UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





x ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
fiscal year ended December 31, 2009





OR





o TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the transition period from      to





Commission
file number 001-33493





Greenlight
Capital Re, Ltd.


(Exact
Name of Registrant as Specified in Its Charter)





Cayman
      Islands
            N/A(State
      or Other Jurisdiction of
              Incorporation
      or Organization)
            (I.R.S.
      Employer
              Identification
      No.)





65
Market Street, Suite 1207, Camana Bay


P.O.
Box 31110


Grand
Cayman, KY1-1205


Cayman
Islands


(Address
of Principal Executive Offices)





Registrant’s
telephone number, including area code:345-943-4573





Securities
registered pursuant to Section 12(b) of the Act:





Title of Class
            Name of Exchange on Which
      RegisteredClass
      A ordinary shares,
              $0.10
      par value per share
            The
      Nasdaq Stock Market LLC





Securities
registered pursuant to Section 12(g) of the Act: None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes oNo
x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o   
No x





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
o





o o




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ and
‘‘smaller reporting company’’ in Rule 12b-2 of the Exchange Act. (Check one):


Large
accelerated filer o  Accelerated
filer  x  Non-accelerated
filer o  Smaller reporting
company o





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes oNox





The
aggregate market value of voting and non-voting Class A ordinary shares held by
non-affiliates of the registrant as of June 30, 2009 was $446,315,726 based on
the closing price of the registrant’s Class A ordinary shares reported on the
Nasdaq Global Select Market on June 30, 2009, the last business day of the
registrant’s most recently completed second fiscal quarter. Solely for the
purpose of this calculation and for no other purpose, the non-affiliates of the
registrant are assumed to be all shareholders of the registrant other than (i)
directors of the registrant, (ii) executive officers of the registrant who are
identified as ‘‘named executives’’ pursuant to Item 11 of this Form 10-K, (iii)
any shareholder that beneficially owns 10% or more of the registrant’s common
shares and (iv) any shareholder that has one or more of its affiliates on the
registrant’s board of directors. Such exclusion is not intended, nor shall it be
deemed, to be an admission that such persons are affiliates of the
registrant.





As of
February 1, 2010, there were 30,063,893 Class A ordinary shares
outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the proxy statement for the registrant’s 2010 annual meeting of shareholders,
to be filed subsequently with the Securities and Exchange Commission, or the
SEC, pursuant to Regulation 14A, under the Securities Exchange Act of 1934, as
amended, or Exchange Act, relating to the registrant’s annual general meeting of
shareholders scheduled to be held on April 28, 2010 are incorporated by
reference in Part III of this annual report on Form 10-K.











TABLE OF CONTENTS





PagePART
      I
            
            
            3ITEM
      1.
            BUSINESS
            
            
            4ITEM
      1A.
            RISK
      FACTORS
            
            
            16ITEM
      1B.
            UNRESOLVED
      STAFF
      COMMENTS
            
            
            32ITEM
      2.
            PROPERTIES
            
            
            32ITEM
      3.
            LEGAL
      PROCEEDINGS
            
            
            32ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
            
            
            32PART
      II
            
            
            33ITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
            
            
            33ITEM
      6.
            SELECTED
      FINANCIAL
      DATA
            
            
            34ITEM
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
            
            
            36ITEM
      7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            
            
            52ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
            
            
            54ITEM
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
            
            
            54ITEM
      9A.
            CONTROLS
      AND
      PROCEDURES
            
            
            54ITEM
      9B.
            OTHER
      INFORMATION
            
            
            55PART
      III
            
            
            56ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
            
            
            56ITEM
      11.
            EXECUTIVE
      COMPENSATION
            
            
            56ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
            
            
            56ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
            
            
            56ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND
      SERVICES
            
            
            56PART
      IV
            
            
            57ITEM
      15.
            EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
            
            
            57











2











PART I








Special
Note About Forward-Looking Statements








Certain
statements in this Form 10-K, other than purely historical information,
including estimates, projections, statements relating to our business plans,
objectives and expected operating results and the assumptions upon which those
statements are based, are ‘‘forward-looking statements’’ within the meaning of
the Private Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Exchange Act.
These forward-looking statements generally are identified by the words
‘‘believe,’’ ‘‘project,’’ ‘‘predict,’’ ‘‘expect,’’ ‘‘anticipate,’’ ‘‘estimate,’’
‘‘intend,’’ ‘‘plan,’’ ‘‘may,’’ ‘‘should,’’ ‘‘will,’’ ‘‘would,’’ ‘‘will be,’’
‘‘will continue,’’ ‘‘will likely result,’’ and similar expressions.
Forward-looking statements are based on current expectations and assumptions
that are subject to risks and uncertainties which may cause actual results to
differ materially from the forward-looking statements. A detailed discussion of
risks and uncertainties that could cause actual results and events to differ
materially from such forward-looking statements is included in the section
entitled ‘‘Risk Factors’’ (refer to Part I, Item 1A) and include but are
not limited to:








•
            Our
      results will fluctuate from period to period and may not be indicative of
      our long-term prospects;





•
            The
      property and casualty reinsurance market may be affected by cyclical
      trends;





•
            Rating
      agencies may downgrade or withdraw our
  rating;





•
            Loss
      of key executives could adversely impact our ability to implement our
      business strategy;





•
            Currency
      fluctuations could result in exchange rate losses and negatively impact
      our business; and





•
            We
      depend on DME Advisors, LP, or DME Advisors, to implement our investment
      strategy.





We
caution that the foregoing list of important factors is not intended to be and
is not exhaustive. We undertake no obligation to update or revise publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise and all subsequent written and oral forward-looking
statements attributable to us or individuals acting on our behalf are expressly
qualified in their entirety by this paragraph. If one or more risks or
uncertainties materialize, or if our underlying assumptions prove to be
incorrect, actual results may vary materially from what we projected. Any
forward-looking statement in this Form 10-K reflect our current view with
respect to future events and are subject to these and other risks, uncertainties
and assumptions relating to our operations, results of operations, growth,
strategy and liquidity. Readers are cautioned not to place undue reliance on the
forward-looking statements which speak only to the dates on which they were
made.








We intend
to communicate events that we believe may have a material adverse impact on the
Company's operations or financial position, including property and casualty
catastrophic events and material losses in our investment portfolio, in a timely
manner through a public announcement. Other than as required by the Exchange
Act, we do not intend to make public announcements regarding events that we do
not believe, based on management's estimates and current information, will have
a material adverse impact to the Company's operations or financial
position.





3
 Table of contents








ITEM 1.
            BUSINESS








Unless
otherwise indicated or unless the context otherwise requires, all references in
this annual report on Form 10-K to ‘‘the Company,’’ ‘‘we,’’ ‘‘us,’’ ‘‘our’’ and
similar expressions are references to Greenlight Capital Re, Ltd. and its
consolidated subsidiaries. Unless otherwise indicated or unless the context
otherwise requires, all references in this annual report to entity names are as
set forth in the following table:





Reference
            Entity’s
      legal nameGreenlight
      Capital Re
            Greenlight
      Capital Re, Ltd.Greenlight
      Re
            Greenlight
      Reinsurance, Ltd.Verdant
            Verdant
      Holding Company, Ltd.





Company
Overview





Greenlight
Capital Re is a holding company that was incorporated in July 2004 under the
laws of Cayman Islands. In August 2004, we raised gross proceeds of $212.2
million from private placements of Greenlight Capital Re’s Class A ordinary
shares and Class B ordinary shares, ("ordinary shares"). On May 24, 2007,
Greenlight Capital Re raised proceeds of $208.3 million, net of underwriting
fees, in an initial public offering of Class A ordinary shares, as well as an
additional $50.0 million from a private placement of Class B ordinary
shares.





The
Company, through its operating subsidiary, Greenlight Re, is a Cayman
Islands-based specialty property and casualty reinsurer with a reinsurance and
investment strategy that we believe differentiates us from our competitors. Our
goal is to build long-term shareholder value by selectively offering customized
reinsurance solutions, in markets where capacity and alternatives are limited,
that we believe will provide favorable long-term returns on equity. We aim to
complement our underwriting results with a non-traditional investment approach
in order to achieve higher rates of return over the long-term than reinsurance
companies that employ more traditional, fixed-income investment strategies. We
manage our investment portfolio according to a value-oriented philosophy, in
which we take long positions in perceived undervalued securities and short
positions in perceived overvalued securities.









Description
of Business





We manage our
business on the basis of one operating segment; property and casualty
reinsurance. In September 2008, the Cayman Islands Monetary Authority granted
approval for us to engage in long term business (e.g., life insurance, long term
disability, long term care, etc.) in addition to our current property and
casualty reinsurance business but to date we have not offered or written any
long term products. We currently offer excess of loss and quota share products
in the property and casualty market. Our underwriting operations are designed to
capitalize on inefficiencies that we perceive exist in the traditional approach
to underwriting. We believe that we conduct our business differently from
traditional reinsurers in multiple ways, including:





•
            we
      focus on offering customized reinsurance solutions to select
      customers at times and in markets where capacity and alternatives are
      limited rather than pursuing and participating in broadly available
      traditional property and casualty
opportunities;





•
            we
      aim to build a reinsurance portfolio of frequency and severity contracts
      with favorable ultimate economic results measured after all loss payments
      have been made rather than focusing on interim results when losses may be
      incurred but not yet reported or
paid;





•
            we
      seek to act as the lead underwriter on a majority of the contracts we
      underwrite in an effort to obtain greater influence in negotiating
      pricing, terms and conditions rather than focusing on taking a minority
      participation in contracts that have been negotiated and priced by another
      party;





•
            we
      maintain a small staff of experienced generalist underwriters that are
      capable of underwriting many lines of property and casualty business
      rather than a large staff of underwriters, each with an individual,
      specific focus on certain lines of
  business;





•
            we
      implement a ‘‘cradle to grave’’ service philosophy where the same
      individual underwrites and administers each reinsurance contract rather
      than separating underwriting and administrative duties among many
      employees; and





•
            we
      compensate our management with a cash bonus structure largely dependent on
      our underwriting results over a multi-year period rather than on premium
      volume or underwriting results in any given financial accounting
      period.





Our
investment strategy, like our reinsurance strategy, is designed to maximize
returns over the long term while minimizing the risk of capital loss. Unlike the
investment strategy of many of our competitors, which invest primarily in
fixed-income securities either directly or through fixed-fee arrangements with
one or more investment managers, our investment strategy is to invest in long
and short positions primarily in publicly-traded equity and corporate debt
instruments exclusively through a joint venture with a third-party investment
advisor that is compensated with both a fixed annual fee based on assets under
management and on the positive performance of our portfolio. DME Advisors, which
makes investments on our behalf, is a value-oriented investment advisor that
analyzes companies' available financial data, business strategies and prospects
in an effort to identify undervalued and overvalued securities. DME Advisors is
controlled by David Einhorn, the Chairman of our Board of Directors and the
president of Greenlight Capital, Inc. DME Advisors has the contractual right to
manage substantially all of our investable assets until December 31, 2010 and is
required to follow our investment guidelines and to act in a manner that is fair
and equitable in allocating investment opportunities to us. However, DME
Advisors is not otherwise restricted with respect to the nature or timing of
making investments for our account.





4
 Table of contents





We
measure our success by long-term growth in book value per share, which we
believe is the most comprehensive gauge of the performance of our business.
Accordingly, our incentive compensation plans are designed to align employee and
shareholder interests. Compensation under our cash bonus plan is largely
dependent on the ultimate underwriting returns of our business measured over a
multi-year period, rather than premium targets or estimated underwriting
profitability for the year in which we initially underwrote the
business.





We
characterize the reinsurance risks we assume as frequency or severity and aim to
balance the risks and opportunities of our underwriting activities by creating a
diversified portfolio of both types of businesses.





Frequency
business is characterized by contracts containing a potentially large number of
smaller losses emanating from multiple events. Clients generally buy this
protection to increase their own underwriting capacity and typically select a
reinsurer based upon the reinsurer's financial strength and expertise. We expect
the results of frequency business to be less volatile than those of severity
business from period to period due to its greater predictability. We also expect
that over time the profit margins and return on equity for our frequency
business will be lower than those of our severity business.





Severity
business is typically characterized by contracts with the potential for
significant losses emanating from one event, or multiple events. Clients
generally buy this protection to reduce volatility from their balance sheets
and, accordingly, we expect the results of severity business to be volatile from
period to period. However, over the long term, we also expect that our severity
business will generate higher profit margins and return on equity than our
frequency business.





While we
intend to continue to diversify our portfolio, our allocation of risk will vary
based on our perception of the opportunities available in each line of business.
Moreover, our focus on certain lines will fluctuate based upon market conditions
and we may only offer or underwrite a limited number of lines in any given
period. We intend to continue:





•
            targeting
      markets where capacity and alternatives are underserved or
      constrained;





•
              seeking
      clients with appropriate expertise in their line of
      business;




•
            employing
      strict underwriting discipline;





•
            selecting
      reinsurance opportunities with favorable returns on equity over the life
      of the contract; and





•
            strengthening and
      expanding relationships with existing
clients.






The
      following table sets forth our gross premiums written by line of business
      for the years ended December 31, 2009, 2008 and
  2007:


2009
            
            
            2008
            
            
            2007($
      in thousands)PropertyCommercial
      lines
            
            $
            26,113
            
            
            
            10.1
            %
            
            $
            13,591
            
            
            
            8.4
            %
            
            $
            17,532
            
            
            
            13.8
            %Personal
      lines
            
            
            34,434
            
            
            
            13.3
            
            
            
            (4,071
            )
            (1)
            
            (2.5
            )
            
            
            41,291
            
            
            
            32.5CasualtyGeneral
      liability
            
            
            40,320
            
            
            
            15.6
            
            
            
            16,948
            
            
            
            10.4
            
            
            
            17,597
            
            
            
            13.8Motor
      liability
            
            
            78,161
            
            
            
            30.2
            
            
            
            72,578
            
            
            
            44.7
            
            
            
            795
            
            
            
            0.6Professional
      liability
            
            
            12
            
            
            
            —
            
            
            
            2,150
            
            
            
            1.3
            
            
            
            27,230
            
            
            
            21.4SpecialtyHealth
            
            
            47,749
            
            
            
            18.4
            
            
            
            40,210
            
            
            
            24.7
            
            
            
            16,489
            
            
            
            13.0Medical
      malpractice
            
            
            5,703
            
            
            
            2.2
            
            
            
            4,641
            
            
            
            2.9
            
            
            
            6,197
            
            
            
            4.9Workers’
      compensation
            
            
            26,326
            
            
            
            10.2
            
            
            
            16,348
            
            
            
            10.1
            
            
            
            —
            
            
            
            —$
            258,818
            
            
            
            100.0
            %
            
            $
            162,395
            
            
            
            100.0
            %
            
            $
            127,131
            
            
            
            100.0
            %




(1)
            Represents
      our share of gross return premiums based on updated information received
      from client.











The
following table sets forth our gross premiums written by the geographic area of
the risk insured for the years ended December 31, 2009, 2008 and
2007:





2009
            
            
            2008
            
            
            2007($
      in thousands)USA
            
            $
            233,058
            
            
            
            90.0
            %
            
            $
            142,604
            
            
            
            87.8
            %
            
            $
            79,647
            
            
            
            62.6
            %Worldwide(1)
            
            
            24,015
            
            
            
            9.3
            
            
            
            18,991
            
            
            
            11.7
            
            
            
            44,722
            
            
            
            35.2Europe
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            2,157
            
            
            
            1.7Caribbean
            
            
            1,745
            
            
            
            0.7
            
            
            
            800
            
            
            
            0.5
            
            
            
            605
            
            
            
            0.5258,818
            
            
            
            100.0
            %
            
            $
            162,395
            
            
            
            100.0
            %
            
            $
            127,131
            
            
            
            100.0
            %





(1)
            “Worldwide”
      risk is comprised of individual policies that insure risks on a worldwide
      basis.





Additional
information about our business is set forth in ‘‘Item 7 — Management’s
Discussion and Analysis of Financial Condition and Results of Operations’’ and
Note 15 to our consolidated financial statements included herein.








5
 Table of contents




Marketing
and Distribution





A
majority of our business is sourced through reinsurance brokers. Brokerage
distribution channels provide us with access to an efficient, variable cost and
global distribution system without the significant time and expense that would
be incurred in creating a wholly-owned distribution network. We believe that our
financial strength rating, unencumbered balance sheet and superior client
service are essential for creating long-term relationships with clients and
brokers.





We aim to
build and strengthen long-term relationships with global reinsurance
brokers and captive insurance companies located in the Cayman Islands. Our
management team has significant relationships with most of the primary and
specialty broker intermediaries in the reinsurance marketplace. We believe that
by maintaining close relationships with brokers we will be able to continue to
obtain access to a broad range of reinsurance clients and
opportunities.





We focus
on the quality and financial strength of any brokerage firm with which we do
business. Brokers do not have the authority to bind us to any reinsurance
contract. We review and approve all contract submissions in our corporate
offices located in the Cayman Islands. We have entered into a service agreement
with a specialist service provider. Under the agreement, the specialist provides
administration and support in developing and maintaining relationships,
reviewing and recommending programs and managing risks on certain specialty
lines of business. The service provider does not have any authority to bind the
Company to any reinsurance contracts.





Reinsurance
brokers receive a brokerage commission that is usually a percentage of gross
premiums written. We seek to become the first choice of brokers and clients by
providing:





•
            customized
      solutions that address the specific business needs of our
      clients;





•
            rapid
      and substantive responses to proposal and pricing quote
      requests;





•
            timely
      payment of claims;





•
            financial
      security; and





•
            clear
      indication of risks we will and will not
  underwrite.





The
following table sets forth our gross premiums written by brokers for the years
ended December 31, 2009, 2008 and 2007:





2009
            
            
            2008
            
            
            2007($
      in thousands)Name
      of BrokerAON
      Benfield (1)
            
            $
            79,419
            
            
            
            30.7
            %
            
            $
            35,736
            
            
            
            22.0
            %
            
            $
            37,414
            
            
            
            29.5
            %Cornerstone
      Re
            
            
            62,346
            
            
            
            24.1
            
            
            
            25,552
            
            
            
            15.7
            
            
            
            —
            
            
            
            —Frontline
      Insurance Managers
            
            
            11
            
            
            
            —
            
            
            
            (4,071
            )
            (2)
            
            (2.5
            )
            
            
            41,291
            
            
            
            32.5Lainston
      International Mgmt
            
            
            3,154
            
            
            
            1.2
            
            
            
            5,955
            
            
            
            3.7
            
            
            
            12,112
            
            
            
            9.5Marsh
      & McLennan Companies
            
            
            9,397
            
            
            
            3.6
            
            
            
            9,910
            
            
            
            6.1
            
            
            
            1,958
            
            
            
            1.5Reinsurance
      Cooperative Associates, LLC
            
            
            60,043
            
            
            
            23.2
            
            
            
            50,000
            
            
            
            30.8
            
            
            
            —
            
            
            
            —Reinsurance
      Risk Services
            
            
            13,885
            
            
            
            5.4
            
            
            
            2,405
            
            
            
            1.5
            
            
            
            —
            
            
            
            —RIB
      Intermediaries
            
            
            6,771
            
            
            
            2.6
            
            
            
            9,329
            
            
            
            5.7
            
            
            
            —
            
            
            
            —Risk
      & Insurance Consulting, Inc
            
            
            (121
            )
            (2)
            
            —
            
            
            
            12,450
            
            
            
            7.7
            
            
            
            14,981
            
            
            
            11.8Towers
      Watson (3)
            
            
            17,700
            
            
            
            6.8
            
            
            
            7,500
            
            
            
            4.6
            
            
            
            10,537
            
            
            
            8.3Other
            
            
            6,213
            
            
            
            2.4
            
            
            
            7,629
            
            
            
            4.7
            
            
            
            8,838
            
            
            
            6.9Total
            
            $
            258,818
            
            
            
            100.0
            %
            
            $
            162,395
            
            
            
            100.0
            %
            
            $
            127,131
            
            
            
            100.0
            %




(1)
            AON
      Ltd acquired Gallagher Re in February 2008 and merged with Benfield Group
      in December 2008. The historical gross premiums written include those
      originally sourced by Benfield and Gallagher
Re.


(2)
            Represents
      our share of gross return premiums based on updated information received
      from client.


(3)
            Towers
      Perrin acquired Denis Clayton in 2002 and merged with Watson Wyatt in
      2009. The historical gross premiums written include those originally
      sourced by Watson Wyatt and Denis
    Clayton.





We
believe that by maintaining close relationships with brokers, we are able to
obtain access to a range of potential clients that meet our criteria. We meet
frequently in the Cayman Islands and elsewhere with brokers and senior
representatives of clients and prospective clients. All contract submissions are
approved in our executive offices in the Cayman Islands. Due to our dependence
on brokers, we may assume a degree of credit risk. See ‘‘Risk Factors — The
involvement of reinsurance brokers subjects us to their credit
risk.’’
 
 In
addition, we continue to expect the large number of captive insurance companies
located in the Cayman Islands to be a source of business for us. We aim to
develop relationships with potential clients when we believe they have a need
for reinsurance, based on our industry knowledge and market trends.
 
 We
believe that diversity in our sources of business helps reduce any potential
adverse effects arising out of the termination of any one of our business
relationships.




6
 Table of contents





Underwriting
and Risk Management





We have
established a senior team of generalist underwriters and actuaries to operate
our reinsurance business. We believe that their experience, coupled with our
approach to underwriting, allows us to deploy our capital in a variety of lines
of business and to capitalize on opportunities that we believe offer favorable
returns on equity over the long term. Our underwriters and actuaries have
expertise in a number of lines of business and we also look to outside
consultants on a fee-for-service basis to help us with niche areas of expertise
when we deem it appropriate. We generally apply the following underwriting and
risk management principles:





Economics
of Results





Our
primary goal is to build a reinsurance portfolio that has attractive economic
results. We may underwrite a reinsurance contract that may not demonstrate
immediate short-term accounting benefits if we believe it will provide a
favorable return on equity over the life of the contract. In pricing our
products, we assume investment returns that approximate the risk-free rate,
which we review and adjust, if necessary, on an annual basis.





Team
Approach





Each
transaction typically is assigned to an underwriter and an actuary to evaluate
underwriting, structuring and pricing. Prior to committing capital to any
transaction, the evaluation team creates a deal analysis memorandum that
highlights the key components of the proposed transaction and presents the
proposed transaction to a senior group of staff, including underwriting,
actuarial and finance. This group, including our Chief Underwriting Officer,
must agree that the transaction meets or exceeds our return on equity
requirements before we submit a firm proposal. Our Chief Underwriting Officer
maintains the exclusive ultimate authority to bind contracts.





Actuarially
Based Pricing





We have
developed proprietary actuarial models and also use several commercially
available tools to price our business. Our models not only consider conventional
underwriting metrics, but also incorporate a component for risk aversion that
places greater weight on scenarios that result in greater losses. The actuary
working on the transaction must agree that the transaction is expected to meet
or exceed our return on equity requirements before we commit capital. We price
each transaction based on our view of the merits and structure of the
transaction.




Act
as Lead Underwriter
 
 Typically,
one reinsurer acts as the lead underwriter in negotiating principal policy terms
and pricing of reinsurance contracts. We aim to act as that lead underwriter for
the majority of the aggregate premiums that we underwrite. We believe that lead
underwriting is an important factor in achieving long-term success, as lead
underwriters typically have greater influence in negotiating pricing, terms and
conditions. In addition, we believe that reinsurers that lead policies are
generally solicited for a broader range of business and have greater access to
attractive risks.
 
 Alignment
of Company and Client’s Interests
 
 We seek
to ensure each contract we underwrite aligns our interests with our client’s
interests. Specifically, depending upon the opportunity we may seek
to:
 
 •
              pay
      our clients a commission based upon a predetermined percentage of the
      profit we realize on the business, which we refer to as a profit
      commission;
 
 •
              provide
      that the client pays a predetermined amount of all losses before our
      reinsurance policy will respond to a loss, which we refer to as self
      insured retentions;
 
 •
              provide
      that the client pays a predetermined proportion of all losses above a
      predetermined amount, which we refer to as co-participation;
      and/or
 
 •
              charge
      the client a premium for reinstatement of the amount of reinsurance
      coverage to the full amount reduced as a result of a reinsurance loss
      payment, which we refer to as a reinstatement
  premium.
 
 We
believe that through profit commissions, self-insured retentions,
co-participation, reinstatement premiums or other terms within the contract, our
clients are provided with an incentive to manage our interests. We believe that
aligning our interests with our client’s interests promotes accurate reporting
of information, timely settling and management of claims and limits the
potential for disputes.
  Integrated
Underwriting Operations





We have
implemented a ‘‘cradle to grave’’ service philosophy where the same individual
underwrites and administers each reinsurance contract. We believe this method
enables us to best understand the risks and likelihood of loss for any
particular contract and to provide superior client service.


7
 Table of contents


Detailed
Contract Diligence





We are
highly selective in the contracts we choose to underwrite and spend a
significant amount of time with our clients and brokers to understand the risks
and appropriately structure the contracts. We usually obtain significant amounts
of data from our clients to conduct a thorough actuarial modeling analysis. As
part of our pricing and underwriting process, we assess among other
factors:





•
            the
      client’s and industry historical loss
data;





•
            the
      expected duration for claims to fully
develop;





•
            the
      client’s pricing and underwriting
strategies;





•
            the
      geographic areas in which the client is doing business and its market
      share;





•
            the
      reputation and financial strength of the
client;





•
            the
      reputation and expertise of the
broker;





•
            the
      likelihood of establishing a long-term relationship with the client and
      the broker; and





•
            reports
      provided by independent industry
specialists.





Underwriting
Authorities
 
 We use
actuarial models that we produce and apply our underwriting guidelines to
analyze each reinsurance opportunity before we commit capital. The Underwriting
Committee of our Board of Directors has set parameters for zonal and aggregate
property catastrophic caps and limits for maximum loss potential under any
individual contract. The Underwriting Committee may approve exceptions to the
established limits. Our approach to risk control imposes an absolute loss limit
on our natural catastrophic exposures rather than an estimate of probable
maximum losses and we have established zonal and aggregate limits. We manage all
non-catastrophic exposures and other risks by analyzing our maximum loss
potential on a contract-by-contract basis. We believe that the maximum
underwriting authorities, as set by our Underwriting Committee, will likely
change over time, including as and when our capital base
changes.
  Retrocessional
Coverage
 
 We
may from time to time purchase retrocessional coverage for one or more of the
following reasons: to manage our overall exposure, to reduce our net liability
on individual risks, to obtain additional underwriting capacity and to balance
our underwriting portfolio. Additionally, retrocession can be used as a
mechanism to share the risks and rewards of business written and therefore can
be used as a tool to align our interests with those of our
counter-parties.
  The
amount of retrocessional coverage that we purchase will vary based on numerous
factors some of which include the inherent riskiness of the portfolio of
business we write and the level of our capital base. Given our opportunistic
approach to underwriting, which may change the composition and inherent
riskiness of our underwriting portfolio on an annual basis, it is not possible
to predict the level of retrocessional coverage that we will purchase in any
given year. To date, our retrocessional coverage has been primarily
used as a tool to align our interests with those of our
counter-parties.
 
 We
intend to only purchase uncollateralized retrocessional coverage from a
reinsurer with a minimum financial strength rating of ‘‘A− (Excellent)’’ from
either A.M. Best Company, Inc., or “A.M. Best”, or an equivalent rating from a
recognized rating service. For non-rated reinsurers, we monitor and obtain
collateral in the form of cash, funds withheld, or letters of
credit.  As of December 31, 2009, the aggregate amount due from
reinsurers from retrocessional coverages represents 5.3% of our gross
outstanding loss reserves. As of December 31, 2009, all the reinsurers of our
retrocessional coverage had either a financial strength rating from A.M. Best of
‘‘A− (Excellent)’’ or better, or we held cash collateral or letters of credit in
excess of the estimated losses recoverable.
 
 Capital
Allocation
 
 We
allocate capital to each contract that we bind. Our capital allocation
methodology uses the probability and magnitude of potential for economic loss.
We allocate capital for the period from each contract’s inception until the risk
is resolved. We have developed a proprietary return on equity capital allocation
model to evaluate and price each reinsurance contract that we underwrite. We use
different return on equity thresholds depending on the type and risk
characteristics of the business we underwrite.
 
 Claims
Management
 
 We have
implemented a ‘‘cradle to grave’’ service philosophy where the same individual
underwrites and administers each reinsurance contract.
 
 Our
claims management process begins upon receipt of claims submissions from our
clients which the underwriter reviews for authorization prior to entry and
settlement. We believe this ensures we pay claims consistently with the terms
and conditions of each contract. Depending on the size of the claim payment,
additional approvals for payment must be obtained from our executive
officers, which may include our Chief Financial Officer.
 
 Where
necessary, we will conduct or contract for on-site audits, particularly for
large accounts and for those whose performance differs from our expectations.
Through these audits, we will evaluate ceding companies’ claims-handling
practices, including the organization of their claims departments, their
fact-finding and investigation techniques, their loss notifications, the
adequacy of their reserves, their negotiation and settlement practices and their
adherence to claims-handling guidelines.
 
 We
recognize that fair interpretation of our reinsurance agreements with our
clients and timely payment of covered claims are valuable services to our
clients.








8
 Table of contents




Reserves





Our
reserving philosophy is to reserve to our best estimates of the actual results
of the risks underwritten. Our actuaries and underwriters provide reserving
estimates on a quarterly basis calculated to meet our estimated future
obligations. We reserve on a transaction by transaction basis. We have engaged
outside actuaries who review these estimates at least once a year. Due to the
use of different assumptions, accounting treatment and loss experience, the
amount we establish as reserves with respect to individual risks, transactions
or classes of business may be greater or less than those established by clients
or ceding companies. Reserves may also include unearned premiums, premium
deposits, profit sharing earned but not yet paid, claims reported but not yet
paid, claims incurred but not reported and claims in the process of
settlement.





Reserves
do not represent an exact calculation of liability. Rather, reserves represent
our estimate of the expected cost of the ultimate settlement and administration
of the claim. Although the methods for establishing reserves are well-tested,
some of the major assumptions about anticipated loss emergence patterns are
subject to unanticipated fluctuation. We base these estimates on our assessment
of facts and circumstances then known, as well as estimates of future trends in
claim severity and frequency, judicial theories of liability and other factors,
including the actions of third parties, which are beyond our
control.





Collateral
Arrangements and Letter of Credit Facilities





We are
not licensed or admitted as an insurer in any jurisdiction other than the Cayman
Islands. Many jurisdictions such as the United States do not permit clients to
take credit for reinsurance on their statutory financial statements if such
reinsurance is obtained from unlicensed or non-admitted insurers without
appropriate collateral. As a result, we anticipate that all of our U.S. clients
and a portion of our non-U.S. clients will require us to provide collateral for
the contracts we bind with them. We expect this collateral to take the form of
funds withheld, trust arrangements or letters of credit. As of December 31,
2009, we have letter of credit facilities with an aggregate maximum
available amount of $475.0 million. As of December 31, 2009, we have issued
letters of credit totaling $278.4 million to clients. The failure to maintain,
replace or increase our letter of credit facilities on commercially acceptable
terms may significantly and negatively affect our ability to implement our
business strategy. See ‘‘Risk Factors — Our failure to maintain sufficient
letter of credit facilities or to increase our letter of credit capacity on
commercially acceptable terms as we grow could significantly and negatively
affect our ability to implement our business strategy.’’





Competition





The
reinsurance industry is highly competitive. We compete with major reinsurers,
most of which are well established, have significant operating histories and
strong financial strength ratings, and have developed long-standing client
relationships.





Our
competitors include ACE Limited, Everest Re, General Re Corporation, Hannover Re
Group, Munich Reinsurance Company, PartnerRe Ltd., Swiss Reinsurance Company,
and Transatlantic Reinsurance Company, which are dominant companies in our
industry. Although we seek to provide coverage where capacity and alternatives
are limited, we directly compete with these larger companies due to the breadth
of their coverage across the property and casualty market in substantially all
lines of business. We also compete with smaller companies and other niche
reinsurers.





While we
have a limited operating history, we believe that our approach to underwriting
will allow us to be successful in underwriting transactions against more
established competitors.





Ratings





We
currently have an ‘‘A− (Excellent)’’ financial strength rating with a stable
outlook from A.M. Best, which is the fourth highest of 15 ratings. We believe
that a strong rating is an important factor in the marketing of reinsurance
products to clients and brokers. This rating reflects the rating agency’s
opinion of our financial strength, operating performance and ability to meet
obligations. It is not an evaluation directed toward the protection of investors
or a recommendation to buy, sell or hold our Class A ordinary
shares.





The
failure to maintain a strong rating may significantly and negatively affect our
ability to implement our business strategy. See “Risk Factors – A downgrade or
withdrawal of our A.M. Best rating would significantly and negatively affect our
ability to implement our business strategy successfully.”







9
 Table of contents





Regulations





Cayman
Islands Insurance Regulation





Greenlight
Re holds an Unrestricted Class B insurance license issued in accordance with the
terms of the Insurance Law (as revised) of the Cayman Islands, or the Law, and
is subject to regulation by the Cayman Islands Monetary Authority, or CIMA, in
terms of the Law.





As the
holder of an Unrestricted Class B insurance license, Greenlight Re is permitted
to undertake insurance business from the Cayman Islands, but, except with the
prior written approval of CIMA, may not engage in any Cayman Islands domestic
business unless such business forms a minor part of the international risk
of a policyholder whose main activities are in territories outside the Cayman
Islands.





Greenlight
Re is required to comply with the following principal requirements under the
Law:





•
            the
      maintenance of a net worth (defined in the Law as the excess of assets,
      including any contingent or reserve fund secured to the satisfaction of
      CIMA, over liabilities other than liabilities to partners or shareholders)
      of at least 100,000 Cayman Islands dollars (which is equal to
      approximately US$120,000), subject to increase by CIMA depending on the
      type of business undertaken;





•
            to
      carry on its insurance business in accordance with the terms of the
      license application submitted to CIMA, to seek the prior approval of CIMA
      to any proposed change thereto, and annually to file a certificate of
      compliance with this requirement in the prescribed form signed by an
      independent auditor, or any other party approved by
  CIMA;





•
            to
      prepare annual accounts in accordance with generally accepted accounting
      principles, audited by an independent auditor approved by
      CIMA;





•
            to
      seek the prior approval of CIMA in respect of the appointment of directors
      and officers and to provide CIMA with information in connection therewith
      and notification of any changes
thereto;





•
            to
      notify CIMA as soon as reasonably practicable of any change of control of
      Greenlight Re, the acquisition by any person or group of persons of shares
      representing more than 10% of Greenlight Re’s issued share capital or
      total voting rights;





•
            to
      maintain appropriate business records in the Cayman Islands;
      and





•
            to
      pay an annual license fee.





The Law
requires that the holder of an Unrestricted Class B insurance license engage a
licensed insurance manager operating in the Cayman Islands to provide insurance
expertise and oversight, unless exempted by CIMA. Greenlight Re has been
exempted from this requirement.





It is the
duty of CIMA:





•
            to
      maintain a general review of insurance practices in the Cayman
      Islands;





•
            to
      examine the affairs or business of any licensee or other person carrying
      on, or who has carried on, insurance business in order to ensure that the
      Law has been complied with and that and the licensee is in a sound
      financial position and is carrying on its business in a satisfactory
      manner;





•
            to
      examine and report on the annual returns delivered to CIMA in terms of the
      Law; and





•
            to
      examine and make recommendations with respect to, among other things,
      proposals for the revocation of licenses and cases of suspected insolvency
      of licensed entities.





Where
CIMA believes that a licensee is committing, or is about to commit or pursue, an
act that is an unsafe or unsound business practice, CIMA may request that the
licensee cease or refrain from committing the act or pursuing the offending
course of conduct. Failures to comply with CIMA regulation may be punishable by
a fine of up to 100,000 Cayman Islands dollars (which is equal to approximately
US$120,000), and an additional 10,000 Cayman Islands dollars (which is
approximately US$12,000) for every day after conviction that the breach
continues.





Whenever
CIMA believes that a licensee is or may become unable to meet its obligations as
they fall due, is carrying on business in a manner likely to be detrimental to
the public interest or to the interest of its creditors or policyholders, has
contravened the terms of the Law, or has otherwise behaved in such a manner so
as to cause CIMA to call into question the licensee’s fitness, CIMA may take one
of a number of steps, including requiring the licensee to take steps to rectify
the matter, suspending the license of the licensee, revoking the license,
imposing conditions upon the license and amending or revoking any such
condition, requiring the substitution of any director, manager or officer of the
licensee, at the expense of the licensee, appointing a person to advise the
licensee on the proper conduct of its affairs and to report to CIMA thereon, at
the expense of the licensee, appointing a person to assume control of the
licensee’s affairs or otherwise requiring such action to be taken by the
licensee as CIMA considers necessary. We have not been subject to any such
actions from CIMA to date.





Other
Regulations in the Cayman Islands





As a
Cayman Islands exempted company, we may not carry on business or trade locally
in the Cayman Islands except in furtherance of our business outside the Cayman
Islands and we are prohibited from soliciting the public of the Cayman Islands
to subscribe for any of our securities or debt. We are further required to file
a return with the Registrar of Companies in January of each year and to pay an
annual registration fee at that time.





The
Cayman Islands has no exchange controls restricting dealings in currencies or
securities.





10
 Table of contents


Overview
of Investments





Our
investment portfolio is managed by DME Advisors, a value-oriented investment
advisor that analyzes companies' available financial data, business strategies
and prospects in an effort to identify undervalued and overvalued securities.
DME Advisors is controlled by David Einhorn, the Chairman of our Board of
Directors and the president of Greenlight Capital, Inc. Prior to January 1,
2008, we operated pursuant to an investment agreement with DME Advisors. On
January 1, 2008 we entered into an agreement, or the “advisory agreement”,
wherein the Company and DME Advisors agreed to create a joint venture for the
purposes of managing certain jointly held assets. The term of the advisory
agreement is from January 1, 2008 through December 31, 2010 with automatic
three-year renewals unless either Greenlight Re or DME Advisors terminates the
agreement by giving 90 days notice prior to the end of the three year term.
Concurrent with the execution of the advisory agreement, we terminated the
investment agreement with DME Advisors.





Pursuant
to the advisory agreement, DME Advisors has the exclusive right to manage our
investments, subject to the investment guidelines adopted by our Board of
Directors for so long as the agreement is in effect. DME Advisors receives two
forms of compensation:





•
            a
      1.5% annual management fee, regardless of the performance of our
      investment account, payable monthly based on the net asset value of our
      investment account, excluding assets, if any, held in trusts used to
      collateralize our reinsurance obligations, which we refer to as Regulation
      114 Trusts; and





•
            performance
      compensation based on the appreciation in the value of our investment
      account equal to 20% of net profits calculated per annum, subject to a
      loss carry forward provision.





The loss
carry forward provision allows DME Advisors to earn reduced incentive
compensation of 10% on profits in any year subsequent to the year in which our
investment account incurs a loss, until all the losses are recouped and an
additional amount equal to 150% of the loss is earned. DME Advisors is not
entitled to earn performance compensation in a year in which our investment
portfolio incurs a loss. However, DME Advisors is entitled to earn reduced
incentive compensation on subsequent years to the extent it generates profits
for our investment portfolio in such years. For the year ended December 31,
2008, our portfolio reported a net investment loss of $126.1 million and as a
result no performance compensation was paid to DME Advisors. In addition, the
performance compensation for subsequent years will be reduced to 10% of net
profits until all the investment losses have been recouped and an additional
amount equal to 150% of the investment loss is earned. As of December 31, 2009,
the loss carry forward balance was $94.3 million.





DME
Advisors is required to follow our investment guidelines and act in a manner
that it considers fair and equitable in allocating investment opportunities to
us, but we do not otherwise impose any specific obligations or requirements
concerning the allocation of time, effort or investment opportunities to us or
any restrictions on the nature or timing of investments for our account and for
DME Advisors’ own account or other accounts that DME Advisors or its affiliates
may manage. In addition, DME Advisors can outsource to sub-advisors without our
consent or approval. In the event that DME Advisors and any of its affiliates
attempt to simultaneously invest in the same opportunity, the opportunity will
be allocated pro rata as reasonably determined by DME Advisors and its
affiliates. Affiliates of DME Advisors presently serve as general partner or
investment advisor of Greenlight Capital, L.P., Greenlight Capital Qualified,
L.P., Greenlight Capital Offshore, Ltd., Greenlight Capital Offshore Qualified,
Ltd., Greenlight Masters, L.P., Greenlight Masters Qualified, L.P., Greenlight
Masters Offshore, Ltd., Greenlight Masters Offshore I, Ltd., and Greenlight
Masters Partners, which we collectively refer to as the Greenlight Funds.





We have
agreed to use commercially reasonable efforts to cause all of our current and
future subsidiaries to enter into substantially similar advisory agreements,
provided that any such agreement shall be terminable on the same date that the
advisory agreement is terminable.





11
 Table of contents





We have
agreed to release DME Advisors and its affiliates from, and to indemnify and
hold them harmless against, any liability arising out of the advisory agreement,
subject to certain exceptions. Furthermore, DME Advisors and its affiliates have
agreed to indemnify us against any liability incurred in connection with certain
actions.





We may
terminate the advisory agreement prior to the expiration of its term only ‘‘for
cause,’’ which the advisory agreement defines as:





•
            a
      material violation of applicable law relating to DME Advisors’ advisory
      business;





•
            DME
      Advisors' gross negligence, willful misconduct or reckless disregard of
      its obligations under the advisory
agreement;





•
            a
      material breach by DME Advisors of our investment guidelines that is not
      cured within a 15-day period; or





•
            a
      material breach by DME Advisors of its obligations to return and deliver
      assets as we may request.





Investment
Strategy





DME
Advisors implements a value-oriented investment strategy by taking long
positions in perceived undervalued securities and short positions in perceived
overvalued securities. DME Advisors aims to achieve high absolute rates of
return while minimizing the risk of capital loss. DME Advisors attempts to
determine the risk/return characteristics of potential investments by analyzing
factors such as the risk that expected cash flows will not be obtained, the
volatility of the cash flows, the leverage of the underlying business and the
security's liquidity, among others.





Our Board
of Directors conducts reviews of our investment portfolio activities and
oversees our investment guidelines to meet our investment objectives. We
believe, while less predictable than traditional fixed-income portfolios, our
investment approach complements our reinsurance business and will achieve higher
rates of return over the long term than reinsurance companies that invest
predominantly in fixed-income securities. Our investment guidelines are
designed to maintain adequate liquidity to fund our reinsurance operations and
to protect against unexpected events.





