Variable Interest Entities

12 Months Ended

Dec. 31, 2020

Variable Interest Entities [Abstract]

In the normal course of business, the Company is involved with various types of investment entities that may be considered VIEs. The Company evaluates its involvement with each entity to determine whether consolidation is required. The Company’s maximum risk of loss is limited to the carrying value and unfunded commitments of its investments in the VIEs.

Consolidated VIEs

One of the Company’s subsidiaries was registered with the U.S. Securities and Exchange Commission (the “SEC”) as an investment adviser. The subsidiary managed and invested in CLOs and real estate funds and conducted other forms of investment activities. Prior to third quarter 2020, the Company had determined that the CLOs and real estate fund were VIEs and consolidated each because the Company was deemed to be the primary beneficiary of these entities due to (i) its role as collateral manager, which gave it the power to direct the activities that most significantly impact the economic performance of the entities, and (ii) its economic interest in the entities, which exposed it to losses and the right to receive benefits that could potentially be significant to the entities. During the third quarter 2020, the Company sold its CLO asset management platform and outsourced its real estate asset management. As a result of these transactions, the Company deconsolidated the CLO entities and real estate fund since it no longer acts as collateral manager and, as a result, no longer has the power to control these entities. See Note 4 for additional information on the sale of the CLO asset management platform.

Collateralized Loan Obligations: Prior to the deconsolidation in the third quarter of 2020, the CLO entities were collateralized financing entities. Under the elected measurement alternative for collateralized financing entities, the carrying value of the CLO debt equals the fair value of the CLO assets (senior secured leveraged loans) as the assets have more observable fair values. The CLO liabilities are reduced by the fair value of the beneficial interests the Company retains in the CLO and the carrying value of any beneficial interests that represent compensation for services. CLO earnings attributable to the Company’s shareholders are measured by the change in the fair value of the Company’s CLO investments, net investment income earned and investment management and contingent performance fees earned. Investment management fees are reported as a reduction to investment expenses in the consolidated statements of operations. The assets of the CLOs are legally isolated from the Company’s creditors and can only be used to settle obligations of the CLOs. The liabilities of the CLOs are non-recourse to the Company and the Company has no obligation to satisfy the liabilities of the CLOs.

As of December 31, 2020, due to the deconsolidation, the CLO investments of $92.2 million are reported in the consolidated balance sheet in fixed maturity securities and other investments. As of December 31, 2019, the carrying value of the Company’s investment in the CLOs that had closed was $77.4 million in subordinated debt tranches and $21.1 million in senior debt tranches.

The Company’s retained beneficial interests in subordinated tranches are measured at fair value using the market or income valuation techniques using significant unobservable inputs and assumptions, including prepayment, default rate, recovery lag, reinvestment, collateral liquidation price, discount rate and call date assumptions.

Real Estate Fund: Prior to the deconsolidation in the third quarter of 2020, the Company’s real estate fund investment was a closed ended fund that include contributions from third party investors, which were recorded as non-controlling interests. Real estate fund earnings attributable to the Company’s shareholders are measured by the net investment income of the real estate fund, which includes the change in fair value of the Company’s investments in the real estate fund and investment management fees earned. The Company had a majority investment in the real estate fund in the form of an equity interest. As of December 31, 2020, the real estate fund equity interest of $43.0 million is reported in the consolidated balance sheet in other investments. The carrying value of the Company’s investment in the real estate fund was $88.3 million as of December 31, 2019.

Fair Value of VIE Assets and Liabilities

The Company categorizes its fair value measurements according to a three-level hierarchy. See Note 10 for the definition of the three levels of the fair value hierarchy. The following table presents the Company’s fair value hierarchy for financial assets and liabilities held by consolidated investment entities measured at fair value on a recurring basis as of December 31, 2019.


	December 31, 2019
	Total		Level 1			Level 2		Level 3
Financial Assets
Investments:
Cash and cash equivalents	$	32.9	$	32.9	(1)	$	—	$	—
Corporate debt securities	1,850.7		—			1,850.7		—
Real estate fund	107.2		—			—		107.2
Total financial assets	$	1,990.8	$	32.9		$	1,850.7	$	107.2

Financial Liabilities
Collateralized loan obligation notes	$	1,603.1	$	—		$	1,603.1	$	—
Total financial liabilities	1,603.1		—			1,603.1		—

(1)Amounts consist of money market funds.

Level 2 Securities

Corporate debt securities: These assets were comprised of senior secured leveraged loans. The Company values these securities using estimates of fair value from a pricing service which utilizes the market valuation technique. The primary observable market inputs used by the pricing service are prices of reported trades from dealers. The fair value was calculated using a simple average of the prices received.

Collateralized loan obligation notes: As the Company elected the measurement alternative, the carrying value of the CLO debt was equal to the fair value of the CLO assets. The CLO notes were classified within Level 2 of the fair value hierarchy, consistent with the classification of the majority of the CLO financial assets.

Level 3 Securities

Real estate fund: These assets were comprised of investments in limited partnerships whose underlying investments are real estate properties. Management estimates the fair value of these real estate assets using the market, income or cost approach valuation techniques, using significant unobservable inputs and assumptions, including capitalization rates, discount rates, market comparable prices, leasing assumptions and replacement costs.

The following table summarizes the change in balance sheet carrying value associated with Level 3 assets held by consolidated investment entities measured at fair value for the years ended December 31, 2020 and 2019:


	Years Ended December 31,
	2020		2019
Balance, beginning of period	$	107.2	$	112.0

Sales	(61.0)		(30.0)


Deconsolidation adjustments (1)	(54.5)		—
Total income included in earnings (2)	8.3		25.2
Balance, end of period	$	—	$	107.2

(1)Deconsolidation adjustments include $8.8 million related to non-controlling interests and $45.7 million related to investments retained, which are now included in other investments.

(2)Total income included in earnings includes $1.1 million and $3.8 million of pre-tax income related to non-controlling interests for 2020 and 2019, respectively.

Non-Consolidated VIEs

The Company invests in private equity limited partnerships and real estate joint ventures. These investments are generally accounted for under the equity method as the primary beneficiary criteria is not met; however, the Company is able to exert significant influence over the investees operating and financial policies. These investments are included in the consolidated balance sheets in other investments. As of December 31, 2020, the Company’s maximum exposure to loss is its recorded carrying value of $253.9 million and unfunded commitments of $50.4 million.

Commercial Mortgage Loan Securitization

In 2016, the Company transferred commercial mortgage loans on real estate into a trust. Upon transfer, the loans were securitized as a source of funding for the Company and as a means of transferring the economic risk of the loans to third parties. The securitized assets are legally isolated from the Company’s creditors and can only be used to settle obligations of the trust. The Company does not have the power to direct the activities of the trust, nor does it provide guarantees or recourse to the trust other than standard representations and warranties. The Company retained an interest in the trust in the form of subordinate securities issued by the trust. The trust is a VIE that the Company does not consolidate.

As of December 31, 2020 and 2019, the maximum loss exposure the Company had to the trust was $19.9 million and $19.1 million, respectively. The Company calculates its maximum loss exposure based on the unlikely event that all the assets in the trust become worthless and the effect it would have on the Company’s consolidated balance sheets based upon its retained interest in the trust. The securities purchased from the trust are included within fixed maturity securities available for sale at fair value on the consolidated balance sheet and are part of the Company’s ongoing impairment review. See Note 10 for additional information on the Company’s fair value inputs and valuation techniques.

See Note 2 for additional information on significant accounting policies related to VIEs.