VARIABLE INTEREST ENTITIES

The Company’s investments include certain investments, primarily in limited liability companies and limited partnerships in which the Company holds a variable interest. The Company evaluates these investments for the characteristics of a VIE. The Variable Interest Model identifies the characteristics of a VIE to include investments (1) lacking sufficient equity to finance activities without additional subordinated support or (2) in which the holders of equity at risk in the investments lack characteristics of a controlling financial interest, such as the power to direct activities that most significantly impact the legal entity’s economic performance; the obligation to absorb the legal entity’s expected losses; or the right to receive the expected residual returns of the legal entity. The equity investors as a group are considered to lack the power to direct activities that most significantly impact the legal entity’s economic performance when (1) the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the legal entity or their rights to receive the expected residual returns of the legal entity and (2) substantially all of the activities of the legal entity are conducted on behalf of an investor with disproportionately few voting rights. When evaluating whether an investment lacks characteristics of a controlling financial interest, the Company considers limited liability companies and limited partnerships to lack the power of a controlling financial interest if neither of the following exists: (1) a simple majority or lower threshold of partners or members with equity at risk are able to exercise substantive kick-out rights through voting interest over the general partner(s) or managing member(s) or (2) limited partners with equity at risk are able to exercise substantive participating rights over the general partner(s) or managing member(s).

If the characteristics of a VIE are met, the Company evaluates whether it meets the primary beneficiary criteria. The primary beneficiary is considered to be the entity holding a variable interest that has the power to direct activities that most significantly impact the economic performance of the VIE; the obligation to absorb losses of the VIE; or the right to receive benefits from the VIE that could potentially be significant to the VIE. In instances where the Company is considered to be the primary beneficiary, the Company consolidates the VIE. When the Company is not considered to be the primary beneficiary of the VIE, the VIE is not consolidated and the Company uses the equity method to account for the investment. Under this method, the carrying value is generally the Company’s share of the net asset value of the unconsolidated entity, and changes in the Company’s share of the net asset value are recorded in net investment income.

(a) Consolidated VIEs

Argo Holdings Fund I, LLC:

The Company held a 43.4% investment in Argo Holdings at December 31, 2018 and December 31, 2017. Argo Holdings makes investments, primarily in established lower middle market companies based in North America, through investments in search funds. The managing member of Argo Holdings is Argo Management, a wholly owned subsidiary of the Company. Argo Holdings is considered to be a VIE as the members holding equity at risk lack characteristics of a controlling financial interest. The Company holds a variable interest in Argo Holdings due to its right to absorb significant economics in Argo Holdings and through its controlling interest in Argo Management, through which the Company holds the power to direct the significant activities of Argo Holdings. As such, the Company was the primary beneficiary of Argo Holdings and consolidated Argo Holdings at December 31, 2018 and December 31, 2017.

Net Lease Investment Grade Portfolio, LLC:

The Company held a 71.0% and 71.8% investment in Net Lease at December 31, 2018 and December 31, 2017, respectively. Net Lease holds three commercial properties under triple net leases. The properties are encumbered by mortgage loans. Net Lease is considered to be a VIE as the members holding equity at risk lack characteristics of a controlling financial interest. The Company holds a variable interest in Net Lease due to its right to absorb significant economics in Net Lease and to control the management decisions of Net Lease, which allows the Company to hold the power to direct the significant activities of Net Lease. As such, the Company is the primary beneficiary of Net Lease and consolidated Net Lease at December 31, 2018 and December 31, 2017.

DPM SPV, LLC:

The Company held a 66.7% investment in DPM at December 31, 2018 and December 31, 2017. DPM holds an investment in Swerve Pay LLC, which is a software development firm for medical imaging software. DPM is considered to be a VIE as the members holding equity at risk lack characteristics of a controlling financial interest. The Company holds a variable interest in DPM due to its right to absorb significant economics in DPM and to control the management decisions of DPM, which allows the Company to hold the power to direct the significant activities of the VIE. As such, the Company is the primary beneficiary of DPM and consolidated DPM at December 31, 2018 and December 31, 2017.

Insurance Income Strategies Ltd.

