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Variable Interest Entities and Noncontrolling Interests | 9 Months Ended
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Sep. 30, 2021
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 approximately 11% of Watford’s outstanding common equity. Watford was considered a VIE and the Company concluded that it was the primary beneficiary of Watford, through June 30, 2021. As such, the results of Watford were included in the Company’s consolidated financial statements as of and for the periods ended June 30, 2021. In the 2020 fourth quarter, Arch Capital, Watford and Greysbridge, a wholly-owned subsidiary of Arch Capital, entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”). The merger and the related Greysbridge equity financing closed on July 1, 2021. Effective July 1, 2021, Watford is wholly owned by Greysbridge, and Greysbridge is owned 40% by the Company, 30% by certain investment funds managed by Kelso and 30% by certain investment funds managed by Warburg. Based on the governing documents of Greysbridge, the Company concluded that, while it retains significant influence over Watford, Watford no longer constitutes a variable interest entity. Accordingly, effective July 1, 2021, the Company no longer consolidates the results of Watford in its consolidated financial statements and footnotes. Beginning in the 2021 third quarter, the Company classifies its investment as ‘investments in operating affiliates’ on the Company’s balance sheets and is accounted for under the equity method. The following table provides the carrying amount and balance sheet caption in which the assets and liabilities of Watford were reported at December 31, 2020:
|  |  | December 31,
|  |  | 2020
Assets |  |  |
Investments accounted for using the fair value option (1) |  |  | $ | 1,790,385 |
Fixed maturities available for sale, at fair value |  |  | 655,249 |
Equity securities, at fair value |  |  | 52,410 |
Cash |  |  | 211,451 |
Accrued investment income |  |  | 14,679 |
Premiums receivable |  |  | 224,377 |
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses |  |  | 286,590 |
Ceded unearned premiums |  |  | 122,339 |
Deferred acquisition costs |  |  | 53,705 |
Receivable for securities sold |  |  | 37,423 |
Goodwill and intangible assets |  |  | 7,650 |
Other assets |  |  | 75,801 |
Total assets of consolidated VIE |  |  | $ | 3,532,059 |
Liabilities |  |  |
Reserve for losses and loss adjustment expenses |  |  | $ | 1,519,583 |
Unearned premiums |  |  | 407,714 |
Reinsurance balances payable |  |  | 63,269 |
Revolving credit agreement borrowings |  |  | 155,687 |
Senior notes |  |  | 172,689 |
Payable for securities purchased |  |  | 25,881 |
Other liabilities |  |  | 193,494 |
Total liabilities of consolidated VIE |  |  | $ | 2,538,317 |
Redeemable noncontrolling interests |  |  | $ | 52,398 |
(1) Included in “other investments” on the Company’s balance sheet. Through June 30, 2021, Watford generated $47.0 million of cash provided by operating activities, $96.3 million of cash provided by investing activities and $2.0 million of cash used for financing activities, compared to $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 for the nine months ended September 30, 2020. Non-redeemable noncontrolling interests Through June 30, 2021, the Company accounted for the portion of Watford’s common equity attributable to third party investors in the shareholders’ equity section of its consolidated balance sheets. The portion of Watford’s income or loss attributable to third party investors was 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,
| 2021 |  | 2020
Three Months Ended |  |  |
Balance, beginning of period | $ | 918,874 |  |  | $ | 679,089 |
Impact of deconsolidation of Watford | (918,874) |  |  | — |
Additional paid in capital attributable to noncontrolling interests | — |  |  | 243 |
Amounts attributable to noncontrolling interests | — |  |  | 67,768 |
Other comprehensive income (loss) attributable to noncontrolling interests | — |  |  | 10,820 |
Balance, end of period | $ | — |  |  | $ | 757,920 |
Nine Months Ended |  |  |
Balance, beginning of year | $ | 823,007 |  |  | $ | 762,777 |
Impact of deconsolidation of Watford | (918,874) |  |  |
Additional paid in capital attributable to noncontrolling interests | 22,113 |  |  | 715 |
Repurchases attributable to non-redeemable noncontrolling interests (1) | — |  |  | (2,867) |
Amounts attributable to noncontrolling interests | 78,314 |  |  | (578) |
Other comprehensive income (loss) attributable to noncontrolling interests | (4,560) |  |  | (2,127) |
Balance, end of period | $ | — |  |  | $ | 757,920 |
(1) During 2020, Watford’s board of directors authorized the investment in Watford’s common shares through a share repurchase program. Redeemable noncontrolling interests Through June 30, 2021, the Company accounted for redeemable noncontrolling interests in the mezzanine section of its consolidated balance sheets in accordance with applicable accounting guidance. Such redeemable noncontrolling interests primarily related 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. Through June 30, 2021 preferred dividends, including the accretion of the discount and issuance costs, were included in ‘net (income) loss attributable to noncontrolling interests’ in the Company’s consolidated statements of income. The following table sets forth activity in the redeemable non-controlling interests:
| September 30,
| 2021 |  | 2020
Three Months Ended |  |  |
Balance, beginning of period | $ | 57,533 |  |  | $ | 55,986 |
Impact of deconsolidation of Watford | (48,919) |  |  | — |
Accretion of preference share issuance costs | — |  |  | 23 |
Other | 1,623 |  |  | 1,826 |
Balance, end of period | $ | 10,237 |  |  | $ | 57,835 |
Nine Months Ended |  |  |
Balance, beginning of year | $ | 58,548 |  |  | $ | 55,404 |
Impact of deconsolidation of Watford | (48,919) |  |  | — |
Accretion of preference share issuance costs | — |  |  | 70 |
Other | 608 |  |  | 2,361 |
Balance, end of period | $ | 10,237 |  |  | $ | 57,835 |
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,
| 2021 |  | 2020
Three Months Ended |  |  |
Amounts attributable to non-redeemable noncontrolling interests | $ | — |  |  | $ | (67,768) |
Amounts attributable to redeemable noncontrolling interests | (1,473) |  |  | (1,875) |
Net (income) loss attributable to noncontrolling interests | $ | (1,473) |  |  | $ | (69,643) |
Nine Months Ended |  |  |
Amounts attributable to non-redeemable noncontrolling interests | $ | (78,314) |  |  | $ | 578 |
Amounts attributable to redeemable noncontrolling interests | (3,889) |  |  | (4,998) |
Net (income) loss attributable to noncontrolling interests | $ | (82,203) |  |  | $ | (4,420) |
Bellemeade Re The Company has entered into 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 benchmark index for each respective transaction and short term invested trust asset yields. The benchmark index for agreements effective prior to 2021 is based on one-month LIBOR, while the 2021 agreements benchmark index is based on the Secured Overnight Financing Rate (“SOFR”). SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions.