DME
Advisors, which is contractually obligated to adhere to our investment
guidelines, makes investment decisions on our behalf, which include buying
public or private corporate equities and current-pay debt instruments, selling
securities short and investing in trade claims, debt instruments of distressed
issuers, arbitrages, bank loan participations, derivatives (including options,
warrants, swaps and futures), commodities, currencies, leases, break-ups,
consolidations, reorganizations and limited partnerships.





Investment
Guidelines





The
investment guidelines adopted by our Board of Directors, which may be amended or
modified from time to time take into account restrictions imposed on us by
regulators, our liability mix, requirements to maintain an appropriate claims
paying rating by ratings agencies and requirements of lenders. As of the date
hereof, the investment guidelines currently state:





•
            Quality Investments: At
      least 80% of the assets in the investment portfolio are to be held in debt
      or equity securities (including swaps) of publicly-traded companies (or
      their subsidiaries) and governments of the Organization of Economic
      Co-operation and Development ("the OECD"), high income countries,
      cash, cash equivalents, and gold. Assets which are fair valued using
      unobservable inputs (Level 3 assets) are to be excluded from the 80%
      calculation above. No more than 10% of the assets in the investment
      portfolio will be held in private equity
  securities.





•
            Concentration of
      Investments: Other than cash, cash equivalents and United States
      government obligations, no single investment in the investment portfolio
      may constitute more than 20% of the
portfolio.





•
            Liquidity: Assets will
      be invested in such fashion that we have a reasonable expectation that we
      can meet any of our liabilities as they become due. We periodically review
      with the investment advisor the liquidity of the
  portfolio.





•
            Monitoring: We require
      our investment advisor to re-evaluate each position in the investment
      portfolio and to monitor changes in intrinsic value and trading value and
      provide monthly reports on the investment portfolio to us or as we may
      reasonably determine.





•
            Leverage: The
      investment portfolio may not employ greater than 5% indebtedness for
      borrowed money, including net margin balances, for extended time periods.
      The investment advisor may use, in the normal course of business, an
      aggregate of 20% net margin leverage for periods of less than 30
      days.








12
 Table of contents





Investment
Results





Composition





Our
investment portfolio managed by DME Advisors contains investments in equity
securities, debt instruments, commodities, unrestricted cash and funds held with
brokers, derivatives, and securities sold, not yet purchased. The following
table represents the fair value of the total long positions as reported in the
consolidated financial statements as of December 31, 2009 and 2008:





2009
            
            
            2008($
      in thousands)Debt
      instruments
            
            $
            95,838
            
            
            
            10.7
            %
            
            $
            70,214
            
            
            
            11.8
            %Equities
      – listed
            
            
            593,201
            
            
            
            66.6
            
            
            
            409,329
            
            
            
            69.0Private
      and unlisted equity securities
            
            
            25,228
            
            
            
            2.8
            
            
            
            11,897
            
            
            
            2.0Call
      options
            
            
            5,285
            
            
            
            0.6
            
            
            
            2,526
            
            
            
            0.5Put
      options
            
            
            8,809
            
            
            
            1.0
            
            
            
            —
            
            
            
            —Commodities
            
            
            102,239
            
            
            
            11.5
            
            
            
            —
            
            
            
            —830,600
            
            
            
            93.2
            
            
            
            493,966
            
            
            
            83.3Cash
      and funds held with brokers
            
            
            46,422
            
            
            
            5.2
            
            
            
            94,814
            
            
            
            16.0Financial
      contracts, net
            
            
            13,917
            
            
            
            1.6
            
            
            
            4,279
            
            
            
            0.7Total
      long investments
            
            $
            890,939
            
            
            
            100
            %
            
            $
            593,059
            
            
            
            100.0
            %











The
following table represents the fair value of our total short positions as
reported in the consolidated financial statements as of December 31, 2009 and
2008:





2009
            
            
            2008($
      in thousands)Equities
      – listed
            
            $
            570,875
            
            
            
            100.0
            %
            
            $
            234,301
            
            
            
            100.0
            %Total
      short investments
            
            $
            570,875
            
            
            
            100.0
            %
            
            $
            234,301
            
            
            
            100.0
            %





DME
Advisors also reports the composition of our managed portfolio on a notional
exposure basis, which it believes is the appropriate manner in which to assess
the exposure and profile of investments and is the way in which it manages the
portfolio. This exposure analysis does not include cash (U.S. dollar and foreign
currencies), gold, credit default swaps, or interest
rate options. In addition, under this methodology, the exposure for total
return swaps is reported at full notional amount. The notional amount of a
derivative contract is the underlying value upon which payment obligations are
computed and that we believe best represents the risk exposure. For an equity
total return swap, for example, the notional amount is the number of shares
underlying the swap multiplied by the market price of those shares. Options are
reported at their delta adjusted basis. The delta of an option is the
sensitivity of the option price to the underlying stock (or
commodity) price. The delta adjusted basis is the number of shares
underlying the option multiplied by the delta and the underlying stock (or
commodity) price. The following table represents the composition of our
investment portfolio based on the percentage of assets in our investment account
managed by DME Advisors as of December 31, 2009 and 2008:





2009
            
            
            2008Long
      %
            
            
            Short
      %
            
            
            Long
      %
            
            
            Short
      %Debt
      instruments
            
            
            10.8
            %
            
            
            —
            %
            
            
            11.8
            %
            
            
            —Equities
      & related derivatives
            
            
            71.8
            
            
            
            (64.8
            )
            
            
            65.8
            
            
            
            (39.3
            )Private
      and unlisted equity securities
            
            
            2.6
            
            
            
            —
            
            
            
            1.9
            
            
            
            —Other
      investments
            
            
            0.0
            
            
            
            (0.1
            )
            
            
            —
            
            
            
            (0.2
            )Total
            
            
            85.2
            %
            
            
            (64.9
            )%
            
            
            79.5
            %
            
            
            (39.5
            )%





As of
December 31, 2009, our exposure to gold on a delta adjusted basis was 17.3%
(2008: 10.4%).




13
 Table of contents





The
following table represents the composition of our investment portfolio, by
industry sector, based on the percentage of assets in our investment account
managed by DME Advisors as of December 31, 2009:





Sector
            
            Long
      %
            
            
            Short
      %
            
            
            Net
      %Basic
      Materials
            
            
            5.0
            %
            
            
            (2.5
            )%
            
            
            2.5
            %Consumer
      Cyclical
            
            
            1.5
            
            
            
            (10.1
            )
            
            
            (8.6
            )Consumer
      Non-Cyclical
            
            
            4.2
            
            
            
            (5.3
            )
            
            
            (1.1
            )Energy
            
            
            4.3
            
            
            
            (2.1
            )
            
            
            2.2Financial
            
            
            27.0
            
            
            
            (27.7
            )
            
            
            (0.7
            )Healthcare
            
            
            18.9
            
            
            
            (2.7
            )
            
            
            16.2Industrial
            
            
            12.6
            
            
            
            (12.2
            )
            
            
            0.4Technology
            
            
            11.7
            
            
            
            (2.3
            )
            
            
            9.4Total
            
            
            85.2
            %
            
            
            (64.9
            )%
            
            
            20.3
            %





The
following table represents the composition of our investment portfolio, by the
market capitalization of the underlying security, based on the percentage of
assets in our investment account managed by DME Advisors as of December 31,
2009:





Capitalization
            
            Long
      %
            
            
            Short
      %
            
            
            Net
      %Large
      Cap Equity (≥$5 billion)
            
            
            40.3
            %
            
            
            (32.9
            )%
            
            
            7.4
            %Mid
      Cap Equity (≥$1 billion)
            
            
            25.2
            
            
            
            (26.6
            )
            
            
            (1.4
            )Small
      Cap Equity (<$1 billion)
            
            
            7.9
            
            
            
            (5.4
            )
            
            
            2.5Debt
      Instruments
            
            
            10.7
            
            
            
            —
            
            
            
            10.7Other
      Investments
            
            
            1.1
            
            
            
            —
            
            
            
            1.1Total
            
            
            85.2
            %
            
            
            (64.9
            )%
            
            
            20.3
            %





Investment
Returns





A summary
of our consolidated net investment income (loss) for the years ended December
31, 2009, 2008 and 2007 is as follows:





2009
            
            
            2008
            
            
            2007($
      in thousands)Realized
      gains (losses) and change in unrealized gains and losses,
      net
            
            $
            232,410
            
            
            $
            (118,667
            )
            
            $
            28,051Interest,
      dividend and other income
            
            
            17,038
            
            
            
            20,879
            
            
            
            21,375Interest,
      dividend and other expenses
            
            
            (16,886
            )
            
            
            (18,437
            )
            
            
            (7,151
            )Investment
      advisor compensation
            
            
            (32,701
            )
            
            
            (9,901
            )
            
            
            (14,633
            )Net
      investment income (loss)
            
            $
            199,861
            
            
            $
            (126,126
            )
            
            $
            27,642





Our
investment return is based on the total assets in our investment account, which
includes the majority of our equity capital and collected premiums. Investment
returns, net of all fees and expenses, by quarter and for each year since
inception are as follows: (1)





Quarter
            
            2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            20041st
            
            4.6
            %
            
            
            (0.9
            )%
            
            
            (4.2
            )%
            
            
            7.5
            %
            
            
            2.2
            %
            
            
            —
            %2nd
            
            13.9
            
            
            
            4.5
            
            
            
            6.8
            
            
            
            2.9
            
            
            
            5.4
            
            
            
            —3rd
            
            4.3
            
            
            
            (15.9
            )
            
            
            (0.8
            )
            
            
            6.2
            
            
            
            3.0
            
            
            
            1.34th
            
            6.4
            
            
            
            (5.3
            )
            
            
            4.2
            
            
            
            5.9
            
            
            
            2.9
            
            
            
            3.9Full
      Year
            
            32.1
            %
            
            
            (17.6
            )%
            
            
            5.9
            %
            
            
            24.4
            %
            
            
            14.2
            %
            
            
            5.2
            %
      (2)





(1)
            Investment
      returns are calculated monthly and compounded to calculate the quarterly
      and annual returns. Actual investment income may vary depending on cash
      flows into and out of the investment account. Past performance is not
      necessarily indicative of future
results.





(2)
            Represents
      the return for the period from July 13, 2004 (date of incorporation) to
      December 31, 2004.





14
 Table of contents





DME
Advisors and its affiliates manage and expect to manage other client accounts
besides ours, some of which have, or may have, objectives similar to ours.
Because of the similarity or potential similarity of our investment portfolio to
these others, and because, as a matter of ordinary course, DME Advisors and its
affiliates provide their clients, including us, with results of their respective
investment portfolios on the last day of each month, those other clients
indirectly may have material non-public information regarding our investment
portfolio. To address this issue, and to comply with Regulation FD, we present,
prior to the start of trading on the first business day of each month, our
largest disclosed long positions, and a summary of our consolidated net
investment returns on our website, www.greenlightre.ky. DME Advisors may choose
not to disclose certain positions to its clients in order to protect its
investment strategy. Therefore, we present on our website the largest positions
held by us that are disclosed by DME Advisors or its affiliates to their other
clients.





Internal
Risk Management





Our Board
of Directors reviews our investment portfolio together with our reinsurance
operations on a periodic basis. With the assistance of DME Advisors, we
periodically analyze both our assets and liabilities including the numerous
components of risk in our portfolio, such as concentration risk and liquidity
risk.





Information
Technology





Our
information technology infrastructure is currently housed in our corporate
offices in Grand Cayman, Cayman Islands. We have implemented backup procedures
to ensure that data is backed up on a daily basis and can be quickly restored as
needed.





We have a
disaster recovery plan with respect to our information technology infrastructure
that includes arrangements with an offshore data center in Jersey, Channel
Islands. We can access our systems from this offshore facility in the event that
our primary systems are unavailable due to a disaster or otherwise.





Employees





As of
December 31, 2009, we had 15 full-time employees, all of whom were based in
Grand Cayman. We believe that our employee relations are good. None of our
employees are subject to collective bargaining agreements, and we are not aware
of any current efforts to implement such agreements.





Additional
Information





Our
website address is www.greenlightre.ky. We make available links to our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and other documents we file with or furnish to the SEC as soon as reasonably
practicable after such material is electronically filed with or furnished to the
SEC. In order to comply with Regulation FD, our investment returns are posted on
a monthly basis. Additionally, our Code of Business Conduct and Ethics is
available on our website.








15
 Table of contents





ITEM 1A. RISK FACTORS





Factors
that could materially affect our business, financial condition and results of
operations are outlined below. Additional risks not presently known to us or
that we currently deem immaterial may also impair our business financial
position or results of operations.





Risks
Relating to Our Business





Our
results of operations will fluctuate from period to period and may not be
indicative of our long-term prospects.





The
performance of our reinsurance operations and our investment portfolio will
fluctuate from period to period. Fluctuations will result from a variety of
factors, including:





•
            reinsurance
      contract pricing;





•
            our
      assessment of the quality of available reinsurance
      opportunities;





•
            the
      volume and mix of reinsurance products we
  underwrite;





•
            loss
      experience on our reinsurance
liabilities;





•
            the
      performance of our investment portfolio;
and





•
            our
      ability to assess and integrate our risk management strategy
      properly.





In
particular, we seek to opportunistically underwrite products and make
investments to achieve favorable return on equity over the long term. Our
investment strategy to invest primarily in long and short positions in
publicly-traded equity and corporate debt instruments, is subject to market
volatility and is likely to be more volatile than traditional fixed-income
portfolios that are comprised primarily of investment grade bonds. In addition,
our opportunistic nature and focus on long-term growth in book value will result
in fluctuations in total premiums written from period to period as we
concentrate on underwriting contracts that we believe will generate better
long-term, rather than short-term, results. Accordingly, our short-term results
of operations may not be indicative of our long-term prospects.





We
are a start-up operation and there is limited historical information available
for investors to evaluate our performance.





We have
limited operating history. We were formed in July 2004 but we did not begin
underwriting reinsurance transactions until April 2006. As a result, there is
limited historical information available to help investors evaluate our
performance. In addition, in light of our limited operating history, and
opportunistic underwriting philosophy, our historical financial statements are
not necessarily meaningful for evaluating the potential of our future
operations. Because our underwriting and investment strategies differ from those
of other participants in the property and casualty reinsurance market, you may
not be able to compare our business or prospects to other property and casualty
reinsurers.





Established
competitors with greater resources may make it difficult for us to effectively
market our products or offer our products at a profit.





The
reinsurance industry is highly competitive. We compete with major reinsurers,
many of which have substantially greater financial, marketing and management
resources than we do. Competition in the types of business that we underwrite is
based on many factors, including:





•
            premium
      charges;





•
            the
      general reputation and perceived financial strength of the
      reinsurer;





•
            relationships
      with reinsurance brokers;





•
            terms
      and conditions of products offered;








16
 Table of contents




•
            ratings
      assigned by independent rating
agencies;





•
            speed
      of claims payment and reputation;
and





•
            the
      experience and reputation of the members of our underwriting team in the
      particular lines of reinsurance we seek to
  underwrite.





Additionally,
although the members of our underwriting team have general experience across
many property and casualty lines, they may not have the requisite experience or
expertise to compete for all transactions that fall within our strategy of
offering customized frequency and severity contracts at times and in markets
where capacity and alternatives may be limited.





Our
competitors include ACE Limited, Everest Re, General Re Corporation, Hannover Re
Group, Munich Reinsurance Company, Partner Re Ltd., Swiss Reinsurance Company,
and Transatlantic Reinsurance Company, which are dominant companies in our
industry. Although we seek to provide coverage where capacity and alternatives
are limited, we directly compete with these larger companies due to the breadth
of their coverage across the property and casualty market in substantially all
lines of business. We also compete with smaller companies and other niche
reinsurers.









We cannot
assure you that we will be able to compete successfully in the reinsurance
market. Our failure to compete effectively would significantly and negatively
affect our financial condition and results of operations and may increase the
likelihood that we may be deemed to be a passive foreign investment company or
an investment company. See risk factor ‘‘— We are subject to the risk of
possibly becoming an investment company under U.S. federal securities
law.’’





If
our losses greatly exceed our loss reserves, our financial condition may be
significantly and negatively affected.





Our
results of operations and financial condition depend upon our ability to assess
accurately the potential losses associated with the risks we reinsure. Reserves
are estimates at a given time of claims an insurer ultimately expects to pay,
based upon facts and circumstances then known, predictions of future events,
estimates of future trends in claim severity and other variable factors. The
inherent uncertainties of estimating loss reserves generally are greater for
reinsurance companies as compared to primary insurers, primarily due
to:





•
            the
      lapse of time from the occurrence of an event to the reporting of the
      claim and the ultimate resolution or settlement of the
    claim;





•
            the
      diversity of development patterns among different types of reinsurance
      treaties; and





•
            the
      necessary reliance on the client for information regarding
      claims.





As a
relatively new reinsurer with an objective of being the lead underwriter on
sizeable transactions and on a majority of premiums we underwrite, our
estimation of reserves may be less reliable than the reserve estimations of a
reinsurer with a greater volume of business of smaller transactions and an
established loss history. Actual losses and loss adjustment expenses paid may
deviate substantially from the estimates of our loss reserves contained in our
financial statements, to our detriment. If we determine our loss reserves to be
inadequate, we will increase our loss reserves with a corresponding reduction in
our net income in the period in which we identify the deficiency, and such a
reduction would negatively affect our results of operations. If our losses
greatly exceed our loss reserves, our financial condition may be significantly
and negatively affected.





The
property and casualty reinsurance market may be affected by cyclical
trends.





We write
reinsurance in the property and casualty markets. The property and casualty
reinsurance industry is cyclical. Primary insurers’ underwriting results,
prevailing general economic and market conditions, liability retention decisions
of companies and primary insurers and reinsurance premium rates influence the
demand for property and casualty reinsurance. Prevailing prices and available
surplus to support assumed business influence reinsurance supply. Supply may
fluctuate in response to changes in





17
 Table of contents





return
on capital realized in the reinsurance industry, the frequency and severity of
losses and prevailing general economic and market conditions.





Continued
increases in the supply of reinsurance may have consequences for the reinsurance
industry generally and for us, including lower premium rates, increased expenses
for customer acquisition and retention and less favorable policy terms and
conditions.





Unpredictable
developments, including courts granting increasingly larger awards for certain
damages, natural disasters (such as catastrophic hurricanes, windstorms,
tornados, earthquakes, wildfires and floods), fluctuations in interest
rates, changes in the investment environment that affect market prices of
investments and inflationary pressures, affect the industry’s profitability. The
effects of cyclicality could significantly and negatively affect our financial
condition and results of operations.





Adverse
consequences of the recent U.S. and global economic and financial industry
downturns could harm our business, our liquidity and financial condition, and
our stock price.





Current
economic conditions may adversely affect (among other aspects of our business)
the demand for and claims made under our products, the ability of customers,
counterparties and others to establish or maintain their relationships with us,
our ability to access and efficiently use internal and external capital
resources and our investment performance. Volatility in the U.S. and other
securities markets may adversely affect our investment portfolio and our stock
price.





A
downgrade or withdrawal of our A.M. Best rating would significantly and
negatively affect our ability to implement our business strategy
successfully.





Companies,
insurers and reinsurance brokers use ratings from independent ratings agencies
as an important means of assessing the financial strength and quality of
reinsurers. A.M. Best has assigned us a financial strength rating of ‘‘A−
(Excellent),’’ which is the fourth highest of 15 ratings that A.M. Best issues.
This rating reflects the rating agency’s opinion of our financial strength,
operating performance and ability to meet obligations. It is not an evaluation
directed toward the protection of investors or a recommendation to buy, sell or
hold our Class A ordinary shares. A.M. Best periodically reviews our rating and
may revise it downward or revoke it at its sole discretion based primarily on
its analysis of our balance sheet strength, operating performance and business
profile. Factors that may affect such an analysis include:





•
            if
      we change our business practices from our organizational business plan in
      a manner that no longer supports our A.M. Best's
  rating;





•
            if
      unfavorable financial or market trends impact
  us;





•
            if
      our losses significantly exceed our loss
  reserves;





•
            if
      we are unable to retain our senior management and other key personnel;
      or





•
            if
      our investment portfolio incurs significant
  losses.





If A.M.
Best downgrades or withdraws our rating, we could be severely limited or
prevented from writing any new reinsurance contracts, which would significantly
and negatively affect our ability to implement our business
strategy.





Certain
of our reinsurance contracts provide the client with the right to terminate the
agreement if our ‘‘A− (Excellent)’’ A.M. Best rating is downgraded below certain
rating thresholds. We expect that similar provisions will be included in certain
future contracts as well.





A
significant decrease in our capital or surplus could enable certain clients to
terminate reinsurance agreements or to require additional
collateral.





Certain
of our assumed reinsurance contracts contain provisions that permit our clients
to cancel the contract or require additional collateral in the event of a
downgrade in our ratings below specified levels or a reduction of our capital or
surplus below specified levels over the course of the agreement. Whether a
client would exercise such cancellation rights would likely depend, among other
things, on the reason the provision is triggered, the prevailing market
conditions, the degree of unexpired coverage and the pricing and availability of
replacement reinsurance coverage.





If any
such provisions were to become exercisable, we cannot predict whether or how
many of our clients would actually exercise such rights or the extent to which
they would have a significant and negative effect on our financial condition,
results of operations or future prospects but they could have a significant
adverse effect on the operations of our company.








18
 Table of contents





If we lose or are
unable to retain our senior management and other key personnel and are unable to
attract qualified personnel, our ability to implement our business strategy
could be delayed or hindered, which, in turn, could significantly and negatively
affect our business.





Our
future success depends to a significant extent on the efforts of our senior
management and other key personnel to implement our business strategy. We
believe there are only a limited number of available, qualified executives with
substantial experience in our industry. In addition, we will need to add
personnel to implement our business strategy. We could face challenges
attracting personnel to the Cayman Islands. Accordingly, the loss of the
services of one or more of the members of our senior management or other key
personnel, or our inability to hire and retain other key personnel, could delay
or prevent us from fully implementing our business strategy and, consequently,
significantly and negatively affect our business.





We do not
currently maintain key man life insurance with respect to any of our senior
management, including our Chief Executive Officer, Chief Financial Officer or
Chief Underwriting Officer. If any member of senior management dies or becomes
incapacitated, or leaves the company to pursue employment opportunities
elsewhere, we would be solely responsible for locating an adequate replacement
for such senior management and for bearing any related cost. To the extent that
we are unable to locate an adequate replacement or are unable to do so within a
reasonable period of time, our business may be significantly and negatively
affected.





Our
ability to implement our business strategy could be adversely affected by Cayman
Islands employment restrictions.





Under
Cayman Islands law, persons who are not Caymanian, do not possess Caymanian
status, or are not otherwise entitled to reside and work in the Cayman Islands
pursuant to provisions of the Immigration Law (2009 Revision) of the Cayman
Islands, which we refer to as the Immigration Law, may not engage in any gainful
occupation in the Cayman Islands without an appropriate governmental work
permit. Such a work permit may be granted or extended on a continuous basis for
a maximum period of seven years (unless the employee is deemed to be exempted
from such requirement in accordance with the provisions of the Immigration Law,
in which case such period may be extended to nine years and the employee is
given the opportunity to apply for permanent residence) upon showing that, after
proper public advertisement, no Caymanian or person of Caymanian status, or
other person legally and ordinarily resident in the Cayman Islands who meets the
minimum standards for the advertised position is available. The failure of these
work permits to be granted or extended could delay us from fully implementing
our business strategy.





Operational
risks, including human or systems failures, are inherent in our
business.





Operational
risks and losses can result from, among other things, fraud, errors, failure to
document transactions properly or to obtain proper internal authorization,
failure to comply with regulatory requirements, information technology failures
or external events.





We
believe that our modeling, underwriting and information technology and
application systems are critical to our business. Moreover, our information
technology and application systems have been an important part of our
underwriting process and our ability to compete successfully. We have also
licensed certain systems and data from third parties. We cannot be certain that
we will have access to these, or comparable, service providers, or that our
information technology or application systems will continue to operate as
intended. A major defect or failure in our internal controls or information
technology and application systems could result in management distraction, harm
our reputation or increase expenses. We believe appropriate controls and
mitigation procedures are in place to prevent significant risk of defect in our
internal controls, information technology and application systems, but internal
controls provide only a reasonable, not absolute, assurance as to the absence of
errors or irregularities and any ineffectiveness of such controls and procedures
could have a material adverse effect on our business.





Our
failure to maintain sufficient letter of credit facilities or to increase our
letter of credit capacity on commercially acceptable terms as we grow could
significantly and negatively affect our ability to implement our business
strategy.





We are
not licensed or admitted as a reinsurer in any jurisdiction other than the
Cayman Islands. Certain jurisdictions, including the United States, do not
permit insurance companies to take credit for reinsurance obtained from
unlicensed or non-admitted insurers on their statutory financial statements
unless appropriate security measures are implemented. Consequently, certain
clients will require us to obtain a letter of credit or provide other collateral
through funds withheld or trust arrangements. When we obtain a letter of credit
facility, we are customarily required to provide collateral to the letter of
credit provider in order to secure our obligations under the facility. Our
ability to provide collateral, and the costs at which we provide collateral, are
primarily dependent on the composition of our investment portfolio.





Typically,
letters of credit are collateralized with fixed-income securities. Banks may be
willing to accept our investment portfolio as collateral, but on terms that may
be less favorable to us than reinsurance companies that invest solely or
predominantly in fixed-income securities. The inability to renew, maintain or
obtain letters of credit collateralized by our investment portfolio may
significantly limit the amount of reinsurance we can write or require us to
modify our investment strategy.







19
 Table of contents





Our banks
have accepted, with certain restrictions, our investment portfolio as
collateral. In the event of a decline in the market value of our investment
portfolio that results in a collateral shortfall, as defined in each letter of
credit facility, we have the right, at our option, to reduce the outstanding
obligations under applicable letter of credit facility, to deposit additional
collateral or to change the collateral composition in order to cure the
shortfall. If the shortfall is not cured within the prescribed time period, an
event of default will immediately occur. We will be prohibited from issuing
additional letters of credit until any shortfall is cured.





Our
access to funds under our existing credit facilities is dependent on the ability
of the banks that are parties to the facilities to meet their funding
commitments. Those banks may not be able to meet their funding commitments if
they experience shortages of capital and liquidity or if they experience
excessive volumes of borrowing requests within a short period of time, and we
might be forced to replace credit sources in a difficult market.





There has
also been recent consolidation in the financial industry, which could lead to
increased reliance on and exposure to particular institutions. If we cannot
obtain adequate capital or sources of credit on favorable terms, or at all, our
business, operating results, and financial condition could be adversely
affected. It is possible that, in the future, one or more of the rating agencies
may reduce our existing ratings. If one or more of our ratings were downgraded,
we could incur higher borrowing costs and our ability to access the capital
markets could be impacted. Our inability to obtain adequate capital could have a
significant and negative effect on our business, financial condition and results
of operations.





We may
need additional letter of credit capacity as we grow, and if we are unable to
renew, maintain or increase any of our letter of credit facilities or are unable
to do so on commercially acceptable terms we may need to liquidate all or a
portion of our investment portfolio and invest in a fixed-income portfolio or
other forms of investment acceptable to our clients and banks as collateral,
which could significantly and negatively affect our ability to implement our
business strategy.





The
inability to obtain business provided from brokers could adversely affect our
business strategy and results of operations.





Substantially
all of our business is primarily placed through brokered transactions, which
involve a limited number of reinsurance brokers. Since we began underwriting
operations in April 2006, we have placed substantially all of our premiums
written through brokers. To lose or fail to expand all or a substantial portion
of the brokered business provided through one or more of these brokers, many of
whom may not be familiar with our Cayman Islands jurisdiction, could
significantly and negatively affect our business and results of
operations.





We may need
additional capital in the future in order to operate our business, and such
capital may not be available to us or may not be available to us on favorable
terms.





We may
need to raise additional capital in the future through public or private equity
or debt offerings or otherwise in order to:





•
            fund
      liquidity needs caused by underwriting or investment
    losses;





•
            replace
      capital lost in the event of significant reinsurance losses or adverse
      reserve developments or significant investment
  losses;





•
            satisfy
      letters of credit or guarantee bond requirements that may be imposed by
      our clients or by regulators;





•
            meet
      applicable statutory jurisdiction
requirements;





•
            meet
      rating agency capital requirements;
or





•
            respond
      to competitive pressures.





Additional
capital may not be available on terms favorable to us, or at all. Further, any
additional capital raised through the sale of equity could dilute your ownership
interest in our company and may cause the market price of our Class A ordinary
shares to decline. Additional capital raised through the issuance of debt may
result in creditors having rights, preferences and privileges senior or
otherwise superior to those of our Class A ordinary shares.





Our
property and property catastrophe reinsurance operations may make us vulnerable
to losses from catastrophes and may cause our results of operations to vary
significantly from period to period.





Certain
of our reinsurance operations expose us to claims arising out of unpredictable
catastrophic events, such as hurricanes, hailstorms, tornados, windstorms,
severe winter weather, earthquakes, floods, fires, explosions, volcanic
eruptions and other natural or man-made disasters. The incidence and severity of
catastrophes are inherently unpredictable but the loss experience of property
catastrophe reinsurers has been generally characterized as low frequency and
high severity. Claims from catastrophic events could reduce our earnings and
cause substantial volatility in our results of operations for any fiscal quarter
or year and adversely affect our financial condition. Corresponding reductions
in our surplus levels could impact our ability to write new reinsurance
policies.







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Catastrophic
losses are a function of the insured exposure in the affected area and the
severity of the event. Because accounting regulations do not permit reinsurers
to reserve for catastrophic events until they occur, claims from catastrophic
events could cause substantial volatility in our financial results for any
fiscal quarter or year and could significantly and negatively affect our
financial condition and results of operations.





We
depend on our clients' evaluations of the risks associated with their insurance
underwriting, which may subject us to reinsurance losses.





In some of
our proportional reinsurance business, in which we assume an agreed percentage
of each underlying insurance contract being reinsured, or quota share contracts,
we do not expect to separately evaluate each of the original individual risks
assumed under these reinsurance contracts. Therefore, we will be largely
dependent on the original underwriting decisions made by ceding companies. We
will be subject to the risk that the clients may not have adequately evaluated
the insured risks and that the premiums ceded may not adequately compensate us
for the risks we assume. We also do not expect to separately evaluate each of
the individual claims made on the underlying insurance contracts under
quota-share contracts. Therefore, we will be dependent on the original claims
decisions made by our clients.





We
could face unanticipated losses from war, terrorism and political instability,
and these or other unanticipated losses could have a material adverse effect on
our financial condition and results of operations.





We have
exposure to large, unexpected losses resulting from man-made catastrophic
events, such as acts of war, acts of terrorism and political instability. These
risks are inherently unpredictable and recent events may indicate an increased
frequency and severity of losses. It is difficult to predict the timing of these
events or to estimate the amount of loss that any given occurrence will
generate. To the extent that losses from these risks occur, our financial
condition and results of operations could be significantly and negatively
affected.





Changing
climate conditions may adversely affect our financial condition, profitability
or cash flows
  Climate
change, to the extent it produces rising temperatures and changes in weather
patterns, could impact the frequency or severity of weather events and
wildfires. Further, it could impact the affordability and availability of
homeowners insurance, which could have an impact on pricing. Changes in weather
patterns could also affect the frequency and severity of natural catastrophe
events to which we may be exposed.




The
involvement of reinsurance brokers subjects us to their credit
risk.





In
accordance with industry practice, we frequently pay amounts owed on claims
under our policies to reinsurance brokers, and these brokers, in turn, remit
these amounts to the ceding companies that have reinsured a portion of their
liabilities with us. In some jurisdictions, if a broker fails to make such a
payment, we might remain liable to the client for the deficiency notwithstanding
the broker’s obligation to make such payment. Conversely, in certain
jurisdictions, when the client pays premiums for policies to reinsurance brokers
for payment to us, these premiums are considered to have been paid and the
client will no longer be liable to us for these premiums, whether or not we have
actually received them. Consequently, we assume a degree of credit risk
associated with brokers around the world.





We
may be unable to purchase reinsurance for the liabilities we reinsure, and if we
successfully purchase such reinsurance, we may be unable to collect, which could
adversely affect our business, financial condition and results of
operations.





From time
to time we may purchase reinsurance for certain liabilities we reinsure, which
we refer to as retrocessional coverage, in order to mitigate the effect of a
potential concentration of losses upon our financial condition. The insolvency
or inability or refusal of a retrocessionaire to make payments under the terms
of its agreement with us could have an adverse effect on us because we remain
liable to our client. From time to time, market conditions have limited, and in
some cases have prevented, reinsurers from obtaining the types and amounts of
retrocessional coverage that they consider adequate for their business needs.
Accordingly, we may not be able to obtain our desired amounts of retrocessional
coverage or negotiate terms that we deem appropriate or acceptable or obtain
retrocessional coverage from entities with satisfactory creditworthiness. Our
failure to establish adequate retrocessional arrangements or the failure of our
retrocessional arrangements to protect us from overly concentrated risk exposure
could significantly and negatively affect our business, financial condition and
results of operations.





Currency
fluctuations could result in exchange rate losses and negatively impact our
business.





Our
functional currency is the U.S. dollar. However, we expect that we will write a
portion of our business and receive premiums in currencies other than the U.S.
dollar. In addition, DME Advisors may invest a portion of our portfolio in
securities or cash denominated in currencies other than the U.S. dollar.
Consequently, we may experience exchange rate losses to the extent our foreign
currency exposure is not hedged or is not sufficiently hedged, which could
significantly and negatively affect our business. If we do seek to hedge our
foreign currency exposure through the use of forward foreign currency exchange
contracts or currency swaps, we will be subject to the risk that our
counterparties to the arrangements fail to perform.







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There
are differences under Cayman Islands corporate law and Delaware corporate law
with respect to interested party transactions which may benefit certain of our
shareholders at the expense of other shareholders.





Under
Cayman Islands corporate law, a director may vote on a contract or transaction
where the director has an interest as a shareholder, director, officer or
employee provided such interest is disclosed. None of our contracts will be
deemed to be void because any director is an interested party in such
transaction and interested parties will not be held liable for monies owed to
the company.





Under
Delaware law, interested party transactions are voidable.





Risks
Relating to Insurance and Other Regulations





Any
suspension or revocation of our reinsurance license would materially impact our
ability to do business and implement our business strategy.





We are
presently licensed as a reinsurer only in the Cayman Islands. The suspension or
revocation of our license to do business as a reinsurance company in the Cayman
Islands for any reason would mean that we would not be able to enter into any
new reinsurance contracts until the suspension ended or we became licensed in
another jurisdiction. Any such suspension or revocation of our license would
negatively impact our reputation in the reinsurance marketplace and could have a
material adverse effect on our results of operations.





The
Cayman Island Monetary Authority, or CIMA, which is the regulating authority of
the Cayman Islands, may take a number of actions, including suspending or
revoking a reinsurance license whenever CIMA believes that a licensee is or may
become unable to meet its obligations, is carrying on business in a manner
likely to be detrimental to the public interest or to the interest of its
creditors or policyholders, has contravened the terms of the Law, or has
otherwise behaved in such a manner so as to cause CIMA to call into question the
licensee's fitness.





Further
CIMA may revoke our license if:





•
            we
      cease to carry on reinsurance
business;





•
            the
      direction and management of our reinsurance business has not been
      conducted in a fit and proper
manner;





•
            a
      person holding a position as a director, manager or officer is not a fit
      and proper person to hold the respective position;
  or





•
            we
      become bankrupt or go into liquidation or we are wound up or otherwise
      dissolved.





Similarly,
if CIMA suspended or revoked our license, we could lose our exemption under the
Investment Company Act.





We
are subject to the risk of possibly becoming an investment company under U.S.
federal securities law.





The
Investment Company Act regulates certain companies that invest in or trade
securities. We rely on an exemption under the Investment Company Act for an
entity organized and regulated as a foreign insurance company which is engaged
primarily and predominantly in the reinsurance of risks on insurance agreements.
The law in this area is subjective and there is a lack of guidance as to the
meaning of ‘‘primarily and predominantly’’ under the relevant exemption to the
Investment Company Act. For example, there is no standard for the amount of
premiums that need to be written relative to the level of an entity’s capital in
order to qualify for the exemption. If this exemption were deemed inapplicable,
we would have to register under the Investment Company Act as an investment
company. Registered investment companies are subject to extensive, restrictive
and potentially adverse regulation relating to, among other things, operating
methods, management, capital structure, leverage, dividends and transactions
with affiliates. Registered investment companies are not permitted to operate
their business in the manner in which we operate our business, nor are
registered investment companies permitted to have many of the relationships that
we have with our affiliated companies. Accordingly, we likely would not be
permitted to engage DME Advisors as our investment advisor, unless we obtained
board and shareholder approvals under the Investment Company Act. If DME
Advisors were not our investment advisor, DME Advisors would liquidate our
investment portfolio and we would seek to identify and retain another investment
advisor with a value-oriented investment philosophy. If we could not identify or
retain such an advisor, we would be required to make substantial modifications
to our investment strategy. Any such changes to our investment strategy could
significantly and negatively impact our investment results, financial condition
and our ability to implement our business strategy.





If at any
time it were established that we had been operating as an investment company in
violation of the registration requirements of the Investment Company Act, there
would be a risk, among other material adverse consequences, that we could become
subject to monetary penalties or injunctive relief, or both, that we would be
unable to enforce contracts with third parties or that third parties could seek
to obtain rescission of transactions with us undertaken during the period in
which it was established that we were an unregistered investment
company.





To the
extent that the laws and regulations change in the future so that contracts we
write are deemed not to be reinsurance contracts, we will be at greater risk of
not qualifying for the Investment Company Act exception. Additionally, it is
possible that our classification as an investment company would result in the
suspension or revocation of our reinsurance license.







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Insurance
regulators in the United States or elsewhere may review our activities and claim
that we are subject to that jurisdiction’s licensing requirements.





We are
admitted to do business only in the Cayman Islands. In general, the Cayman
Islands insurance statutes, regulations and the policies of CIMA are less
restrictive than United States state insurance statutes and regulations. We
cannot assure you, however, that insurance regulators in the United States,
the European Union or elsewhere will not review our activities and
claim that we are subject to such jurisdiction’s licensing requirements. In
addition, we are subject to indirect regulatory requirements imposed by
jurisdictions that may limit our ability to provide reinsurance. For example,
our ability to write reinsurance may be subject, in certain cases, to
arrangements satisfactory to applicable regulatory bodies and proposed
legislation and regulations may have the effect of imposing additional
requirements upon, or restricting the market for, non-U.S. reinsurers such as us
with whom domestic companies may place business. We do not know of any such
proposed legislation pending at this time.





If in the
future we were to become subject to the laws or regulations of any state in the
United States or to the laws of the United States, the European Union, or of any
other country, we may consider various alternatives to our operations. If we
choose to attempt to become licensed in another jurisdiction, for instance, we
may not be able to do so and the modification of the conduct of our business or
the non-compliance with insurance statutes and regulations could significantly
and negatively affect our business.





Current
legal and regulatory activities relating to certain insurance products could
affect our business, results of operations and financial condition.





The sale and
purchase of products that may be structured in such a way so as to not contain
sufficient risk transfer to meet the requirement of U.S. GAAP to be accounted
for as reinsurance, or loss mitigation insurance products, have become the focus
of investigations by the SEC and numerous state Attorneys General. Although
we seek to use structured contractual features in our product offerings, we
conduct both internal and external accounting analysis with respect to risk
transfer and believe that to date we have accurately reported our contracts that
contain sufficient risk transfer under U.S. GAAP to be accounted for as
reinsurance. However, because some of our contracts contain or will contain
features designed to manage the overall risks we assume, such as a cap on
potential losses or a refund of some portion of the premium if we incur smaller
losses than anticipated at the time the contract is entered into, it is possible
that we may become subject to the ongoing inquiries into loss mitigation
products conducted by the SEC or certain Attorney Generals. In addition, we
cannot predict at this time what effect the current investigations, litigation
and regulatory activity will have on the reinsurance industry or our business or
what, if any, changes may be made to laws and regulations regarding the industry
and financial reporting.  It is possible that these investigations or
related regulatory developments will mandate changes in industry practices that
will negatively impact our ability to use certain loss mitigation features in
our products and, accordingly, our ability to operate our business pursuant to
our existing strategy. Moreover, any reclassification of our reinsurance
contracts as deposit liabilities rather than reinsurance contacts could call
into question our exception under the Investment Company Act.





Risks
Relating to Our Investment Strategy and Our Investment Advisor





We
have limited control as to how our investment portfolio is allocated and its
performance depends on the ability of DME Advisors to select and manage
appropriate investments.





DME
Advisors acts as our exclusive investment advisor for our investment portfolio
and recommends appropriate investment opportunities. Although DME Advisors is
contractually obligated to follow our investment guidelines, we cannot assure
shareholders as to how assets will be allocated to different investment
opportunities, including long and short positions and derivatives trading, which
could increase the level of risk to which our investment portfolio will be
exposed. In addition, DME Advisors can outsource to sub-advisors without our
consent or approval.





The
performance of our investment portfolio depends to a great extent on the ability
of DME Advisors to select and manage appropriate investments. Our advisory
agreement with DME Advisors terminates on December 31, 2010, unless extended,
and we have limited ability to terminate the advisory agreement earlier. We
cannot assure you that DME Advisors will be successful in meeting our investment
objectives or that the advisory agreement with DME Advisors will be renewed. The
failure of DME Advisors to perform adequately could significantly and negatively
affect our business, results of operations and financial condition.





We
depend upon DME Advisors to implement our investment strategy.





We depend
upon DME Advisors to implement our investment strategy. Accordingly, the
diminution or loss of the services of DME Advisors could significantly affect
our business. DME Advisors, in turn, is dependent on the talents, efforts and
leadership of DME Advisors’ principals. The diminution or loss of the services
of DME Advisors’ principals, or diminution or loss of their reputation and
integrity or any negative market or industry perception arising from that
diminution or loss, could have a material adverse effect on our
business. In addition, the loss of DME Advisors' key personnel, or DME
Advisors' inability to hire and retain other key personnel, over which we have
no control, could delay or prevent DME Advisors from fully implementing our
investment strategy on our behalf, and consequently, could significantly and
negatively affect our business.





Our
advisory agreement with DME Advisors does not allow us to terminate the
agreement in the event that DME Advisors loses any or all of its principals or
key personnel.The advisory agreement requires that we utilize the
advisory services of DME Advisors exclusively until December 31, 2010 subject to
limited termination provisions, even if the performance of our investment
portfolio is below our expectations.