Insurance Income Strategies Ltd. ("IIS") is a Bermuda corporation organized to offer collateralized reinsurance in the property catastrophe market through its wholly owned operating subsidiary IIS Re Ltd. The Company held 100% of the outstanding common stock of IIS at December 31, 2018 and December 31, 2017. IIS was considered to be a VIE at December 31, 2017 as IIS did not hold sufficient equity to finance its activities without additional subordinated support. At December 31, 2017, the Company was deemed to have the power to direct the activities of IIS through its voting rights and had the right to absorb significant economics in IIS; therefore, the Company was the primary beneficiary of IIS and consolidated IIS at December 31, 2017. The results of consolidation of IIS at December 31, 2017 were immaterial and are reflected as zero in the following table at December 31, 2017.

Effective August 10, 2018, IIS issued preferred stock to a third-party investor in the amount of $15.0 million. In conjunction with this transaction, documents were executed prohibiting IIS to enter into any material contract, issue equity or debt securities, incur any other material obligation or enter into, amend or waive any material term of any agreement between the Company and IIS without the prior written consent of the third-party investor. As a result, while IIS raised sufficient equity to finance its activities, the holders of equity at risk of IIS no longer had proportionate voting rights, resulting in IIS continuing to be considered a VIE, including at December 31, 2018. Due to the contractual agreements executed in conjunction with the third-party investment, the Company no longer holds power over IIS as of August 10, 2018. As such, the Company is no longer considered the primary beneficiary as of August 10, 2018 and deconsolidated IIS.

The following table summarizes the assets and liabilities related to VIEs consolidated by the Company at December 31, 2018 and December 31, 2017:



(in thousands)	December 31,
	2018		2017
Assets
Limited liability investments, at fair value	$	25,809	$	21,895
Investments in private companies, at adjusted cost	750		750
Cash and cash equivalents	351		220
Accrued investment income	217		107
Other receivable	48		—
Total Assets	27,175		22,972
Liabilities
Accrued expenses and other liabilities	252		97
Notes payable	9,000		9,000
Total Liabilities	$	9,252	$	9,097

No arrangements exist requiring the Company to provide additional funding to the consolidated VIEs in excess of the Company’s unfunded commitments. At December 31, 2018 and December 31, 2017, the Company had $0.6 million and $1.2 million, respectively, of unfunded commitments to Argo Holdings. There are no restrictions on assets consolidated by these VIEs. There are no structured settlements of liabilities consolidated by these VIEs. Creditors have no recourse to the general credit of the Company as the primary beneficiary of these VIEs.

(b) Non-Consolidated VIEs

The Company’s investments include certain non-consolidated investments, primarily in limited liability companies and limited partnerships in which the Company holds variable interests, that are considered VIEs due to the legal entities holding insufficient equity; the holders of equity at risk in the legal entities lacking controlling financial interests; and/or the holders of equity at risk having non-proportional voting rights.

The Company’s risk of loss associated with its non-consolidated VIEs is limited and depends on the investment. Limited liability investments accounted for under the equity method are limited to the Company’s initial investments. At December 31, 2018 and December 31, 2017, the Company had zero and $0.1 million, respectively, of unfunded commitments to its non-consolidated VIEs.

The following table summarizes the carrying value and maximum loss exposure of the Company’s non-consolidated VIEs at December 31, 2018 and December 31, 2017:



(in thousands)	December 31,
	2018				2017
	Carrying Value		Maximum Loss Exposure		Carrying Value		Maximum Loss Exposure
Investments in non-consolidated VIEs	$	4,664	$	4,664	$	15,363	$	15,363

The following table summarizes the Company’s non-consolidated VIEs by category at December 31, 2018 and December 31, 2017:



(in thousands)	December 31,
	2018				2017
	Carrying Value		Percent of total		Carrying Value		Percent of total
Investments in non-consolidated VIEs:
Real estate related	1,710		36.7	%	1,726		11.2	%
Non-real estate related	2,954		63.3	%	13,637		88.8	%
Total investments in non-consolidated VIEs	$	4,664	100.0	%	$	15,363	100.0	%

The following table presents aggregated summarized financial information of the Company’s non-consolidated VIEs at December 31, 2018 and December 31, 2017. For certain of the non-consolidated VIEs, the financial information is presented on a lag basis, consistent with how the changes in the Company’s share of the net asset values of these equity method investees are recorded in net investment income. The difference between the end of the reporting period of an equity method investee and that of the Company is typically no more than three months.



(in thousands)	December 31,
	2018		2017
Assets	$	363,516	$	332,181
Liabilities	296,521		238,819
Equity	66,995		93,362



(in thousands)	December 31,
	2018			2017
Net (loss) income	$	(29,619	)	$	(4,294	)