564)		9,322,535		(156,435)

Short-term investments	95,579		(601)		—		—		95,579		(601)
Total	$	9,197,152	$	(150,472)	$	220,962	$	(6,564)	$	9,418,114	$	(157,036)

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 March 31, 2021, on a lot level basis, approximately 4,610 security lots out of a total of approximately 11,360 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 $1.1 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.


	March 31, 2021				December 31, 2020
Maturity	Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost
Due in one year or less	$	381,212	$	370,798	$	348,200	$	339,951
Due after one year through five years	11,124,344		10,918,279		10,629,959		10,340,819
Due after five years through 10 years	4,052,472		4,008,520		4,881,564		4,654,754
Due after 10 years	440,274		436,152		482,180		448,139
	15,998,302		15,733,749		16,341,903		15,783,663
Mortgage backed securities	571,071		575,495		630,001		626,368
Commercial mortgage backed securities	255,373		254,344		389,900		384,254
Asset backed securities	2,028,441		2,015,464		1,634,804		1,627,384
Total (1)	$	18,853,187	$	18,579,052	$	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 March 31, 2021, the fair value of the cash collateral received on securities lending was nil and the fair value of security collateral received was $143.9 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
March 31, 2021
U.S. government and government agencies	$	16,397	$	—	$	102,743	$	—	$	119,140
Corporate bonds	13,724		—		—		—		13,724
Equity securities	11,022		—		—		—		11,022
Total	$	41,143	$	—	$	102,743	$	—	$	143,886
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									$	143,886

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 March 31, 2021, the Company held $1.5 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:


	March 31, 2021		December 31, 2020
Fixed maturities	$	900,304	$	843,354
Other investments	2,318,185		2,331,885
Short-term investments	623,930		557,008
Equity securities	92,935		92,549
Investments accounted for using the fair value option	$	3,935,354	$	3,824,796

Other investable assets (1)	500,000		500,000
Total other investments	$	4,435,354	$	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:


	March 31, 2021		December 31, 2020
Term loan investments	$	1,187,752	$	1,231,731
Lending	606,207		572,636
Credit related funds	79,355		90,780
Energy	78,500		65,813
Investment grade fixed income	142,630		138,646
Infrastructure	152,352		165,516
Private equity	52,064		48,750
Real estate	19,325		18,013
Total	$	2,318,185	$	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:


	March 31, 2021		December 31, 2020
Credit related funds	$	818,344	$	740,060
Equities	357,641		343,058
Real estate	292,424		258,518
Lending	199,913		179,629
Private equity	288,657		235,289
Infrastructure	179,225		175,882
Energy	120,123		115,453
Total	$	2,256,327	$	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:


	March 31, 2021		December 31, 2020
Investments accounted for using the equity method (1)	2,256,327		2,047,889
Investments accounted for using the fair value option (2)	196,087		184,720
Total	$	2,452,414	$	2,232,609

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

(2) Aggregate unfunded commitments were $36.1 million at March 31, 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:


	March 31,
	2021		2020
Three Months Ended
Fixed maturities	$	90,626	$	114,847
Term loans	14,728		23,170
Equity securities	5,650		6,007
Short-term investments	607		4,896
Other (1)	14,355		19,406
Gross investment income	125,966		168,326
Investment expenses	(27,110)		(23,173)
Net investment income	$	98,856	$	145,153

(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:


	March 31,
	2021		2020
Three Months Ended
Available for sale securities:
Gross gains on investment sales	$	65,002	$	178,200
Gross losses on investment sales	(62,998)		(31,968)
Change in fair value of assets and liabilities accounted for using the fair value option:
Fixed maturities	16,553		(127,666)
Other investments	46,855		(307,800)
Equity securities	2,065		(4,909)
Short-term investments	736		(8,681)
Equity securities, at fair value:
Net realized gains (losses) on sales during the period	37,849		(539)
Net unrealized gains (losses) on equity securities still held at reporting date	19,708		(175,566)
Allowance for credit losses:
Investments related	(1,648)		(9,320)
Underwriting related	5,268		(3,270)
Net impairment losses	—		(533)
Derivative instruments (1)	36,116		127,189
Other	(23,045)		(2,097)
Net realized gains (losses)	$	142,461	$	(366,960)

(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 $71.7 million of equity in net income related to investment funds accounted for using the equity method in the 2021 first quarter, compared to loss of $4.2 million for the 2020 first quarter. 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 March 31, 2021 the Company’s carrying value in Coface was $604.6 million.

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		Total
March 31, 2021
Balance at beginning of period	$	1,490	$	11	$	896	$	2,397

Additions for current-period provision for expected credit losses	182		—		2,421		2,603
Additions (reductions) for previously recognized expected credit losses	(382)		(9)		(540)		(931)
Reductions due to disposals	(83)		—		(156)		(239)
Write-offs charged against the allowance	—		—		—		—
Balance at end of period	$	1,207	$	2	$	2,621	$	3,830

December 31, 2020
Balance at beginning of period	$	—	$	—	$	—	$	—
Cumulative effect of accounting change (2)	517		—		117		634
Additions for current-period provision for expected credit losses	2,942		67		7,644		10,653
Additions (reductions) for previously recognized expected credit losses	(1,398)		6		(5,638)		(7,030)
Reductions due to disposals	(571)		(62)		(1,227)		(1,860)
Write-offs charged against the allowance	—		—		—		—
Balance at end of period	$	1,490	$	11	$	896	$	2,397

(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:


	March 31, 2021		December 31, 2020
Assets used for collateral or guarantees:
Affiliated transactions	$	4,815,120	$	4,643,334
Third party agreements	3,366,016		3,083,324
Deposits with U.S. regulatory authorities	819,444		827,552
Deposits with non-U.S. regulatory authorities	330,197		179,099

Total restricted assets	$	9,330,777	$	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 March 31, 2021 and December 31, 2020, Watford held $1.0 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:


	March 31, 2021		December 31, 2020
Cash	$	941,951	$	906,448
Restricted cash (included in ‘other assets’)	$	425,563	$	384,096
Cash and restricted cash	$	1,367,514	$	1,290,544