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Our
investment performance may suffer as a result of adverse capital market
developments or other factors that impact our liquidity, which could in turn
adversely affect our financial condition and results of operations.





We may
derive a significant portion of our income from our investment portfolio. As a
result, our operating results depend in part on the performance of our
investment portfolio. We strive to structure our investments in a manner that
recognizes our liquidity needs for future liabilities. We cannot assure you that
DME Advisors will successfully structure our investments in relation to our
anticipated liabilities. Failure to do so could force us to liquidate
investments at a significant loss or at prices that are not optimal, which could
significantly and adversely affect our financial results.





The risks
associated with DME Advisors’ value-oriented investment strategy may be
substantially greater than the risks associated with traditional fixed-income
investment strategies. In addition, making long equity investments in an up or
rising market may increase the risk of not generating profits on these
investments and we may incur losses if the market declines. Similarly, making
short equity investments in a down or falling market may increase the risk of
not generating profits on these investments and we may incur losses if the
market rises. The market price of the Class A ordinary shares may be volatile
and the risk of loss may be greater when compared with other reinsurance
companies. The success of our investment strategy may also be affected by
general economic conditions. Unexpected market volatility and illiquidity
associated with our investments could significantly and negatively affect our
investment portfolio results.





Potential
conflicts of interest with DME Advisors may exist that could adversely affect
us.





None of
DME Advisors and its principals, including David Einhorn, Chairman of our Board
of Directors, and the president of Greenlight Capital, Inc., are obligated to
devote any specific amount of time to the affairs of our company. Affiliates of
DME Advisors, including Greenlight Capital, Inc., manage and expect to continue
to manage other client accounts, some of which have objectives similar to ours,
including collective investment vehicles managed by DME Advisors' affiliates and
in which DME Advisors or its affiliates may have an equity interest. Pursuant to
our advisory agreement with DME Advisors, DME Advisors has the exclusive right
to manage our investment portfolio and is required to follow our investment
guidelines and act in a manner that is fair and equitable in allocating
investment opportunities to us, but the agreement does not otherwise impose any
specific obligations or requirements concerning allocation of time, effort or
investment opportunities to us or any restriction on the nature or timing of
investments for our account and for DME Advisors' own account or other accounts
that DME Advisors or its affiliates may manage. If we compete for any investment
opportunity with another entity that DME Advisors or its affiliates manage, DME
Advisors is not required to afford us any exclusivity or priority. DME Advisors'
interest and the interests of its affiliates, including Greenlight Capital,
Inc., may at times conflict, possibly to DME Advisors' detriment, which may
potentially adversely affect our investment opportunities and
returns.





Although
Mr. Einhorn, Chairman of our Board of Directors, recused himself from the vote
approving and adopting our investment guidelines, he is not, under Cayman
Islands law, legally restricted from participating in making decisions with
respect to our investment guidelines. Accordingly, his involvement as a member
of our Board of Directors may lead to a conflict of interest.





DME
Advisors and its affiliates may also manage accounts whose advisory fee
schedules, investment objectives and policies differ from ours, which may cause
DME Advisors and its affiliates to effect trading in one account that may have
an adverse effect on another account, including ours. We are not entitled to
inspect the trading records of DME Advisors, or its principals, that are not
related to our company.





Our
investment portfolio may be concentrated in a few large positions which could
result in large losses.





Our
investment guidelines provide that DME Advisors may commit up to 20% of our
assets under management to any one investment. Accordingly, from time to time we
may hold a few, relatively large security positions in relation to our capital.
As of December 31, 2009, we were invested in approximately 100 equity and debt
securities and the largest five long and short positions comprised an aggregate
of 38% and 20% respectively, of our investment portfolio. Since our investment
portfolio may not be widely diversified, it may be subject to more rapid changes
in value than would be the case if the investment portfolio were required to
maintain a wide diversification among companies, securities and types of
securities.





We
are exposed to credit risk primarily from the possibility that counterparties
may default on their obligations to us.





We are
exposed to credit risk primarily from the possibility that counterparties may
default on their obligations to us. The amount of the maximum exposure to credit
risk is indicated by the carrying value of our financial assets. In addition, we
hold the securities of our investment portfolio with several prime brokers and
have credit risk from the possibility that one or more of them may default on
their obligations to us. Other than our investment in derivative contracts and
corporate debt, if any, and the fact that our investments are held by prime
brokers and custodians on our behalf, we have no significant concentrations of
credit risk.







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Issuers
or borrowers whose securities or debt we hold, customers, reinsurers, clearing
agents, exchanges, clearing houses and other financial intermediaries and
guarantors may default on their obligations to us due to bankruptcy, insolvency,
lack of liquidity, adverse economic conditions, operational failure, fraud or
other reasons. Such defaults could have a significant and negative effect on our
results of operations, financial condition and cash flows. Additionally, the
underlying assets supporting our financial contracts may deteriorate
causing these securities to incur losses.





DME
Advisors may trade on margin and use other forms of financial leverage, which
could potentially adversely affect our revenues.





Our
investment guidelines provide DME Advisors with the ability to trade on margin
and use other forms of financial leverage. Fluctuations in the market value of
our investment portfolio could have a disproportionately large effect in
relation to our capital. Any event which may adversely affect the value of
positions we hold could significantly negatively affect the net asset value of
our investment portfolio and thus our results of operations.





DME
Advisors may effectuate short sales that subject us to unlimited loss
potential.





DME
Advisors may enter into transactions in which it sells a security it does not
own, which we refer to as a short sale, in anticipation of a decline in the
market value of the security. Short sales for our account theoretically will
involve unlimited loss potential since the market price of securities sold short
may continuously increase. Under adverse market conditions, DME Advisors might
have difficulty purchasing securities to meet short sale delivery obligations
and may have to cover shorts sales at suboptimal prices.





DME
Advisors may transact in derivative instruments, which may increase the risk of
our investment portfolio.





Derivative
instruments, or derivatives, include futures, options, swaps, structured
securities and other instruments and contracts that derive their value from one
or more underlying securities, financial benchmarks, currencies, commodities or
indices. There are a number of risks associated with derivatives trading.
Because many derivatives are leveraged, and thus provide significantly more
market exposure than the money paid or deposited when the transaction is entered
into, a relatively small adverse market movement may result in the loss of a
substantial portion of or the entire investment, and may potentially expose us
to a loss exceeding the original amount invested. Derivatives may also expose us
to liquidity and counterparty risk. There may not be a liquid market within
which to close or dispose of outstanding derivatives contracts. In the event of
the counterparty’s default, we will generally only rank as an unsecured creditor
and risk the loss of all or a portion of the amounts we are contractually
entitled to receive.





The
compensation arrangements of DME Advisors may create an incentive to effect
transactions that are risky or speculative.





Pursuant
to the advisory agreement with DME Advisors, we are obligated to pay DME
Advisors:





•
            a
      1.5% annual management fee, regardless of the performance of our
      investment account, payable monthly based on net assets of our investment
      account, excluding assets, if any, held in Regulation 114 Trusts;
      and





•
            performance
      compensation based on the appreciation in the value of our investment
      account equal to 20% of net profits calculated per annum, subject to a
      loss carry forward provision.





The loss
carry forward provision allows DME Advisors to earn reduced incentive
compensation of 10% of profits in any year subsequent to the year in which our
investment account managed by DME Advisors incurs a loss, until all losses are
recouped and an additional amount equal to 150% of the loss is
earned.





While the
performance compensation arrangement provides that losses will be carried
forward as an offset against net profits in subsequent periods, DME Advisors
generally will not otherwise be penalized for realized losses or decreases in
the value of our portfolio. These performance compensation arrangements may
create an incentive for DME Advisors to engage in transactions that focus on the
potential for short-term gains rather than long-term growth or that are
particularly risky or speculative.







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DME
Advisors' representatives' service on boards and committees may place trading
restrictions on our investments and may subject us to indemnification
liability.





DME
Advisors may from time to time place its or its affiliates’ representatives on
creditors’ committees and/or boards of certain companies in which we have
invested. While such representation may enable DME Advisors to enhance the sale
value of our investments, it may also place trading restrictions on our
investments and may subject us to indemnification liability. The advisory
agreement provides for the indemnification of DME Advisors or any other person
designated by DME Advisors for claims arising from such board
representation.





From
March 31, 2006 until March 7, 2007, David Einhorn, the Chairman of our Board of
Directors, was a director of New Century Financial Corp., or New Century, a
subprime mortgage lender that filed for bankruptcy protection under Chapter 11
of the U.S. Bankruptcy Code on April 2, 2007. Each of New Century's directors,
including Mr. Einhorn, has been named as a defendant in a consolidated
shareholder lawsuit. If Mr. Einhorn were held liable with respect to any claims
relating to or arising out of New Century's bankruptcy filing or the shareholder
lawsuit, and if such claims were not fully covered by New Century's director and
officer insurance coverage or indemnification by New Century, then under the
advisory agreement we may have to indemnify him for certain losses arising from
such claims. We do not believe that our indemnification obligations, if any,
relating to Mr. Einhorn's former membership on the board of directors of New
Century would have a material adverse effect on our business.





As of
December 31, 2009, representatives of DME Advisors sat on the board of directors
of each of BioFuel Energy Corp. and Einstein Noah Restaurant Group, both of
whose securities are publicly traded, as well as Ark Real Estate Partners
LP, a privately-held company. As of December 31, 2009, our portfolio included
investments in each of these companies.





The
ability to use ‘‘soft dollars’’ may provide DME Advisors with an incentive to
select certain brokers that may take into account benefits to be received by DME
Advisors.





DME
Advisors is entitled to use so-called ‘‘soft dollars’’ generated by commissions
paid in connection with transactions for our investment portfolio to pay for
certain of DME Advisors' operating and overhead costs, including the payment of
all or a portion of its costs and expenses of operation. ‘‘Soft dollars’’ are a
means of paying brokerage firms for their services through commission revenue,
rather than through direct payments. DME Advisors' right to use soft dollars may
give DME Advisors an incentive to select brokers or dealers for our
transactions, or to negotiate commission rates or other execution terms, in a
manner that takes into account the soft dollar benefits received by DME Advisors
rather than giving exclusive consideration to the interests of our investment
portfolio and, accordingly, may create a conflict.





The
advisory agreement has limited termination provisions.





The
advisory agreement has limited termination provisions which restrict our ability
to manage our investment portfolio outside of DME Advisors. Because the advisory
agreement contains exclusivity and limited termination provisions, we are unable
to use investment managers other than DME Advisors for so long as the agreement
is in effect. The advisory agreement term is January 1, 2008 through December
31, 2010 and will automatically renew for successive three-year terms unless we
or DME Advisors notify the other party at least 90 days prior to the end of the
current term of its desire to terminate. We may terminate the advisory agreement
prior to the expiration of its term only ‘‘for cause,’’ which is defined
as:





•
            a
      material violation of applicable law relating to DME Advisors' advisory
      business;





•
            DME
      Advisors' gross negligence, willful misconduct or reckless disregard of
      its obligations under the advisory
agreement;





•
            a
      material breach by DME Advisors of our investment guidelines that is not
      cured within a 15-day period; or





•
            a
      material breach by DME Advisors' of its obligations to return and deliver
      assets as we may request.





If we
become dissatisfied with the results of the investment performance of DME
Advisors, we will be unable to hire new investment managers until the advisory
agreement expires by its terms or is terminated for cause.





Certain
of our investments may have limited liquidity and lack valuation data, which
could create a conflict of interest.





Our
investment guidelines provide DME Advisors with the flexibility to invest in
certain securities with limited liquidity or no public market. This lack of
liquidity may adversely affect the ability of DME Advisors to execute trade
orders at desired prices and may impact our ability to fulfill our payment
obligations. To the extent that DME Advisors invests in securities or
instruments for which market quotations are not readily available, under the
terms of the advisory agreement the valuation of such securities and instruments
for purposes of compensation to DME Advisors will be determined by DME Advisors,
whose determination, subject to audit verification, will be conclusive and
binding in the absence of bad faith or manifest error. Because the advisory
agreement gives DME Advisors the power to determine the value of securities with
no readily discernable market value, and because the calculation of DME
Advisors' fee is based on the value of the investment account, a conflict may
exist or arise.







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 Table of contents




Increased
regulation or scrutiny of alternative investment advisors may affect DME
Advisors’ ability to manage our investment portfolio or affect our business
reputation.





Non-traditional
investment advisors that pursue investment strategies like ours, which involve
the shorting of securities and the use of derivatives and leverage to enhance
returns and which we refer to as alternative investment strategies, have
recently come under increased scrutiny by regulatory officials and have been the
subject of proposals for new regulation and oversight.





On
October 27, 2009, the House Financial Services Committee approved an amended
version of the Private Fund Investment Advisers Registration Act of 2009 for
progression to the floor of the House of Representatives (the “Registration
Act”). The Registration Act would, if enacted, require many investment advisors
to register with the Securities and Exchange Commission (the “SEC”)
under the Investment Advisers Act of 1940. The Registration Act or other
potential legislation relating to the regulation of investment advisors, if
enacted, could adversely impact DME Advisors’ ability to manage our investment
portfolio or its ability to manage our portfolio pursuant to our existing
investment strategy, which could cause us to alter our existing investment
strategy and could significantly and negatively affect our business and results
of operations. In addition, adverse publicity regarding alternative investment
strategies generally, or DME Advisors or its affiliates specifically, could
negatively affect our business reputation and attractiveness as a counterparty
to brokers and clients.




Short
sale transactions have been subject to increased regulatory scrutiny, including
the imposition of restrictions on short selling certain securities and reporting
requirements. Our ability to execute a short selling strategy may be
materially adversely impacted by temporary and/or new permanent rules,
interpretations, prohibitions, and restrictions adopted in response to these
adverse market events.  Temporary restrictions and/or prohibitions on
short selling activity may be imposed by regulatory authorities with little or
no advance notice and may impact prior and future trading activities of our
investment portfolio. Additionally, the SEC, its non-U.S. counterparts, other
governmental authorities and/or self-regulatory organizations may at any time
promulgate permanent rules or interpretations consistent with such temporary
restrictions or that impose additional or different permanent or temporary
limitations or prohibitions. The SEC might impose different limitations
and/or prohibitions on short selling from those imposed by various non-U.S.
regulatory authorities.  These different regulations, rules or
interpretations might have different effective periods.




Regulatory
authorities may from time-to-time impose restrictions that adversely affect our
ability to borrow certain securities in connection with short sale
transactions. In addition, traditional lenders of securities might be less
likely to lend securities under certain market conditions. As a result, we
may not be able to effectively pursue a short selling strategy due to a limited
supply of securities available for borrowing. We may also incur additional
costs in connection with short sale transactions, including in the event that
they are required to enter into a borrowing arrangement in advance of any short
sales. Moreover, the ability to continue to borrow a security is not
guaranteed and we are subject to strict delivery requirements.  The
inability to deliver securities within the required time frame may subject us to
mandatory close out by the executing broker-dealer. A mandatory close out
may subject us to unintended costs and losses. Certain action or inaction
by third parties, such as executing broker-dealers or clearing broker-dealers,
may materially impact our ability to effect short sale
transactions.




We
may invest in securities based outside the United States which may be riskier
than securities of United States issuers.





Under our
investment guidelines, DME Advisors may invest in securities of issuers
organized or based outside the United States. These investments may be subject
to a variety of risks and other special considerations not affecting securities
of U.S. issuers. Many foreign securities markets are not as developed or
efficient as those in the United States. Securities of some foreign issuers are
less liquid and more volatile than securities of comparable U.S. issuers.
Similarly, volume and liquidity in many foreign securities markets are less than
in the United States and, at times, price volatility can be greater than in the
United States. Non-U.S. issuers may be subject to less stringent financial
reporting and informational disclosure standards, practices and requirements
than those applicable to U.S. issuers.





Risks
Relating to our Class A Ordinary Shares





A
shareholder may be required to sell its Class A ordinary shares.





Our Third
Amended and Restated Memorandum and Articles of Association, or Articles,
provide that we have the option, but not the obligation, to require a
shareholder to sell its Class A ordinary shares for their fair market value to
us, to other shareholders or to third parties if our Board of Directors
determines that ownership of our Class A ordinary shares by such shareholder may
result in adverse tax, regulatory or legal consequences to us, any of our
subsidiaries or any of our shareholders and that such sale is necessary to avoid
or cure such adverse consequences.






27
 Table of contents




Provisions
of our Articles, the Companies Law of the Cayman Islands and our corporate
structure may each impede a takeover, which could adversely affect the value of
our Class A ordinary shares.
 
 Our
Articles contain certain provisions that could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our
shareholders. Our Articles provide that a director may only be removed for
"Cause" as defined in the Articles, upon the affirmative vote of not less than
50% of our issued and outstanding Class A ordinary shares.
 
 Our
Articles permit our Board of Directors to issue preferred shares from time to
time, with such rights and preferences as they consider appropriate. Our Board
of Directors may authorize the issuance of preferred shares with terms and
conditions and under circumstances that could have an effect of discouraging a
takeover or other transaction, deny shareholders the receipt of a premium on
their Class A ordinary shares in the event of a tender or other offer for Class
A ordinary shares and have a depressive effect on the market price of the Class
A ordinary shares.
 
 As
compared to mergers under corporate law in the United States, it may be
more difficult to consummate a merger of two or more entities in the Cayman
Islands, even if such transaction would be beneficial to our
shareholders. Cayman Islands law has statutory provisions that provide
for the reconstruction and amalgamation of companies, which are commonly
referred to, in the Cayman Islands, as "schemes of arrangement." Recently,
in May 2009, the Companies Law of the Cayman Islands was amended to create a
process for merger or consolidation of two or more companies that are Cayman
Islands entities or where the surviving entity is a Cayman Islands
company. Prior to the adoption of this new law, the "schemes or
arrangement" was the only vehicle available to consolidate companies
and Cayman Islands law did not provide for mergers as that term is understood
under corporate law in the United States. Although the new merger law
makes it faster and easier for companies to merge or consolidate than the
"schemes of arrangement" statutory provision, the new merger law does not
replace the "schemes of arrangement" provision as the new merger law only
applies to a transaction in which all companies involved are Cayman Islands
companies or where the surviving entity is a Cayman Islands entity. With
respect to all other mergers, the "schemes of arrangement" provision continues
to apply. The procedural and legal requirements necessary to consummate these
transactions under the new merger law or the "schemes of arrangement"
provision may be more rigorous and take longer to complete than the
procedures typically required to consummate a merger in the United
States.
 
 Under
Cayman Islands law and practice, a scheme of arrangement must be approved at a
shareholders’ meeting by each class of shareholders, in each case, by a majority
of the number of holders of each class of an entity's shares that are present
and voting, either in person or by proxy, at such a meeting, which holders must
also represent 75% in value of such class issued that are present and voting,
either in person or by proxy, at such meeting, excluding the shares owned by the
parties to the scheme of arrangement. A merger under the new law requires
approval by the shareholders of each company representing 75% in value of the
shareholders voting together as one class, or where the shares to be issued in
the surviving company will have the same rights and economic value, by a special
resolution, which normally requires, as a minimum, a two thirds majority of
shareholders voting together as one class.
 
 Although
a merger under the new law does not require court approval, the convening of
these meetings and the terms of the amalgamation under the "schemes of
arrangement" must be sanctioned by the Grand Court of the Cayman Islands.
Although there is no requirement to seek the consent of the creditors of the
parties involved in the scheme of arrangement, the Grand Court typically seeks
to ensure that the creditors have consented to the transfer of their liabilities
to the surviving entity or that the scheme of arrangement does not otherwise
materially adversely affect the creditors’ interests. Furthermore, the Grand
Court will only approve a scheme of arrangement if it is satisfied
that:
 
 •
                the
      statutory provisions as to majority vote have been complied
      with;
 
 •
                the
      shareholders have been fairly represented at the meeting in
      question;
 
 •
                the
      scheme of arrangement is such as a businessman would reasonably approve;
      and
 
 •
                the
      scheme of arrangement is not one that would more properly be sanctioned
      under some other provision of the Companies
Law.
 
 In
addition, David Einhorn, Chairman of our Board of Directors, owns all of the
outstanding Class B ordinary shares. As a result, we will not be able to enter
into a scheme of arrangement without the approval of Mr. Einhorn as the holder
of our Class B ordinary shares.






28
 Table of contents





Holders
of Class A ordinary shares may have difficulty obtaining or enforcing a judgment
against us, and they may face difficulties in protecting their interests because
we are incorporated under Cayman Islands law.





Because
we are a Cayman Islands company, there is uncertainty as to whether the Grand
Court of the Cayman Islands would recognize or enforce judgments of United
States courts obtained against us predicated upon the civil liability provisions
of the securities laws of the United States or any state thereof, or be
competent to hear original actions brought in the Cayman Islands against us
predicated upon the securities laws of the United States or any state
thereof.





We are
incorporated as an exempted company limited by shares under the Companies Law. A
significant amount of our assets are located outside of the United States. As a
result, it may be difficult for persons purchasing the Class A ordinary shares
to effect service of process within the United States upon us or to enforce
judgments against us or judgments obtained in U.S. courts predicated upon the
civil liability provisions of the federal securities laws of the United States
or any state of the United States.





Although
there is no statutory enforcement in the Cayman Islands of judgments obtained in
the United States, the courts of the Cayman Islands will, based on the principle
that a judgment by a competent foreign court will impose upon the judgment
debtor an obligation to pay the sum for which judgment has been given, recognize
and enforce a foreign judgment of a court of competent jurisdiction if such
judgment is final, for a liquidated sum, not in respect of taxes or a fine or
penalty if not inconsistent with a Cayman Islands judgment in respect of the
same matters, and was not obtained in a manner, and is not of a kind, the
enforcement of which is contrary to the public policy of the Cayman Islands.
There is doubt, however, as to whether the courts of the Cayman Islands will, in
an original action in the Cayman Islands, recognize or enforce judgments of U.S.
courts predicated upon the civil liability provisions of the securities laws of
the United States or any state of the United States on the grounds that such
provisions are penal in nature.





A Cayman
Islands court may stay proceedings if concurrent proceedings are being brought
elsewhere.





Unlike
many jurisdictions in the United States, Cayman Islands law does not
specifically provide for shareholder appraisal rights on a merger or
consolidation of an entity. This may make it more difficult for shareholders to
assess the value of any consideration they may receive in a merger or
consolidation or to require that the offer or give a shareholder additional
consideration if he believes the consideration offered is
insufficient.





Shareholders
of Cayman Islands exempted companies such as ours have no general rights under
Cayman Islands law to inspect corporate records and accounts. Our directors have
discretion under our Articles to determine whether or not, and under what
conditions, the corporate records may be inspected by shareholders, but are not
obligated to make them available to shareholders. This fact may make it more
difficult for shareholders to obtain the information needed to establish any
facts necessary for a shareholder motion or to solicit proxies from other
shareholders in connection with a proxy contest.





Subject to
limited exceptions, under Cayman Islands law, a minority shareholder may not
bring a derivative action against our Board of Directors.





Provisions
of our Articles may reallocate the voting power of our Class A ordinary shares
and subject holders of Class A ordinary shares to SEC compliance.





In
certain circumstances, the total voting power of our Class A ordinary shares
held by any one person will be reduced to less than 9.9% and the total voting
power of the Class B ordinary shares will be reduced to 9.5% of the total voting
power of the total issued and outstanding ordinary shares. In the event a holder
of our Class A ordinary shares acquires shares representing 9.9% or more of
the total voting power of our total ordinary shares or the Class B ordinary
shares represent more than 9.5% of the total voting power of our total
outstanding shares, there will be an effective reallocation of the voting power
of the Class A ordinary shares or Class B ordinary shares which may cause a
shareholder to acquire 5% or more of the voting power of the total ordinary
shares.







29
 Table of contents




Such a
shareholder may become subject to the reporting and disclosure requirements of
Sections 13(d) and (g) of the Exchange Act. Such a reallocation also may result
in an obligation to amend previous filings made under Section 13(d) or (g) of
the Exchange Act. Under our Articles, we have no obligation to notify
shareholders of any adjustments to their voting power. Shareholders should
consult their own legal counsel regarding the possible reporting requirements
under Section 13 of the Exchange Act.





As of
December 31, 2009, David Einhorn owned 17.2% of the issued and outstanding
ordinary shares, which given that each Class B share is entitled to ten votes,
causes him to exceed the 9.5% limitation imposed on the total voting power of
the Class B ordinary shares. Thus, the voting power held by the Class B ordinary
shares that is in excess of the 9.5% limitation will be reallocated pro rata to
holders of Class A ordinary shares according to their percentage interest in the
company. However, no shareholder will be allocated voting rights that would
cause it to have 9.9% or more of the total voting power of our ordinary shares.
The allocation of the voting power of the Class B ordinary shares to a holder of
Class A ordinary shares will depend upon the total voting power of the Class B
ordinary shares outstanding, as well as the percentage of Class A ordinary
shares held by a shareholder and the other holders of Class A ordinary shares.
Accordingly, we cannot estimate with precision what multiple of a vote per share
a holder of Class A ordinary shares will be allocated as a result of the
anticipated reallocation of voting power of the Class B ordinary
shares.





Risks
Relating to Taxation





We
may become subject to taxation in the Cayman Islands, which would negatively
affect our results.





Under
current Cayman Islands law, we are not obligated to pay any taxes in the Cayman
Islands on either income or capital gains. The Governor-in-Cabinet of Cayman
Islands has granted us an exemption from the imposition of any such tax on us
until February 1, 2025. We cannot be assured that after such date we would not
be subject to any such tax. If we were to become subject to taxation in the
Cayman Islands, our financial condition and results of operations could be
significantly and negatively affected. See ‘‘Certain Cayman Islands Tax
Considerations.’’





Greenlight
Capital Re and/or Greenlight Re may be subject to United States
federal income taxation.





Greenlight
Capital Re and Greenlight Re are incorporated under the laws of the Cayman
Islands and intend to operate in a manner that will not cause us to be treated
as engaging in a trade or business within the United States and will not cause
us to be subject to current United States federal income taxation on Greenlight
Capital Re's and/or Greenlight Re'snet income. However, because there
are no definitive standards provided by the Internal Revenue Code, regulations
or court decisions as to the specific activities that constitute being engaged
in the conduct of a trade or business within the United States, and as any such
determination is essentially factual in nature, we cannot assure you that the
United States Internal Revenue Service, or the IRS, will not successfully assert
that Greenlight Capital Re and/or Greenlight Re are engaged in a trade or
business within the United States.  If the IRS were to
successfully assert that Greenlight
Capital Re and/or Greenlight Rehave been engaged in a trade or business
within the United States in any taxable year, various adverse tax consequences
could result, including the following: Greenlight
Capital Re and/or Greenlight Remay become subject to current United
States federal income taxation on its net income from sources within
the United States; Greenlight
Capital Re and/or Greenlight Re may be subject to United States
federal income tax on a portion of its net investment income, regardless of its
source; Greenlight
Capital Re and/or Greenlight Remay not be entitled to deduct certain
expenses that would otherwise be deductible from the income subject to United
States taxation; and Greenlight
Capital Re and/or Greenlight Re may be subject to United States branch
profits tax on profits deemed to have been distributed out of the United
States.





United
States persons who own Class A ordinary shares may be subject to United States
federal income taxation on our undistributed earnings and may recognize ordinary
income upon disposition of Class A ordinary shares.





Passive Foreign Investment
Company. Significant potential adverse United States federal income tax
consequences generally apply to any United States person who owns shares in a
passive foreign investment company, or a PFIC. We believe that each of
Greenlight Capital Re and Greenlight Re was a PFIC in 2006, 2005 and 2004. We do
not believe, although we cannot assure you, that either of Greenlight Capital Re
or Greenlight Re were a PFIC since 2007. We cannot provide assurance that either
Greenlight Capital Re or Greenlight Re will not be a PFIC in any future taxable
year.





In
general, either of Greenlight Capital Re or Greenlight Re would be a PFIC for a
taxable year if either (i) 75% or more of its income constitutes ‘‘passive
income’’ or (ii) 50% or more of its assets produce ‘‘passive income.’’ Passive
income generally includes interest, dividends and other investment income but
does not include income derived in the active conduct of an insurance business
by a corporation predominantly engaged in an insurance business. This exception
for insurance companies is intended to ensure that a bona fide insurance
entity’s income is not treated as passive income, except to the extent such
income is attributable to financial reserves in excess of the reasonable needs
of the insurance business. We believe that we are currently operating and intend
to continue operating our business with financial reserves at a level that
should not cause us to be deemed PFICs, although we cannot assure you the IRS
will not successfully challenge this conclusion. If we are unable to underwrite
sufficient amount of risks, either of Greenlight Capital Re or Greenlight Re may
become a PFIC.







30
 Table of contents




In
addition, sufficient risk must be transferred under an insurance entity’s
contracts with its insureds in order to qualify for the insurance exception.
Whether our insurance contracts possess adequate risk transfer for purposes of
determining whether income under our contracts is insurance income, and whether
we are predominantly engaged in the insurance business, are subjective in nature
and there is very little authority on these issues. However, because we are and
may continue to be engaged in certain structured risk and other non-traditional
reinsurance markets, we cannot assure you that the IRS will not successfully
challenge the level of risk transfer under our reinsurance contracts for
purposes of the insurance company exception.  We cannot assure you
that the IRS will not successfully challenge our interpretation of the scope of
the active insurance company exception and our qualification for the exception.
Further, the IRS may issue regulatory or other guidance that causes us to fail
to qualify for the active insurance company exception on a prospective or
retroactive basis. Therefore, we cannot assure you that we will satisfy the
exception for insurance companies and will not be treated as PFICs currently or
in the future.





Controlled Foreign
Corporation. United States persons who, directly or indirectly or through
attribution rules, own 10% or more of our Class A ordinary shares, which we
refer to as United States 10% shareholders, may be subject to the controlled
foreign corporation, or CFC, rules. Under the CFC rules, each United States 10%
shareholder must annually include his pro rata share of the CFC’s ‘‘subpart F
income,’’ even if no distributions are made. In general, a foreign insurance
company will be treated as a CFC only if United States 10% shareholders
collectively own more than 25% of the total combined voting power or total value
of the entity’s shares for an uninterrupted period of 30 days or more during any
year. We believe that the dispersion of our Class A ordinary shares among
holders and the restrictions placed on transfer, issuance or repurchase of our
Class A ordinary shares (including the ownership limitations described below),
will generally prevent shareholders who acquire Class A ordinary shares from
being United States 10% shareholders. In addition, because our Articles prevent
any person from holding 9.9% or more of the total combined voting power of our
shares (whether held directly, indirectly, or constructively), unless such
provision is waived by the unanimous consent of our Board of Directors, we
believe no persons holding Class A ordinary shares should be viewed as United
States 10% shareholders of a CFC for purposes of the CFC rules. We cannot assure
you, however, that these rules will not apply to you. If you are a United States
person we strongly urge you to consult your own tax advisor concerning the CFC
rules.





Related Person Insurance Income.If:





•
            our
      gross income attributable to insurance or reinsurance policies where the
      direct or indirect insureds are our direct or indirect United States
      shareholders or persons related to such United States shareholders equals
      or exceeds 20% of our gross insurance income in any taxable year;
      and





•
            direct
      or indirect insureds and persons related to such insureds owned directly
      or indirectly 20% or more of the voting power or value of our
      stock,





a United
States person who owns Class A ordinary shares directly or indirectly on the
last day of the taxable year would most likely be required to include their pro
rata share of our related person insurance income for the taxable year in their
income. This amount would be determined as if such related person insurance
income were distributed proportionally to United States persons at that date. We
do not expect that we will knowingly enter into reinsurance agreements in which,
in the aggregate, the direct or indirect insureds are, or are related to, owners
of 20% or more of the Class A ordinary shares. We do not believe that the 20%
gross insurance income threshold will be met. However, we cannot assure you that
this is or will continue to be the case. Consequently, we cannot assure you that
a person who is a direct or indirect United States shareholder will not be
required to include amounts in its income in respect of related person insurance
income in any taxable year.





If a United
States shareholder is treated as disposing of shares in a foreign insurance
corporation that has related person insurance income and in which United States
persons own 25% or more of the voting power or value of the entity’s capital
stock, any gain from the disposition will generally be treated as a dividend to
the extent of the United States shareholder’s portion of the corporation’s
undistributed earnings and profits that were accumulated during the period that
the United States shareholder owned the shares. In addition, the shareholder
will be required to comply with certain reporting requirements, regardless of
the amount of shares owned by the direct or indirect United States shareholder.
Although not free from doubt, we believe these rules should not apply to
dispositions of Class A ordinary shares because Greenlight Re is not directly
engaged in the insurance business and because proposed United States Treasury
regulations applicable to this situation appear to apply only in the case of
shares of corporations that are directly engaged in the insurance business. We
cannot assure you, however, that the IRS will interpret the proposed regulations
in this manner or that the proposed regulations will not be promulgated in final
form in a manner that would cause these rules to apply to dispositions of Class
A ordinary shares.







31
 Table of contents




United
States tax-exempt organizations who own Class A ordinary shares may recognize
unrelated business taxable income.





If you
are a United States tax-exempt organization you may recognize unrelated business
taxable income if a portion of our subpart F insurance income is allocated to
you. In general, subpart F insurance income will be allocated to you if we are a
CFC as discussed above and you are a United States 10% shareholder or there is
related person insurance income and certain exceptions do not apply. Although we
do not believe that any United States persons will be allocated subpart F
insurance income, we cannot assure you that this will be the case. If you are a
United States tax-exempt organization, we advise you to consult your own tax
advisor regarding the risk of recognizing unrelated business taxable
income.





Change
in United States tax laws may be retroactive and could subject us, and/or United
States persons who own Class A ordinary shares to United States income taxation
on our undistributed earnings.





The tax
laws and interpretations regarding whether an entity is engaged in a United
States trade or business, is a CFC, has related party insurance income or is a
PFIC are subject to change, possibly on a retroactive basis. There are currently
no regulations regarding the application of the passive foreign investment
company rules to an insurance company and the regulations regarding related
party insurance income are still in proposed form. New regulations or
pronouncements interpreting or clarifying such rules may be forthcoming from the
IRS. We are not able to predict if, when or in what form such guidance will be
provided and whether such guidance will have a retroactive effect.





The impact of the
initiative of the Organization for Economic Cooperation and Development to
eliminate harmful tax practices is uncertain and could adversely affect our tax
status in the Cayman Islands.




The
Organization for Economic Cooperation and Development, or OECD, has published
reports and launched a global dialogue among member and non-member countries on
measures to limit harmful tax competition. These measures are largely directed
at counteracting the effects of tax havens and preferential tax regimes in
countries around the world. Whilst the Cayman Islands was added to the list of
jurisdictions that have substantially implemented the internationally agreed tax
standard in August 2009 we are not able to predict if additional requirements
will be imposed and if so whether changes arising from such additional
requirements will subject us to additional taxes.





ITEM 1B.   UNRESOLVED STAFF COMMENTS





None.





ITEM 2.    PROPERTIES





On July
9, 2008, we entered into an operating lease agreement for new office space in
Grand Cayman, Cayman Islands which expires on June 30, 2018. We occupied the new
office space in August 2009. Previously, we leased and occupied office space in
Grand Cayman under an operating lease that expires on August 31, 2010. We do not
expect to renew this lease upon it’s expiration in August 2010. We believe that
for the foreseeable future the new office space will be sufficient for
conducting our operations.





ITEM 3.   LEGAL PROCEEDINGS





We are
not party to any pending or threatened material litigation or arbitration and
are not currently aware of any pending or threatened litigation. We anticipate
that, similar to the rest of the reinsurance industry, we will be subject to
litigation and arbitration in the ordinary course of business.





ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS





No
matters were submitted to a vote of shareholders during the fourth quarter of
the fiscal year ended December 31, 2009.





32
 Table of contents





PART II





ITEM 5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES





Market
Information





Our Class
A ordinary shares began publicly trading on the Nasdaq Global Select Market on
May 24, 2007 under the symbol ‘‘GLRE’’. The following table sets forth, for the
periods indicated, the high and low reported sale price per share of our Class A
ordinary shares on the Nasdaq Global Select Market.





2009
            
            
            2008High
            
            
            Low
            
            
            High
            
            
            LowFirst
      Quarter
            
            $
            17.26
            
            
            $
            11.32
            
            
            $
            21.46
            
            
            $
            16.30Second
      Quarter
            
            $
            18.34
            
            
            $
            14.09
            
            
            $
            23.85
            
            
            $
            16.75Third
      Quarter
            
            $
            19.45
            
            
            $
            16.51
            
            
            $
            23.50
            
            
            $
            15.80Fourth
      Quarter
            
            $
            25.20
            
            
            $
            18.24
            
            
            $
            19.00
            
            
            $
            8.67





Holders





As of
February 1, 2010, the number of holders of record of our Class A ordinary shares
was approximately 30,
not including beneficial owners of shares registered in nominee or street name,
who represent approximately 95% of the Class A ordinary shares.





Dividends





We have
not paid any cash dividends on our Class A ordinary shares or Class B ordinary
shares, or collectively, ordinary shares.





We
currently do not intend to declare and pay dividends on our ordinary shares.
However, if we decide to pay dividends, we cannot assure you sufficient cash
will be available to pay such dividends. In addition, a letter of credit
facility prohibits us from paying dividends during an event of default as
defined in the letter of credit agreement. Our future dividend policy will also
depend on the requirements of any future financing agreements to which we may be
a party and other factors considered relevant by our Board of Directors, such as
our results of operations and cash flows, our financial position and capital
requirements, general business conditions, rating agency guidelines, legal, tax,
regulatory and any contractual restrictions on the payment of dividends.
Further, any future declaration and payment of dividends is discretionary and
our Board of Directors may at any time modify or revoke our dividend policy on
our ordinary shares. Finally, our ability to pay dividends also depends on the
ability of our subsidiaries to pay dividends to us. Although Greenlight Capital
Re is not subject to any significant legal prohibitions on the payment of
dividends, Greenlight Re is subject to Cayman Islands regulatory constraints
that affect its ability to pay dividends and include a minimum net worth
requirement. Currently the minimum statutory net worth requirement for
Greenlight Re is $120,000, but subject to the discretion of CIMA. As of December
31, 2009, Greenlight Re exceeded the minimum statutory capital requirement by
$730.0 million. Any dividends we pay will be declared and paid in U.S.
dollars.




Performance
Graph





Presented
below is a line graph comparing the yearly percentage change in the cumulative
total shareholder return on our Class A ordinary shares from May 24, 2007 (the
date on which our Class A ordinary shares were first listed on the Nasdaq Global
Select Market) through December 31, 2009 against the total return index for the
Russell 2000 Index, or RUT, and the A.M. Best’s Global Reinsurance Index, or
AMBGR, for the same period. The performance graph assumes $100 invested on May
24, 2007 in the ordinary shares of Greenlight Capital Re, the RUT and the AMBGR.
The performance graph also assumes that all dividends are
reinvested.













Purchases
of Equity Securities by the Issuer and Affiliated Purchasers





On August 5,
2008 the Company’s Board of Directors adopted a share repurchase plan
authorizing the Company to purchase up to 2.0 million Class A ordinary
shares. Shares may be purchased in the open market or through privately
negotiated transactions. The plan, which expires on June 30, 2011, does not
require the Company to repurchase any specific number of shares and may be
modified, suspended or terminated at any time without prior notice. No
repurchases of our Class A ordinary shares were made during the three months
ended December 31, 2009. As of December 31, 2009, 1,771,100 shares remained
authorized for repurchase under the plan.





33
 Table of contents




ITEM 6.
            SELECTED
      FINANCIAL DATA





The
following table sets forth our selected historical consolidated statement of
income data for the fiscal years ended December 31, 2009, 2008, 2007, 2006 and
2005, as well as our selected consolidated balance sheet data as of December 31,
2009, 2008, 2007, 2006, and 2005, which are derived from our audited
consolidated financial statements. The audited consolidated financial statements
are prepared in accordance with U.S. GAAP and have been audited by BDO Seidman,
LLP, an independent registered public accounting firm. Since we commenced
underwriting business in April 2006 and did not write any reinsurance contracts
in 2005 and 2004, comparisons to periods prior to April 2006 may not be
meaningful.





These
historic results are not necessarily indicative of results for any future
period. You should read the following selected financial data in conjunction
with our consolidated financial statements and related notes thereto contained
in Item 8 ‘‘Financial Statements and Supplementary Data’’ and Item 7
‘‘Management’s Discussion and Analysis of Financial Condition and Results of
Operations’’ included in this filing and all other information appearing
elsewhere or incorporated into this filing by reference.





