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Variable Interest Entities and Noncontrolling Interests

3 Months Ended

Mar. 31, 2022

Noncontrolling Interest [Abstract]

Variable Interest Entity and Noncontrolling Interests

Somers

In March 2014, the Company invested $100.0 million and acquired approximately 11% of Somers’ outstanding common equity. 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.

Somers generated $7.0 million of cash provided by operating activities, $21.4 million of cash provided by investing activities and $1.0 million of cash used for financing activities for the three months ended March 31, 2021.

Non-redeemable noncontrolling interests

Through June 30, 2021, the Company accounted for the portion of Somers’s common equity attributable to third party investors in the shareholders’ equity section of its consolidated balance sheets. The portion of Somers’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:

									March 31,
									2021
Three Months Ended
Balance, beginning of period									$	823,007
Additional paid in capital attributable to noncontrolling interests									21,730
Amounts attributable to noncontrolling interests									36,697
Other comprehensive income (loss) attributable to noncontrolling interests									(4,570)
Balance, end of period									$	876,864

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. 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:

			March 31,
			2022						2021
Three Months Ended
Balance, beginning of period			$	9,233					$	58,548
Accretion of preference share issuance costs			—						23
Other			530						(901)
Balance, end of period			$	9,763					$	57,670

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:

			March 31,
			2022						2021
Three Months Ended
Amounts attributable to non-redeemable noncontrolling interests			$	—					$	(36,697)
Amounts attributable to redeemable noncontrolling interests			(1,632)						(855)
Net (income) loss attributable to noncontrolling interests			$	(1,632)					$	(37,552)

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 and later 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.

												March 31, 2022																														December 31, 2021
												Maximum Exposure to Loss																														Maximum Exposure to Loss
Bellemeade Entities (Issue Date)						Total VIE Assets						On-Balance Sheet (Asset) Liability						Off-Balance Sheet						Total						Coverage Remaining from Reinsurers (1)						Total VIE Assets						On-Balance Sheet (Asset) Liability						Off-Balance Sheet						Total
2017-1 Ltd. (Oct-17)						$	81,415					$	(90)					$	380					$	290											$	108,368					$	(159)					$	424					$	265
2018-1 Ltd. (Apr-18)						147,647						(384)						1,176						792												181,136						(528)						1,268						740
2018-3 Ltd. (Oct-18)						283,088						(707)						1,953						1,246												302,563						(1,018)						2,496						1,478
2019-1 Ltd. (Mar-19)						157,397						(135)						1,407						1,272												181,324						(380)						5,807						5,427
2019-2 Ltd. (Apr-19)						398,316						(379)						5,906						5,527												398,316						(515)						3,998						3,483
2019-3 Ltd. (Jul-19)						347,583						(298)						2,783						2,485												409,859						(584)						3,190						2,606
2019-4 Ltd. (Oct-19)						352,232						(251)						4,728						4,477												411,954						(462)						4,759						4,297
2020-2 Ltd. (Sep-20)						185,380						(36)						1,800						1,764						784						217,766						(177)						1,984						1,807
2020-3 Ltd. (Nov-20)						324,869						47						5,088						5,135						12,175						348,818						(128)						5,793						5,665
2020-4 Ltd. (Dec-20)						145,747						56						1,528						1,584						7,249						176,826						(50)						1,630						1,580
2021-1 Ltd. (Mar-21)						543,457						(600)						3,596						2,996						54,795						568,986						(303)						3,283						2,980
2021-2 Ltd. (Jun-21)						514,932						(111)						4,392						4,281						91,241						522,807						281						4,124						4,405
2021-3 Ltd. (Sep-21)						507,873						(779)						3,574						2,795						131,518						507,873						(411)						3,446						3,035
2022-1 Ltd. (Jan-22)						283,500						(29)						2,464						2,435						33,260
Total						$	4,273,436					$	(3,696)					$	40,775					$	37,079					$	331,022					$	4,336,596					$	(4,434)					$	42,202					$	37,768

(1) Coverage from a separate panel of reinsurers remaining at March 31, 2022.

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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

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- References

No definition available.

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