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Variable Interest Entity and Noncontrolling Interests

12 Months Ended

Dec. 31, 2021

Variable Interest Entity and Noncontrolling Interest Disclosure [Abstract]

Variable Interest Entity and Noncontrolling Interests

Somers Holdings Ltd.

In March 2014, the Company invested $100.0 million and acquired 2,500,000 common shares of Somers. Somers was considered a VIE and the Company concluded that it was the primary beneficiary of Somers, through June 30, 2021. As such, the results of Somers 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, Somers 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, Somers 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 Somers, Somers no longer constitutes a variable interest entity. Accordingly, effective July 1, 2021, the Company no longer consolidates the results of Somers 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 Somers were reported:

									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 LAE									286,590
Ceded unearned premiums									122,339
Deferred acquisition costs, net									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
Reserves 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.

The following table summarizes Somers’ cash flow from operating, investing and financing activities.

			Year Ended December 31,
			2021						2020						2019
Total cash provided by (used for):
Operating activities			46,991						181,736						239,284
Investing activities			96,325						258,589						(140,620)
Financing activities			(2,042)						(335,776)						(61,433)

Non-redeemable noncontrolling interests

Through June 30, 2021, the Company accounted for the portion of Somers’ common equity attributable to third party investors in the shareholders’ equity section of its consolidated balance sheets. The non-controlling ownership in Somers common shares was approximately 87% at December 31, 2020. The portion of Somers’ 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:

			December 31,
			2021						2020
Balance, beginning of year			$	823,007					$	762,777
Impact of deconsolidation of Somers			(918,874)						—
Additional paid in capital attributable to noncontrolling interests			22,113						1,334
Repurchases attributable to non-redeemable noncontrolling interests			—						(2,867)
Amounts attributable to noncontrolling interests			78,314						53,076
Other amounts attributable to noncontrolling interests			—						(375)
Other comprehensive (income) loss attributable to noncontrolling interests			(4,560)						9,062
Balance, end of year			$	—					$	823,007

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 Somers 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 Somers Preference Shares were issued at a discounted amount of $24.50 per share. Because the redemption features are not solely within the control of Somers, the Company accounted for the redeemable noncontrolling interests in the Somers Preference Shares in the mezzanine section of its consolidated balance sheets.

On August 1, 2019, Somers redeemed 6,919,998 of its 9,065,200 issued and outstanding preference shares (“Somers 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 Somers Preference Shares.

Preferred dividends on the Somers Preference Shares, including the accretion of the discount and issuance costs, was $2.1 million for 2021, compared to $4.4 million for 2020 and $17.8 million for 2019.

The following table sets forth activity in the redeemable noncontrolling interests:

			December 31,
			2021						2020						2019
Balance, beginning of year			$	58,548					$	55,404					$	206,292
Impact of deconsolidation of Somers			(48,919)						—						—
Redemption of noncontrolling interests			—						—						(157,709)
Accretion of preference share issuance costs			—						93						244
Other			(396)						3,051						6,577
Balance, end of year			$	9,233					$	58,548					$	55,404

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,
			2021						2020						2019
Amounts attributable to non-redeemable noncontrolling interests			$	(78,314)					$	(53,076)					$	(40,072)
Amounts attributable to redeemable noncontrolling interests			(4,299)						(7,114)						(16,909)
Net (income) loss attributable to noncontrolling interests			$	(82,613)					$	(60,190)					$	(56,981)

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.

									Dec 31, 2021																								Dec 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)			$	108,368					$	(159)					$	424					$	265					$	145,573					$	(245)					$	844					$	599
Bellemeade 2018-1 Ltd. (Apr-18)			181,136						(528)						1,268						740						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						(1,018)						2,496						1,478						302,563						(1,320)						3,262						1,942
Bellemeade 2019-1 Ltd. (Mar-19)			181,324						(380)						5,807						5,427						219,256						(1,361)						8,461						7,100
Bellemeade 2019-2 Ltd. (Apr-19)			398,316						(515)						3,998						3,483						398,316						(730)						5,201						4,471
Bellemeade 2019-3 Ltd. (Jul-19)			409,859						(584)						3,190						2,606						528,084						(861)						5,079						4,218
Bellemeade 2019-4 Ltd. (Oct-19)			411,954						(462)						4,759						4,297						468,737						(890)						6,676						5,786
Bellemeade 2020-1 Ltd. (Jun-20)			—						—						—						—						275,068						(178)						1,012						834
Bellemeade 2020-2 Ltd. (Sep-20) (1)			217,766						(177)						1,984						1,807						423,420						(556)						6,839						6,283
Bellemeade 2020-3 Ltd. (Nov-20) (2)			348,818						(128)						5,793						5,665						418,158						(631)						9,605						8,974
Bellemeade 2020-4 Ltd. (Dec-20) (3)			176,826						(50)						1,630						1,580						321,393						(156)						6,816						6,660
Bellemeade 2021-1 Ltd. (Mar-21) (4)			568,986						(303)						3,283						2,980						—						—						—						—
Bellemeade 2021-2 Ltd. (Jun-21) (5)			522,807						281						4,124						4,405						—						—						—						—
Bellemeade 2021-3 Ltd. (Sep-21) (6)			507,873						(411)						3,446						3,035						—						—						—						—
Total			$	4,336,596					$	(4,434)					$	42,202					$	37,768					$	3,859,058					$	(7,969)					$	56,320					$	48,351

(1)  At December 31, 2021, $1 million of coverage from a separate panel of reinsurers is remaining (not reflected in this table).

(2)  At December 31, 2021, $16 million of coverage from a separate panel of reinsurers is remaining (not reflected in this table).

(3)  At December 31, 2021, $9 million of coverage from a separate panel of reinsurers is remaining (not reflected in this table).

(4)  At December 31, 2021, $61 million of coverage from a separate panel of reinsurers is remaining (not reflected in this table).

(5)  At December 31, 2021, $93 million of coverage from a separate panel of reinsurers is remaining (not reflected in this table).

(6)  At December 31, 2021, $131 million

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Variable Interest Entity and Noncontrolling Interest Disclosure [Abstract]

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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.

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