Year
      Ended December 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005($ in thousands, except per share and
      share amounts)Summary
      Consolidated Statement of Income DataGross
      premiums written
            $
            258,818
            
            
            $
            162,395
            
            
            $
            127,131
            
            
            $
            74,151
            
            
            $
            —Net
      premiums earned
            
            214,680
            
            
            
            114,949
            
            
            
            98,047
            
            
            
            26,605
            
            
            
            —Net
      investment income (loss)
            
            199,861
            
            
            
            (126,126
            )
            
            
            27,642
            
            
            
            58,509
            
            
            
            27,934Loss
      and loss adjustment expenses incurred, net
            
            119,045
            
            
            
            55,485
            
            
            
            39,507
            
            
            
            9,671
            
            
            
            —Acquisition
      costs, net
            
            69,232
            
            
            
            41,649
            
            
            
            38,939
            
            
            
            10,415
            
            
            
            —General
      and administrative expenses
            
            18,994
            
            
            
            13,756
            
            
            
            11,918
            
            
            
            9,063
            
            
            
            2,992Net
      income (loss)
            $
            209,545
            
            
            $
            (120,904
            )
            
            $
            35,325
            
            
            $
            56,999
            
            
            $
            26,265Earnings (Loss) Per Share Data(1)Basic
            $
            5.78
            
            
            $
            (3.36
            )
            
            $
            1.16
            
            
            $
            2.67
            
            
            $
            1.24Diluted
            
            5.71
            
            
            
            (3.36
            )
            
            
            1.14
            
            
            
            2.66
            
            
            
            1.24Weighted
      average number of ordinary shares used in the determination
      ofBasic
            
            36,230,501
            
            
            
            35,970,479
            
            
            
            30,405,007
            
            
            
            21,366,140
            
            
            
            21,226,868Diluted
            
            36,723,552
            
            
            
            35,970,479
            
            
            
            30,866,016
            
            
            
            21,457,443
            
            
            
            21,265,801Selected
      Ratios (based on U.S. GAAP Consolidated Statement of Income
      data)Loss
      ratio (2)
            
            55.4
            %
            
            
            48.3
            %
            
            
            40.3
            %
            
            
            36.4
            %
            
            
            —Acquisition
      cost ratio (3)
            
            32.3
            %
            
            
            36.2
            %
            
            
            39.7
            %
            
            
            39.1
            %
            
            
            —Internal
      expense ratio (4)
            
            8.8
            %
            
            
            12.0
            %
            
            
            12.2
            %
            
            
            34.1
            %
            
            
            —Combined
      ratio (5)
            
            96.5
            %
            
            
            96.5
            %
            
            
            92.2
            %
            
            
            109.6
            %
            
            
            —








34
 Table of contents




As of December 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005($ in thousands, except per share and
      share amounts)Selected
      Consolidated Balance Sheet Data:Total
      investments
            $
            830,600
            
            
            $
            493,966
            
            
            $
            590,536
            
            
            $
            243,522
            
            
            $
            219,211Cash
      and cash equivalents
            
            31,717
            
            
            
            94,144
            
            
            
            64,192
            
            
            
            82,704
            
            
            
            7,218Restricted
      cash and cash equivalents
            
            590,871
            
            
            
            248,330
            
            
            
            371,607
            
            
            
            154,720
            
            
            
            99,719Total
      assets
            
            1,624,216
            
            
            
            958,005
            
            
            
            1,094,145
            
            
            
            518,608
            
            
            
            327,935Loss
      and loss adjustment expense reserves
            
            137,360
            
            
            
            81,425
            
            
            
            42,377
            
            
            
            4,977
            
            
            
            —Unearned
      premium reserves
            
            118,899
            
            
            
            88,926
            
            
            
            59,298
            
            
            
            47,546
            
            
            
            —Total
      liabilities
            
            894,978
            
            
            
            466,565
            
            
            
            488,563
            
            
            
            206,441
            
            
            
            96,113Total
      shareholders' equity
            
            729,238
            
            
            
            491,440
            
            
            
            605,582
            
            
            
            312,167
            
            
            
            231,822Adjusted
      book value (6)
            $
            698,641
            
            
            $
            485,382
            
            
            $
            605,582
            
            
            $
            312,167
            
            
            $
            248,034Diluted
      adjusted book value (7)
            $
            715,264
            
            
            $
            500,108
            
            
            $
            623,460
            
            
            $
            329,631
            
            
            $
            257,929Ordinary
      shares outstanding:Basic
            
            36,318,842
            
            
            
            36,036,685
            
            
            
            36,102,736
            
            
            
            21,557,228
            
            
            
            21,231,666Diluted
      (8)
            
            37,740,182
            
            
            
            37,357,685
            
            
            
            37,631,736
            
            
            
            23,094,900
            
            
            
            22,175,000Per
      Share Data:Basic
      adjusted book value per share (9)
            $
            19.24
            
            
            $
            13.47
            
            
            $
            16.77
            
            
            $
            14.48
            
            
            $
            11.68Fully
      diluted adjusted book value per share (10)
            
            18.95
            
            
            
            13.39
            
            
            
            16.57
            
            
            
            14.27
            
            
            
            11.63








(1)
            Basic
      earnings per share is calculated by dividing net income by the weighted
      average number of common shares and participating securities outstanding
      for the period. Diluted earnings per share is calculated by taking into
      account the effects of exercising all dilutive stock options. Unvested
      stock awards which contain non-forfeitable rights to dividends or dividend
      equivalents, whether paid or unpaid (referred to as “participating
      securities”) are included in the number of shares outstanding for both
      basic and diluted earnings per share calculations. In the event of a net
      loss, the participating securities are excluded from both basic and
      diluted earnings per share.





(2)
            The
      loss ratio is calculated by dividing net loss and loss adjustment expenses
      incurred by net premiums earned.





(3)
            The
      acquisition cost ratio is calculated by dividing net acquisition costs by
      net premiums earned.





(4)
            The
      internal expense ratio is calculated by dividing general and
      administrative expenses by net premiums
earned.





(5)
            The
      combined ratio is the sum of the loss ratio, acquisition cost ratio and
      the internal expense ratio.





(6)
            Adjusted
      book value equals total shareholders’ equity minus non-controlling
      interest in joint venture with DME Advisors entered into effective
      January 1, 2008. In addition, adjusted book value for the year ended
      December 31, 2005 includes the aggregate principal outstanding on the
      Greenlight Capital Investors, LLC, or GCI, promissory note pursuant to the
      Securities Purchase Agreement, dated April 11, 2004, between us and GCI,
      which was fully repaid on December 6,
  2006.




(7)
            Diluted adjusted
      book value is the adjusted book value plus the proceeds from the exercise
      of in-the-money options issued and outstanding at year
  end.




(8)
            Diluted number of
      shares outstanding is the sum of basic shares outstanding and the
      in-the-money options issued and outstanding at year
  end.




(9)
            Basic
      adjusted book value per share is calculated by dividing adjusted book
      value by the number of shares and share equivalents issued and
      outstanding at year end.




(10)
            Fully
      diluted adjusted book value per share is calculated by dividing
      the diluted adjusted book value by the diluted number of
      shares outstanding at year
end.








35
 Table of contents




ITEM 7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





The
following is a discussion and analysis of our results of operations for the
years ended December 31, 2009, 2008 and 2007 and financial condition as of
December 31, 2009 and 2008. The following discussion should be read in
conjunction with the consolidated financial statements and accompanying notes,
which appear elsewhere in this filing.





General





We are a
Cayman Islands-based specialty property and casualty reinsurer with a
reinsurance and investment strategy that we believe differentiates us from our
competitors. Our goal is to build long-term shareholder value by selectively
offering customized reinsurance solutions, in markets where capacity and
alternatives are limited, that we believe will provide favorable long-term
returns on equity.





We
aim to complement our underwriting results with a non-traditional investment
approach in order to achieve higher rates of return over the long term than
reinsurance companies that employ more traditional, fixed-income investment
strategies. We manage our investment portfolio according to a value-oriented
philosophy, in which we take long positions in perceived undervalued securities
and short positions in perceived overvalued securities.





Because
we have a limited operating history and employ an opportunistic
underwriting philosophy, period-to-period comparisons of our underwriting
results may not be meaningful. In addition, our historical investment results
may not necessarily be indicative of future performance. Due to the nature of
our reinsurance and investment strategies, our operating results will likely
fluctuate from period to period.





Segments





We manage
our business on the basis of one operating segment: property and casualty
reinsurance, in accordance with the qualitative and quantitative criteria
established by United States generally accepted accounting principles (“U.S.
GAAP”). Within the property and casualty reinsurance segment, we analyze our
underwriting operations using two categories:





•
            frequency
      business; and





•
            severity
      business.





Frequency
business is characterized by contracts containing a potentially large number of
smaller losses emanating from multiple events. Clients generally buy this
protection to increase their own underwriting capacity and typically select a
reinsurer based upon the reinsurer’s financial strength and expertise. We expect
the results of frequency business to be less volatile than those of severity
business from period to period due to its greater predictability. We also expect
that over time the profit margins and return on equity for our frequency
business will be lower than those of our severity business.





Severity
business is typically characterized by contracts with the potential for
significant losses emanating from one event or multiple events. Clients
generally buy this protection to remove volatility from their balance sheets
and, accordingly, we expect the results of severity business to be volatile from
period to period. However, over the long term, we also expect that our severity
business will generate higher profit margins and return on equity than those of
our frequency business.





36
 Table of contents


Revenues





We derive
our revenues from two principal sources:





•
            premiums
      from reinsurance on property and casualty business assumed;
      and





•
            income
      from investments.





Premiums
from reinsurance on property and casualty business assumed are directly related
to the number, type and pricing of contracts we write. For financial reporting
purposes, we earn premiums over the contract term, which is typically twelve
months.





Income
from our investments is primarily comprised of interest income, dividends, net
realized and unrealized gains and losses on investment securities. We also
derive interest income from money market funds and notes
receivable.





We may from time to time derive other
income from gains on deposit accounted contracts, fees generated from advisory
services provided by Verdant, and penalty fees relating to early terminations of
contracts.





Expenses





Our
expenses consist primarily of the following:





•
            underwriting
      losses and loss adjustment
expenses;





•
            acquisition
      costs;





•
            investment-related
      expenses; and





•
            general
      and administrative expenses.





Loss and
loss adjustment expenses are a function of the amount and type of reinsurance
contracts we write and of the loss experience of the underlying coverage. As
described below, loss and loss adjustment expenses are based on an actuarial
analysis of the estimated losses, including losses incurred during the period
and changes in estimates from prior periods. Depending on the nature of the
contract, loss and loss adjustment expenses may be paid over a period of
years.





Acquisition
costs consist primarily of brokerage fees, ceding commissions, premium taxes,
profit commissions, letters of credit fees and other direct expenses that
relate to our writing reinsurance contracts. We amortize deferred acquisition
costs over the related contract term.





Investment-related
expenses primarily consist of interest expense on borrowings, dividend expense
on short sales, management fees and performance compensation that we pay to our
investment advisor. We net these expenses against investment income in our
consolidated financial statements.





General
and administrative expenses consist primarily of salaries and benefits and
related costs, including costs associated with our incentive compensation plan,
bonuses and stock compensation expenses. General and administrative
expenses also include professional fees, travel and
entertainment, information technology, rent and other general operating
expenses.





For stock
option expenses, we calculate compensation cost using the Black-Scholes option
pricing model and expense stock options over their vesting period, which is
typically three years.





Critical
Accounting Policies





Our
consolidated financial statements contain certain amounts that are inherently
subjective in nature and have required management to make assumptions and best
estimates to determine reported values. If certain factors, including those
described in ‘‘Risk Factors,’’ cause actual events or results to differ
materially from our underlying assumptions or estimates, there could be a
material adverse effect on our results of operations, financial condition or
liquidity. We believe that the following accounting policies affect the more
significant estimates used in the preparation of our consolidated financial
statements. The descriptions below are summarized and have been simplified for
clarity. A more detailed description of our significant accounting policies as
well as recently issued accounting standards is included
in Note 2 to the consolidated financial statements.





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 Table of contents


Premium
Revenues and Risk Transfer. Our property and casualty reinsurance
premiums are recorded as premiums written at the inception of each contract,
based upon contract terms and information received from ceding companies and
their brokers. For excess of loss reinsurance contracts, premiums are typically
stated as a percentage of the subject premiums written by the client, subject to
a minimum and deposit premium. The minimum and deposit premium is typically
based on an estimate of subject premiums expected to be written by the client
during the contract term. Generally, the minimum and deposit premium is reported
initially as premiums written and adjusted, if necessary, in subsequent periods
once the actual subject premium is known.





For each
quota-share or proportional property and casualty reinsurance contract we
underwrite, our client estimates gross premiums written at inception of the
contract. We generally account for such premiums using our best estimates
and then adjust our estimates based on actual reports provided by our
client and based on our expectations of the industry developments. As the
contract progresses, we monitor actual premiums received in conjunction with
correspondence from the client in order to refine our estimate. Variances from
initial gross premiums written estimates can be greater for quota-share
contracts than for excess of loss contracts. All premiums are earned on a pro
rata basis over the coverage period. Unearned premiums consist of the unexpired
portion of reinsurance provided.





At the
inception of each of our reinsurance contracts, we receive premium estimates
from the client, which, together with historical and industry data, we use to
estimate what we believe will be the ultimate premium payable pursuant to each
such contract. We receive actual premiums written by each client as the client
reports the actual results of the underlying insurance writings to us on a
monthly or quarterly basis (depending on the terms of the contract). We book the
actual premiums written when we receive them from our client. Each reporting
period we estimate the amount of premiums that are written for stub periods that
have not yet been reported. For example, for December year-end we may have to
estimate December premiums ceded under certain contracts since the client may
not be required to report the actual results to us until after we have filed our
financial statements. Typically, premium estimates are only used for
unreported stub periods, which accounts for a small percentage of our reported
premiums written. We believe that estimating premiums written for these stub
periods is standard reinsurance industry practice.




We are
able to confirm the accuracy and completeness of premiums reported by our
clients by either reviewing the client’s statutory filings and/or performing an
audit of the client, as per the terms of the contract. Discrepancies between
premiums being ceded and reported under a contract are, in our experience, rare.
To date, we have not had any material discrepancy in premium being reported by a
client that required a dispute resolution process.




We
account for reinsurance contracts in accordance with U.S. GAAP. Assessing
whether or not a reinsurance contract meets the conditions for risk transfer
requires judgment. The determination of risk transfer is critical to reporting
premiums written and is based, in part, on the use of actuarial and pricing
models and assumptions. If we determine that a reinsurance contract does not
transfer sufficient risk, or if a contract provides retroactive reinsurance
coverage, we use deposit accounting. Any losses on such contracts are
charged to earnings immediately and recorded in the consolidated statements of
income as other expense. Any gains relating to such contracts are deferred and
amortized over the estimated remaining settlement period. All such deferred
gains are included in reinsurance balances payable in the consolidated balance
sheets. Amortized gains are recorded in the consolidated statements of
income as other income.





Investments. Our investments in
debt and equity securities that are classified as “trading securities” are
carried at fair value in accordance with U.S. GAAP. The fair values of the
listed equity and debt investments are derived based on last reported price on
the balance sheet date as reported by a recognized exchange. The fair values of
private debt instruments are generally derived based on the average of multiple
market maker or broker quotes which are considered to be binding. Where quotes
are not available, debt instruments are valued using cash flow models using
assumptions and estimates that may be subjective and
non-observable.





The fair
values of our investments in commodities are based on the commodity’s last
reported price on the balance sheet date as reported by a recognized commodities
exchange. Our other investments in private and unlisted equity securities,
limited partnerships, futures, are all carried at fair value, based on
broker or market maker quotes, or based on management’s assumptions developed
from available information, using the services of our investment advisor. Our
exchange traded option contracts are recorded at fair value based on quoted
prices in active markets. For OTC options and exchange traded options where a
quoted price in an active market is not available, we obtain multiple market
maker quotes to determine the fair values.





For
securities classified as “trading securities,” and “other investments,” any
realized and unrealized gains or losses are determined on the basis of specific
identification method (by reference to cost and amortized cost, as appropriate)
and included in net investment income in the consolidated statements of income.
Prior to January 1, 2008, unrealized gains and losses, if any, on unlisted
securities were included in accumulated other comprehensive income as a separate
component of shareholders’ equity. A decline in market value of a security below
cost that was deemed other than temporary, was previously charged to earnings
and resulted in the establishment of a new cost basis of the security. Effective
January 1, 2008, as a result of adopting topic ASC 825-10-45-3 (Financial
Instruments) we record unrealized gains and losses, if any, on unlisted
securities in net investment income in the consolidated statements of income.
There was no material impact to our results of operations or financial condition
as a result of this change.





38
 Table of contents


Financial
contracts which include total return swaps, credit default swaps, and other
derivative instruments are recorded at their fair value with any unrealized
gains and losses included in net investment income in the consolidated
statements of income. Fair values on total return swaps are based on the
underlying security’s fair value which are obtained from closing prices on a
recognized exchange (for equity swaps), or from market makers or broker quotes.
Fair values for credit default swaps trading in an active market are based on
market maker or broker quotes taking into account credit spreads on identical
contracts. Fair values for other derivative instruments are determined based on
multiple broker or market maker quotes taking into account the liquidity and the
availability of an active market for the derivative.





Loss and Loss
Adjustment Expense Reserves. Our loss and loss adjustment expense
reserves are comprised of:


·
            case
      reserves resulting from claims notified to us by our
    clients;


·
            incurred
      but not reported losses (“IBNR”);
      and


·
            estimated
      loss adjustment expenses.





Case
reserves and IBNR are estimated each reporting period based on a contract by
contract review of all data available to us for each individual
contract.  Each of our reinsurance contracts is unique and the methods
and estimates we use vary depending on the facts and circumstances of each
contract. The resulting total loss reserves, including IBNR, are the sum of each
loss reserve estimated on a contract by contract basis.





We
establish reserves for contracts based on estimates of the ultimate cost of all
losses including losses incurred but not reported, or IBNR. These estimated
ultimate reserves are based on reports received from ceding companies,
historical experience and actuarial estimates. These estimates are periodically
reviewed and adjusted when necessary. Since reserves are estimates, the setting
of appropriate reserves is an inherently uncertain process. Our estimates are
based upon actuarial and statistical projections and on our assessment of
currently available data, predictions of future developments and estimates of
future trends and other factors. The final settlement of losses may vary,
perhaps materially, from the reserves initially established and periodically
adjusted. All adjustments to the estimates are recorded in the period in
which they are determined. Under U.S. GAAP we are not permitted to establish
loss reserves, which include case reserves and IBNR, until the occurrence of an
event which may give rise to a claim. As a result, only loss reserves applicable
to losses incurred up to the reporting date are established, with no allowance
for the establishment of loss reserves to account for expected future loss
events.





For
natural peril exposed business we generally establish loss reserves based on
loss payments and case reserves reported by our clients, when and if received.
We then add to these case reserves our estimates for IBNR. To establish our IBNR
loss estimates, in addition to the loss information and estimates communicated
by ceding companies, we use industry information, knowledge of the business
written and management’s judgment.





For most
of the contracts we write, our risk exposure is limited by the fact that the
contracts have defined limits of liability. Once the loss limit for a contract
has been reached, we have no further exposure to additional losses from that
contract. However, certain contracts, particularly quota share contracts which
relate to first dollar exposure, may not contain aggregate limits.





For all
non-natural peril business, we initially reserve every individual contract to
the expected loss and loss expense ratio that we calculated when we originally
priced the business. In our pricing analysis, we typically utilize a significant
amount of information both from the individual client and from industry data.
Where practical, we compare historic reserving data that we receive from our
client, if any, to publicly-available financial statements of the client in an
effort to identify, confirm and monitor the accuracy and completeness of the
received data.We
require each of our clients to provide loss information for each reporting
period, which, depending on the contract, could be monthly or quarterly. The
loss information required depends on the terms and conditions of each contract
and may include many years of history. Depending on the type of business
underwritten, we are entitled to receive client and industry information on
historical paid losses, incurred losses, number of open claims, number of closed
claims, number of total claims, listings of individual large losses, earned
premiums, policy count, policy limits underwritten, exposure information and
rate change information. We may also receive information by class or
subclass of business. If we do not receive reserving data from a client, we rely
on industry data, as well as the judgment and experience of our underwriters and
actuaries.




We rely
more on client and industry data than our own data to identify unusual
trends requiring changes in reserve estimates. Each reinsurance contract is
different and the degree to which we rely on client data versus our own data
varies greatly from contract to contract. The extent to which we rely on client
data for reserve setting purposes depends upon the availability of historical
loss data from the client and our judgment as to how reliable we believe the
client’s historic loss performance is compared to its current book of business.
We may from time to time supplement client data with industry and competitor
information where we deem appropriate. Where available, we also receive relevant
actuarial reports from the client. We supplement this information with
subjective information on each client, which may include management biographies,
competitor information, meetings with the client, and supplementary industry
research and data.






39
 Table of contents





Generally,
we obtain regular updates of premium and loss related information for the
current period and historical periods, which we utilize to update our initial
expected loss and loss expense ratio. There may be a time lag from when claims
are reported to our client and when our client reports the claims to us. This
time lag may impact our loss reserve estimates from period to period. Client
reports, whether due monthly or quarterly, have set reporting dates of when they
are due to us (for example, fifteen days after month end). As such, the time lag
in the client’s reporting depends upon the terms of the specific contract. The
timing of the reporting requirements is designed so that we receive premium and
loss information as soon as practicable once the client has closed its books.
Accordingly, there should be a very short lag in such reporting. Additionally,
most of our contracts that have the potential for large single event losses have
provisions that such loss notification needs to be received immediately upon the
occurrence of an event.Once we receive this
updated information we use a variety of standard actuarial methods in our
analysis each quarter. Such methods may include:




•
            Paid Loss
      Development Method.We estimate ultimate
      losses by calculating past paid loss development factors and applying them
      to exposure periods with further expected paid loss development. The paid
      loss development method assumes that losses are paid in a consistent
      pattern. It provides an objective test of reported loss projections
      because paid losses contain no reserve estimates. For many coverages,
      claim payments are made very slowly and it may take years for claims to be
      fully reported and settled.





•
            Reported
      Loss Development Method. We estimate ultimate losses by calculating
      past reported loss development factors and applying them to exposure
      periods with further expected reported loss development. Since reported
      losses include payments and case reserves, changes in both of these
      amounts are incorporated in this method. This approach provides a larger
      volume of data to estimate ultimate losses than paid loss methods. Thus,
      reported loss patterns may be less varied than paid loss patterns,
      especially for coverage that have historically been paid out over a long
      period of time but for which claims are reported relatively early and case
      loss reserve estimates have been
established.





•
            Expected
      Loss Ratio Method.We estimate ultimate losses under
      the expected loss ratio method, by multiplying earned premiums by an
      expected loss ratio. We select the expected loss ratio using industry
      data, historical company data and our professional judgment. We use this
      method for lines of business and contracts where there are no historical
      losses or where past loss experience is not
  credible.





•
            Bornhuetter-Ferguson
      Paid Loss Method.We estimate ultimate losses by
      modifying expected loss ratios to the extent paid losses experienced to
      date differ from what would have been expected to have been paid based
      upon the selected paid loss development pattern. This method avoids some
      of the distortions that could result from a large development factor being
      applied to a small base of paid losses to calculate ultimate losses. We
      generally use this method for lines of business and contracts where
      there are limited historical paid
losses.





•
            Bornhuetter-Ferguson
      Reported Loss Method.We estimate ultimate losses by
      modifying expected loss ratios to the extent reported losses experienced
      to date differ from what would have been expected to have been reported
      based upon the selected reported loss development pattern. This method
      avoids some of the distortions that could result from a large development
      factor being applied to a small base of reported losses to calculate
      ultimate losses. We generally use this method for lines of
      business and contracts where there are limited historical reported
      losses.





In
addition, we supplement our analysis with other reserving methodologies that we
deem to be relevant to specific contracts.




For each
contract, we utilize each reserving methodology that our actuaries deem
appropriate in order to calculate a best estimate, or point estimate, of
reserves. We use various actuarial methods to provide data point estimates to
aid us in our estimation of reasonable and adequate loss reserves. In setting
our reserves, we do not use a range of estimates that may be subject to
adjustment. We analyze reserves on a contract by contract basis and do not
reserve based on aggregated product lines. Whether we use one methodology,
a combination of methodologies or all methodologies depends upon the contract
and the judgment of the actuaries responsible for the contract. We do not have a
set weighting of the various methods we use. Certain of the methods we consider
are more appropriate depending on the type and structure of the contract; the
point we are at in the contract’s life-cycle (i.e. how mature is the contract);
and the duration of the expected paid losses on the contract. For example, the
data estimation for contracts that are relatively new and therefore have little
paid loss development is more appropriately considered using the
Bornhuetter-Ferguson method than a paid loss development
method.





Our aggregate
reserves are the sum of the point estimate of all contracts. We perform a
quarterly loss reserve analysis on each contract regardless of the line of
business. This analysis may incorporate some or all of the information described
above, using some or all of the methodologies described above. We generally
calculate IBNR reserves for each contract by estimating the ultimate incurred
losses at any point in time and subtracting cumulative paid claims and case
reserves, which incorporate specific exposures, loss payment and reporting
patterns and other relevant factors. Each quarter our reserving committee, which
is comprised of our CEO, CFO, Controller and Reserving Actuary, meets to assess
the adequacy of our loss reserves based on the reserve analysis and
recommendations prepared by the company’s actuaries. The reserving committee
discusses each contract individually and approves or revises the stated
reserves. 
 Additionally,
we contract with a third-party actuarial firm to perform a quarterly reserve
review and to annually opine on the reasonableness and adequacy of our loss
reserves. We provide our external actuary with our pricing models, reserving
analysis and any other data they may request. Additionally, the actuarial
firm may inquire as to the various assumptions and estimates that we may use in
our reserving analysis. The external actuarial firm independently creates
its own reserving models based on industry loss information, augmented by
specific client loss information that we may be asked to provide as well as its
own independent assumptions and estimates. Based on various reserving
methodologies that the actuarial firm considers appropriate, it creates a
reserve estimate for each contract in our portfolio and provides us with an
aggregate recommended loss reserve, including IBNR. If there are material
differences between our booked reserves and the actuarial firm’s
recommended reserves we review the differences and agree upon and make any
necessary adjustments to the booked reserves. To date there have been no
material differences resulting from the external actuary's reviews.
  Because
of the uncertainties that surround our estimates of loss and loss adjustment
expense reserves, we cannot be certain that ultimate loss and loss adjustment
expense payments will not exceed our estimates, or be less than our
estimates. If our estimated reserves are deficient, we would be required to
increase loss reserves in the period in which such deficiencies are identified
which would cause a charge to our earnings and a reduction of our
capital. Similarly, if our estimated reserves are excessive, we would
decrease loss reserves in such period in which the excesses are
identified. By way of illustration, since we started underwriting
operations in 2006, the reserve re-estimation process has resulted in a decrease
to prior year reserves and an increase in net income during each of the three
years ended December 31, as follows:
  Calendar
      Year
                
                Effect
      on Net Income($
      in thousands)2009
                $
                7,597
      increase2008
                $
                11,988
      increase2007
                $
                1,077 increase


Given
the uncertainties involved in estimating ultimate reserves and since we reserve
to a point estimate on an individual contract basis, our estimated reserves may
be deficient or excessive. Historical development of estimated reserves is not
an accurate reflection of future loss development. Additionally, external
factors can influence prior year loss development. For example, changes in
specific tort law which may cause ultimate loss awards to increase or decrease
could have a material effect on our loss reserve development. We are unable
to predict with accuracy the magnitude or direction that such external factors
may have on our estimated loss reserves.





40
 Table of contents





Acquisition
Costs. We capitalize brokerage fees, ceding commissions, premium taxes
and other direct expenses that relate directly to and vary with the writing of
reinsurance contracts. Acquisition costs are deferred subject to ultimate
recoverability and amortized over the related contract term. Acquisition costs
also include profit commissions. Certain contracts include provisions for profit
commissions to be paid to the ceding insurer based upon the ultimate experience
of the contracts. The methodology for calculating profit commissions are
specific to the individual contracts and vary from contract to contract.
Typically profit commissions are calculated and accrued based on the expected
loss experience for such contracts and recorded when the expected loss
experience indicates that a profit commission is probable under the contract
terms. Profit commission reserves, if any, are included in reinsurance balances
payable on the consolidated balance sheets.




Bonus accruals.
Under the
Company's bonus program, each employee’s target bonus consists of two
components: a discretionary component based on a qualitative assessment of each
employee’s
performance and a quantitative component based on the return on deployed equity
("RODE") for each underwriting year relating to reinsurance
operations. The qualitative portion of an employee’s
annual bonus is accrued at each employee's target amount, which may differ
significantly from the actual amount approved and awarded annually by the
Compensation Committee. The quantitative portion of each employee’s annual bonus
is accrued based on the expected RODE for each underwriting year and adjusted
for changes in the expected RODE each quarter until the final
quantitative bonus is calculated and paid two years from the end of
the fiscal year in which the business was underwritten. The
expected RODE calculationutilizesproprietary
modelswhichrequiressignificant estimation and judgment. Actual RODE may vary
significantly from the expected RODE and any adjustments to thequantitativebonus
estimates, which may be material, arerecordedin
the period in which they are
determined.


Share-Based
Payments. We have established a Stock Incentive Plan for directors,
employees and consultants. U.S. GAAP requires us to recognize share-based
compensation transactions using the fair value at the grant date of the award.
We calculate the compensation for restricted stock awards based on the price of
the Company’s common shares at the grant date and recognize the expense over the
vesting period. Determining the fair value of share option awards at the grant
date requires significant estimation and judgment. We use an option-pricing
model (Black-Scholes pricing model) to assist in the calculation of fair
value. Our shares have not been publicly traded for a sufficient length of
time to reasonably estimate the expected volatility. Therefore we have based our
expected volatility on the historical volatility of similar entities. We
typically considered factors such as an entity's industry, stage of life
cycle, size and financial leverage when selecting similar
entities. Additionally, we used the full life of the option, ten years, as
the estimated term of the option, and we have assumed that dividends will
not be paid. If actual results differ significantly from these estimates and
assumptions, particularly in relation to our estimation of volatility which
requires significant judgment due to our limited operating history,
share-based compensation expense, primarily with respect to future share-based
awards, could be materially impacted.





Outlook
and Trends





We believe
that the rebound in the financial markets during 2009 resulted in restored
financial positions in the property and casualty insurance and reinsurance
industry. As a result, we believe that underwriting capacity has become
more available in the property and casualty market which has resulted in
a delay in significant price increases for our specialty products. In
addition, the lack of large catastrophes in 2009 has preserved industry
capital. Further, we believe the slowdown in worldwide economic activity
has decreased the overall demand for insurance. Notwithstanding, price
reductions from prior years appear to have slowed, and in some areas
reversed. We believe that pricing of the property and casualty 
industry will be relatively flat for the near term until insurers and
reinsurers begin to realize that the current price levels are not economically
rational. Given that prior years' reserve redundancies have been reduced
substantially and current interest rates are low, which limits opportunities for
traditional fixed maturity investment income, we believe the industry will
eventually need to increase pricing. However, we do not expect to see the
effects of this until late 2010 or 2011. Price increases could occur
earlier if financial and credit markets experience additional
adverse shocks and loss of capital of insurers and
reinsurers.





Despite an
overall less attractive marketplace, we believe that we are well positioned to
compete for frequency business due to our increasing market recognition and the
development of certain strategic relationships. In addition, there are a number
of insurers and reinsurers that continue to suffer from capacity issues even
after the rebound of the financial markets during 2009.  We have seen
a number of large, frequency-oriented opportunities that we believe fit
well within our business strategy.  These opportunities could increase
for us if financial and credit markets report large losses while we
maintain our financial strength. We have also begun to see some consolidation in
the industry in 2009.  We believe if merger and
acquisition activity in the reinsurance industry increases
and the number of industry participants decreases we could benefit from
increased opportunities since insurers may prefer to diversify their reinsurance
placements.




If the
current challenges facing the insurance industry create significant
dislocations, we believe we will be well positioned to capitalize on and compete
for resulting opportunities. In some markets, such as subsectors of the
credit and surety markets, we believe prices are rising substantially and
reinsurance capacity is being withdrawn due to recent loss activity. In
January 2010, we entered the credit and surety markets for the first time, as we
believe recent dislocations will create above average opportunities
for profit over the near term. Property catastrophe retrocession pricing
remained flat in January 2010. At the same time, property catastrophe
reinsurance pricing softened by an estimated 8% to 10% versus January 2009. We
believe this soft pricing is due to the increased underwriting capacity of the
industry, and in the absence of large catastrophe events, could further soften
the property catastrophe retrocessional market later in 2010 and into 2011. If
pricing softens significantly in property catastrophe retrocessional coverage,
we expect to reduce our exposures accordingly. While it is unclear what other
businesses could be significantly affected by the current economic
downturn, we believe that opportunities are likely to arise in a number of
areas, including the following:




•   lines
of business that experience significant losses;




•   lines
of business where current market participants are experiencing financial
distress or uncertainty; and




•  
business that is premium and capital intensive due to regulatory and other
requirements.




Significant
market dislocations that increase the pricing of certain insurance coverages
could create the need for insureds to retain risks and therefore fuel the
opportunity or need to form new captives. If this happens, a number of these
captives could form in the Cayman Islands, enhancing our opportunity to provide
additional reinsurance to the Cayman Islands' captive
market.




Our
investment portfolio continues to be conservatively postured in 2010 as the
market appears to be discounting a strong economic recovery that may or may not
materialize. Our long portfolio is, for the most part, invested in stable,
less cyclical businesses and three of our top five positions were
initiated in 2009. We continue to hold short positions in businesses
that we believe should be fundamentally challenged, especially in a difficult
economic environment. We believe that there is a risk that the market will
contract the multiples of higher reported earnings which we
believe have been principally supported by significant government
stimulus programs and one-time temporary inventory improvements. Given
the challenging macroeconomic environment and higher government deficits, we
continue to hold a significant position in gold and have other macro hedges
in place in the form of options on higher interest rates and
some corporate and sovereign CDS. We will continue
to opportunistically evaluate mispriced equity and debt investments as
the credit contraction continues to bear out.


41
 Table of contents





We intend to
continue monitoring market conditions to position ourselves to
participate in future underserved or capacity-constrained markets as they arise
and intend to offer products that we believe will generate favorable returns on
equity over the long term. Accordingly, our underlying results and product line
concentrations in any given period may not be indicative of our future results
of operations.




Results
of Operations





Years
Ended December 31, 2009, 2008 and 2007





For the
year ended December 31, 2009, we reported a net income of $209.5 million as
compared to a net loss of $120.9 million for the year ended December 31,
2008.  The net income principally related to a net investment income
of $199.9 million. Our investment portfolio reported a gain of 32.1% for the
year ended December 31, 2009 compared to a loss of 17.6% for the year ended
December 31, 2008. The underwriting income for the year ended December 31, 2009
increased 48.3% to $26.4 million compared to $17.8 million for the year ended
December 31, 2008. In addition, we generated other income of $4.5 million for
the year ended December 31, 2009 (2008: $0) relating to penalty fees upon early
termination of a reinsurance contract, net gains on deposit accounted contracts,
and advisory fees earned by Verdant.





For the
year ended December 31, 2008, we reported a net loss of $120.9 million compared
to net income of $35.3 million for the year ended December 31, 2007. For the
year ended December 31, 2008, we reported underwriting income of $17.8 million
compared to underwriting income of $19.6 million for the year ended
December 31, 2007. Our investment portfolio reported a loss of $126.1 million,
or 17.6%, for the year ended December 31, 2008 compared to a gain of $27.6
million, or 5.9%, for the year ended December 31, 2007.





Our
primary financial goal is to increase the long-term value in fully diluted
adjusted book value per
share. During 2009, as a result
of adopting FASB's amendment to topic ASC 810-10-45 (Consolidation), the
non-controlling interest in joint venture was reclassified from liabilities into
shareholders’ equity for current and all prior periods. As a result of this
reclassification, we believe that adjusting our book value to exclude the
non-controlling interest in joint venture from total shareholders' equity
is a more accurate and consistent presentation of our performance. During
the year ended December 31, 2009, the fully diluted adjusted book
value per share increased by $5.56 per
share, or 41.5%, to $18.95 per share from $13.39 per share at December 31,
2008. For the year ended December 31, 2008, the fully diluted
adjusted book value per share decreased by $3.18 per share, or 19.2% to $13.39
per share from $16.77 per share at December 31, 2007.





For the year
ended December 31, 2009, the adjusted book value per
share increased by $5.77 per share, or 42.8%, to $19.24 per share from
$13.47 per share at December 31, 2008. For the
year ended December 31, 2008, the adjusted book value decreased by
$3.30 per share, or 19.7%, to $13.47 per share.





Adjusted
book value per share is a non-GAAP measure as it excludes the non-controlling
interest in joint venture from total shareholders' equity. In addition, fully
diluted adjusted book value per share is also a non-GAAP measure
and represents basic adjusted book value per share combined with the
impact from dilution of all in-the-money stock options issued and
outstanding as of any period end. We believe that long-term growth
in fully diluted adjusted book value per share is the most relevant measure
of our financial performance. In addition, fully diluted adjusted book
value per share may be of benefit to our investors, shareholders, and other
interested parties to form a basis of comparison with other companies within the
property and casualty reinsurance industry.





Premiums
Written





Details
of gross premiums written for the years ended December 31, are provided in the
following table:





2009
            
            
            2008
            
            
            2007($
      in thousands)Frequency
            
            $
            226,949
            
            
            
            87.7
            %
            
            $
            134,012
            
            
            
            82.5
            %
            
            $
            76,885
            
            
            
            60.5
            %Severity
            
            
            31,869
            
            
            
            12.3
            
            
            
            28,383
            
            
            
            17.5
            
            
            
            50,246
            
            
            
            39.5Total
            
            $
            258,818
            
            
            
            100
            %
            
            $
            162,395
            
            
            
            100.0
            %
            
            $
            127,131
            
            
            
            100.0
            %





We expect
our annual reporting of premiums written to be volatile as our underwriting
portfolio continues to develop. Additionally, the composition of premiums
written between frequency and severity business will vary from year to year
depending on the specific market opportunities that we pursue. For the year
ended December 31, 2009, the premiums written relating to frequency business
increased by $92.9 million, or 69.3%, from the year ended December 31,
2008. The increase reflects the continuing development of our underwriting
activities which resulted in a number of new and renewing frequency contracts
written during the year ended December 31, 2009. The largest increase in
premiums written for the year ended December 31, 2009 was a result of a new
multi-year homeowners’ personal lines contract entered into during 2009 which
accounted for 41.4% of the increase. General liability, workers’ compensation,
health, motor liability and medical malpractice lines also contributed 28.9%,
10.8%, 8.1%, 6.0% and 4.8% respectively, to the increase in frequency premiums
written for the year ended December 31, 2009.





For the
year ended December 31, 2009, the premiums written relating to severity
contracts increased by $3.5 million, or 12.3%, from the year ended December 31,
2008. The increase was the net effect of an increase in commercial property
lines ($12.5 million) offset by decreases in medical malpractice ($3.4 million),
general liability ($3.5 million), and professional liability ($2.1 million)
lines of business.





42
 Table of contents





For the
year ended December 31, 2008, the increase in premiums written for frequency
business compared to 2007 was due to continuing development of our underwriting
activities which resulted in a number of new frequency contracts written during
the year ended December 31, 2008. Approximately 84.2% of the frequency premiums
written during the year ended December 31, 2008 related to motor liability and
health lines of business. By comparison, 53.7% of the frequency premiums written
during the year ended December 31, 2007 related to personal property line of
business. The shift in premiums written relating to our lines of business
reflects our opportunistic underwriting strategy.





For the
year ended December 31, 2008, the decrease in premiums written for severity
business compared to 2007 was mainly attributed to a multi-year professional
liability contract written during the year ended December 31, 2007, for which
all premiums were recognized as written premiums at inception in accordance with
our accounting policy for premium recognition.





We
entered into retrocessional contracts with ceded premiums of $13.3 million,
$16.4 million and $26.2 million for the years ended December 31, 2009, 2008 and
2007, respectively, to reduce the risk of loss assumed on certain frequency
reinsurance contracts. The decrease in ceded premiums for the year ended
December 31, 2009, is the net result of a health contract and its corresponding
retroceded contract expiring in 2009, offset by a new general liability
retroceded contract entered into during the year ended December 31, 2009. The
decrease in ceded premiums for the year ended December 31, 2008 was principally
due to frequency contracts restructured on renewal during 2008 which resulted in
lower subject premiums and where we retained certain additional risks which we
had previously ceded.





Details
of net premiums written for the years ended December 31, are provided in the
following table:





2009
            
            
            2008
            
            
            2007($
      in thousands)Frequency
            
            $
            213,673
            
            
            
            87.0
            %
            
            $
            117,616
            
            
            
            80.6
            %
            
            $
            50,735
            
            
            
            50.2
            %Severity
            
            
            31,869
            
            
            
            13.0
            
            
            
            28,383
            
            
            
            19.4
            
            
            
            50,246
            
            
            
            49.8Total
            
            $
            245,542
            
            
            
            100.0
            %
            
            $
            145,999
            
            
            
            100.0
            %
            
            $
            100,981
            
            
            
            100.0
            %





Net
Premiums Earned





Net
premiums earned reflects the pro rata inclusion into income of net premiums
written over the life of the reinsurance contracts. Details of net premiums
earned for the years ended December 31, are provided in the following
table:





2009
            
            
            2008
            
            
            2007($
      in thousands)Frequency
            
            $
            169,530
            
            
            
            79.0
            %
            
            $
            81,133
            
            
            
            70.6
            %
            
            $
            71,596
            
            
            
            73.0
            %Severity
            
            
            45,150
            
            
            
            21.0
            
            
            
            33,816
            
            
            
            29.4
            
            
            
            26,451
            
            
            
            27.0Total
            
            $
            214,680
            
            
            
            100.0
            %
            
            $
            114,949
            
            
            
            100.0
            %
            
            $
            98,047
            
            
            
            100.0
            %





Premiums
relating to quota share contracts are earned over the contract period in
proportion to the period of protection. The increase in frequency earned
premiums of 109.0% reflects the additional quota share contracts written
throughout the 2009 year. The increase primarily related to motor liability
lines which accounted for 46.3% of the increase, followed by health, general
liability, workers' compensation, and personal lines accounting for 17.7%,
13.2%, 12.7% and 8.1% of the increase, respectively.  For the year ended
December 31, 2009, severity earned premiums increased 33.5% compared to the 2008
year. Commercial, medical malpractice, and general liability lines accounted for
42.5%, 35.8%, and 30.2% of the increase, respectively, with an offsetting
decrease in professional liability lines.





For the
year ended December 31, 2008, the increase in frequency earned premiums of 13.3%
reflected additional quota share contracts written throughout the 2008
year. For the year ended December 31, 2008, earned premiums on severity
contracts increased while the written premiums on severity contracts decreased.
This was due to a multi-year professional liability contract written during the
year ended December 31, 2007, which continued to earn premiums over the
multi-year term of the contract. In addition, the severity earned premiums
increased due to reinstatement premiums on severity contracts which were earned
in full for the year ended December 31, 2008. There were no reinstatement
premiums on severity contracts during the year ended December 31,
2007.








43
 Table of contents





Losses
Incurred





Losses
incurred include losses paid and changes in loss reserves, including reserves
for IBNR, net of actual and estimated loss recoverables. Details of losses
incurred for the years ended December 31, are provided in the following
table:











2009
            
            
            2008
            
            
            2007($
      in thousands)Frequency
            
            $
            95,934
            
            
            
            80.6
            %
            
            $
            36,013
            
            
            
            64.9
            %
            
            $
            34,252
            
            
            
            86.7
            %Severity
            
            
            23,111
            
            
            
            19.4
            
            
            
            19,472
            
            
            
            35.1
            
            
            
            5,255
            
            
            
            13.3Total
            
            $
            119,045
            
            
            
            100.0
            %
            
            $
            55,485
            
            
            
            100.0
            %
            
            $
            39,507
            
            
            
            100.0
            %





Total
losses incurred on frequency contracts continued to increase as a result of
increases in premiums earned. Losses incurred as a percentage of premiums earned
(i.e. loss ratio) fluctuate based on the mix of business, and the favorable or
adverse development of our larger contracts. The loss ratio of our frequency
business was 56.6%, 44.4% and 47.9% for the years ended December 31, 2009, 2008
and 2007, respectively. For the year ended December 31, 2009 the increase in
frequency loss ratio was principally due to the increase in earned premiums on
certain lines of business that typically have higher loss ratios. Specifically,
the increase in premiums earned on our motor liability and health lines
contributed to the majority of the increase in the frequency loss
ratio.