|  |  | September 30, 2021 |  |  |  | December 31, 2020
|  |  | Maximum Exposure to Loss |  |  |  | Maximum Exposure to Loss
Bellemeade Entities (Issue Date) | Total VIE Assets |  | On-Balance Sheet (Asset) Liability |  | Off-Balance Sheet |  | Total |  | Total VIE Assets |  | On-Balance Sheet (Asset) Liability |  | Off-Balance Sheet |  | Total
Bellemeade 2017-1 Ltd. (Oct-17) | $ | 145,573 |  |  | $ | (214) |  |  | $ | 585 |  |  | $ | 371 |  |  | $ | 145,573 |  |  | $ | (245) |  |  | $ | 844 |  |  | $ | 599 |
Bellemeade 2018-1 Ltd. (Apr-18) | 228,938 |  |  | (764) |  |  | 1,683 |  |  | 919 |  |  | 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 |  |  | (1,049) |  |  | 2,328 |  |  | 1,279 |  |  | 302,563 |  |  | (1,320) |  |  | 3,262 |  |  | 1,942 |
Bellemeade 2019-1 Ltd. (Mar-19) | 210,529 |  |  | (931) |  |  | 8,142 |  |  | 7,211 |  |  | 219,256 |  |  | (1,361) |  |  | 8,461 |  |  | 7,100 |
Bellemeade 2019-2 Ltd. (Apr-19) | 398,316 |  |  | (787) |  |  | 5,658 |  |  | 4,871 |  |  | 398,316 |  |  | (730) |  |  | 5,201 |  |  | 4,471 |
Bellemeade 2019-3 Ltd. (Jul-19) | 491,634 |  |  | (826) |  |  | 3,971 |  |  | 3,145 |  |  | 528,084 |  |  | (861) |  |  | 5,079 |  |  | 4,218 |
Bellemeade 2019-4 Ltd. (Oct-19) | 468,737 |  |  | (682) |  |  | 4,761 |  |  | 4,079 |  |  | 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) | 266,704 |  |  | (279) |  |  | 2,629 |  |  | 2,350 |  |  | 423,420 |  |  | (556) |  |  | 6,839 |  |  | 6,283 |
Bellemeade 2020-3 Ltd. (Nov-20) (3) | 381,410 |  |  | (395) |  |  | 6,646 |  |  | 6,251 |  |  | 418,158 |  |  | (631) |  |  | 9,605 |  |  | 8,974 |
Bellemeade 2020-4 Ltd. (Dec-20) (4) | 226,916 |  |  | (100) |  |  | 2,190 |  |  | 2,090 |  |  | 321,393 |  |  | (156) |  |  | 6,816 |  |  | 6,660 |
Bellemeade 2021-1 Ltd. (Mar-21) (5) | 579,717 |  |  | 229 |  |  | 4,217 |  |  | 4,446 |  |  | — |  |  | — |  |  | — |  |  | — |
Bellemeade 2021-2 Ltd. (Jun-21) (6) | 522,807 |  |  | 906 |  |  | 5,090 |  |  | 5,996 |  |  | — |  |  | — |  |  | — |  |  | — |
Bellemeade 2021-3 Ltd. (Sep-21) (7) | 507,873 |  |  | 182 |  |  | 4,561 |  |  | 4,743 |  |  | — |  |  | — |  |  | — |  |  | — |
Total | $ | 4,731,717 |  |  | $ | (4,710) |  |  | $ | 52,461 |  |  | $ | 47,751 |  |  | $ | 3,859,058 |  |  | $ | (7,969) |  |  | $ | 56,320 |  |  | $ | 48,351 |
(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. (5) An additional $64 million capacity was provided directly to Arch MI U.S. by a separate panel of reinsurers and is not reflected in this table. (6) An additional $93 million capacity was provided directly to Arch MI U.S. by a separate panel of reinsurers and is not reflected in this table. (7) An additional $131 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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- References No definition available. + Details
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