For the
year ended December 31, 2008, the decrease in frequency loss ratio was mainly
due to the favorable loss development on a prior year personal lines contract
written.





We expect
losses incurred on our severity business to be volatile from period to period.
The loss ratios for our severity business were 51.2%, 57.7%, and 19.9% for the
years ended December 31, 2009, 2008 and 2007, respectively. The decrease in the
severity loss ratio for the year ended December 31, 2009 was due to a medical
malpractice contract that was terminated early with no losses. Offsetting this
were losses reported during 2009 on an aggregate catastrophe excess of loss
contract and an additional loss reported to us during 2009 on a 2007
casualty clash contract.





The
increase in our severity loss ratio during the year ended December 31, 2008 was
a result of losses primarily related to sub-prime related claims on
casualty clash contracts.





Losses
incurred can be further broken down into losses paid and changes in loss
reserves. Losses incurred for the years ended December 31, 2009, 2008 and 2007
were comprised as follows:





2009
            
            
            2008
            
            
            2007Gross
            
            
            Ceded
            
            
            Net
            
            
            Gross
            
            
            Ceded
            
            
            Net
            
            
            Gross
            
            
            Ceded
            
            
            Net($
      in thousands)Losses
      paid (recovered)
            
            $
            62,070
            
            
            $
            (3,329
            )
            
            $
            58,741
            
            
            $
            29,791
            
            
            $
            (8,440
            )
            
            $
            21,351
            
            
            $
            15,505
            
            
            $
            (6,677
            )
            
            $
            8,828Change in
      reserves
            
            
            55,911
            
            
            
            4,393
            
            
            
            60,304
            
            
            
            39,075
            
            
            
            (4,941
            )
            
            
            34,134
            
            
            
            37,400
            
            
            
            (6,721
            )
            
            
            30,679Total
      losses incurred
            
            $
            117,981
            
            
            $
            1,064
            
            
            $
            119,045
            
            
            $
            68,866
            
            
            $
            (13,381
            )
            
            $
            55,485
            
            
            $
            52,905
            
            
            
            (13,398
            )
            
            $
            39,507





For the
year ended December 31, 2009, the losses incurred included an increase of $126.6
million related to current year contracts offset by $7.6 million related to net
favorable loss development on prior year contracts. For the year ended December
31, 2009, the decrease in ceded reserves of $4.4 million were primarily due to
favorable loss development on an inward contract and the reduction in reserves
recoverable on the corresponding retroceded contract.





During
the year ended December 31, 2009, the loss development on prior year contracts
primarily related to the following:





·
            Favorable
      loss development of $8.0 million on a 2006 Florida personal lines
      contract. We review loss reserves based upon the most recent available
      information. In general, initially on a contract, loss reserves are
      estimated based on historic or modeled information. These reserve
      estimates are adjusted, up or down, as the actual loss experience is
      realized. Our loss reserves on this contract were adjusted quarterly as
      new information was presented by our client and we reported these
      adjustments quarterly. The client reports incurred losses on this contract
      to us on a quarterly basis. The reserves we book are based on a
      combination of data received from the client as well as historic and
      industry data. During each quarter of 2009, the client
      reported favorable development of claims data resulting from lower than
      expected paid and incurred losses which impacted our own reserve
      analysis and correspondingly caused us to reduce our reserves by
      approximately $8.0 million during the year ended December 31,
      2009.





·
            Favorable
      loss development of $1.5 million on a 2008 motor liability contract. The
      reserves on this contract were adjusted in the fourth quarter of 2009
      based on data received from the client as well as our own quarterly
      reserve analysis.





·
            Favorable
      loss development of $0.7 million on a 2008 severity medical malpractice
      contract based on our quarterly reserve
  analysis.





·
            Favorable
      loss development of $0.7 million on a 2008 workers' compensation contract.
      The reserves on this contract were adjusted in the fourth quarter of 2009
      based on data received from the client as well our own quarterly reserve
      analysis.





44
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·
            Eliminating $1.0
      million of reserves, held on two casualty clash contracts which
      were commuted during the year ended December 31, 2009, without any
      reported losses.







·
            Adverse
      loss development of $3.4 million on a 2007 casualty clash contract
      resulting from claims relating to California
  wildfires.







·
            Adverse
      loss development of $1.1 million on a 2007 health contract based on our
      quarterly reserve analysis.








For the
year ended December 31, 2008, the increase in losses incurred of $55.5 million
included an increase of $67.5 million related to current year incurred losses on
2008 contracts, offset by a decrease of $12.0 million related to net favorable
loss development on prior year incurred losses. The loss development on
prior year losses primarily related to the following:





·
            Favorable
      loss development of $12.4 million on a 2006 Florida personal lines
      contract. During 2008, each quarter the client reported improved (i.e.
      lower) loss ratio estimates. This decrease, supported by the favorable
      development of claims data, impacted our own reserve analysis and
      correspondingly caused us to reduce our reserves by approximately $12.4
      million.





·
            Eliminating $1.2
      million of reserves, held on two frequency contracts covering
      excess of loss medical malpractice, due to commutation without
      any reported losses.





·
            Adverse
      loss development of $1.4 million on a casualty clash severity
      contract due to notification of claims relating to sub-prime related
      events. This resulted in reserving for a full limit
    loss.





Acquisition
      Costs





Acquisition
costs represent the amortization of commission and brokerage expenses incurred
on contracts written as well as profit commissions and other underwriting
expenses which are expensed when incurred. Deferred acquisition costs are
limited to the amount of commission and brokerage expenses that are expected to
be recovered from future earned premiums and anticipated investment income.
Details of acquisition costs for the years ended December 31, are provided in
the following table:





2009
            
            
            2008
            
            
            2007($
      in thousands)Frequency
            
            $
            65,497
            
            
            
            94.6
            %
            
            $
            37,989
            
            
            
            91.2
            %
            
            $
            33,174
            
            
            
            85.2
            %Severity
            
            
            3,735
            
            
            
            5.4
            
            
            
            3,660
            
            
            
            8.8
            
            
            
            5,765
            
            
            
            14.8Total
            
            $
            69,232
            
            
            
            100.0
            %
            
            $
            41,649
            
            
            
            100.0
            %
            
            $
            38,939
            
            
            
            100.0
            %








Increased
acquisition costs for the year ended December 31, 2009 compared to the same
period for 2008 are a direct result of the increases in premiums written and
earned. For the years ended December 31, 2009, 2008 and 2007 the acquisition
cost ratios for frequency business were 38.6%, 46.8% and 46.3%, respectively. We
expect that acquisition costs will be higher for frequency business than for
severity business. The acquisition cost ratios for severity business were 8.3%,
10.8% and 21.8% for the years ended December 31, 2009, 2008 and 2007,
respectively.





For the
year ended December 31, 2009, the decrease in the frequency acquisition cost
ratio was principally due to a lower profit commission recorded on a personal
lines contract during the year ended December 31, 2009 compared to
the profit commission recorded on the same contract during the year ended
December 31, 2008. Excluding the impact of this contract on the acquisition
costs for both 2008 and 2009 years, our frequency acquisition cost ratio
increased from 2008 to 2009 principally due to higher commissions allowed on a
new homeowners’ personal lines contract and higher actual reported commission on
a 2008 motor liability contract.





For the
year ended December 31, 2009, the decrease in severity acquisition cost ratio
was primarily due to a reversal of profit commissions on a 2008 catastrophe
excess of loss contract upon notification of losses from the insured during
2009.





For the
year ended December 31, 2008, the slight increase in frequency acquisition cost
ratio was due to the accrual of profit commissions on frequency contracts that
had favorable underwriting results. For the year ended December 31, 2008, the
decrease in severity acquisition cost ratio is the result of (a) lower
profit commissions accrued and paid on severity contracts due to losses
developing on non-natural peril contracts, and (b) the premiums earned
on certain multi-year professional liability severity contracts which incepted
in the later part of the second quarter of 2007 and had no acquisition
costs associated with them.





45
 Table of contents





General and Administrative
Expenses





Our general
and administrative expenses for the years ended December 31, 2009, 2008 and 2007
were $19.0 million, $13.8 million and $11.9 million, respectively. For the year
ended December 31, 2009, approximately 84.6% of the increase in general and
administrative expenses related to higher personnel costs including employee
bonuses, stock compensation, salaries and benefits. While we added three new
employees during the year ended December 31, 2009, the increase in personnel
costs primarily related to higher accrued employee bonuses, which resulted from
net favorable loss development and investment income accrued
on the deferred bonus compensation relating to the 2007 and 2008 underwriting
years, payable to the employees during 2010 and 2011, respectively. Higher
rent and office expenses relating to new office space (including
expensing the remaining lease payments relating to the original office
space) accounted for approximately 13.5% of the increase in general and
administrative expenses.





For the
year ended December 31, 2008, the increase in general and administrative
expenses of $1.9 million primarily related to higher personnel costs, including
employee bonus accruals.





General
and administrative expenses for the years ended December 31, 2009, 2008 and 2007
include $3.4 million, $3.0 million and $2.9 million, respectively, for the
expensing of the fair value of stock options and restricted stock granted to
employees and directors.





Net
Investment Income (Loss)





A summary
of net investment income (loss) for the years ended December 31, is as
follows:





2009
            
            
            2008
            
            
            2007($
      in thousands)Realized
      gains (losses) and change in unrealized gains and losses,
      net
            
            $
            232,410
            
            
            $
            (118,667
            )
            
            $
            28,051Interest,
      dividend and other income
            
            
            17,038
            
            
            
            20,879
            
            
            
            21,375Interest,
      dividend and other expenses
            
            
            (16,886
            )
            
            
            (18,437
            )
            
            
            (7,151
            )Investment
      advisor compensation
            
            
            (32,701
            )
            
            
            (9,901
            )
            
            
            (14,633
            )Net
      investment income (loss)
            
            $
            199,861
            
            
            $
            (126,126
            )
            
            $
            27,642








Investment
income, net of all fees and expenses, resulted in a gain of 32.1% on our
investment portfolio for the year ended December 31, 2009. This compares
to loss of 17.6% and a gain of 5.9% reported for the years ended December
31, 2008 and 2007, respectively. Investment returns are calculated monthly and
compounded to calculate the annual returns. The resulting actual investment
income may vary depending on cash flows into or out of the investment
account.





For the year
ended December 31, 2009, included in investment advisor compensation was $10.8
million (2008: $9.9 million) relating to management fees paid to DME Advisors
and $21.9 million (2008: $0) relating to performance compensation in accordance
with the loss carry forward provision of the advisory agreement with DME
Advisors. Given the net investment loss for the year ended December 31, 2008, no
performance compensation was paid to DME Advisors in 2008. In addition, based on
the advisory agreement, the performance compensation for the subsequent years
will be reduced to 10% until all the investment losses from 2008 have been
recouped and an additional amount equal to 150% of the investment loss is
earned. As of December 31, 2009, the loss carry forward balance was $94.3
million.





Our
investment advisor, DME Advisors, and its affiliates manage and expect to manage
other client accounts besides ours, some of which have investment objectives
similar to ours. To comply with regulation FD, our investment returns are posted
on our website on a monthly basis. Additionally, on our website
(www.greenlightre.ky) we provide the names of the largest disclosed long
positions in our investment portfolio as of the last date of the month of the
relevant posting. DME Advisors may choose not to disclose certain positions to
its clients in order to protect its investment strategy. Therefore, we present
on our website the largest positions held by us that are disclosed by DME
Advisors or its affiliates to their other clients.





Taxes





We are
not obligated to pay any taxes in the Cayman Islands on either income or capital
gains. We have been granted an exemption by the Governor-in-Cabinet from any
taxes that may be imposed in the Cayman Islands for a period of 20 years,
expiring on February 1, 2025.





Our wholly
owned subsidiary, Verdant, is incorporated in Delaware, and therefore is
subject to taxes in accordance with the U.S. federal rates and regulations
prescribed by the Internal Revenue Service. Verdant’s taxable income is expected
to be taxed at a rate of 35%. For the year ended December 31, 2009, we recorded
a deferred tax asset of $68,719 resulting solely from the temporary differences
in recognition of expenses for tax purposes. An accrual of $19,529 has been
recorded for current taxes payable as of December 31, 2009. Based on the timing
of the reversal of the temporary differences and likelihood of generating
sufficient taxable income to realize the future tax benefit, management believes
it is more likely than not that the deferred tax asset will be fully realized in
the future and therefore no valuation allowance has been recorded.
Verdant has not taken any tax positions that are subject to uncertainty or that
are reasonably likely to have a material impact to Verdant or the
Company.





46
 Table of contents
 
 The following
table sets forth our current and deferred income tax expense for the years ended
December 31, 2009, 2008 and 2007.





2009
            
            
            2008
            
            
            2007($
      in thousands)Current
      tax expense
            
            $
            (20
            )
            
            
            —
            
            
            
            —Deferred
      tax benefit
            
            
            69
            
            
            
            —
            
            
            
            —Income
      tax benefit
            
            $
            49
            
            
            
            —
            
            
            
            —





Ratio
Analysis





Due to
the opportunistic and customized nature of our underwriting operations, we
expect to report different loss and expense ratios in both our frequency and
severity businesses from period to period. For the years ended December 31,
2009, 2008 and 2007, we reported the following ratios:





2009
            
            
            2008
            
            
            2007Frequency
            
            
            Severity
            
            
            Total
            
            
            Frequency
            
            
            Severity
            
            
            Total
            
            
            Frequency
            
            
            Severity
            
            
            TotalLoss
      ratio
            
            
            56.6
            %
            
            
            51.2
            %
            
            
            55.4
            %
            
            
            44.4
            %
            
            
            57.7
            %
            
            
            48.3
            %
            
            47.9
            %
            
            19.9
            %
            
            40.3
            %Acquisition
      cost ratio
            
            
            38.6
            %
            
            
            8.3
            %
            
            
            32.3
            %
            
            
            46.8
            %
            
            
            10.8
            %
            
            
            36.2
            %
            
            46.3
            %
            
            21.8
            %
            
            39.7
            %Composite
      ratio
            
            
            95.2
            %
            
            
            59.5
            %
            
            
            87.7
            %
            
            
            91.2
            %
            
            
            68.5
            %
            
            
            84.5
            %
            
            94.2
            %
            
            41.7
            %
            
            80.0
            %Internal
      expense ratio
            
            
            
            
            
            
            
            
            
            
            8.8
            %
            
            
            
            
            
            
            
            
            
            
            12.0
            %
            
            
            
            
            
            
            
            12.2
            %Combined
      ratio
            
            
            
            
            
            
            
            
            
            
            96.5
            %
            
            
            
            
            
            
            
            
            
            
            96.5
            %
            
            
            
            
            
            
            
            92.2
            %





The loss
ratio is calculated by dividing net loss and loss adjustment expenses incurred
by net premiums earned. We expect that the loss ratio will be volatile for our
severity business and may exceed that of our frequency business in certain
periods. Given that we opportunistically underwrite a concentrated portfolio
across several lines of business that have varying expected loss ratios, we can
expect there to be significant annual variations in the loss ratios reported
from our frequency business. In addition, the loss ratios for both frequency and
severity business can vary depending on the lines of business
written.





The
acquisition cost ratio is calculated by dividing net acquisition costs by net
premiums earned. This ratio demonstrates the higher acquisition costs incurred
for our frequency business than for our severity business.





The
composite ratio is the ratio of underwriting losses incurred, loss adjustment
expenses and acquisition costs, excluding general and administrative expenses,
to net premiums earned. Similar to the loss ratio, we expect that this ratio
will be more volatile for our severity business depending on loss activity in
any particular period.





The
internal expense ratio is the ratio of all general and administrative expenses
to net premiums earned. We expect our internal expense ratio to decrease as we
continue to expand our underwriting operations.





The
combined ratio is the sum of the composite ratio and the internal expense ratio.
The combined ratio measures the total profitability of our underwriting
operations and does not take net investment income or loss into account. Given
the nature of our opportunistic underwriting strategy, we expect that our
combined ratio may also be volatile from period to period.





Financial
Condition





Investments





Investments
reported on our consolidated balance sheet as of December 31, 2009 were $830.6
million compared to $494.0 million as of December 31, 2008, an increase of
68.1%. The increase in investments was due to an investment gain of 32.1% for
the year ended December 31, 2009, and cash flows from our underwriting
operations used to purchase investments.





Our
investment portfolio, including any derivatives, is valued at fair value and any
unrealized gains or losses are reflected in net investment income in the
consolidated statements of income. As of December 31, 2009, 87.6% of
our investment portfolio (excluding restricted and unrestricted cash and
cash equivalents) was comprised of investments valued based on quoted
prices in actively traded markets (Level 1), 10.5% comprised of securities
valued based on observable inputs other than quoted prices (Level 2) and
1.9% was comprised of securities valued based on non-observable inputs
(Level 3).





47
 Table of contents





In
determining whether a market for a financial instrument is active or inactive,
we obtain information from our investment advisor who makes the determination
based on feedback from executing brokers, market makers, and in-house traders to
assess the level of market activity and available liquidity for any given
financial instrument. Where a financial instrument is valued based on broker
quotes, our investment advisor generally requests multiple quotes. The
ultimate value is based on an average of the quotes obtained. Broker quoted
prices are generally not adjusted in determining the ultimate values and are
obtained with the expectation of the quotes being binding. As of December
31, 2009, $122.2 million of our investments were valued based on broker quotes,
of which $113.5 millionwere based on observable
market information and classified as Level 2, and $8.7 million were based on
non-observable inputs and classified as Level 3.





During
the year ended December 31, 2009, debt instruments with a fair value of $5.0
million were transferred from Level 2 to Level 3, as there was no longer an
active market for these instruments and we were unable to obtain multiple quotes
for these instruments. The fair values of these securities were estimated using
the last available transaction price, adjusted for credit risk, expectation of
future cash flows, and other non-observable inputs. In addition, during the
year ended December 31, 2009, debt instruments with a fair value of $3.2 million
were transferred out of Level 3, as multiple broker quotes were obtained
for determining fair values. In addition, during the year ended December 31,
2009, unlisted equity securities with a fair value of $1.6 million were
transferred from Level 2 to Level 3 as there was no longer an active market for
these securities. The fair value of these securities was estimated based on a
single quote from a market maker.





Non-observable
inputs used by our investment advisor include discounted cash flow models for
valuing certain corporate debt instruments. In addition, other non-observable
inputs include the use of investment manager statements and management estimates
based on third party appraisals of underlying assets for valuing private equity
investments.





Restricted
Cash and Cash Equivalents; Securities Sold, Not Yet Purchased





Restricted
cash totaled $590.9 million as of December 31, 2009 compared to $248.3 million
as of December 31, 2008, an increase of 137.9%. The increase in restricted cash
was principally due to an increase in securities sold, not yet purchased
since restricted cash balances are used to support the liability created from
securities sold, not yet purchased.





Reinsurance
Balances Receivable; Deferred Acquisition Costs, Net; Unearned Premium
Reserves





As of
December 31, 2009, reinsurance balances receivable, deferred acquisition costs,
and unearned premium reserves increased by $13.0 million, or 21.8%, $16.8
million, or 95.1%, and $30.0 million, or 33.7%, respectively, compared to
December 31, 2008. The increases in these balances are a direct result of the
increase in the premiums written during the year ended December 31,
2009.





Notes
Receivable





As of
December 31, 2009, notes receivable increased by $13.7 million primarily as a
result of promissory notes issued to third parties as part of our strategic
investments in select property and casualty insurers. At December 31, 2009, all
notes receivable were current and performing and recorded at cost plus accrued
interest, which approximated their fair values. Included in the notes receivable
at December 31, 2009 were accrued interest receivable of $0.7 million (2008:
$19,201).





Loss
and Loss Adjustment Expense Reserves





December
      31, 2009
            
            
            December
      31, 2008Case
      Reserves
            
            
            IBNR
            
            
            Total
            
            
            Case
      Reserves
            
            
            IBNR
            
            
            Total($
      in thousands)Frequency
            
            $
            19,704
            
            
            $
            69,166
            
            
            $
            88,870
            
            
            $
            6,666
            
            
            $
            49,127
            
            
            $
            55,793Severity
            
            
            20,472
            
            
            
            28,018
            
            
            
            48,490
            
            
            
            —
            
            
            
            25,632
            
            
            
            25,632Total
            
            $
            40,176
            
            
            $
            97,184
            
            
            $
            137,360
            
            
            $
            6,666
            
            
            $
            74,759
            
            
            $
            81,425





Loss
reserves totaled $137.4 million as of December 31, 2009 compared to $81.4
million as of December 31, 2008. The increases are principally attributable to
estimated losses incurred associated with the increase in premiums earned during
the year ended December 31, 2009 resulting from our increased underwriting
activities. Case reserves increased $33.5 million accounting for 59.9% of the
increase, while reserves for losses incurred but not reported increased by
approximately $22.4 million accounting for 40.1% of the increase as of December
31, 2009. The increase in frequency case reserves related primarily to motor
liability contracts ($8.9 million) along with small increases in
workers' compensation ($1.4 million), general liability ($1.1 million), and
personal lines ($1.1 million). The increase in severity case reserves as of
December 31, 2009 related primarily to general liability casualty clash
contracts ($9.2 million), commercial lines ($9.0 million) and professional
liability lines ($2.2 million).





48
 Table of contents





Our severity
business includes contracts that contain or may contain natural peril loss
exposure. As of February 1, 2010, our maximum aggregate loss exposure to any
series of natural peril events was $97.5
million.For purposes of the preceding sentence,
aggregate loss exposure is equal to the difference between the aggregate limits
available in the contracts that contain natural peril exposure minus
reinstatement premiums for the same contracts. We categorize peak zones as:
United States, Europe, Japan and the rest of the world. The following table
provides single event loss exposure and aggregate loss exposure information for
the peak zones of our natural peril coverage as of February 1,
2010:





Zone
            
            Single
      Event
              Loss
            
            
            Aggregate
              Loss($
      in thousands)USA(1)
            
            $
            58,450
            
            
            $
            97,450Europe
            
            
            46,900
            
            
            
            70,900Japan
            
            
            46,900
            
            
            
            70,900Rest
      of the world
            
            
            26,900
            
            
            
            50,900Maximum
      aggregate
            
            
            58,450
            
            
            
            97,450




(1)
            Includes
      the Caribbean





Shareholders’
Equity





Our
shareholders’ equity increased to $729.2 million as of December 31, 2009 from
$491.4 million as of December 31, 2008, an increase of 48.4%. The increase is
principally attributable to the increase in retained earnings from net income of
$209.5 million for the year ended December 31, 2009. In addition, the
non-controlling interest in joint venture increased by $24.5 million primarily
as a result of DME Advisors retaining its performance compensation of $21.9
million for the year ended December 31, 2009, in the joint venture
account.





Liquidity
and Capital Resources





General





We are
organized as a holding company with no operations of our own. As a holding
company, we have minimal continuing cash needs, and most of such needs are
principally related to the payment of administrative expenses. All of our
underwriting operations are conducted through our sole reinsurance subsidiary,
Greenlight Re which underwrites risks associated with our property and casualty
reinsurance programs. There are restrictions on Greenlight Re’s ability to pay
dividends which are described in more detail below. It is our current policy to
retain earnings to support the growth of our business. We currently do not
expect to pay dividends on our ordinary shares.





As of
December 31, 2009, the financial strength of Greenlight Re was rated “A-
(Excellent)” with a stable outlook by A.M. Best. This rating reflects the
A.M. Best’s opinion of our financial strength, operating performance and
ability to meet obligations and it is not an evaluation directed toward the
protection of investors or a recommendation to buy, sell or hold our
Class A ordinary shares.





Sources
and Uses of Funds





Our
sources of funds primarily consist of premium receipts (net of brokerage and
ceding commissions) and investment income (net of advisory compensation and
investment expenses), including realized gains, and other income. We use cash
from our operations to pay losses and loss adjustment expenses, profit
commissions and general and administrative expenses. Substantially all of our
surplus funds, net of funds required for cash liquidity purposes, are invested
with our investment advisor to invest in accordance with our investment
guidelines. As of December 31, 2009, approximately 94.1% of our investments were
comprised of publicly traded equity securities, actively traded debt instruments
and gold bullion, which can all be readily liquidated to meet current and future
liabilities. As of December 31, 2009, the majority of our investments are
liquid, and are predominately securities that are traded on recognized
securities exchanges and valued based on quoted prices in active markets for
identical assets (Level 1). Given our value-oriented long and short investment
strategy, if markets are distressed we would expect the liability of the short
portfolio to decline. Any reduction in the liability would cause our need for
restricted cash to decrease and thereby free cash to be used for any purpose.
Additionally, since the majority of our invested assets are liquid, even in
distressed markets, we believe securities can be sold or covered to generate
cash to pay claims. Since we classify our investments as “trading,” we book all
gains and losses on all our securities in our consolidated statements of income
for each reporting period. Thus, liquidating an investment in a distressed
market has no negative financial implication to the Company as any investment
loss on such a security has already been booked.




49
 Table of contents





For the
year ended December 31, 2009, we generated $50.0 million in cash from
operations mainly as a result of increased underwriting activities, used
$112.7 million for purchase of investments, and generated $0.3
million from financing activities mainly relating to exercised stock
options. For the year ended December 31, 2008, we generated $45.8
million in cash from operations mainly as a result of increases in our
underwriting activities, used $13.6 million to increase our
net investments, and used $2.3 million to repurchase ordinary shares.
Effective January 1, 2008, as a result of adopting FASB’s amendment to topic ASC
825-10-45-3 (Financial Instruments) cash flows relating to our investment
portfolio are no longer classified as an operating activity, and instead have
been classified as an investing activity to reflect the underlying nature and
purpose of our investing strategies.





As of
December 31, 2009, we believe we have sufficient cash flow from operations to
meet our foreseeable liquidity requirements. We expect that our operational
needs for liquidity will be met by cash, funds generated from underwriting
activities and investment income, including realized gains. We have no current
plans to issue debt and expect to fund our operations for the next 12 months
from operating cash flow. However, we cannot provide assurances that in the
future we will not incur indebtedness to implement our business strategy, pay
claims or make acquisitions.





Although
Greenlight Capital Re is not subject to any significant legal prohibitions on
the payment of dividends, Greenlight Re is subject to Cayman Islands regulatory
constraints that affect its ability to pay dividends to us and include a minimum
net worth requirement. Currently the minimum net worth requirement for
Greenlight Re is $120,000. As of December 31, 2009 Greenlight Re exceeded the
minimum required by $730.0 million. By law, Greenlight Re is restricted from
paying a dividend if such a dividend would cause its net worth to drop to less
than the required minimum.





Letters
of Credit





Greenlight Re
is currently not licensed or admitted as a reinsurer in any jurisdiction other
than the Cayman Islands. Because certain jurisdictions do not permit domestic
insurance companies to take credit on their statutory financial statements
unless appropriate measures are in place for reinsurance obtained from
unlicensed or non-admitted insurers we anticipate that all of our U.S. clients
and some of our non-U.S. clients will require us to provide collateral through
funds withheld, trust arrangements, letters of credit or a combination
thereof.





As of
December 31, 2009, Greenlight Re had a letter of credit facility of $400.0
million with Citibank, N.A. with a termination date of October 11, 2010. The
termination date is automatically extended for an additional year unless written
notice of cancellation is delivered to the other party at least 120 days prior
to the termination date.




As
of December 31, 2009, Greenlight Re had a $25.0 million letter of credit
facility with Butterfield Bank (Cayman) Limited ("Butterfield Bank") with a
termination date of June 6, 2010. The termination date is automatically
extended for an additional year unless written notice of cancellation is
delivered to the other party at least 30 days prior to the termination
date.





As of
December 31, 2009, Greenlight Re had a $50.0 million letter of credit
facility with Bank of America, N.A. with a termination date of July 20,
2010. The termination date is automatically extended for an additional year
unless notice of cancellation is delivered to the other party at least
90 days prior to the termination date.




As of
December 31, 2009, an aggregate of $278.4 million (December 31, 2008:
$167.3 million) in letters of credit were issued from the available $475.0
million facilities. Under the letter of credit facilities, we pledge assets that
may consist of equity securities and cash equivalents. As of December 31, 2009,
we had pledged an aggregate of $315.2 million (December 31, 2008: $220.2
million) of equity securities and cash equivalents as security for our letter of
credit facilities.





The amount of
collateral, currently in the form of letters of credit, posted for the benefit
of our clients is based on the specific collateral requirement as stated in each
reinsurance contract. For U.S. clients, the amount of letters of credit required
is typically equal to the client’s reinsurance losses recoverable including IBNR
plus unearned premium reserve that they book for statutory purposes on each
contract. These balances need to be collateralized in order for our client to
get statutory credit for their reinsurance assets which is standard practice in
the reinsurance industry.  Alternatively, the amount of collateral
posted to a client may be a fixed negotiated amount.





Once letters
of credit are issued to our clients, the minimum amount of assets that we pledge
to our letter of credit providers depends upon the requirements stated in the
specific letter of credit facility agreement. The amount of pledged assets
required depends on the specific investment instrument that we transfer to the
pledge account. The amount of credit that is given on the pledged assets depends
on the type of instrument and the exchange on which that instrument is
traded.  For example, under the terms of the letter of credit facility
with Citibank, N.A., if we pledge an equity security that is traded on the New
York Stock Exchange, we receive a fixed percentage credit for the market value
of such a security. If the market value of these securities were to decline, we
would be obligated to pledge additional assets. Conversely if the market value
of these securities increased we would be entitled to withdraw any excess
pledged assets from the account if we so choose. The ultimate amount of pledged
assets posted is simply the value of securities held in a designated pledge
account, which may be greater than the minimum required.





Each of
the facilities contains various covenants that, in part, restrict
Greenlight Re's ability to place a lien or charge on the pledged assets and
further restrict Greenlight Re’s ability to issue any debt without the consent
of the letter of credit provider. Additionally, if an event of default exists,
as defined in the letter of credit agreements, Greenlight Re will be prohibited
from paying dividends to us. For the year ended December 31, 2009, the Company
was in compliance with all of the covenants under each of
these facilities.





50
 Table of contents





Capital





Our capital
structure currently consists entirely of equity issued in two separate classes
of ordinary shares. We expect that existing capital base and internally
generated funds will be sufficient to implement our business strategy.
Consequently, we do not presently anticipate that we will incur any material
indebtedness in the ordinary course of our business. We filed a Form S-3
registration statement for an aggregate principal amount of $200.0 million in
securities, which was declared effective by the SEC on July 10,
2009, in order to provide us with additional flexibility and timely access
to public capital markets should we require additional capital for working
capital, capital expenditures, acquisitions, and for other general corporate
purposes.We have not made any significant commitments for capital
expenditures during the period as of December 31, 2009.





On
August 5, 2008, the Board adopted a share repurchase plan authorizing
management to repurchase up to 2.0 million Class A ordinary shares. We may
from time to time repurchase shares to optimize our capital structure. Shares
may be purchased in the open market or through privately negotiated
transactions. The timing of such repurchases and actual number of shares
repurchased will depend on a variety of factors including price, market
conditions and applicable regulatory and corporate requirements. The plan, which
expires on June 30, 2011, does not require us to repurchase any specific number
of shares and may be modified, suspended or terminated at any time without prior
notice. As of December 31, 2009, we had repurchased 228,900 shares under the
share repurchase plan.





We have
been assigned a financial strength rating of ‘‘A− (Excellent)’’ by A.M. Best.
This rating reflects the rating agency’s opinion of our financial strength,
operating performance and ability to meet obligations. If an independent rating
agency downgrades or withdraws our rating, we could be severely limited or
prevented from writing any new reinsurance contracts, which would significantly
and negatively affect our business. Insurer financial strength ratings are based
upon factors relevant to policyholders and are not directed toward the
protection of investors. Our rating may be revised or revoked at the sole
discretion of the rating agency.





Contractual
Obligations and Commitments





The
following table shows our aggregate contractual obligations by time period
remaining to due date as of December 31, 2009:





Less
      than
              1
      year
            
            
            1-3
      years
            
            
            3-5
      years
            
            
            More
      than 5 years
            
            
            Total($
      in thousands)Operating
      leases obligations (1)
            
            $
            345
            
            
            $
            552
            
            
            $
            552
            
            
            $
            967
            
            
            $
            2,416Specialist
      service agreement
            
            
            689
            
            
            
            550
            
            
            
            —
            
            
            
            —
            
            
            
            1,239Private
      equity investments (2)
            
            
            16,836
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            16,836Loss
      and loss adjustment expense reserves (3)
            
            
            58,607
            
            
            
            47,790
            
            
            
            20,103
            
            
            
            10,860
            
            
            
            137,360Total
            
            $
            76,477
            
            
            $
            48,892
            
            
            $
            20,655
            
            
            $
            11,827
            
            
            $
            157,851





(1)
            Reflects
      our contractual obligations pursuant to the September 1, 2005 lease
      agreement and the July 9, 2008 lease agreement as described
      below.





(2)
            As
      of December 31, 2009 we have made total commitments of $44.5 million in
      private and unlisted investments, of which we have invested
      $27.7 million, and our remaining commitments to these investments
      total $16.8 million. Given the nature of the private equity investments,
      we are unable to determine with any degree of accuracy on when the
      commitments will be called. As such, for the purposes of the above table,
      we have assumed that all commitments with no fixed payment schedule will
      be made within one year. Under our investment guidelines, in effect as of
      the date hereof, no more than 10% of the assets in the investment
      portfolio may be held in private equity securities without specific
      approval from the Board of
Directors.





(3)
            Due
      to the nature of our reinsurance operations, the amount and timing of the
      cash flows associated with our reinsurance contractual liabilities will
      fluctuate, perhaps materially, and, therefore, are highly
      uncertain.





On
September 1, 2005 we entered into a five-year lease agreement for office
premises in the Cayman Islands. The lease repayment schedule is included under
operating lease obligations in the above table and in the accompanying
consolidated financial statements.





51
 Table of contents





On July 9, 2008, we signed a ten year lease agreement for new office space
in the Cayman Islands with the option to renew for an additional five year term.
The lease term is effective from July 1, 2008, and the rental payments
commenced on December 1, 2008. We occupied the premises in August 2009.
Under the terms of the lease agreement, our minimum annual rent payments will be
$253,539 for the first three years, increasing by 3% thereafter each year to
reach $311,821 by the tenth year. The minimum lease payments are included in the
above table under operating lease obligations and in Note 14 to the
accompanying consolidated financial statements.





We have
entered into a service agreement with a specialist service provider for the
provision of administration and support in developing and maintaining
business relationships, reviewing and recommending programs and managing
risks relating to certain specialty lines of business. The specialist service
provider does not have any authority to bind the Company to any reinsurance
contracts. Under the terms of the agreement, the Company has committed to
quarterly payments to the specialist service provider. If the agreement is
terminated, the Company is obligated to make minimum payments for another two
years to ensure any contracts to which the Company is bound are
adequately administered by the specialist service provider. The minimum
payments are included in the above table under specialist service agreement and
in Note 14 to the accompanying consolidated financial statements.





On January 1,
2008, we entered into an agreement wherein the Company and DME Advisors agreed
to create a joint venture for the purposes of managing certain jointly held
assets. The term of the agreement is January 1, 2008 through December 31, 2010,
with automatic three-year renewals unless either the Company or DME Advisors
terminates the agreement by giving 90 days notice prior to the end of the
three-year term. Pursuant to this agreement, the Company pays a monthly
management fee of 0.125% on the Company’s share of the assets managed by DME
Advisors and performance compensation of 20% on the net investment income
of the Company’s share of assets managed by DME Advisors subject to a loss carry
forward provision. The loss carry forward provision allows DME Advisors to
earn reduced incentive compensation of 10% on net investment income in any year
subsequent to the year in which the investment account incurs a loss, until all
the losses are recouped and an additional amount equal to 150% of the
aggregate loss is earned. DME Advisors is not entitled to earn
performance compensation in a year in which the investment portfolio incurs a
loss. For the year ended December 31, 2008 the portfolio reported a net
investment loss and as a result no performance compensation was paid to DME
Advisors. The performance compensation for the year ended December 31, 2009 and
subsequent years will be reduced to 10% of net investment income until the
total loss carry forward balance is recovered. As of December 31, 2009, the
loss carry forward balance was $94.3 million. For the year ended
December 31, 2009, performance compensation of $21.9 million at the reduced
rate of 10% of investment income was allocated to DME Advisors’ joint venture
account





In February
2007, we entered into a service agreement with DME Advisors pursuant to which
DME Advisors will provide investor relations services to us for compensation of
$5,000 per month (plus expenses). The agreement had an initial term of one year,
and will continue for sequential one year periods until terminated by us or DME
Advisors. Either party may terminate the agreement for any reason with
30 days prior written notice to the other party.





Off-Balance
Sheet Financing Arrangements





We have
no obligations, assets or liabilities, other than those derivatives in our
investment portfolio and those disclosed in the consolidated financial
statements, which would be considered off-balance sheet arrangements. We do not
participate in transactions that create relationships with unconsolidated
entities or financial partnerships, often referred to as variable interest
entities, which would have been established for the purpose of facilitating
off-balance sheet arrangements.







ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK





We
believe we are principally exposed to six types of market risk:





•
            equity
      price risk;





•
            foreign
      currency risk;





•
            interest
      rate risk;





•
            credit
      risk;





•
            effects
      of inflation; and





•
            political
      risk





52
 Table of contents




Equity Price
Risk. As of December 31, 2009, our investment portfolio included
significant long and short equity securities, along with certain equity-based
derivative instruments, the carrying values of which are primarily based on
quoted market prices. Generally, market prices of common equity securities are
subject to fluctuation, which could cause the amount to be realized upon the
closing of the position to differ significantly from the current reported value.
This risk is partly mitigated by the presence of both long and short equity
securities. As of December 31, 2009, a 10% decline in the price of each of these
listed equity securities and equity-based derivative instruments would result in
a $7.3 million, or 0.9%, decline in the fair value of the total investment
portfolio.





Computations
of the prospective effects of hypothetical equity price changes are based on
numerous assumptions, including the maintenance of the existing level and
composition of investment securities and should not be relied on as indicative
of future results.





Foreign Currency
Risk. Certain of our reinsurance contracts provide that ultimate losses
may be payable in foreign currencies depending on the country of original loss.
Foreign currency exchange rate risk exists to the extent that there is an
increase in the exchange rate of the foreign currency in which losses are
ultimately owed. As of December 31, 2009, we have no known losses payable in
foreign currencies.





While we
do not seek to specifically match our liabilities under reinsurance policies
that are payable in foreign currencies with investments denominated in such
currencies, we continually monitor our exposure to potential foreign currency
losses and will consider the use of forward foreign currency exchange contracts
in an effort to hedge against adverse foreign currency movements.





Through
cash, options and investments in securities denominated in foreign currencies,
we are also exposed to foreign currency risk. Foreign currency exchange rate
risk is the potential for adverse changes in the U.S. dollar value of
investments (long and short), speculative foreign currency options and
cash positions due to a change in the exchange rate of the foreign currency
in which cash and financial instruments are denominated. As of
December 31, 2009, some of our currency exposure resulting from foreign
denominated securities (longs and shorts) was reduced by offsetting cash
balances (shorts and longs) denominated in the corresponding foreign
currencies. The following table summarizes the net impact that a 10%
increase and decrease in the value of the United States dollar against select
foreign currencies would have on the value of our investment portfolio as of
December 31, 2009:






10%
      increase in U.S. dollar
              
              
              
              10% decrease in U.S. dollarForeign
      Currency
              
              
              Change
      in
                  fair
      value
              
              
              Change
      in fair value as % of investment portfolio
              
              
              
              Change
      in
                  fair
      value
              
              
              Change
      in fair value as % of investment portfolio($
      in thousands)British
      Pounds
              
              $
              (1,518
              )
              
              (0.18
              )%
              
              $
              1,518
              
              
              0.18
              %Canadian
      Dollar
              
              
              (2,396
              )
              
              (0.28
              )
              
              
              2,396
              
              
              0.28Indian
      Rupee
              
              
              1,606
              
              
              0.19
              
              
              
              (1,606
              )
              
              (0.19
              )Japanese
      Yen
              
              
              10,224
              
              
              1.19
              
              
              
              (6,294
              )
              
              (0.73
              )Swiss
      Franc
              
              
              (2,204
              )
              
              (0.26
              )
              
              
              2,204
              
              
              0.26Other
              
              
              (777
              )
              
              (0.09
              )
              
              
              777
              
              
              0.09Total
              
              $
              4,934
              
              
              0.57
              %
              
              $
              (1,005
              )
              
              (0.12
              )%





Computations
of the prospective effects of hypothetical currency price changes are based on
numerous assumptions, including the maintenance of the existing level and
composition of investment in securities denominated in foreign currencies and
related hedges, and should not be relied on as indicative of future
results.





Interest Rate
Risk. Our investment portfolio includes interest rate sensitive
securities, such as corporate debt instruments, credit default swaps, and
interest rate options. The primary market risk exposure for any debt
security is interest rate risk. As interest rates rise, the market value of our
long fixed-income portfolio falls, and the converse is also true as
interest rates fall. Additionally, some of our derivative investments may
also be credit sensitive and their value may indirectly fluctuate with
changes in interest rates.  The following table summarizes the impact
that a 100 basis point increase and decrease in interest rates would have
on the value of our investment portfolio as of December 31, 2009:





100
      basis point increase
              in
      interest rates
            
            
            100
      basis point decrease
              in
      interest ratesChange
      in
              fair
      value
            
            Change
      in fair value as % of investment portfolio
            
            
            Change
      in
              fair
      value
            
            
            Change
      in fair value as % of investment portfolio($
      in thousands)Debt
      instruments
            
            $
            (2,424
            )
            (0.28
            )%
            
            $
            2,595
            
            
            
            0.30
            %Credit
      default swaps
            
            
            (261
            )
            (0.03
            )
            
            
            261
            
            
            
            0.03Interest
      rate options
            
            
            20,346
            
            2.36
            
            
            
            (9,005
            )
            
            
            (1.05
            )Net
      exposure to interest rate risk
            
            $
            17,661
            
            2.05
            %
            
            $
            (6,149
            )
            
            
            (0.72
            )%





Credit
Risk.  We are exposed to credit risk primarily from the possibility that
counterparties may default on their obligations to us. The amount of the maximum
exposure to credit risk is indicated by the carrying value of our financial
assets. In addition, the securities, commodities, and cash in our investment
portfolio are held with several prime brokers and custodians and we have credit
risk from the possibility that one or more of them may default on their
obligations to us. Other than our investment in derivative contracts and
corporate debt, if any, and the fact that our investments and majority of cash
balances are held by prime brokers and custodians on our behalf, we have no
significant concentrations of credit risk.





Effects of
Inflation. We do not believe that inflation has had or will have a
material effect on our combined results of operations, except insofar as
inflation may affect interest rates.





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 Table of contents




Political
Risk.We are exposed to political risk to the extent that our
investment advisor, on our behalf and subject to our investment guidelines,
trades securities that are listed on various U.S. and foreign exchanges and
markets. The governments in any of these jurisdictions could impose
restrictions, regulations or permanent measures, which may have a material
adverse impact on our investment strategy. In addition, governments in the
U.S. and other jurisdictions could impose new tax rules and regulations which
may have a material adverse impact on our operations.







ITEM 8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA





Information
with respect to this Item is set forth under Item 15.





ITEM 9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE





There
have been no disagreements with any accountants regarding accounting and
financial disclosure for the period since the Company’s incorporation on July
13, 2004 through the date of this filing.





ITEM 9A.              
CONTROLS AND PROCEDURES





As
required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934,
the Company has evaluated, with the participation of management, including the
Chief Executive Officer and the Chief Financial Officer, the effectiveness of
its disclosure controls and procedures (as defined in such rules) as of the end
of the period covered by this report. Based on such evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports prepared in accordance with
the rules and regulations of the Securities and Exchange Commission (“SEC”) is
recorded, processed, summarized and reported within the time periods specified
by the SEC’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by an issuer in the reports that it files or submits
under the Securities Exchange Act of 1934 is accumulated and communicated to the
issuer's management, including its principal executive officer and principal
financial officer, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure.





Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that the Company’s disclosure controls and procedures will
prevent all errors and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake.





Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control. The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be
detected.





Changes
in Internal Control Over Financial Reporting





There have
been no changes in the Company’s internal control over financial reporting that
occurred during the fourth quarter of the year ended December 31, 2009 that
have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting. The Company continues to
review its disclosure controls and procedures, including its internal controls
over financial reporting, and may from time to time make changes aimed at
enhancing their effectiveness and to ensure that the Company’s systems evolve
with its business.





54
 Table of contents





Management
Report on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control system is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles in the United States of America
(“U.S. GAAP”) and includes those policies and procedures that:





•
            
            pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      company;





•
            
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with U.S. GAAP, and that
      receipts and expenditures of the company are being made only in accordance
      with authorizations of management and directors of the company;
      and





•
            
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the company’s assets that
      could have a material effect on its financial
  statements.





Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Further, because of changes in conditions, effectiveness of
internal control over financial reporting may vary over time. Our system
contains self-monitoring mechanisms, and actions are taken to correct
deficiencies as they are identified.





Our
management conducted an evaluation of the effectiveness of the system of
internal control over financial reporting based on the framework in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on this evaluation, our management concluded
that our system of internal control over financial reporting was effective as of
December 31, 2009. The effectiveness of our internal control over financial
reporting has been audited by BDO Seidman, LLP, an independent registered public
accounting firm, as stated in their report, which is included
herein.





ITEM 9B.  OTHER INFORMATION





None


55
 Table of contents




PART III





ITEM 10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





This item
is omitted because a definitive proxy statement that involves the election of
directors will be filed with the SEC not later than 120 days after the close of
the fiscal year pursuant to Regulations 14A, which proxy statement is
incorporated by reference.





ITEM 11.
            EXECUTIVE
      COMPENSATION





This item
is omitted because a definitive proxy statement that involves the election of
directors will be filed with the SEC not later than 120 days after the close of
the fiscal year pursuant to Regulations 14A, which proxy statement is
incorporated by reference.





ITEM 12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS





This item
is omitted because a definitive proxy statement that involves the election of
directors will be filed with the SEC not later than 120 days after the close of
the fiscal year pursuant to Regulations 14A, which proxy statement is
incorporated by reference.





ITEM 13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE





This item
is omitted because a definitive proxy statement that involves the election of
directors will be filed with the SEC not later than 120 days after the close of
the fiscal year pursuant to Regulations 14A, which proxy statement is
incorporated by reference.





ITEM 14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES





This item
is omitted because a definitive proxy statement that involves the election of
directors will be filed with the SEC not later than 120 days after the close of
the fiscal year pursuant to Regulations 14A, which proxy statement is
incorporated by reference.





56





PART IV








ITEM 15.
            EXHIBITS AND FINANCIAL STATEMENT
      SCHEDULES





Page(a)(1)
            Financial
      StatementsReport of Independent Registered Public Accounting
      Firm (on the internal control over financial
reporting)
            
            
            F-1Report of Independent Registered Public Accounting
      Firm (on the consolidated financial statements)
            
            
            F-2Consolidated Balance Sheets as of December 31,
      2009 and
      2008
            
            
            F-3Consolidated Statements of Income for the Years
      Ended December 31, 2009, 2008 and 2007
            
            
            F-4Consolidated Statements of Shareholders’ Equity
      for the Years Ended December 31, 2009, 2008 and
    2007
            
            
            F-5Consolidated Statements of Cash Flows for the
      Years Ended December 31, 2009, 2008 and 2007
            
            
            F-6Notes to the Consolidated Financial
      Statements
            
            
            F-7(a)(2)
            Financial
      Statement SchedulesSchedule I – Summary of Investments — Other Than
      Investments in Related Parties
            
            
            F-29Schedule II – Condensed Financial Information of
      Registrant
            
            
            F-30Schedule III – Supplementary Insurance
      Information
            
            
            F-32Schedule IV – Supplementary Reinsurance
      Information
            
            
            F-33








57








Exhibit
      Number
            Description
      of Exhibit3.1
            Third
      Amended and Restated Memorandum and Articles of Association as revised by
      special resolution on July 10, 2008. (incorporated by reference to
      Exhibit 3.1 of the Company’s  Form 10-Q filed on August 7,
      2008)4.1
            Form
      of Specimen Certificate of Class A ordinary shares (incorporated by
      reference to Exhibit 4.1 of the Company’s Registration Statement
      No. 333-139993)4.2
            Share
      Purchase Option, dated August 11, 2004, by and between the Registrant
      and First International Capital Holdings, Ltd. (incorporated by reference
      to Exhibit 4.2 of the Company’s Registration Statement
      No. 333-139993)10.1
            $200,000,000
      Letter of Credit Facility, dated October 12, 2005, by Citibank, N.A.
      to Greenlight Reinsurance, Ltd., as amended (incorporated by reference to
      Exhibit 10.1 of the Company’s Registration Statement
      No. 333-139993)10.2
            Letter
      of Credit Facility amendment letter dated November 2, 2007 and
      acknowledged and accepted on November 8, 2007 between Greenlight
      Reinsurance, Ltd. and Citibank, N.A. (incorporated by reference to Exhibit
      10.1 of the Company’s Current Report on Form 8-K filed with the SEC on
      November 9, 2007)10.3
            Letter
      of Credit Agreement dated June 6, 2007 between Greenlight
      Reinsurance, Ltd. and Bank Austria Cayman Islands Ltd. (incorporated by
      reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K
      filed with the SEC on June 8, 2008)10.4
            Deed
      of Novation dated December 15, 2008, between UniCredit Bank Cayman Islands
      Ltd., Butterfield Bank (Cayman) Limited, and Greenlight Reinsurance, Ltd.
      (incorporated by reference to Exhibit 10.1 of the Company’s Current report
      on Form 8-K filed with the SEC on December 22, 2008)10.5
            Form
      of Securities Purchase Agreement for Class A ordinary shares by and
      between the Registrant and each of the subscribers thereto (incorporated
      by reference to Exhibit 10.2 of the Company’s Registration Statement
      No. 333-139993)10.6
            Promissory
      Note, dated August 11, 2004, for $24,500,000 by and between the
      Registrant, as payee, and Greenlight Capital Investors, LLC, as maker
      (incorporated by reference to Exhibit 10.3 of the Company’s
      Registration Statement No. 333-139993)10.7
            Second
      Amended and Restated Investment Advisory Agreement, dated January 1,
      2007, by and between Greenlight Reinsurance, Ltd. and DME Advisors, LP
      (incorporated by reference to Exhibit 10.4 of the Company’s
      Registration Statement No. 333-139993)10.8
            Agreement
      by and among Greenlight Reinsurance, Ltd., Greenlight Capital Re, Ltd.
      (for limited purpose) and DME Advisors dated as of January 1, 2008
      (incorporated by reference to Exhibit 10.1 of the Company’s Current Report
      on Form 8-K filed with the SEC on January 3, 2008)10.9
            Termination
      Agreement by and among Greenlight Reinsurance, Ltd., Greenlight Capital
      Re, Ltd. and DME Advisors, LP dated as of January 1, 2008
      (incorporated by reference to Exhibit 10.2 of the Company’s Current Report
      on Form 8-K filed with the SEC on January 3, 2008)10.10
            Greenlight
      Capital Re, Ltd. Third Amended and Restated 2004 Stock Incentive Plan
      (incorporated by reference to Exhibit 10.19 of the Company’s Registration
      Statement No. 333-139993)10.11
            Form
      of Restricted Stock Award Agreement by and between the Registrant and the
      Grantee (incorporated by reference to Exhibit 10.6 of the Company’s
      Registration Statement No. 333-139993)10.12
            Form
      of Stock Option Agreement (incorporated by reference to Exhibit 10.7
      of the Company’s Registration Statement
    No. 333-139993)10.13
            Greenlight
      Capital Re, Ltd. Form of Directors’ Restricted Stock Award (incorporated
      by reference to Exhibit 10.20 of the Company’s Registration Statement
      No. 333-139993)10.14
            Greenlight
      Capital Re, Ltd. Form of Employees’ Restricted Stock Award (incorporated
      by reference to Exhibit 10.21 of the Company’s Registration Statement
      No. 333-139993)10.15
            Form
      of Shareholders’ Agreement, dated August 11, 2004, by and among the
      Registrant and each of the subscribers (incorporated by reference to
      Exhibit 10.8 of the Company’s Registration Statement No.
      333-139993)10.16
            Administration
      Agreement, dated August 11, 2004, between the Registrant and HSBC
      Financial Services (Cayman) Limited (incorporated by reference to Exhibit
      10.9 of the Company’s Registration Statement No.
    333-139993)10.17
            Administration
      Agreement, dated August 11, 2004, between Greenlight Reinsurance, Ltd. and
      HSBC Financial Services (Cayman) Limited (incorporated by reference to
      Exhibit 10.10 of the Company’s Registration Statement No.
      333-139993)10.18
            Form
      of Deed of Indemnity between the Registrant and each of its directors and
      certain of its officers (incorporated by reference to Exhibit 10.11 of the
      Company’s Registration Statement No. 333-139993)10.19
            Amended
      and Restated Employment Agreement, dated as of December 30, 2008, by
      and among Greenlight Capital Re, Ltd., Greenlight Reinsurance, Ltd. and
      Leonard Goldberg (incorporated by reference to Exhibit 10.1 of the
      Company’s Current Report on Form 8-K filed with the SEC on January 2,
      2009)10.20
            Amended
      and Restated Employment Agreement, dated as of December 30, 2008, by
      and among Greenlight Capital Re, Ltd., Greenlight Reinsurance, Ltd. and
      Tim Courtis (incorporated by reference to Exhibit 10.2 of the
      Company’s Current Report on Form 8-K filed with the SEC on January 2,
      2009)10.21
            Amended
      and Restated Employment Agreement, dated as of December 30, 2008, by
      and between Greenlight Reinsurance, Ltd. and Barton Hedges
      (incorporated by reference to Exhibit 10.3 of the Company’s Current
      Report on Form 8-K filed with the SEC on January 2,
  2009)





58








10.22
            Lease,
      dated August 25, 2005, by and between Greenlight Reinsurance, Ltd.
      and Grand Pavilion Ltd. (incorporated by reference to Exhibit 10.15
      of the Company’s Registration Statement
    No. 333-139993)10.23
            Concurrent
      Private Placement Stock Purchase Agreement for Class B Ordinary
      Shares, dated January 11, 2007, by and between the Registrant and
      David Einhorn (incorporated by reference to Exhibit 10.16 of the
      Company’s Registration Statement No. 333-139993)10.24
            Service
      Agreement, dated as of February 21, 2007 between DME Advisors, LP and
      Greenlight Capital Re, Ltd. (incorporated by reference to
      Exhibit 10.17 of the Company’s Registration Statement
      No. 333-139993)10.25
            Multiple
      Line Quota Share Reinsurance Agreement, effective as of October 1,
      2006, between First Protective Insurance Company and Greenlight
      Reinsurance, Ltd. (incorporated by reference to Exhibit 10.22 of the
      Company’s Registration Statement No. 333-139993)10.26
            Amendment
      No. 1, dated February 18, 2009, to the Amended and
      Restated Employment Agreement, dated as of December 30,
      2008, by and among Greenlight Capital Re, Ltd., Greenlight Reinsurance,
      Ltd. and Tim Courtis (incorporated by reference to Exhibit 10.26 of the
      Company's Form 10-K filed on February 23, 2009)10.27
            Amendment
      No. 1, dated February 18, 2009, to the Amended and Restated Employment
      Agreement, dated as of December 30, 2008, by and between
      Greenlight Reinsurance, Ltd. and Barton Hedges (incorporated by reference
      to Exhibit 10.27 of the Company's Form 10-K filed on February 23,
      2009)10.28
            Amendment No.
      1, dated February 20, 2009 to the Agreement dated
      January 1, 2008 by and among Greenlight Reinsurance, Ltd., Greenlight
      Capital Re, Ltd. (for limited purposes) and DME Advisors,
      LP (incorporated by reference to Exhibit 10.28 of the Company's Form
      10-K filed on February 23, 2009)10.29
            Letter
      of credit agreement executed July 21, 2009 between Greenlight Reinsurance,
      Ltd. and Bank of America, N.A. (incorporated by reference to Exhibit 10.1
      of the Company's Form 10-Q filed on November 2, 2009)12.1
            Ratio
      of earnings to fixed charges and preferred share
  dividends21.1
            Subsidiaries
      of the registrant23.1
            Consent
      of BDO Seidman, LLP31.1
            Certification
      of the Chief Executive Officer of Greenlight Capital Re, Ltd. filed
      herewith pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2
            Certification
      of the Chief Financial Officer of Greenlight Capital Re, Ltd. filed
      herewith pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1
            Certification
      of the Chief Executive Officer of Greenlight Capital Re, Ltd. filed
      herewith pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
            Certification
      of the Chief Financial Officer of Greenlight Capital Re, Ltd. filed
      herewith pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002

















59











SIGNATURES








Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.





GREENLIGHT
      CAPITAL RE, LTD.By:
            /s/ Leonard
      GoldbergLeonard
      Goldberg
              Chief
      Executive OfficerDate:
      February 24, 2010








60




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.





/s/ DAVID
      M. EINHORN
            
            /s/ LEONARD
      GOLDBERGDavid
      M. Einhorn
              Director
            
            Leonard
      Goldberg
              Director
      & Chief Executive Officer
              (principal
      executive officer)Date:
      February 24, 2010
            
            Date:
      February 24, 2010/s/ FRANK
      D. LACKNER
            
            /s/ ALAN
      BROOKSFrank
      D. Lackner
              Director
            
            Alan
      Brooks
              DirectorDate:
      February 24, 2010
            
            Date:
      February 24, 2010/s/ IAN
      ISAACS
            
            /s/ JOSEPH
      P. PLATTIan
      Isaacs
              Director
            
            Joseph
      P. Platt
              DirectorDate:
      February 24, 2010
            
            Date:
      February  24,2010/s/ TIM
      COURTIS
            
            /s/
      BRYAN MURPHYTim
      Courtis
              Chief
      Financial Officer
              (principal
      financial and accounting officer)
            
            Bryan
      Murphy
              DirectorDate:
      February 24, 2010
            
            Date:
      February 24, 2010








61





Report of Independent Registered Public Accounting
Firm





The Board
of Directors and Shareholders


Greenlight
Capital Re, Ltd.


Grand
Cayman, Cayman Islands





We have
audited Greenlight Capital Re, Ltd.'s internal control over financial reporting
as of December 31, 2009, based on criteria established inInternal
Control – Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO criteria).  Greenlight Capital Re, Ltd.’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying "Item 9A, Management Report on Internal
Control Over Financial Reporting". Our responsibility is to express an opinion
on the Company’s internal control over financial reporting based on our
audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.




A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




In our
opinion, Greenlight Capital Re, Ltd. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009,
based on the COSO criteria.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Greenlight
Capital Re, Ltd. as of December 31, 2009 and 2008, and the related
consolidated statements of income, shareholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2009 and our report dated
February 24, 2010 expressed an unqualified opinion thereon.





/s/ BDO
Seidman, LLP


Grand
Rapids, Michigan


February
24, 2010








F-1





Report of Independent Registered Public Accounting
Firm








The Board
of Directors and Shareholders


Greenlight
Capital Re, Ltd.


Grand
Cayman, Cayman Islands





We have
audited the accompanying consolidated balance sheets of Greenlight Capital Re,
Ltd. as of December 31, 2009 and 2008 and the related consolidated statements of
income, shareholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2009. In connection with our audits of the financial
statements, we have also audited the financial statement schedules listed in the
accompanying index.  These financial statements and schedules are the
responsibility of the Company’s management.  Our responsibility is to
express an opinion on these financial statements and schedules based on our
audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements and schedules.  We
believe that our audits provide a reasonable basis for our
opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Greenlight Capital Re, Ltd.
at December 31, 2009 and 2008, and the results of its operations and its cash
flows for each of the three years in the period ended December 31,
2009,in
conformity with accounting principles generally accepted in the United States of
America.




Also, in
our opinion, the financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly, in
all material respects, the information set forth therein.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Greenlight Capital Re, Ltd.'s internal control
over financial reporting as of December 31, 2009, based on criteria established
inInternal
Control – Integrated Frameworkissued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and
our report dated February 24, 2010 expressed an unqualified opinion
thereon.








/s/ BDO
Seidman, LLP


Grand
Rapids, Michigan


February
24, 2010








F-2


GREENLIGHT CAPITAL RE, LTD.


CONSOLIDATED
BALANCE SHEETS





December
31, 2009 and 2008


(expressed
in thousands of U.S. dollars, except per share and share amounts)





2009
            
            
            2008AssetsInvestmentsDebt
      instruments, trading, at fair value
            
            $
            95,838
            
            
            $
            70,214Equity
      securities, trading, at fair value
            
            
            593,201
            
            
            
            409,329Other
      investments, at fair value
            
            
            141,561
            
            
            
            14,423Total
      investments
            
            
            830,600
            
            
            
            493,966Cash
      and cash equivalents
            
            
            31,717
            
            
            
            94,144Restricted
      cash and cash equivalents
            
            
            590,871
            
            
            
            248,330Financial
      contracts receivable, at fair value
            
            
            30,117
            
            
            
            21,419Reinsurance
      balances receivable
            
            
            72,584
            
            
            
            59,573Loss
      and loss adjustment expense recoverables
            
            
            7,270
            
            
            
            11,662Deferred
      acquisition costs, net
            
            
            34,401
            
            
            
            17,629Unearned
      premiums ceded
            
            
            6,478
            
            
            
            7,367Notes
      receivable
            
            
            15,424
            
            
            
            1,769Other
      assets
            
            
            4,754
            
            
            
            2,146Total
      assets
            
            $
            1,624,216
            
            
            $
            958,005Liabilities
      and shareholders’ equityLiabilitiesSecurities
      sold, not yet purchased, at fair value
            
            $
            570,875
            
            
            $
            234,301Financial
      contracts payable, at fair value
            
            
            16,200
            
            
            
            17,140Loss
      and loss adjustment expense reserves
            
            
            137,360
            
            
            
            81,425Unearned
      premium reserves
            
            
            118,899
            
            
            
            88,926Reinsurance
      balances payable
            
            
            32,013
            
            
            
            34,963Funds
      withheld
            
            
            6,835
            
            
            
            3,581Other
      liabilities
            
            
            12,796
            
            
            
            6,229Total
      liabilities
            
            
            894,978
            
            
            
            466,565Shareholders’
      equityPreferred
      share capital (par value $0.10; authorized, 50,000,000; none
      issued)
            
            
            —
            
            
            
            —Ordinary
      share capital (Class A: par value $0.10; authorized, 100,000,000; issued
      and outstanding, 30,063,893 (2008: 29,781,736): Class B: par value $0.10;
      authorized, 25,000,000; issued and outstanding, 6,254,949 (2008:
      6,254,949))
            
            
            3,632
            
            
            
            3,604Additional
      paid-in capital
            
            
            481,449
            
            
            
            477,571Non-controlling
      interest in joint venture
            
            
            30,597
            
            
            
            6,058Retained
      earnings
            
            
            213,560
            
            
            
            4,207Total
      shareholders’ equity
            
            
            729,238
            
            
            
            491,440Total
      liabilities and shareholders’ equity
            
            $
            1,624,216
            
            
            $
            958,005











The
accompanying Notes to the Consolidated Financial Statements are an
 integral part of the Consolidated Financial Statements.
 F-3


GREENLIGHT CAPITAL RE, LTD.


CONSOLIDATED
STATEMENTS OF INCOME





Years
ended December 31, 2009, 2008 and 2007


(expressed
in thousands of U.S. dollars, except per share and share amounts)





2009
            
            
            2008
            
            
            2007RevenuesGross
      premiums written
            
            $
            258,818
            
            
            $
            162,395
            
            
            $
            127,131Gross
      premiums ceded
            
            
            (13,276
            )
            
            
            (16,396
            )
            
            
            (26,150
            )Net
      premiums written
            
            
            245,542
            
            
            
            145,999
            
            
            
            100,981Change
      in net unearned premium reserves
            
            
            (30,862
            )
            
            
            (31,050
            )
            
            
            (2,934
            )Net
      premiums earned
            
            
            214,680
            
            
            
            114,949
            
            
            
            98,047Net
      investment income (loss)
            
            
            199,861
            
            
            
            (126,126
            )
            
            
            27,642Other
      income, net
            
            
            4,538
            
            
            
            —
            
            
            
            —Total
      revenues
            
            
            419,079
            
            
            
            (11,177
            )
            
            
            125,689ExpensesLoss
      and loss adjustment expenses incurred, net
            
            
            119,045
            
            
            
            55,485
            
            
            
            39,507Acquisition
      costs, net
            
            
            69,232
            
            
            
            41,649
            
            
            
            38,939General
      and administrative expenses
            
            
            18,994
            
            
            
            13,756
            
            
            
            11,918Total
      expenses
            
            
            207,271
            
            
            
            110,890
            
            
            
            90,364Net
      income (loss) before non-controlling interest and
      income tax benefit
            
            
            211,808
            
            
            
            (122,067
            )
            
            
            35,325Non-controlling
      interest in (income) loss of joint venture
            
            
            (2,312
            )
            
            
            1,163
            
            
            
            —Net
      income (loss) before income tax benefit
            
            
            209,496
            
            
            
            (120,904
            )
            
            
            35,325Income
      tax benefit
            
            
            49
            
            
            
            —
            
            
            
            —Net
      income (loss)
            
            $
            209,545
            
            
            $
            (120,904
            )
            
            $
            35,325Earnings
      (loss) per shareBasic
            
            $
            5.78
            
            
            $
            (3.36
            )
            
            $
            1.16Diluted
            
            
            5.71
            
            
            
            (3.36
            )
            
            
            1.14Weighted
      average number of ordinary shares used in the determination
      ofBasic
            
            
            36,230,501
            
            
            
            35,970,479
            
            
            
            30,405,007Diluted
            
            
            36,723,552
            
            
            
            35,970,479
            
            
            
            30,866,016











The
accompanying Notes to the Consolidated Financial Statements are an
 integral part of the Consolidated Financial Statements.
 F-4


GREENLIGHT CAPITAL RE, LTD.


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY





Years
ended December 31, 2009, 2008 and 2007


(expressed
in thousands of U.S. dollars, except per share and share amounts)





2009
            
            
            2008
            
            
            2007Ordinary
      share capitalBalance
      – beginning of year
            
            $
            3,604
            
            
            $
            3,610
            
            
            $
            2,156Issue
      of Class A ordinary share capital, net of
forfeitures
            
            
            28
            
            
            
            17
            
            
            
            1,191Issue
      of Class B ordinary share capital
            
            
            —
            
            
            
            —
            
            
            
            263Repurchase
      of Class A ordinary shares
            
            
            —
            
            
            
            (23
            )
            
            
            —Balance
      – end of year
            
            $
            3,632
            
            
            $
            3,604
            
            
            $
            3,610Additional
      paid-in capitalBalance
      – beginning of year
            
            $
            477,571
            
            
            $
            476,861
            
            
            $
            219,972Issue
      of Class A ordinary share capital
            
            
            716
            
            
            
            9
            
            
            
            207,144Issue
      of Class B ordinary share capital
            
            
            —
            
            
            
            —
            
            
            
            49,737Repurchase
      of Class A ordinary shares
            
            
            —
            
            
            
            (2,311
            )
            
            
            —Share-based
      compensation expense, net of forfeitures
            
            
            3,410
            
            
            
            3,000
            
            
            
            2,884Options
      repurchased
            
            
            (248
            )
            
            
            —
            
            
            
            (247
            )Initial
      public offering expenses
            
            
            —
            
            
            
            —
            
            
            
            (2,629
            )Short-swing
      sale profit from shareholder
            
            
            —
            
            
            
            12
            
            
            
            —Balance
      – end of year
            
            $
            481,449
            
            
            $
            477,571
            
            
            $
            476,861Non-controlling
      interestBalance
      – beginning of year
            
            $
            6,058
            
            
            $
            —
            
            
            $
            —Non-controlling
      interest contribution in joint venture
            
            
            22,227
            
            
            
            7,221
            
            
            
            —Non-controlling
      interest in income (loss) of joint venture
            
            
            2,312
            
            
            
            (1,163
            )
            
            
            —Balance
      – end of year
            
            $
            30,597
            
            
            $
            6,058
            
            
            $
            —Retained
      earningsBalance
      – beginning of year
            
            $
            4,207
            
            
            $
            125,111
            
            
            $
            90,039Net
      income (loss)
            
            
            209,545
            
            
            
            (120,904
            )
            
            
            35,325Options
      repurchased
            
            
            (192
            )
            
            
            —
            
            
            
            (253
            )Balance
      – end of year
            
            $
            213,560
            
            
            $
            4,207
            
            
            $
            125,111Total
      shareholders’ equity
            
            $
            729,238
            
            
            $
            491,440
            
            
            $
            605,582











The
accompanying Notes to the Consolidated Financial Statements are an
 integral part of the Consolidated Financial Statements.
 F-5


GREENLIGHT CAPITAL RE, LTD.


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Years
ended December 31, 2009, 2008 and 2007


(expressed
in thousands of U.S. dollars, except per share and share amounts)





2009
            
            
            2008
            
            
            2007Cash
      provided by (used in)Operating
      activitiesNet income
      (loss)
            
            $
            209,545
            
            
            $
            (120,904
            )
            
            $
            35,325Adjustments
      to reconcile net income (loss) to net cash provided by (used in)
      operating activitiesNet
      change in unrealized gains and losses on investments and financial
      contracts
            
            
            (192,319
            )
            
            
            151,064
            
            
            
            (23,719
            )Net
      realized gains on investments and financial
contracts
            
            
            (38,512
            )
            
            
            (8,923
            )
            
            
            (13,215
            )Foreign
      exchange gains on restricted cash and cash
    equivalents
            
            
            (1,580
            )
            
            
            (23,474
            )
            
            
            —Non-controlling
      interest in income (loss) of joint venture
            
            
            2,312
            
            
            
            (1,163
            )
            
            
            —Share-based
      compensation expense
            
            
            3,410
            
            
            
            3,000
            
            
            
            2,884Depreciation
      expense
            
            
            117
            
            
            
            40
            
            
            
            40Purchases
      of investments
            
            
            —
            
            
            
            —
            
            
            
            (1,044,933
            )Sales
      of investments
            
            
            —
            
            
            
            —
            
            
            
            943,515Net
      change inRestricted
      cash and cash equivalents
            
            
            —
            
            
            
            —
            
            
            
            (216,887
            )Financial
      contracts receivable, at fair value
            
            
            —
            
            
            
            —
            
            
            
            (222
            )Reinsurance
      balances receivable
            
            
            (13,011
            )
            
            
            (15,717
            )
            
            
            (24,234
            )Loss
      and loss adjustment expense recoverables
            
            
            4,392
            
            
            
            (4,941
            )
            
            
            (6,721
            )Deferred
      acquisition costs, net
            
            
            (16,772
            )
            
            
            (10,327
            )
            
            
            8,980Unearned
      premiums ceded
            
            
            889
            
            
            
            1,377
            
            
            
            (8,744
            )Other
      assets
            
            
            (1,247
            )
            
            
            (1,221
            )
            
            
            753Financial
      contracts payable, at fair value
            
            
            —
            
            
            
            —
            
            
            
            9,106Loss
      and loss adjustment expense reserves
            
            
            55,935
            
            
            
            39,048
            
            
            
            37,400Unearned
      premium reserves
            
            
            29,973
            
            
            
            29,628
            
            
            
            11,752Reinsurance
      balances payable
            
            
            (2,950
            )
            
            
            15,823
            
            
            
            14,904Funds
      withheld
            
            
            3,254
            
            
            
            (3,961
            )
            
            
            7,542Other
      liabilities
            
            
            6,567
            
            
            
            3,360
            
            
            
            495Performance
      compensation payable to related party
            
            
            —
            
            
            
            (6,885
            )
            
            
            (7,739
            )Net
      cash provided by (used in) operating activities
            
            
            50,003
            
            
            
            45,824
            
            
            
            (273,718
            )Investing
      activitiesPurchases
      of investments and financial contracts
            
            
            (1,226,298
            )
            
            
            (1,570,683
            )
            
            
            —Sales
      of investments and financial contracts
            
            
            1,447,431
            
            
            
            1,404,904
            
            
            
            —Change
      in restricted cash and cash equivalents, net
            
            
            (340,961
            )
            
            
            146,751
            
            
            
            —Change
      in notes receivable, net
            
            
            (13,655
            )
            
            
            (1,769
            )
            
            
            —Non-controlling
      interest contribution in joint venture
            
            
            22,227
            
            
            
            7,221
            
            
            
            —Fixed
      assets additions
            
            
            (1,478
            )
            
            
            —
            
            
            
            —Net
      cash used in investing activities
            
            
            (112,734)
            
            
            
            (13,576
            )
            
            
            —Financing
      activitiesNet
      proceeds from share issue
            
            
            28
            
            
            
            17
            
            
            
            255,706Options
      repurchased
            
            
            (440
            )
            
            
            —
            
            
            
            (500
            )Net
      proceeds from exercise of stock options
            
            
            716
            
            
            
            9
            
            
            
            —Repurchase
      of Class A ordinary shares
            
            
            —
            
            
            
            (2,334
            )
            
            
            —Short-swing
      sale profit from shareholder
            
            
            —
            
            
            
            12
            
            
            
            —Net
      cash provided  by (used in) financing
      activities
            
            
            304
            
            
            
            (2,296
            )
            
            
            255,206Net
      (decrease) increase in cash and cash equivalents
            
            $
            (62,427
            )
            
            
            29,952
            
            
            
            (18,512
            )Cash
      and cash equivalents at beginning of the year
            
            
            94,144
            
            
            
            64,192
            
            
            
            82,704Cash
      and cash equivalents at end of the year
            
            $
            31,717
            
            
            $
            94,144
            
            
            $
            64,192Supplementary
      informationInterest
      paid in cash
            
            $
            5,629
            
            
            $
            8,992
            
            
            $
            2,665Interest
      received in cash
            
            
            6,350
            
            
            
            6,528
            
            
            
            14,094Income
      tax paid in cash
            
            
            —
            
            
            
            —
            
            
            
            —





The
accompanying Notes to the Consolidated Financial Statements are an
 integral part of the Consolidated Financial Statements.
 F-6


GREENLIGHT CAPITAL RE, LTD.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





Years
ended December 31, 2009, 2008 and 2007








1.  
DESCRIPTION OF BUSINESS





Greenlight
Capital Re, Ltd. (‘‘GLRE’’) was incorporated as an exempted company under the
Companies Law of the Cayman Islands on July 13, 2004. GLRE’s wholly-owned
subsidiary, Greenlight Reinsurance, Ltd. (‘‘Greenlight Re’’), provides global
specialty property and casualty reinsurance. Greenlight Re has an unrestricted
Class ‘‘B’’ insurance license under Section 4(2) of the Cayman Islands Insurance
Law. Greenlight Re commenced underwriting in April 2006. Effective May 30, 2007,
GLRE completed an initial public offering of 11,787,500 Class A ordinary shares
at $19.00 per share. Concurrently, 2,631,579 Class B ordinary shares of GLRE
were sold at $19.00 per share as part of a private placement. On December 9,
2008, Verdant Holding Company, Ltd (“Verdant”), a wholly owned subsidiary of
GLRE, was incorporated in the state of Delaware principally for the purpose of
making strategic investments in a select group of property and casualty insurers
and general agents.





The Class
A ordinary shares of GLRE are listed on the Nasdaq Global Select Market under
the symbol ‘‘GLRE’’.





As used
herein, the ‘‘Company’’ refers collectively to GLRE and its
subsidiaries.





2.  
SIGNIFICANT ACCOUNTING POLICIES





These
consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America (‘‘U.S. GAAP’’).
The significant accounting policies adopted by the Company are as
follows:





Basis
of Presentation





The
consolidated financial statements include the accounts of GLRE and the
consolidated financial statements of its wholly owned subsidiaries, Greenlight
Re and Verdant. All significant intercompany transactions and balances have been
eliminated on consolidation.









Use
of Estimates





The
preparation of consolidated financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of income and expenses during the year. Actual results could
differ from these estimates.





Cash
and Cash Equivalents





Cash and
cash equivalents consist of cash and certain short-term, highly liquid
investments with original maturity dates of three months or less.





Premium
Revenue Recognition





The
Company accounts for reinsurance contracts in accordance with U.S. GAAP. In the
event that a reinsurance contract does not transfer sufficient risk, deposit
accounting is used and the contract is reported as a deposit
liability.





The
Company writes excess of loss contracts as well as quota-share contracts. The
Company estimates the ultimate premiums for the entire contract period. These
estimates are based on information received from the ceding companies and
estimates from actuarial pricing models used by the Company. For excess of loss
contracts, the total ultimate estimated premiums are recorded as premiums
written at the inception of the contract. For quota-share contracts, the
premiums are recorded as written based on cession statements from cedents which
typically are received monthly or quarterly depending on terms specified in
each contract. For any reporting lag, premiums written are
estimated based on the portion of the ultimate estimated premiums
relating to the risks underwritten during the lag period.





Changes
in premium estimates, including premium receivable on both excess of loss
and quota-share contracts are expected and may result in significant adjustments
in any period. These estimates change over time as additional information
regarding the underlying business volume is obtained. Any subsequent adjustments
arising on such estimates are recorded in the period in which they are
determined.





Certain
contracts allow for re-instatement premiums in the event of a full limit loss
prior to the expiry of a contract. A re-instatement premium is not due until
there is a full limit loss event and therefore in accordance with U.S. GAAP, the
Company records a re-instatement premium as written only in the event that a
client incurs a full limit loss on the contract and the contract allows for a
re-instatement of coverage upon payment of an additional premium.




F-7


Certain
contracts provide for a penalty to be paid if the contract is terminated and
cancelled prior to its expiration term. Cancellation penalties are recognized in
the period the notice of cancellation is received and are recorded in the
consolidated statements of income under other income (expense).





Premiums
written are generally recognized as earned over the contract period in
proportion to the period of risk covered. Unearned premiums consist of the
unexpired portion of reinsurance provided.








Reinsurance
Premiums Ceded





The
Company reduces the risk of future losses on business assumed by reinsuring
certain risks and exposures with other reinsurers (retrocessionaires). The
Company remains liable to the extent that any retrocessionaire fails to meet its
obligations and to the extent the Company does not hold sufficient security for
their unpaid obligations.





Ceded
premiums are written during the period in which the risks incept and are
expensed over the contract period in proportion to the period of protection.
Unearned premiums ceded consist of the unexpired portion of reinsurance
obtained.





Acquisition
Costs





Policy
acquisition costs, such as commission and brokerage costs, relate directly to
and vary with the writing of reinsurance contracts. These costs are deferred and
amortized over the related contract term, and are limited to their estimated
realizable value based on the related unearned premium, anticipated claims
expenses and investment income. Acquisition costs also include profit
commissions which are expensed when incurred. Profit commissions are calculated
and accrued based on the expected loss experience for contracts and recorded
when the current loss estimate indicates that a profit commission is probable
under the contract terms. As of December 31, 2009, $27.4 million (2008: $20.9
million) of profit commission reserves were included in reinsurance
balances payable on the consolidated balance sheets. For the years ended
December 31, 2009, 2008 and 2007, included in acquisition costs were profit
commission expenses of $6.8 million, $13.3 million and $10.6 million,
respectively.





Funds
Withheld





Funds
withheld include reinsurance balances retained from retrocessionaires as
security for a period of time in accordance with the contract terms. Any
interest expense that the Company incurs during the period these funds are
withheld, are included in the consolidated statements of income under net
investment income.





Loss
and Loss Adjustment Expense Reserves and Recoverables





The
Company establishes reserves for contracts based on estimates of the ultimate
cost of all losses including losses incurred but not reported. These estimated
ultimate reserves are based on reports received from ceding companies, industry
data, historical experience as well as the Company's own actuarial estimates.
These estimates are reviewed periodically and adjusted as necessary. Since
reserves are estimates, the final settlement of losses may vary from the
reserves established and any adjustments to the estimates, which may be
material, are recorded in the period they are determined.





Loss and
loss adjustment expense recoverables include the amounts due from
retrocessionaires for paid and unpaid loss and loss adjustment expenses on
retrocession agreements. Ceded losses incurred but not reported are estimated
based on the Company’s actuarial estimates. These estimates are reviewed
periodically and adjusted when deemed necessary. The Company may not be able to
ultimately recover the loss and loss adjustment expense recoverable amounts due
to the retrocessionaires’ inability to pay. The Company regularly evaluates the
financial condition of its retrocessionaires and records provisions for
uncollectible reinsurance recoverables when recovery becomes
unlikely.





Notes
Receivable





Notes
receivable include promissory notes receivable from third party entities. These
notes are recorded at cost along with accrued interest, if any, which
approximates the fair value. The Company regularly reviews all notes receivable
for impairment and records provisions for uncollectible notes and interest
receivable for non-performing notes. For the year ended December 31, 2009,
the notes earned interest at annual interest rates ranging from 6% to 10% and
had maturity terms ranging from 5 years to 10 years. Included in the notes
receivable balance was accrued interest of $0.7 million at December 31, 2009
(December 31, 2008: $19,201) and all notes were considered current and
performing.





Deposit
Assets and Liabilities





The Company
accounts for reinsurance contracts in accordance with U.S. GAAP. In the event
that a reinsurance contract does not transfer sufficient risk, or a contract
provides retroactive reinsurance, deposit accounting is used. Any losses on such
contracts are charged to earnings immediately and recorded in the consolidated
statements of income as other expense. Any gains relating to such contracts are
deferred and amortized over the estimated remaining settlement period. All such
deferred gains are included in reinsurance balances payable in the consolidated
balance sheets. Amortized gains are recorded in the consolidated
statements of income as other income. At December 31, 2009, included in the
consolidated balance sheets under reinsurance balances receivable and
reinsurance balances payable were $2.1 million and $0.8 million
of deposit assets and deposit liabilities, respectively. For the year ended
December 31, 2009, included in other income (expense) were $0.6
million relating to losses on deposit accounted contracts, and $1.5
million relating to gains on deposit accounted contracts. There were no
deposit assets or deposit liabilities at December 31, 2008.





F-8




Fixed
Assets





Fixed assets
are included in other assets on the consolidated balance sheets and are recorded
at cost. Fixed assets are comprised of computer software, furniture and fixtures
and leasehold improvements and are depreciated, using the straight-line method,
over their estimated useful lives, which is five years for computer software,
and furniture and fixtures. Leasehold improvements are amortized over the
lesser of the estimated useful lives of the assets or remaining lease
term. At December 31, 2009, the cost, accumulated depreciation and net book
values of the fixed assets were as follows:





Cost
            
            
            Accumulated
      depreciation
            
            
            Net
      book value($ in
      thousands)Computer
      software
            
            $
            200
            
            
            $
            (140
            )
            
            $
            60Furniture
      and fixtures
            
            
            261
            
            
            
            (22
            )
            
            
            239Leasehold
      improvements
            
            
            1,217
            
            
            
            (55
            )
            
            
            1,162Total
            
            $
            1,678
            
            
            $
            (217
            )
            
            $
            1,461





At December
31, 2008, fixed assets consisted of computer software with a cost of $200,000
and accumulated depreciation of $100,000.











Financial
Instruments





Investments and
Investments in Securities Sold, Not Yet Purchased





The Company’s
investments in debt instruments and equity securities that are classified as
“trading securities” are carried at fair value. The fair values of the listed
equity and debt investments are derived based on quoted prices (unadjusted) in
active markets for identical assets (Level 1 inputs). The fair values of
private debt instruments are derived based on inputs that are observable, either
directly or indirectly, such as market maker or broker quotes reflecting recent
transactions (Level 2 inputs), and are generally derived based on the
average of multiple market maker or broker quotes which are considered to be
binding. Where quotes are not available, private debt instruments are valued
using cash flow models using assumptions and estimates that may be subjective
and non-observable (Level 3 inputs).





The
Company’s “other investments” may include investments in private and unlisted
equity securities, limited partnerships, futures, commodities, exchange traded
options and over-the-counter options (“OTC”), which are all carried at fair
value. The Company maximizes the use of observable direct or indirect inputs
(Level 2 inputs) when deriving the fair values for “other investments”. For
limited partnerships and private and unlisted equity securities, where
observable inputs are not available, the fair values are derived based on
unobservable inputs (Level 3 inputs) such as management’s assumptions
developed from available information using the services of the investment
advisor, including the most recent net asset values. Amounts invested in
exchange traded and OTC call and put options are recorded as an asset or
liability at inception. Subsequent to initial recognition, unexpired exchange
traded option contracts are recorded at fair value based on quoted prices in
active markets (Level 1 inputs). For OTC options or exchange traded options
where a quoted price in an active market is not available, fair values are
derived based upon observable inputs (Level 2 inputs) such as multiple
market maker quotes.





For
securities classified as “trading securities,” and “other investments,” any
realized and unrealized gains or losses are determined on the basis of specific
identification method (by reference to cost and amortized cost, as appropriate)
and included in net investment income in the consolidated statements of
income.





Dividend
income and expense are recorded on the ex-dividend date. The ex-dividend date is
the date as of when the underlying security must have been traded to be eligible
for the dividend declared. Interest income and interest expense are recorded on
an accrual basis.





Derivative
Financial Instruments





U.S. GAAP
requires that an entity recognize all derivatives in the balance sheet at fair
value. It also requires that unrealized gains and losses resulting from changes
in fair value be included in income or comprehensive income, depending on
whether the instrument qualifies as a hedge transaction, and if so, the type of
hedge transaction. Derivative financial instrument assets are generally included
in investments in securities or financial contracts receivable. Derivative
financial instrument liabilities are generally included in financial contracts
payable. The Company's derivatives do not constitute hedges for financial
reporting purposes.





F-9




Financial
Contracts





The
Company enters into financial contracts with counterparties as part of its
investment strategy. Financial contracts which include total return swaps,
credit default swaps, and other derivative instruments are recorded at their
fair value with any unrealized gains and losses included in net investment
income in the consolidated statements of income. Financial contracts receivable
represents derivative contracts whereby the Company is entitled to receive
payments upon settlement of the contract. Financial contracts payable represents
derivative contracts whereby the Company is obligated to make payments upon
settlement on the contract.




Total
return swap agreements, included on the consolidated balance sheets as financial
contracts receivable and financial contracts payable, are derivative financial
instruments whereby the Company is either entitled to receive or obligated to
pay the product of a notional amount multiplied by the movement in an underlying
security, which the Company does not own, over a specified time frame. In
addition, the Company may also be obligated to pay or receive other payments
based on either interest rate, dividend payments and receipts, or foreign
exchange movements during a specified period. The Company measures its rights or
obligations to the counterparty based on the fair value movements of the
underlying security together with any other payments due. These contracts are
carried at fair value, based on observable inputs (Level 2 inputs) with the
resultant unrealized gains and losses reflected in net investment income in the
consolidated statements of income. Additionally, any changes in the value of
amounts received or paid on swap contracts are reported as a gain or loss in net
investment income in the consolidated statements of income.





Financial
contracts may also include exchange traded futures or options contracts that are
based on the movement of a particular index or interest rate. Where such
contracts are traded in an active market, the Company’s obligations or rights on
these contracts are recorded at fair value measured based on the observable
quoted prices of the same or similar financial contract in an active market
(Level 1) or on broker quotes which reflect market information based on actual
transactions (Level 2).





The
Company purchases and sells credit default swaps ("CDS") for the purposes of
either managing its exposure to certain investments, or for other strategic
investment purposes. A CDS is a derivative instrument that provides protection
against an investment loss due to specified credit or default events of a
reference entity. The seller of a CDS guarantees to the buyer a specified amount
if the reference entity defaults on its obligations or fails to perform. The
buyer of a CDS pays a premium over time to the seller in exchange for obtaining
this protection. CDS trading in an active market are valued at fair value
based on broker or market maker quotes for identical instruments in an active
market (Level 2) or based on the current credit spreads on identical
contracts (Level 2).





Share-Based
Compensation





The
Company has established a stock incentive plan for directors, employees and
consultants. In addition, the Company granted share purchase options in 2004 to
a service provider in exchange for services received (see Note 9).





U.S. GAAP
requires the Company to recognize share-based compensation transactions using
the fair value at the grant date of the award. The Company measures compensation
for restricted shares based on the price of the Company’s common shares at the
grant date and the expense is recognized on a straight line basis over the
vesting period. Determining the fair value of share purchase options at the
grant date requires significant estimation and judgment. The Company uses an
option-pricing model (Black-Scholes option pricing model) to assist in the
calculation of fair value for share purchase options. The Company's shares have
not been publicly traded for a sufficient length of time to reasonably estimate
the expected volatility. Therefore the Company based its expected
volatility on the historical volatility of similar entities. The Company
considered factors such as an entity's industry, stage of life cycle, size and
financial leverage when selecting similar entities. The Company uses a
sample peer group of companies in the reinsurance industry to calculate the
historical volatility. Additionally, the Company used the full life of the
option, ten years, as the estimated term of the option, and has assumed
that dividends will not be paid.





If actual
results differ significantly from these estimates and assumptions, particularly
in relation to the Company’s estimation of volatility which requires the most
judgment due to the Company’s limited operating history, share-based
compensation expense, primarily with respect to future share-based awards, could
be materially impacted.





Service
provider share purchase options are expensed in the consolidated statements of
income when services are rendered. For share purchase options issued under the
employee stock incentive plan, compensation cost is calculated and expensed over
the vesting periods on a graded vesting basis (see Note 9).





Foreign
Exchange





The
reporting currency of the Company and all its subsidiaries is the U.S. dollar.
Transactions in foreign currencies are recorded in U.S. dollars at the exchange
rates in effect on the transaction date. Monetary assets and liabilities in
foreign currencies at the balance sheet date are translated at the exchange rate
in effect at the balance sheet date and translation exchange gains and losses,
if any, are included in the consolidated statements of income.





F-10




Other
Assets





Other
assets consist primarily of investment income receivable, prepaid expenses and
fixed assets.





Other
Liabilities





Other
liabilities consist primarily of dividends payable on securities sold, not yet
purchased, and employee bonus accruals.  Under the
Company's bonus program, each employee’s target bonus consists of two
components: a discretionary component based on a qualitative assessment of each
employee’s
performance and a quantitative component based on the return on deployed equity
("RODE") for each underwriting year relating to reinsurance
operations. The qualitative portion of an employee’s
annual bonus is accrued at each employee's target amount, which may differ
significantly from the actual amount approved and awarded annually by the
Compensation Committee. The quantitative portion of each employee’s annual bonus
is accrued based on the expected RODE for each underwriting year and adjusted
for changes in the expected RODE each quarter until the final
quantitative bonus is calculated and paid two years from the end of
the fiscal year in which the business was underwritten. The
expected RODE calculationutilizesproprietary
modelswhichrequiresignificant estimation and judgment. Actual RODE may vary
significantly from the expected RODE and any adjustments to thequantitativebonus
estimates, which may be material, arerecordedin
the period they are determined.





Also
included in other liabilities are accruals for income taxes payable,
professional fees and other general expenses.





Non-controlling
Interest





Non-controlling
interest in joint venture on the consolidated balance sheets represents DME
Advisors LP’s, ("DME Advisors") share of assets in the joint venture
whereby DME Advisors manages jointly held assets as disclosed in Note 13. DME
Advisors’ share of investment income or loss is included in the consolidated
statements of income as non-controlling interest in income or loss of joint
venture.





In December
2007, the Financial Accounting Standards Board (“FASB”) issued an amendment to
topic ASC 810-10-45 (Consolidation) effective for fiscal years beginning on or
after December 15, 2008. This amendment establishes accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary.  As a result of this amendment, the
Company's non-controlling interest in joint venture (previously referred to
as minority interest in joint venture) was reclassified from
liabilities to shareholders’ equity for all years presented. This
reclassification resulted in an increase in shareholders’ equity and a
decrease in total liabilities. However, this amendment did not have
any impact on the Company's results of operations or retained
earnings.





Comprehensive
Income (Loss)





The
Company has no comprehensive income (loss) other than the net income (loss)
disclosed in the consolidated statements of income.





Earnings
(Loss) Per Share




Basic
earnings (loss) per share are based on the weighted average number of common
shares and participating securities outstanding during the period. Diluted
earnings (loss) per share include the dilutive effect of additional potential
common shares issuable when stock options are exercised and are determined using
the treasury stock method. U.S. GAAP requires that unvested stock
awards which contain non-forfeitable rights to dividends or dividend
equivalents, whether paid or unpaid (referred to as "participating
securities"), be included in the number of shares outstanding for both basic and
diluted earnings (loss) per share calculations. The Company's unvested
restricted stock is considered a participating security. In the event of a
net loss, the participating securities are excluded from the calculation of both
basic and diluted earnings (loss) per share. Therefore, for the year ended
December 31, 2008, unvested restricted stock has been excluded from the weighted
average shares outstanding.





2009
            
            
            2008
            
            
            2007Weighted
      average shares outstanding
            
            
            36,230,501
            
            
            
            35,970,479
            
            
            
            30,405,007Effect
      of dilutive service provider share-based awards
            
            
            131,163
            
            
            
            —
            
            
            
            161,109Effect
      of dilutive employee and director share-based awards
            
            
            361,888
            
            
            
            —
            
            
            
            299,90036,723,552
            
            
            
            35,970,479
            
            
            
            30,866,016Anti-dilutive
      stock options outstanding
            
            
            —
            
            
            
            1,608,340
            
            
            
            50,000





Taxation




Under current
Cayman Islands law, no corporate entity, including the Company, is obligated to
pay taxes in the Cayman Islands on either income or capital gains. The Company
has an undertaking from the Governor-in-Cabinet of the Cayman Islands, pursuant
to the provisions of the Tax Concessions Law, as amended, that, in the
event that the Cayman Islands enacts any legislation that imposes tax on
profits, income, gains or appreciations, or any tax in the nature of estate duty
or inheritance tax, such tax will not be applicable to the Company or its
operations, or to the Class A or Class B ordinary shares or related obligations,
until February 1, 2025.





Verdant is
incorporated in Delaware, and therefore, is subject to taxes in accordance
with the U.S. federal rates and regulations prescribed by the Internal Revenue
Service. Verdant’s taxable income is generally expected to be taxed at a rate of
35%. Any deferred tax asset is evaluated for recovery and
a valuation allowance is recorded when it is more likely than not that
the deferred tax asset will not be realized in the future. Verdant has
not taken any tax positions that are subject to uncertainty or that are
reasonably likely to have a material impact to Verdant or the
Company.





F-11





Segment
Information





Under
U.S. GAAP, operating segments are based on the internal information that
management uses for allocating resources and assessing performance as the source
of the Company's reportable segments.





The
Company manages its business on the basis of one operating segment, Property and
Casualty Reinsurance, in accordance with the qualitative and quantitative
criteria established by U.S. GAAP.





Recently
Issued Accounting Standards





In June 2009, the FASB
established the FASB Accounting Standards Codification ("Codification") as the
source of authoritative accounting principles recognized by the FASB and
supersedes all other existing and related literature. The Codification
does not change U.S. GAAP, but instead takes the hundreds of standards
established by a variety of standard setters and reorganizes them into roughly
90 accounting topics using a consistent structure and a new method for citing
particular content using unique numeric identifiers. The Codification is
effective for financial statements for interim and annual reporting periods
ending after September 15, 2009. The implementation of the Codification had no
impact on the Company’s results of operations or financial position, but
impacted all references to FASB literature previously cited in the Company’s
notes to the consolidated financial statements.





In
September 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-12,
Fair
Value Measurements and Disclosures (Topic 820): Investments in Certain Entities
That Calculate Net Asset Value per Share (or Its Equivalent). This Update
amends Subtopic 820-10, Fair
Value Measurements and Disclosures — Overall, to permit a reporting
entity to measure the fair value of certain investments on the basis of the net
asset value per share of the investment (or its equivalent). This Update also
requires new disclosures, by major category of investments, about the attributes
of investments within the scope of this Update. The guidance in this Update is
effective for interim and annual periods ending after December 15, 2009. The
Company has adopted this Update for its annual period ending December 31, 2009
and has provided the disclosures in Note 3 to the consolidated financial
statements in accordance with ASU No. 2009-12.
  In
January 2010, the FASB issued ASU No. 2010-06,Fair
Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair
Value Measurements.This ASU requires additional disclosures and clarifies some existing disclosure
requirements about fair value measurement.  ASU 2010-06 amends
Codification Subtopic 820-10 to require a reporting entity to disclose
separately the amounts of significant transfers in and out of Level 1 and Level
2 fair value measurements and describe the reasons for the transfers.A
reporting entity should present separately information about purchases, sales,
issuances, and settlements in
the reconciliation for fair value measurements using significant unobservable
inputs. In addition, ASU 2010-06 clarifies the requirements of the
existing disclosures. ASU 2010-06 is effective for interim and annual reporting
periods beginning after December 15, 2009, except for the disclosures about
purchases, sales, issuances, and settlements in the roll forward of activity in
Level 3 fair value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010, and for interim periods within those
fiscal years. Early application is permitted. The Company
anticipates providing the required disclosures in accordance with ASU
2010-06 in the Company’s Form 10-Q for the period ending March
31, 2010. For those additional disclosures required for
fiscal years beginning after December 15, 2010, the Company anticipates
including those in its Form 10-Q for the period ending March 31,
2011.


Reclassifications





Certain
prior year balances have been reclassified to conform to the current year
presentation. The reclassifications resulted in no changes to net income
(loss) or retained earnings for any of the years presented.





3.
            FINANCIAL
      INSTRUMENTS





In the
normal course of its business, the Company purchases and sells various financial
instruments which include listed and unlisted debt, equities, futures, put and
call options, foreign exchange, commodities, derivatives and similar
instruments sold, not yet purchased.





The Company
is exposed to credit risk in relation to counterparties that may default on
their obligations to the Company. The amount of counterparty credit risk
predominantly relates to the value of financial contracts receivable
and assets held at counterparties. The Company mitigates its
counterparty credit by using several counterparties which decreases
the likelihood of any significant concentration of credit risk with any one
counterparty.  In addition, the Company is exposed to credit
risk on corporate debt instruments to the extent that the debtors
may default on their debt instruments.





The
Company is exposed to market risk including interest rate and foreign exchange
fluctuations on financial instruments that are valued at market prices. Market
movements can be volatile and difficult to predict. This may affect the ultimate
gains or losses realized upon the sale of its holdings. Management utilizes the
services of the Company's investment advisor to monitor the Company's positions
to reduce the risk of potential loss due to changes in market
values.





Purchases
and sales of investments are disclosed in the consolidated statements of cash
flows. Net realized gains on the sale of investments, financial contracts,
and investments sold, not yet purchased during 2009 were $38.5 million
(2008: $8.9 million, 2007: $13.2 million). Gross realized gains were $215.7million (2008: $271.3 million, 2007: $101.4 million) and gross
realized losses were
$177.2million (2008: $262.4 million, 2007: $88.2 million). For the year
ended December 31, 2009, included in net investment income in the consolidated
statements of income were $190.0 million of net gains (2008: $145.6
million of net losses, 2007: $14.8 million of net gains) relating to
trading securities still held at the balance sheet date.





F-12




As of
December 31, 2009, cash and investments with a fair value of $315.2 million
(2008: $220.2 million) have been pledged as security against letters of credit
issued.





As of
December 31, 2009, the Company’s investment in gold and gold derivatives was the
only investment in excess of 10% of shareholders’ equity, with a fair value of
$107.3 million, or 14.7% of shareholders' equity. As of December 31, 2008, there
were no investments in excess of 10% of shareholders' equity.





Fair
Value Hierarchy





Effective
January 1, 2008, the Company’s “trading securities” are carried at
fair value, and the net unrealized gains or losses are included in net
investment income in the consolidated statements of income. For private equity
securities, the unrealized gains and losses, if any, which would have been
previously recorded in other comprehensive income, are included in net
investment income in the consolidated statements of income in order to apply a
consistent treatment for the Company’s entire investment portfolio. The change
in treatment resulted in no cumulative-effect adjustment to the opening balance
of retained earnings. The fair values of the private equity securities, existing
at January 1, 2008, remained unchanged from the carrying values of those
securities immediately prior to electing the fair value option.





The
following table presents the Company’s investments, categorized by the level of
the fair value hierarchy as of December 31, 2009:





Fair
      Value Measurements as of December 31, 2009Description
            
            Quoted
      Prices in
              Active
      Markets
              (Level
      1)
            
            
            Significant
      Other
              Observable
              Inputs
              (Level
      2)
            
            
            Significant
              Unobservable
              Inputs
              (Level
      3)
            
            
            Total
      as of
              December
      31, 2009Assets:
            
            ($
      in thousands)Debt
      instruments
            
            $
            —
            
            
            $
            94,301
            
            
            $
            1,537
            
            
            $
            95,838Listed
      equity securities
            
            
            593,201
            
            
            
            —
            
            
            
            —
            
            
            
            593,201Commodities
            
            
            102,239
            
            
            
            —
            
            
            
            —
            
            
            
            102,239Private
      and unlisted equity securities
            
            
            —
            
            
            
            —
            
            
            
            25,228
            
            
            
            25,228Call
      options
            
            
            —
            
            
            
            5,285
            
            
            
            —
            
            
            
            5,285Put
      options
            
            
            —
            
            
            
            8,809
            
            
            
            —
            
            
            
            8,809Financial
      contracts receivable
            
            
            —
            
            
            
            30,117
            
            
            
            —
            
            
            
            30,117$
            695,440
            
            
            $
            138,512
            
            
            $
            26,765
            
            
            $
            860,717Liabilities:Listed
      equity securities, sold not yet purchased
            
            $
            (570,875
            )
            
            $
            —
            
            
            $
            —
            
            
            $
            (570,875
            )Financial
      contracts payable
            
            
            —
            
            
            
            (16,200
            )
            
            
            —
            
            
            
            (16,200
            )$
            (570,875
            )
            
            $
            (16,200
            )
            
            $
            —
            
            
            $
            (587,075
            )





The
following table presents the Company’s investments, categorized by the level of
the fair value hierarchy as of December 31, 2008:





Fair
      Value Measurements as of December 31, 2008Description
            
            Quoted
      Prices in
              Active
      Markets
              (Level
      1)
            
            
            Significant
      Other
              Observable
              Inputs
              (Level
      2)
            
            
            Significant
              Unobservable
              Inputs
              (Level
      3)
            
            
            Total
      as of
              December
      31, 2008Assets:
            
            ($
      in thousands)Debt
      instruments
            
            $
            —
            
            
            $
            66,099
            
            
            $
            4,115
            
            
            $
            70,214Listed
      equity securities
            
            
            409,329
            
            
            
            —
            
            
            
            —
            
            
            
            409,329Private
      and unlisted equity securities
            
            
            —
            
            
            
            121
            
            
            
            11,776
            
            
            
            11,897Call
      options
            
            
            2,526
            
            
            
            —
            
            
            
            —
            
            
            
            2,526Financial
      contracts receivable
            
            
            —
            
            
            
            21,419
            
            
            
            —
            
            
            
            21,419$
            411,855
            
            
            $
            87,639
            
            
            $
            15,891
            
            
            $
            515,385Liabilities:Listed
      equity securities, sold not yet purchased
            
            $
            (234,301
            )
            
            $
            —
            
            
            $
            —
            
            
            $
            (234,301
            )Financial
      contracts payable
            
            
            —
            
            
            
            (17,140
            )
            
            
            —
            
            
            
            (17,140
            )$
            (234,301
            )
            
            $
            (17,140
            )
            
            $
            —
            
            
            $
            (251,441
            )





F-13

















The
following table presents the reconciliation of the balances for all investments
measured at fair value using significant unobservable inputs (Level 3) as
of December 31, 2009:





Fair
      Value Measurements Using Significant Unobservable Inputs (Level
      3)December
      31, 2009Debt
              Instruments
            
            
            Private
      and Unlisted Equity
              Securities
            
            
            Total($
      in thousands)Beginning
      balance
            
            $
            4,115
            
            
            $
            11,776
            
            
            $
            15,891Purchases,
      sales, issuances, and settlements, net
            
            
            (4,263
            )
            
            
            11,299
            
            
            
            7,036Total
      gains (losses) realized and unrealized in earnings,
    net
            
            
            (102
            )
            
            
            547
            
            
            
            445Transfers
      into Level 3, net
            
            
            1,787
            
            
            
            1,606
            
            
            
            3,393Ending
      balance
            
            $
            1,537
            
            
            $
            25,228
            
            
            $
            26,765





The
following table presents the reconciliation of the balances for all investments
measured at fair value using significant unobservable inputs (Level 3) as
of December 31, 2008:





Fair
      Value Measurements Using Significant Unobservable Inputs (Level
      3)December
      31, 2008Debt
              Instruments
            
            
            Private
      and Unlisted Equity
              Securities
            
            
            Total($
      in thousands)Beginning
      balance
            
            $
            865
            
            
            $
            8,115
            
            
            $
            8,980Purchases,
      sales, issuances, and settlements, net
            
            
            5,250
            
            
            
            9,466
            
            
            
            14,716Total
      gains (losses) realized and unrealized in earnings,
    net
            
            
            (2,000
            )
            
            
            (600
            )
            
            
            (2,600
            )Transfers
      out of Level 3
            
            
            —
            
            
            
            (5,205
            )
            
            
            (5,205
            )Ending
      balance
            
            $
            4,115
            
            
            $
            11,776
            
            
            $
            15,891





For the year
ended December 31, 2009, gross transfers into Level 3 of $6.6
million represent the fair value on the date of transfer of unlisted
equity securities and debt instruments for which multiple
broker quotes were not available. The fair values of these securities
were estimated using the last available transaction price, adjusted for credit
risk, expected cash flows, and other non-observable inputs. Gross transfers out
of Level 3 of $3.2 million represent the fair values on the dates of transfer of
debt instruments for which multiple broker quotes became available. For the year
ended December 31, 2008, the transfers out of Level 3 represent the fair
value of private equity securities of an entity that were transferred to
Level 1 when the entity's shares were publicly listed during the second
quarter of fiscal 2008, resulting in fair value being based on the quoted price
in an active market.





For the year ended
December 31, 2009, realized gains of $1.3 million, and change in unrealized
losses of $0.8 million on securities held at the reporting date and valued
using unobservable inputs are included in net investment income in the
consolidated statements of income. For the year ended December 31, 2008, the
change in unrealized losses of $2.6 million on securities still held at the
reporting date, and valued using unobservable inputs, are included in net
investment income (loss) in the consolidated statements of income. There
were no realized gains or losses for the year ended December 31, 2008, relating
to securities valued using unobservable inputs.








F-14





Investments





Debt
instruments, trading





At
December 31, 2009, and 2008 included in debt instruments, are the following
investments:





2009
            
            Cost/
              amortized
              cost
            
            
            Unrealized
              gains
            
            
            Unrealized
              losses
            
            
            Fair
              value($
      in thousands)Corporate
      debt – U.S.
            
            $
            60,121
            
            
            $
            36,040
            
            
            $
            (5,555
            )
            
            $
            90,606Corporate
      debt – Non U.S.
            
            
            2,961
            
            
            
            2,274
            
            
            
            (3
            )
            
            
            5,232Total
      debt instruments
            
            $
            63,082
            
            
            $
            38,314
            
            
            $
            (5,558
            )
            
            $
            95,838








2008
            
            Cost/
              amortized
              cost
            
            
            Unrealized
              gains
            
            
            Unrealized
              losses
            
            
            Fair
              value($
      in thousands)Corporate
      debt – U.S.
            
            $
            74,833
            
            
            $
            1,204
            
            
            $
            (8,750
            )
            
            $
            67,287Corporate
      debt – Non U.S.
            
            
            2,978
            
            
            
            109
            
            
            
            (160
            )
            
            
            2,927Total
      debt instruments
            
            $
            77,811
            
            
            $
            1,313
            
            
            $
            (8,910
            )
            
            $
            70,214





The
maturity distribution for debt instruments held at December 31, 2009 is as
follows:





Cost/
              amortized
              cost
            
            
            Fair
              value($
      in thousands)Within
      one year
            
            $
            6,202
            
            
            $
            8,300From
      one to five years
            
            
            27,450
            
            
            
            49,844From
      five to ten years
            
            
            25,179
            
            
            
            33,732More
      than ten years
            
            
            4,251
            
            
            
            3,962$
            63,082
            
            
            $
            95,838





Investment
in Equity Securities, Trading





At
December 31, 2009 and 2008, included in investment securities, trading are the
following long positions:





2009
            
            Cost
            
            
            Unrealized
              gains
            
            
            Unrealized
              losses
            
            
            Fair
              value($
      in thousands)Equities
      – listed
            
            $
            510,229
            
            
            $
            104,768
            
            
            $
            (40,040
            )
            
            $
            574,957Exchange
      traded funds
            
            
            7,879
            
            
            
            10,365
            
            
            
            —
            
            
            
            18,244$
            518,108
            
            
            $
            115,133
            
            
            $
            (40,040
            )
            
            $
            593,201





2008
            
            Cost
            
            
            Unrealized
              gains
            
            
            Unrealized
              losses
            
            
            Fair
              value($
      in thousands)Equities
      – listed
            
            $
            552,941
            
            
            $
            14,822
            
            
            $
            (219,173
            )
            
            $
            348,590Exchange
      traded funds
            
            
            53,364
            
            
            
            8,092
            
            
            
            (717
            )
            
            
            60,739$
            606,305
            
            
            $
            22,914
            
            
            $
            (219,890
            )
            
            $
            409,329





F-15





Other
Investments





“Other
investments” include options, commodities and private and unlisted equity
securities for which quoted prices in active markets are not readily available.
Options are derivative financial instruments that give the buyer, in exchange
for a premium payment, the right, but not the obligation, to either purchase
from (call option) or sell to (put option) the writer, a specified underlying
security at a specified price on or before a specified date. The Company enters
into option contracts to meet certain investment objectives. For exchange traded
option contracts, the exchange acts as the counterparty to specific transactions
and therefore bears the risk of delivery to and from counterparties of specific
positions. For OTC options a dealer acts as the counterparty and therefore the
Company is exposed to credit risk to the extent the dealer is unable to meet its
obligations. As of December 31, 2009, the Company held OTC call options and put
options with fair values of $0.2 million and $8.8 million, respectively. As of
December 31, 2008, the Company did not hold any OTC call or put
options.





At
December 31, 2009, the following securities are included in other
investments:





Cost
            
            
            Unrealized
              gains
            
            
            Unrealized
              losses
            
            
            Fair
              value($
      in thousands)Commodities
            
            $
            96,552
            
            
            $
            5,687
            
            
            $
            —
            
            
            $
            102,239Private
      and unlisted equity securities
            
            
            27,636
            
            
            
            1,430
            
            
            
            (3,838
            )
            
            
            25,228Put
      options
            
            
            6,269
            
            
            
            2,540
            
            
            
            —
            
            
            
            8,809Call
      options
            
            
            6,406
            
            
            
            51
            
            
            
            (1,172
            )
            
            
            5,285$
            136,863
            
            
            $
            9,708
            
            
            $
            (5,010
            )
            
            $
            141,561





Included
in private and unlisted equity securities are investments in private equity
funds with a fair value of $3.2 million. The fair values of private equity
funds were determined based on unadjusted net
asset values reported by the funds' managers as of periods
prior to the Company's year ended December 31, 2009. The private equity
funds have varying lock-up periods and as of December 31, 2009 none of
the funds were redeemable. The Company had unfunded commitments relating to
a private equity fund of $7.4 million as of December 31, 2009 which are included
in the schedule of commitments and contingencies in Note 14 of these
consolidated financial statements.





At
December 31, 2008, the following securities are included in other
investments:





Cost
            
            
            Unrealized
              gains
            
            
            Unrealized
              losses
            
            
            Fair
              value($
      in thousands)Private
      and unlisted equity securities
            
            $
            15,395
            
            
            $
            1,236
            
            
            $
            (4,734
            )
            
            $
            11,897Call
      options
            
            
            2,133
            
            
            
            393
            
            
            
            —
            
            
            
            2,526$
            17,528
            
            
            $
            1,629
            
            
            $
            (4,734
            )
            
            $
            14,423








During
the years ended December 31, 2009, 2008 and 2007, other-than-temporary
impairment losses on private and unlisted equities of $0, $0 and $323,000
respectively, were reported and included in net realized gains on securities
under net investment income (loss) in the consolidated statements of
income.





Investments
in Securities Sold, Not Yet Purchased





Securities
sold, not yet purchased are securities that the Company has sold, but does not
own, in anticipation of a decline in the market value of the security. The
Company’s risk is that the value of the security will increase rather than
decline. Consequently, the settlement amount of the liability for securities
sold, not yet purchased may exceed the amount recorded in the consolidated
balance sheet as the Company is obligated to purchase the securities sold, not
yet purchased in the market at prevailing prices to settle its obligations. To
sell a security, not yet purchased, the Company needs to borrow the security for
delivery to the buyer. On each day the transaction is open, the liability for
the obligation to replace the borrowed security is marked-to-market and an
unrealized gain or loss is recorded. At the time the transaction is closed, the
Company realizes a gain or loss equal to the difference between the price at
which the security was sold and the cost of replacing the borrowed security.
While the transaction is open, the Company will also incur an expense for any
dividends or interest which will be paid to the lender of the
securities.





F-16





At
December 31, 2009, the following securities are included in investments in
securities sold, not yet purchased:





2009
            
            Proceeds
            
            
            Unrealized
      gains
            
            
            Unrealized
      losses
            
            
            Fair
              value($ in
      thousands)Equities
      – listed
            $
            (536,895
            )
            
            $
            62,278
            
            
            $
            (79,525
            )
            $
            (554,142
            )Warrants
      and rights on listed equities
            
            —
            
            
            
            —
            
            
            
            (733
            )
            
            (733
            )Exchange
      traded funds
            
            (15,678
            )
            
            
            —
            
            
            
            (322
            )
            
            (16,000
            )$
            (552,573
            )
            
            $
            62,278
            
            
            $
            (80,580
            )
            $
            (570,875
            )





At
December 31, 2008, the following securities are included in investments in
securities sold, not yet purchased:





2008
            
            Proceeds
            
            
            Unrealized
      gains
            
            
            Unrealized
      losses
            
            
            Fair
              value($ in
      thousands)Equities
      – listed
            $
            (343,079
            )
            
            $
            115,619
            
            
            $
            (6,841
            )
            $
            (234,301
            )








At
December 31, 2009 and 2008, all equities sold, not yet purchased included in the
Company’s investment portfolio were in equities listed on recognized exchanges
(Level 1).





Financial
Contracts





As of
December 31, 2009 and 2008, the Company had entered into total return swaps,
credit default swaps, and interest rate options contracts with various financial
institutions to meet certain investment objectives. Under the terms of each of
these financial contracts, the Company is either entitled to receive or is
obligated to make payments which are based on the product of a formula contained
within the contract that includes the change in the fair value of the underlying
or reference security.





The fair
value of financial contracts outstanding at December 31, 2009 is as
follows:





Financial
      Contracts
            
            Listing
              currency
            
            Notional
      amount of
              underlying
      instruments
            
            Fair
      value of net assets
              (obligations)
              on
      financial
              contracts($
      in thousands)Financial
      contracts receivableInterest
      rate options
            
            USD
            
            1,723,954
            
            $
            20,325Credit
      default swaps, purchased – Sovereign debt
            
            USD
            
            315,722
            
            
            5,322Total
      return swaps - Equities
            
            USD
            
            45,516
            
            
            4,470Total
      financial contracts receivable, at fair value
            
            
            
            
            
            $
            30,117Financial
      contract payableCredit
      default swaps, purchased – Sovereign debt
            
            USD
            
            20,811
            
            $
            (128
            )Credit
      default swaps, purchased – Corporate debt
            
            USD
            
            121,118
            
            
            (7,281
            )Credit
      default swaps, issued – Corporate debt
            
            USD
            
            13,909
            
            
            (8,739
            )Total
      return swaps - Equities
            
            USD
            
            2,286
            
            
            (52
            )Total
      financial contracts payable, at fair value
            
            
            
            
            
            $
            (16,200
            )





As of
December 31, 2009, included in interest rate options are contracts on U.S. and
Japanese interest rates. As of December 31, 2009, included in financial
contracts payable, was a credit default swap (CDS) issued by the Company
relating to the debt issued by another entity ("reference
entity"). The CDS has a remaining term of 4 years and a notional amount of
$13.9 million. Under this contract, the Company receives fees for
guaranteeing the debt and in return will be obligated to pay the notional
amount to the counterparty if the reference entity defaults under its debt
obligations. As of December 31, 2009, the reference entity had a financial
strength rating of (B3) and a surplus notes rating of (Caa3) from
Moody’s Investors Service. Based on the ratings of the reference entity, there
appears to be a high risk of default at December 31, 2009. The fair value of the
CDS at December 31, 2009 was $8.7 million which was determined
based on broker quotes obtained for identical or similar
contracts traded in an active market (Level 2 inputs).





F-17





The fair
value of financial contracts outstanding at December 31, 2008 is as
follows:





Financial
      Contracts
            
            Listing
              currency
            
            Notional
      amount of
              underlying
      instruments
            
            Fair
      value of net assets
              (obligations)
              on
      financial
              contracts($
      in thousands)Financial
      contracts receivableInterest
      rate options
            
            USD
            
            98,991
            
            $
            2,564Credit
      default swaps, purchased – Corporate debt
            
            USD
            
            52,509
            
            
            5,956Credit
      default swaps, purchased – Sovereign debt
            
            USD
            
            261,721
            
            
            12,881Total
      return swaps - Equities
            
            USD
            
            3,231
            
            
            18Total
      financial contracts receivable, at fair value
            
            
            
            
            
            $
            21,419Financial
      contract payableCredit
      default swaps, issued – Corporate debt
            
            USD
            
            13,909
            
            $
            (7,024
            )Total
      return swaps - Equities
            
            USD
            
            36,960
            
            
            (10,116
            )Total
      financial contracts payable, at fair value
            
            
            
            
            
            $
            (17,140
            )





During the
years ended December 31, 2009, 2008 and 2007, the Company reported gains and
losses on derivatives as follows:





Derivatives
      not designated as hedging instruments
            
            Location
      of gains and losses on derivatives recognized in income
            
            Gain
      (loss) on derivatives recognized
              in
      income for the years ended
              December
      31,2009
            
            
            2008
            
            
            
            2007($
      in thousands)Interest
      rate options
            
            Net
      investment income
            
            $
            7,793
            
            
            $
            (453
            )
            
            $
            —Credit
      default swaps, purchased – Corporate debt
            
            Net
      investment income
            
            
            (14,922
            )
            
            
            5,872
            
            
            
            (2
            )Credit
      default swaps, purchased – Sovereign debt
            
            Net
      investment income
            
            
            (8,273
            )
            
            
            16,573
            
            
            
            —Total
      return swaps – Equities
            
            Net
      investment income
            
            
            6,563
            
            
            
            (30,925
            )
            
            
            (29,402
            )Credit
      default swaps, issued – Corporate debt
            
            Net
      investment income
            
            
            (1,016
            )
            
            
            (3,511
            )
            
            
            —Total
      return swaps – Commodities
            
            Net
      investment income
            
            
            —
            
            
            
            (7,292
            )
            
            
            (12,141
            )Options,
      warrants, and
      rights
            
            Net
      investment income
            
            
            (6,666
            )
            
            
            (10,115
            )
            
            
            1,714Total
            
            
            
            $
            (16,521
            )
            
            $
            (29,851
            )
            
            $
            (39,831
            )





The Company
generally does not enter into derivatives for risk management or hedging
purposes, and the volume of derivative activities varies from period to period
depending on potential investment opportunities. For the year ended December 31,
2009, the Company’s volume of derivative activities (based on notional amounts)
was as follows:





2009Derivatives
      not designated as hedging instruments
            
            
            Entered
            
            
            Exited($
      in thousands)Credit
      default swaps
            
            $
            164,421
            
            
            $
            21,000Total
      return swaps
            
            
            39,087
            
            
            
            20,857Interest
      rate options
            
            
            1,624,963
            
            
            
            —Options
      – equity
            
            
            494,224
            
            
            
            64,527Rights
      – equity
            
            
            7,870
            
            
            
            4,212Total
            
            $
            2,330,565
            
            
            $
            110,596


F-18


4.       
CASH AND CASH EQUIVALENTS





2009
            
            
            2008($
      in thousands)Cash
      at banks
            
            $
            5,291
            
            
            $
            17,179Cash
      held with (due to) brokers
            
            
            25,248
            
            
            
            (89,048
            )Money
      market funds held with brokers
            
            
            1,178
            
            
            
            166,013$
            31,717
            
            
            $
            94,144





Due to
the short term nature of cash and cash equivalents, management believes the
above noted carrying values approximate their fair value. Cash at banks is held
in non-U.S. financial institutions and are not insured by the FDIC or any other
deposit insurance programs.





5.       
RESTRICTED CASH AND CASH EQUIVALENTS





The
Company is required to maintain certain cash in segregated accounts with prime
brokers and swap counterparties. The amount of restricted cash held by prime
brokers is primarily used to support the liability created from securities sold,
not yet purchased. The amount of cash encumbered varies depending on the market
value of the securities sold, not yet purchased. Swap counterparties require
cash collateral to support the current value of any amounts that may be due to
the counterparty based on the value of the underlying security.





2009
            
            
            2008($
      in thousands)Cash
      held by prime brokers
            
            $
            570,875
            
            
            $
            230,481Cash
      held by swap counter-parties
            
            
            19,996
            
            
            
            17,849$
            590,871
            
            
            $
            248,330





Effective
January 1, 2008, upon adoption of topic ASC 825-10-45-3 (Financial Instruments)
any increase or decrease in restricted cash and cash equivalents relating to
securities sold, not yet purchased and swaps is reported as an investing
activity in the consolidated statements of cash flows. Prior to adoption of
topic ASC 825-10-45-3, the net change in restricted cash and cash equivalents
was reported as operating activity in the consolidated statements of cash
flows.





6.            LOSS
AND LOSS ADJUSTMENT EXPENSE RESERVES





A summary
of changes in outstanding loss and loss adjustment expense reserves is as
follows:





2009
            
            
            2008
            
            
            2007($
      in thousands)Gross
      balance at January 1
            
            $
            81,425
            
            
            $
            42,377
            
            
            $
            4,977Less:
      Losses recoverable
            
            
            (11,662
            )
            
            
            (6,721
            )
            
            
            —Net
      balance at January 1
            
            
            69,763
            
            
            
            35,656
            
            
            
            4,977Incurred
      losses related to:Current
      year
            
            
            126,642
            
            
            
            67,473
            
            
            
            40,584Prior
      years
            
            
            (7,597
            )
            
            
            (11,988
            )
            
            
            (1,077
            )Total
      incurred
            
            
            119,045
            
            
            
            55,485
            
            
            
            39,507Paid
      losses related to:Current
      year
            
            
            (34,080
            )
            
            
            (14,069
            )
            
            
            (7,126
            )Prior
      years
            
            
            (24,661
            )
            
            
            (7,282
            )
            
            
            (1,702
            )Total
      paid
            
            
            (58,741
            )
            
            
            (21,351
            )
            
            
            (8,828
            )Foreign
      currency revaluation
            
            
            23
            
            
            
            (27
            )
            
            
            —Net
      balance at December 31
            
            
            130,090
            
            
            
            69,763
            
            
            
            35,656Add:
      Losses recoverable
            
            
            7,270
            
            
            
            11,662
            
            
            
            6,721Gross
      balance at December 31
            
            $
            137,360
            
            
            $
            81,425
            
            
            $
            42,377





F-19





For the year
ended December 31, 2009, the decrease in incurred losses of $7.6 million
relating to prior years included the following:





·
            Favorable
      loss development of $8.0 million on a 2006 Florida personal lines
      contract. During each quarter of 2009, the client reported
      favorable development of claims data resulting from lower than expected
      paid and incurred losses which impacted our internal reserve analysis
      and correspondingly caused us to reduce our reserves.





·
            Favorable
      loss development of $1.5 million on a 2008 motor liability contract. The
      reserves on this contract were adjusted in the fourth quarter of 2009
      based on data received from the client as well as our internal
      quarterly reserve analysis.





·
            Favorable
      loss development of $0.7 million on a 2008 severity medical malpractice
      contract based on our internal quarterly reserve
  analysis.





·
            Favorable
      loss development of $0.7 million on a 2008 workers' compensation
      contract. The reserves on this contract were adjusted in the fourth
      quarter of 2009 based on data received from the client as well as
      our internal quarterly reserve
analysis.





·
            Eliminating $1.0
      million of reserves, held on two casualty clash contracts which
      were commuted during the year ended December 31, 2009, without any
      reported losses.




·
            Adverse
      loss development of $3.4 million on a 2007 casualty clash contract
      resulting from claims relating to California
  wildfires.




·
            Adverse
      loss development of $1.1 million on a 2007 health contract based on our
      internal quarterly reserve
analysis.


·
              The
      remaining net favorable loss development, excluding the above
      developments, was as a result of re-estimation of loss reserves
      performed on a quarterly and annual basis by the actuaries and
      underwriters based on cession statements and other information received on
      a contract by contract basis. There were no other significant adjustments
      (favorable or unfavorable) to the reserves on any given
      contract.


For the year
ended December 31, 2008, the decrease in incurred losses of $12.0
million relating to prior years included the following:





·
            Favorable
      loss development of $12.4 million on a personal lines contract entered
      into during the year ended December 31, 2006. The favorable loss
      development was a result of reserves being released based on
      updated information received from the client indicating lower than
      expected claims development.





·
            Eliminating $1.2
      million of reserves held on two frequency contracts covering
      excess of loss medical malpractice due to commutation without
      any reported losses.





·
            Adverse
      loss development of $1.4 million on a casualty clash severity
      contract due to notification of claims relating to sub-prime related
      events. This resulted in reserving for a full limit loss on
      this contract.





·
            The
      remaining net unfavorable loss development, excluding the above
      developments, was as a result of re-estimation of loss reserves
      performed on a quarterly and annual basis by the actuaries and
      underwriters based on cession statements and other information received on
      a contract by contract basis. There were no other significant adjustments
      (favorable or unfavorable) to the reserves on any given
      contract.





For the
year ended December 31, 2007, the decrease in incurred losses of $1.1
million relating to the prior year was primarily as a result of lowered
expected ultimate losses due to favorable loss development and commutation of
certain contracts with no reported losses.





At
December 31, 2009 and 2008, loss and loss adjustment expense reserves were
comprised of the following:





2009
            
            
            2008($
      in thousands)Case
      reserves
            
            $
            40,176
            
            
            $
            6,666IBNR
            
            
            97,184
            
            
            
            74,759Total
            
            $
            137,360
            
            
            $
            81,425





F-20




7.       
RETROCESSION





The
Company utilizes retrocession agreements in an effort to reduce the risk of loss
on business assumed. The Company currently has coverages that provide for
recovery of a portion of loss and loss expenses incurred on certain contracts.
Loss and loss adjustment expense recoverables from the retrocessionaires are
recorded as assets. For the year ended December 31, 2009, loss and loss
adjustment expenses incurred of $119.0 million (2008: $55.5 million, 2007: $39.5
million) are net of loss and loss expenses recovered and recoverable of
$1.1 million (2008: $13.4 million, 2007: $13.4 million). Retrocession contracts
do not relieve the Company from its obligations to policyholders. Failure of
retrocessionaires to honor their obligations could result in losses to the
Company. The Company regularly evaluates the financial condition of its
retrocessionaires. At December 31, 2009, the company had loss and loss
adjustment expense recoverables of $0.3 million (2008: $0.2 million) with a
retrocessionaire rated “A+ (Superior)” by A.M. Best. Additionally, the Company
has loss recoverables of $7.0 million (2008: $11.5 million) with unrated
retrocessionaires. At December 31, 2009, the Company retains funds and other
collateral from the unrated retrocessionaires for amounts in excess of the loss
recoverable asset, and the Company had no provision for uncollectible losses
recoverable.





8.       
SHARE CAPITAL





The holders
of all ordinary shares are entitled to share equally in dividends declared by
the Board of Directors. In the event of a winding-up or dissolution of the
Company, the ordinary shareholders share equally and ratably in the assets of
the Company, after payment of all debts and liabilities of the Company and after
liquidation of any issued and outstanding preferred shares. At December 31,
2009, no preferred shares were issued or outstanding. The Board of Directors is
authorized to establish the rights and restrictions for preferred shares as they
deem appropriate.





The Third
Amended and Restated Memorandum and Articles of Association as revised by
special resolution on July 10, 2008, (the ‘‘Articles’’) provides that the
holders of Class A ordinary shares generally are entitled to one vote per share.
However, except upon unanimous consent of the Board of Directors, no Class A
shareholder is permitted to vote an amount of shares which would cause any
United States person to own (directly, indirectly or constructively under
applicable United States tax attribution and constructive ownership rules) 9.9%
or more of the total voting power of all issued and outstanding ordinary shares.
The Articles further provide that the holders of Class B ordinary shares
generally are entitled to ten votes per share. However, holders of Class B
ordinary shares, together with their affiliates, are limited to voting that
number of Class B ordinary shares equal to 9.5% of the total voting power of the
total issued and outstanding ordinary shares.





Pursuant
to the Shareholders' Agreement, dated August 11, 2004, by and among the Company
and certain of its shareholders, the holders of at least 50% of the outstanding
Registrable Securities (as defined in the Shareholders' Agreement), may, subject
to certain conditions, request to have all or part of their Registrable
Securities to become registered. The Shareholders' Agreement requires, among
other things, that the Company use its commercially reasonable best efforts to
have a registration statement covering such Registrable Securities to be
declared effective. The registration rights granted pursuant to the
Shareholders' Agreement are not deemed to be liabilities; therefore, there has
been no recognition in the consolidated financial statements of the registration
rights granted pursuant to the Shareholders' Agreement.





Shares
authorized for issuance are comprised of 300,000 (2008: 350,000) Class A
ordinary shares in relation to share purchase options granted to a service
provider and 2,000,000 (2008: 2,000,000) Class A ordinary shares authorized for
the Company’s stock incentive plan for eligible directors, employees and
consultants. As of December 31, 2009, 133,897 (2008: 439,054) Class A ordinary
shares remained available for future issuance under the Company's stock
incentive plan. The stock incentive plan is administered by the compensation
committee of the Board of Directors.





On
January 10, 2007, 1,426,630 Class B ordinary shares were transferred from
Greenlight Capital Investors, LLC (“GCI”) to its underlying owners and
automatically converted into an equal number of Class A ordinary shares on a
one-for-one basis, upon transfer. The remaining 3,623,370 Class B ordinary
shares were transferred from GCI to David Einhorn, the Chairman of the Company's
Board of Directors and a principal shareholder of the Company, and remained as
Class B ordinary shares.





On May
30, 2007, the Company completed the sale of 11,787,500 Class A ordinary shares
at $19.00 per share in an initial public offering. Included in the 11,787,500
shares sold were 1,537,500 shares purchased by the underwriters to cover
over-allotments. Concurrently, 2,631,579 Class B ordinary shares were sold at
$19.00 per share to David Einhorn as part of a private placement. The net
proceeds to the Company of the initial public offering and private placement
were approximately $255.7 million after the deduction of underwriting fees and
other offering expenses.





On
August 5, 2008, the Board adopted a share repurchase plan. Under the share
repurchase plan, the Board authorized the Company to purchase up to 2.0 million
of its Class A ordinary shares from time to time. Class A ordinary
shares may be purchased in the open market or through privately negotiated
transactions. The timing of such repurchases and actual number of shares
repurchased will depend on a variety of factors including price, market
conditions and applicable regulatory and corporate requirements. The share
repurchase plan, which expires on June 30, 2011, does not require the Company to
repurchase any specific number of shares and may be modified, suspended or
terminated at any time without prior notice. As of December 31, 2009, 1,771,100
shares remained available under the share repurchase plan.





F-21
 
 On July 10, 2009,
the SEC declared effective the Company’s Form S-3 registration statement for an
aggregate principal amount of $200.0 million in securities.





The
      following table is a summary of voting ordinary shares issued and
      outstanding:





2009
            
            
            2008
            
            
            2007As
      of December 31,
            
            Class
      A
            
            
            Class
      B
            
            
            Class
      A
            
            
            Class
      B
            
            
            Class
      A
            
            
            Class
      BBalance
      – beginning of year
            
            
            29,781,736
            
            
            
            6,254,949
            
            
            
            29,847,787
            
            
            
            6,254,949
            
            
            
            16,507,228
            
            
            
            5,050,000Issue
      of ordinary shares, net of forfeitures
            
            
            282,157
            
            
            
            —
            
            
            
            162,849
            
            
            
            —
            
            
            
            11,913,929
            
            
            
            2,631,579Transfer
      from Class B to Class A
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,426,630
            
            
            
            (1,426,630
            )Repurchase
      of ordinary shares
            
            
            —
            
            
            
            —
            
            
            
            (228,900
            )
            
            
            —
            
            
            
            —
            
            
            
            —Balance
      – end of year
            
            
            30,063,893
            
            
            
            6,254,949
            
            
            
            29,781,736
            
            
            
            6,254,949
            
            
            
            29,847,787
            
            
            
            6,254,949





Under the
Companies Law of the Cayman Islands, the Company cannot hold treasury
shares; therefore, all ordinary shares repurchased are cancelled immediately
upon repurchase.





Greenlight
Re is subject to a minimum shareholder's equity balance of $120,000 as
determined by the Cayman Islands Monetary Authority.





Additional
paid-in capital includes the premium per share paid by the subscribing
shareholders for Class A and B ordinary shares which have a par value of $0.10
each. It also includes share-based awards earned not yet issued.





9.       
SHARE-BASED COMPENSATION





The
Company has a stock incentive plan for directors, employees and consultants. As
of December 31, 2009, the Company had reserved for issuance 2,000,000 Class A
ordinary shares (2008: 2,000,000) for eligible participants. At December 31,
2009, 133,897 Class A ordinary shares were available for future issuance under
the Company’s stock incentive plan.





Service
Provider Share Purchase Options





An
affiliate of GCI entered into a consulting agreement (the ‘‘Consulting
Agreement’’) with First International Securities Ltd. (‘‘First International’’)
in August 2002. First International received a cash payment of $75,000 for the
preparation and delivery of a feasibility study relating to the formation,
capitalization, licensing and operation of the Company. Additionally, upon
consummation of the initial private offering, First International Capital
Holdings Ltd., the successor to First International, received a 10-year share
purchase option to purchase 400,000 Class A ordinary shares. These share
purchase options were granted on September 20, 2004 and have an exercise price
of $10 per share.  The Company repurchased a portion of the share
purchase options as follows:





Date of
      repurchase
            
            Number
      of share purchase options repurchased
            
            
            Price
      paid per share purchase optionDecember
      24, 2007
            
            
            50,000
            
            
            $
            10.00August
      6, 2009
            
            
            25,000
            
            
            
            8.50November
      5, 2009
            
            
            25,000
            
            
            
            9.10Total
      repurchased share purchase options
            
            
            100,000








Employee
and Director Restricted Shares





As part
of the stock incentive plan, the Company issues restricted shares for which the
fair value is equal to the price of the Company’s Class A ordinary shares on the
grant date. Compensation based on the grant date fair market value of the shares
is expensed on a straight line basis over the vesting period.





During
the year ended December 31, 2009, 201,956 (2008: 141,465) restricted Class A
ordinary shares were issued to employees pursuant to the Company’s stock
incentive plan. These shares contain certain restrictions relating to, among
other things, vesting, forfeiture in the event of termination of employment and
transferability. Each of these restricted shares will cliff vest after three
years from the date of issue, subject to the grantee’s continued service with
the Company. The Company also issued to certain directors, 35,875 (2008: 20,724)
restricted Class A ordinary shares as part of the directors’ remuneration. Each
of these restricted shares issued to directors contains similar restrictions to
those issued to employees and these shares will vest on the earlier of the first
anniversary of the share issuance or the Company’s next annual general meeting,
subject to the grantee’s continued service with the Company.





The
Company recorded $2.7 million of share-based compensation expense relating to
restricted shares for the year ended December 31, 2009 (2008: $1.6 million,
2007: $0.6 million). As of December 31, 2009, there were $3.5 million (2008:
$2.8 million) of unrecognized compensation costs related to non-vested
restricted shares which are expected to be recognized over a weighted average
period of 1.34 years (2008: 1.67 years). For the year ended December 31, 2009,
the total fair value of restricted shares vested was $0.4 million (2008: $0.2
million, 2007: $0).





F-22




The
restricted share award activity during the year ended December 31, 2009 was as
follows:





Number
      of
              non-vested
              restricted
              shares
            
            
            Weighted
              average
              grant
      date
              fair
      valueBalance
      at December 31, 2008
            
            
            270,349
            
            
            $
            17.80Granted
            
            
            237,831
            
            
            
            15.30Vested
            
            
            (20,724
            )
            
            
            18.65Forfeited
            
            
            (12,674
            )
            
            
            18.09Balance
      at December 31, 2009
            
            
            474,782
            
            
            $
            16.51





Employee
and Director Stock Options





During
the year ended December 31, 2009, the Company granted 80,000 (2008: 80,000)
Class A ordinary share purchase options to the Chief Executive Officer, pursuant
to his employment contract. These options vest 25% on the date of grant, and 25%
each in 2010, 2011 and 2012 (2008 options vest 25% on the date of grant and 25%
each in 2009, 2010, and 2011). The options expire after 10 years from the grant
date. The Company uses the Black-Scholes option pricing model to determine the
valuation of these options and has applied the assumptions set forth in the
following table.





2009
            
            
            2008
            
            
            2007Risk
      free rate
            
            
            3.55
            %
            
            
            3.99
            %
            
            
            4.79
            %Estimated
      volatility
            
            
            30
            %
            
            
            30
            %
            
            
            30
            %Expected
      term
            
            10
            years
            
            10
            years
            
            10
            yearsDividend
      yield
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %





If actual
results differ significantly from these estimates and assumptions, particularly
in relation to management’s estimation of volatility which requires the most
judgment due to the Company’s limited operating history, share-based
compensation expense, primarily with respect to future share-based awards, could
be materially impacted.





At the
present time, the Board of Directors does not anticipate that any dividends will
be declared during the expected term of the options. The Company uses graded
vesting for expensing employee stock options. The total compensation cost
expensed for the year ended December 31, 2009 related to employee and director
stock options was $0.7 million (2008: $1.4 million, 2007: $2.3 million). At
December 31, 2009, the total compensation cost related to non-vested options not
yet recognized was $0.5 million (2008: $0.7 million, 2007: $1.4 million) to be
recognized over a weighted average period of 1.3 years (2008: 1.0 year, 2007:
1.09 years) assuming the employees complete their service period for vesting of
the options.





During
the year ended December 31, 2009, 57,000 (2008: 660, 2007: nil) stock
options were exercised which had a weighted average exercise price of $12.66
(2008: $13.85, 2007: nil). For any options exercised, the Company issues new
Class A ordinary shares from the shares authorized for issuance as part of
the Company’s stock incentive plan. The intrinsic value of options exercised
during the year ended December 31, 2009 was $0.3 million (2008: $6,067, 2007:
nil).





Employee
and director stock option activity during years ended December 31, 2009 and 2008
was as follows:


Number
      of
              options
            
            
            Weighted
              average
              exercise
              price
            
            
            Weighted
              average
              grant
      date
              fair
      valueBalance
      at December 31, 2007
            
            
            1,179,000
            
            
            $
            12.19
            
            
            $
            6.20Granted
            
            
            80,000
            
            
            
            29.39
            
            
            
            8.69Exercised
            
            
            (660
            )
            
            
            13.85
            
            
            
            7.13Forfeited
            
            
            —
            
            
            
            —
            
            
            
            —Expired
            
            
            —
            
            
            
            —
            
            
            
            —Balance
      at December 31, 2008
            
            
            1,258,340
            
            
            $
            13.27
            
            
            $
            6.35Granted
            
            
            80,000
            
            
            
            28.44
            
            
            
            6.25Exercised
            
            
            (57,000
            )
            
            
            12.66
            
            
            
            6.57Forfeited
            
            
            —
            
            
            
            —
            
            
            
            —Expired
            
            
            —
            
            
            
            —
            
            
            
            —Balance
      at December 31, 2009
            
            
            1,281,340
            
            
            $
            14.24
            
            
            $
            6.33





At
December 31, 2009, the weighted-average remaining contractual term for options
outstanding was 6.46 years (2008: 7.25 years).





F-23




At
December 31, 2009, 1,164,674 (2008: 964,233) stock options were exercisable.
These options had a weighted-average exercise price of $12.91 (2008: $11.26) and
a weighted-average remaining contractual term of 6.2 years (2008: 6.68
years).





The
weighted average grant date fair value of options granted during the year ended
December 31, 2009 was $6.25 (2008: $8.69, 2007: $10.18). The aggregate intrinsic
value of options outstanding and options exercisable at December 31, 2009 was
$12.8 million and $12.8 million, respectively (2008: $1.4 million and $1.3
million). During the year ended December 31, 2009, 256,332 (2008: 411,233, 2007:
376,333) options vested which had a weighted average grant date fair value of
$6.82 (2008: $6.31, 2007: $6.01).





10.     
NET INVESTMENT INCOME (LOSS)





2009
            
            
            2008
            
            
            2007($
      in thousands)Realized
      gains (losses) and change in unrealized gains and losses,
      net
            
            $
            232,410
            
            
            $
            (118,667
            )
            
            $
            28,051Interest,
      dividend and other income
            
            
            17,038
            
            
            
            20,879
            
            
            
            21,375Interest,
      dividend and other expenses
            
            
            (16,886
            )
            
            
            (18,437
            )
            
            
            (7,151
            )Investment
      advisor compensation
            
            
            (32,701
            )
            
            
            (9,901
            )
            
            
            (14,633
            )Net
      investment income (loss)
            
            $
            199,861
            
            
            $
            (126,126
            )
            
            $
            27,642





11.     
GENERAL AND ADMINISTRATIVE EXPENSES





2009
            
            
            2008
            
            
            2007($
      in thousands)General
      expenses
            
            $
            15,584
            
            
            $
            10,756
            
            
            $
            9,034Share-based
      compensation expense
            
            
            3,410
            
            
            
            3,000
            
            
            
            2,884$
            18,994
            
            
            $
            13,756
            
            
            $
            11,918





12.     
TAXATION




The Company
is domiciled in the Cayman Islands and under current Cayman Islands law, no
corporate entity, including the Company, is obligated to pay taxes in the Cayman
Islands on either income or capital gains. The Company intends to conduct all of
its operations in a manner that will not cause it to be treated as engaging in a
trade or business within the United States and will not cause it to be subject
to current U.S. federal income taxation on its net income. However, because
there are no definitive standards provided by the Internal Revenue Code,
regulations or court decisions as to the specific activities that constitute
being engaged in the conduct of a trade or business within the United States,
and as any such determination is essentially factual in nature, there can be no
assurance that the U.S. Internal Revenue Service (“IRS”) will not successfully
assert that the Company is engaged in a trade or business within the
U.S.




The Company’s
wholly owned subsidiary, Verdant is incorporated in Delaware, and therefore
is subject to taxes in accordance with the U.S. federal rates and regulations
prescribed by the IRS. Verdant’s taxable income is expected to be taxed at a
rate of 35%. For the year ended December 31, 2009 included in the consolidated
balance sheet under other assets is a deferred tax asset of $68,719 (2008: $0)
resulting solely from the temporary differences in recognition of expenses. An
accrual has been recorded for current taxes payable in other liabilities in the
consolidated balance sheet at December 31, 2009 for $19,529 (2008:$0). Based on
the timing of the reversal of the temporary differences and likelihood of
generating sufficient taxable income to realize the future tax benefit,
management believes it is more likely than not that the deferred tax asset will
be fully realized in the future and therefore no valuation allowance
has been recorded. Verdant has not taken any tax positions that are subject to
uncertainty or that are reasonably likely to have a material impact to Verdant
or the Company.





The following
table sets forth our current and deferred income tax benefit (expense) for
the years ended December 31, 2009, 2008 and 2007:





2009
            
            
            2008
            
            
            2007($
      in thousands)Current
      tax expense
            $
            (20
            )
            
            
            —
            
            
            
            —Deferred
      tax benefit
            
            69
            
            
            
            —
            
            
            
            —Income
      tax benefit
            $
            49
            
            
            
            —
            
            
            
            —





F-24




13.     
RELATED PARTY TRANSACTIONS





Investment
Advisory Agreement





The
Company was party to an Investment Advisory Agreement (the “Investment
Agreement”) with DME Advisors until December 31, 2007. DME Advisors is a
related party and an affiliate of David Einhorn, Chairman of the Company’s Board
of Directors (the “Board”) and the beneficial owner of all of the issued and
outstanding Class B ordinary shares. Effective January 1, 2008, the
Company terminated the Investment Agreement and entered into an agreement (the
“Advisory Agreement”) wherein the Company and DME Advisors agreed to create a
joint venture for the purposes of managing certain jointly held assets. Pursuant
to this agreement, there were no changes to the monthly management fee or
performance compensation contained in the Investment Agreement.





Pursuant
to the Advisory Agreement, performance compensation equal to 20% of the net
income of the Company’s share of account managed by DME Advisors is allocated,
subject to a loss carry forward provision, to DME Advisors’ account. The loss
carry forward provision allows DME Advisors to earn reduced incentive
compensation of 10% on net investment income in any year subsequent to the year
in which the investment account incurs a loss, until all the losses are recouped
and an additional amount equal to 150% of the aggregate investment loss is
earned. DME Advisors is not entitled to earn performance compensation in a year
in which the investment portfolio incurs a loss. For the year ended
December 31, 2008, the portfolio reported a net investment loss of $126.1
million and as a result no performance compensation was paid to DME Advisors. In
addition, the performance compensation for the year ended December 31, 2009 and
subsequent years will be reduced to 10% of net investment income until all the
investment losses have been recouped and an additional amount equal to 150% of
the aggregate loss is earned. For the year ended December 31, 2009,
included in net investment income (see Note 10) is performance compensation of
$21.9 million (2008: $0 million, 2007: $6.9 million).





Additionally,
pursuant to the Advisory Agreement, a monthly management fee equal to 0.125%
(1.5% on an annual basis) of the Company’s investment account managed by DME
Advisors is paid to DME Advisors. Included in the net investment income for the
year ended December 31, 2009 are management fees of $10.8 million (2008:
$9.9 million, 2007: $7.7 million). The management fees have been fully paid as
of December 31, 2009.





Pursuant
to the Advisory Agreement, the Company has agreed to indemnify DME Advisors for
any expense, loss, liability, or damage arising out of any claim asserted or
threatened in connection with DME Advisors serving as the Company’s investment
advisor. The Company will reimburse DME Advisors for reasonable costs and
expenses of investigating and/or defending such claims provided such claims were
not caused due to gross negligence, breach of contract or misrepresentation by
DME Advisors. During the year ended December 31, 2009, there were no
indemnification payments made by the Company.





Service
Agreement





The
Company has entered into a service agreement with DME Advisors, pursuant to
which DME Advisors provides investor relations services to the Company for
compensation of $5,000 per month (plus expenses). The agreement is automatically
renewed for one year periods until terminated by either the Company or
DME Advisors for any reason with 30 days prior written notice to the other
party.





14.     
COMMITMENTS AND CONTINGENCIES





Letters
of Credit





At
December 31, 2009, the Company had a $400 million letter of credit facility
with Citibank N.A. This facility terminates on October 11, 2010, although the
termination date is automatically extended for an additional year unless written
notice of cancellation is delivered to the other party at least 120 days
prior to the termination date. In addition, at December 31, 2009, the Company
had a $25 million letter of credit facility with Butterfield Bank (Cayman)
Limited (“Butterfield Bank”). This facility terminates on June 6,
2010, although the termination date is automatically extended for an additional
year unless written notice of cancellation is delivered to the other party at
least 30 days prior to the termination date. On July 21, 2009, the Company
entered into a $50.0 million letter of credit facility with Bank of America,
N.A. This facility terminates on July 20, 2010, although the termination date is
automatically extended for an additional year unless notice is
delivered to the other party at least 90 days prior to the termination
date.





At
December 31, 2009, an aggregate amount of $278.4 million (2008: $167.3 million)
in letters of credit were issued under the above referenced facilities. Under
the facilities, the Company provides collateral that may consist of equity
securities and cash equivalents. At December 31, 2009, total equity securities
and cash equivalents with a fair value in the aggregate of $315.2 million
(December 31, 2008: $220.2 million) were pledged as security against
the letters of credit issued. Each of the facilities requires that the Company
comply with certain covenants, including restrictions on the Company’s ability
to place a lien or charge on the pledged assets, and restricts issuance of any
debt without the consent of the letter of credit provider. Additionally, if an
event of default exists, as defined in the letter of credit facilities,
Greenlight Re will be prohibited from paying dividends to its parent company.
The Company was in compliance with all the covenants of each of these facilities
as of December 31, 2009 and 2008.





F-25




Operating
Lease





Effective
September 1, 2005, the Company entered into a five-year non-cancelable lease
agreement to rent office space in the Cayman Islands. On July 9, 2008, the
Company entered into an additional lease agreement for new office space in the
Cayman Islands. Under the terms of the latter lease agreement, the Company
is committed to annual rent payments ranging from $253,539 to $311,821. The
lease expires on June 30, 2018 and the Company has the option to renew the lease
for a further five year term. Included in the schedule below are the minimum
lease payment obligations relating to these leases.





The total
rent expense related to leased office spaces for the year ended December 31,
2009 was $539,000 (2008: $95,000, 2007: $90,000).





Specialist
Service Agreement





The Company
has entered into a service agreement with a specialist whereby the specialist
service provider provides administration and support in developing and
maintaining business relationships, reviewing and recommending programs and
managing risks relating to certain specialty lines of business. The service
provider does not have any authority to bind the Company to any reinsurance
contracts. Under the terms of the agreement, the Company has committed to
quarterly payments to the service provider. If the agreement is terminated, the
Company is obligated to make minimum payments for another two years, as
presented in the schedule below, to ensure contracts to which
the Company is bound are adequately administered by the
specialist service provider. Included in the schedule below are the minimum
payment obligations relating to this agreement.





Private
and Unlisted Equity





From time to
time the Company makes investments in private and unlisted investments. As
part of the Company's participation in such private and
unlisted investments, the Company may make funding commitments. As of
December 31, 2009, the Company had commitments to invest an additional $16.8
million in private and unlisted investments. Included in the schedule below
are the minimum payment obligations relating to these
investments.





Schedule
of Commitments and Contingencies





The
following is a schedule of future minimum payments required under the above
commitments:





2010
            
            
            2011
            
            
            2012
            
            
            2013
            
            
            2014
            
            
            Thereafter
            
            
            Total($
      in thousands)Operating
      lease obligations
            
            $
            345
            
            
            $
            276
            
            
            $
            276
            
            
            $
            276
            
            
            $
            276
            
            
            $
            967
            
            
            $
            2,416Specialist
      service agreement
            
            
            689
            
            
            
            400
            
            
            
            150
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,239Private
      and unlisted investments (1)
            
            
            16,836
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            16,836$
            17,870
            
            
            $
            676
            
            
            $
            426
            
            
            $
            276
            
            
            $
            276
            
            
            $
            967
            
            
            $
            20,491





(1)  Given the nature of
these investments, the Company is unable to determine with any degree of
accuracy when these commitments will be called. Therefore, for purposes of the
above table, the Company has assumed that all commitments with no fixed payment
schedules will be called during the year ended December 31,
2010.





Litigation





In the
normal course of business, the Company may become involved in various claims
litigation and legal proceedings. As of December 31, 2009, the Company was not a
party to any litigation or arbitration proceedings.





15.     
SEGMENT REPORTING





The
Company manages its business on the basis of one operating segment, Property
& Casualty Reinsurance.





Substantially
all of the business is sourced through reinsurance brokers. During the year
ended December 31, 2009, the three largest brokers accounted for $79.4
million, $62.3 million and $60.0 million of gross premiums written, representing
30.7%, 24.1% and 23.2%, respectively of total gross premiums written by the
Company. During the year ended December 31, 2008, the three largest brokers
accounted for $50.0 million, $35.7 million and $25.6 million of gross premiums
written, representing 30.8%, 22.0% and 15.7%, respectively of total gross
premiums written by the Company. During the year ended December 31, 2007,
the three largest brokers accounted for $41.3 million, $37.4 million and
$15.0 million of gross premiums written, representing 32.5%, 29.5% and 11.8%,
respectively, of total gross premiums written.








F-26











The following
tables provide a breakdown of the Company's gross premiums written by line of
business and by geographic area of risks insured for the years ended December
31, 2009, 2008 and 2007:





Gross
Premiums Written by Line of Business





2009
            
            
            2008
            
            
            2007($
      in thousands)PropertyCommercial
      lines
            
            $
            26,113
            
            
            
            10.1
            %
            
            $
            13,591
            
            
            
            8.4
            %
            
            $
            17,532
            
            
            
            13.8
            %Personal
      lines
            
            
            34,434
            
            
            
            13.3
            
            
            
            (4,071
            )(1)
            
            
            (2.5
            )
            
            
            41,291
            
            
            
            32.5CasualtyGeneral
      liability
            
            
            40,320
            
            
            
            15.6
            
            
            
            16,948
            
            
            
            10.4
            
            
            
            17,597
            
            
            
            13.8Motor
      liability
            
            
            78,161
            
            
            
            30.2
            
            
            
            72,578
            
            
            
            44.7
            
            
            
            795
            
            
            
            0.6Professional
      liability
            
            
            12
            
            
            
            —
            
            
            
            2,150
            
            
            
            1.3
            
            
            
            27,230
            
            
            
            21.4SpecialtyHealth
            
            
            47,749
            
            
            
            18.4
            
            
            
            40,210
            
            
            
            24.7
            
            
            
            16,489
            
            
            
            13.0Medical
      malpractice
            
            
            5,703
            
            
            
            2.2
            
            
            
            4,641
            
            
            
            2.9
            
            
            
            6,197
            
            
            
            4.9Workers’
      compensation
            
            
            26,326
            
            
            
            10.2
            
            
            
            16,348
            
            
            
            10.1
            
            
            
            —
            
            
            
            —$
            258,818
            
            
            
            100.0
            %
            
            $
            162,395
            
            
            
            100.0
            %
            
            $
            127,131
            
            
            
            100.0
            %





(1)
            Represents
      gross return premiums based on updated information received from
      the client.










Gross
Premiums Written by Geographic Area of Risks Insured





2009
            
            
            2008
            
            
            2007($
      in thousands)USA
            
            $
            233,058
            
            
            
            90.0
            %
            
            $
            142,604
            
            
            
            87.8
            %
            
            $
            79,647
            
            
            
            62.6
            %Worldwide(1)
            
            
            24,015
            
            
            
            9.3
            
            
            
            18,991
            
            
            
            11.7
            
            
            
            44,722
            
            
            
            35.2Europe
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            2,157
            
            
            
            1.7Caribbean
            
            
            1,745
            
            
            
            0.7
            
            
            
            800
            
            
            
            0.5
            
            
            
            605
            
            
            
            0.5258,818
            
            
            
            100.0
            %
            
            $
            162,395
            
            
            
            100.0
            %
            
            $
            127,131
            
            
            
            100.0
            %









(1)
            ‘‘Worldwide’’
      risk is comprised of individual policies that insure risks on a worldwide
      basis.















F-27





16.     
QUARTERLY FINANCIAL RESULTS (UNAUDITED)





2009
              Quarter
      endedMarch
      31
            
            
            June
      30
            
            
            September
      30
            
            December
      31($
      in thousands)RevenuesGross
      premiums written
            
            $
            71,871
            
            
            $
            70,047
            
            
            $
            65,983
            
            
            $
            50,917Gross
      premiums ceded
            
            
            (1,220
            )
            
            
            (6,611
            )
            
            
            (2,894
            )
            
            
            (2,551
            )Net
      premiums written
            
            
            70,651
            
            
            
            63,436
            
            
            
            63,089
            
            
            
            48,366Changes
      in net unearned premium reserves
            
            
            (24,458
            )
            
            
            (14,089
            )
            
            
            (6,432
            )
            
            
            14,117Net
      premiums earned
            
            
            46,193
            
            
            
            49,347
            
            
            
            56,657
            
            
            
            62,483Net
      investment income
            
            
            27,717
            
            
            
            88,323
            
            
            
            32,628
            
            
            
            51,193Other
      income (expense)
            
            
            2,124
            
            
            
            (70
            )
            
            
            (145
            )
            
            
            2,629Total
      revenues
            
            
            76,034
            
            
            
            137,600
            
            
            
            89,140
            
            
            
            116,305ExpensesLoss
      and loss adjustment expenses incurred, net
            
            
            30,196
            
            
            
            23,547
            
            
            
            34,643
            
            
            
            30,659Acquisition
      costs, net
            
            
            13,245
            
            
            
            15,578
            
            
            
            17,767
            
            
            
            22,642General
      and administrative expenses
            
            
            4,378
            
            
            
            5,330
            
            
            
            4,081
            
            
            
            5,205Total
      expenses
            
            
            47,819
            
            
            
            44,455
            
            
            
            56,491
            
            
            
            58,506Net
      income before non-controlling interest and income tax
      expense
            
            
            28,215
            
            
            
            93,145
            
            
            
            32,649
            
            
            
            57,799Non-controlling
      interest in income of joint venture
            
            
            (330
            )
            
            
            (1,006
            )
            
            
            (380
            )
            
            
            (596
            )Net
      income before income tax expense
            
            
            27,885
            
            
            
            92,139
            
            
            
            32,269
            
            
            
            57,203Income
      tax benefit (expense)
            
            
            (75
            )
            
            
            57
            
            
            
            (11
            )
            
            
            78Net
      income
            
            $
            27,810
            
            
            $
            92,196
            
            
            $
            32,258
            
            
            $
            57,281Earnings
      per shareBasic
            
            $
            0.77
            
            
            $
            2.54
            
            
            
            0.89
            
            
            
            1.58Diluted
            
            
            0.77
            
            
            
            2.51
            
            
            
            0.88
            
            
            
            1.55Weighted
      average number of ordinary shares used in the determination
      ofBasic
            
            
            36,078,258
            
            
            
            36,252,925
            
            
            
            36,286,514
            
            
            
            36,312,262Diluted
            
            
            36,334,870
            
            
            
            36,689,711
            
            
            
            36,828,726
            
            
            
            37,000,613










2008
              Quarter
      endedMarch
      31
            
            
            June
      30
            
            
            September
      30
            
            
            December
      31($
      in thousands)RevenuesGross
      premiums written
            
            $
            70,766
            
            
            $
            25,360
            
            
            $
            37,684
            
            
            $
            28,585Gross
      premiums ceded
            
            
            (9,272
            )
            
            
            (5,615
            )
            
            
            1,169
            
            
            
            (2,678
            )Net
      premiums written
            
            
            61,494
            
            
            
            19,745
            
            
            
            38,853
            
            
            
            25,907Changes
      in net unearned premium reserves
            
            
            (34,002
            )
            
            
            4,937
            
            
            
            (10,256
            )
            
            
            8,271Net
      premiums earned
            
            
            27,492
            
            
            
            24,682
            
            
            
            28,597
            
            
            
            34,178Net
      investment income (loss)
            
            
            (5,762
            )
            
            
            31,025
            
            
            
            (118,053
            )
            
            
            (33,336
            )Total
      revenues
            
            
            21,730
            
            
            
            55,707
            
            
            
            (89,
      456
            )
            
            
            842ExpensesLoss
      and loss adjustment expenses incurred, net
            
            
            12,124
            
            
            
            9,337
            
            
            
            14,777
            
            
            
            19,247Acquisition
      costs, net
            
            
            9,929
            
            
            
            9,228
            
            
            
            12,204
            
            
            
            10,288General
      and administrative expenses
            
            
            4,460
            
            
            
            3,210
            
            
            
            3,208
            
            
            
            2,878Total
      expenses
            
            
            26,513
            
            
            
            21,775
            
            
            
            30,189
            
            
            
            32,413Net
      income (loss) before non-controlling interest
            
            
            (4,783
            )
            
            
            33,932
            
            
            
            (119,645
            )
            
            
            (31,571
            )Non-controlling
      interest in loss (income) of joint venture
            
            
            33
            
            
            
            (394
            )
            
            
            1,212
            
            
            
            312Net
      income (loss)
            
            $
            (4,750
            )
            
            $
            33,538
            
            
            $
            (118,433
            )
            
            $
            (31,259
            )Earnings
      (loss) per shareBasic
            
            $
            (0.13
            )
            
            $
            0.93
            
            
            
            (3.29
            )
            
            
            (0.87
            )Diluted
            
            
            (0.13
            )
            
            
            0.91
            
            
            
            (3.29
            )
            
            
            (0.87
            )Weighted
      average number of ordinary shares used in the determination
      ofBasic
            
            
            35,981,312
            
            
            
            36,249,979
            
            
            
            35,995,236
            
            
            
            35,918,309Diluted
            
            
            35,981,312
            
            
            
            36,841,029
            
            
            
            35,995,236
            
            
            
            35,918,309





F-28





SCHEDULE I








GREENLIGHT
CAPITAL RE, LTD.


SUMMARY
OF INVESTMENTS — OTHER THAN INVESTMENTS IN RELATED PARTIES


AS
OF DECEMBER 31, 2009





(expressed
in thousands of U.S. dollars)





Type
      of Investment
            
            Cost
            
            
            Fair
      Value
            
            
            Balance
              Sheet
      Value($
      in thousands)Debt
      instruments, trading, at fair value
            
            $
            63,082
            
            
            $
            95,838
            
            
            $
            95,838Equity
      securities, trading, at fair valueCommon
      stocks, listed
            
            
            510,229
            
            
            
            574,957
            
            
            
            574,957Exchange
      traded funds
            
            
            7,879
            
            
            
            18,244
            
            
            
            18,244Total
      equity securities, trading, at fair value
            
            
            518,108
            
            
            
            593,201
            
            
            
            593,201Total
      investments, trading
            
            $
            581,190
            
            
            $
            689,039
            
            
            $
            689,039Other
      investments, at fair valuePrivate
      and unlisted equities securities
            
            $
            27,636
            
            
            $
            25,228
            
            
            $
            25,228Commodities
            
            
            96,552
            
            
            
            102,239
            
            
            
            102,239Put
      options
            
            
            6,269
            
            
            
            8,809
            
            
            
            8,809Call
      options
            
            
            6,406
            
            
            
            5,285
            
            
            
            5,285Total
      other investments, at fair value
            
            $
            136,863
            
            
            $
            141,561
            
            
            $
            141,561Total
      investments
            
            $
            718,053
            
            
            $
            830,600
            
            
            $
            830,600








F-29








SCHEDULE II








GREENLIGHT
CAPITAL RE, LTD.


CONDENSED
FINANCIAL INFORMATION OF REGISTRANT


CONDENSED
BALANCE SHEETS — PARENT COMPANY ONLY





(expressed
in thousands of U.S. dollars)





December
      31,
              2009
            
            
            December
      31,
              2008($
      in thousands)AssetsCash
      and cash equivalents
            
            $
            175
            
            
            $
            37Investment
      in subsidiaries
            
            
            702,389
            
            
            
            488,170Due
      from subsidiaries
            
            
            12,613
            
            
            
            —Total
      assets
            
            $
            715,177
            
            
            $
            488,207Liabilities
      and shareholders’ equityLiabilitiesDue
      to subsidiaries
            
            $
            16,536
            
            
            $
            2,825Total
      liabilities
            
            
            16,536
            
            
            
            2,825Shareholders’
      equityShare
      capital
            
            
            3,632
            
            
            
            3,604Additional
      paid-in capital
            
            
            481,449
            
            
            
            477,571Retained
      earnings
            
            
            213,560
            
            
            
            4,207Total
      shareholders’ equity
            
            
            698,641
            
            
            
            485,382Total
      liabilities and shareholders’ equity
            
            $
            715,177
            
            
            $
            488,207











GREENLIGHT
CAPITAL RE, LTD.


CONDENSED
FINANCIAL INFORMATION OF REGISTRANT


CONDENSED
STATEMENTS OF INCOME — PARENT COMPANY ONLY





(expressed
in thousands of U.S. dollars)





Year
      ended December 312009
            
            
            2008
            
            
            2007($
      in thousands)RevenueInvestment
      income (loss)
            
            $
            (42
            )
            
            $
            —
            
            
            $
            2Other
      income
            
            
            1,800
            
            
            
            —
            
            
            
            —Total
      revenues
            
            
            1,758
            
            
            
            —
            
            
            
            2ExpensesGeneral
      and administrative expenses
            
            
            3,432
            
            
            
            3,017
            
            
            
            2,934Net
      loss before equity in earnings (loss) of consolidated
      subsidiaries
            
            
            (1,674
            )
            
            
            (3,017
            )
            
            
            (2,932
            )Equity
      in earnings (loss) of consolidated subsidiaries
            
            
            211,219
            
            
            
            (117,887
            )
            
            
            38,257Consolidated
      net income (loss)
            
            $
            209,545
            
            
            $
            (120,904
            )
            
            $
            35,325








F-30








SCHEDULE
II (continued)








GREENLIGHT
CAPITAL RE, LTD.


CONDENSED
FINANCIAL INFORMATION OF REGISTRANT


CONDENSED
STATEMENTS OF CASH FLOWS — PARENT COMPANY ONLY





(expressed
in thousands of U.S. dollars)





Year
      Ended December 31,2009
            
            
            2008
            
            
            2007($
      in thousands)Cash
      provided by (used in)Operating
      activitiesNet
      income (loss)
            
            $
            209,545
            
            
            $
            (120,904
            )
            
            $
            35,325Adjustments
      to reconcile net income (loss) to cash provided by operating
      activitiesEquity
      in (earnings) loss of consolidated subsidiaries
            
            
            (211,219
            )
            
            
            117,887
            
            
            
            (38,257
            )Share-based
      compensation expense
            
            
            3,410
            
            
            
            3,000
            
            
            
            2,884Change
      inDue
      from subsidiaries
            
            
            (12,613
            )
            
            
            —
            
            
            
            —Due
      to subsidiaries
            
            
            13,711
            
            
            
            2,825
            
            
            
            500Total
      operating activities
            
            
            2,834
            
            
            
            2,808
            
            
            
            452Investing
      activityContributed
      surplus to subsidiaries
            
            
            (3,000
            )
            
            
            (500
            )
            
            
            (255,656
            )Financing
      activitiesProceeds
      from share issue
            
            
            28
            
            
            
            17
            
            
            
            255,706Repurchase
      of Class A ordinary shares
            
            
            —
            
            
            
            (2,334
            )
            
            
            —Short-swing
      sale profit from shareholder
            
            
            —
            
            
            
            12
            
            
            
            —Net
      proceeds from exercise of stock options
            
            
            716
            
            
            
            9
            
            
            
            —Options
      repurchased
            
            
            (440
            )
            
            
            —
            
            
            
            (500
            )Total
      financing activities
            
            
            304
            
            
            
            (2,296
            )
            
            
            255,206Net
      increase in cash and cash equivalents
            
            
            138
            
            
            
            12
            
            
            
            2Cash
      and cash equivalents at beginning of the year
            
            
            37
            
            
            
            25
            
            
            
            23Cash
      and cash equivalents at end of the year
            
            $
            175
            
            
            $
            37
            
            
            $
            25








F-31








SCHEDULE III








GREENLIGHT
CAPITAL RE, LTD.


SUPPLEMENTARY
INSURANCE INFORMATION


AS
OF AND FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007





(expressed
in thousands of U.S. dollars)





Year
      and Segment
            
            Deferred
              acquisition
              costs,
      net
            
            
            Reserves
              for
      losses
              and
      loss
              adjustment
              expenses
              –
      gross
            
            
            Unearned
              premiums
              –
      gross
            
            
            Net
              premiums
              earned
            
            
            Net
              investment
              income
      (loss)
            
            
            Net
      losses,
              and
      loss
              adjustment
              expenses
            
            
            Amortization
              of
      deferred
              acquisition
              costs
            
            
            Other
              operating
              expenses
            
            
            Gross
              premiums
              written2009
      Property & Casualty
            
            $
            34,401
            
            
            $
            137,360
            
            
            $
            118,899
            
            
            $
            214,680
            
            
            $
            199,861
            
            
            $
            119,045
            
            
            $
            69,232
            
            
            $
            18,994
            
            
            $
            258,8182008
      Property & Casualty
            
            $
            17,629
            
            
            $
            81,425
            
            
            $
            88,926
            
            
            $
            114,949
            
            
            $
            (126,126
            )
            
            $
            55,485
            
            
            $
            41,649
            
            
            $
            13,756
            
            
            $
            162,3952007
      Property & Casualty
            
            $
            7,302
            
            
            $
            42,377
            
            
            $
            59,298
            
            
            $
            98,047
            
            
            $
            27,642
            
            
            $
            39,507
            
            
            $
            38,939
            
            
            $
            11,918
            
            
            $
            127,131








F-32








SCHEDULE IV








GREENLIGHT
CAPITAL RE, LTD.


SUPPLEMENTARY
REINSURANCE INFORMATION


AS
OF AND FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007





(expressed
in thousands of U.S. dollars)





Year
      and Segment
            
            Direct
      gross
              premiums
            
            
            Premiums
              ceded
      to
              other
      companies
            
            
            Premiums
              assumed
      from
              other
      companies
            
            
            Net
      amount
            
            
            Percentage
      of
              amount
              assumed
      to net2009
      Property & Casualty
            
            $
            —
            
            
            $
            13,276
            
            
            $
            258,818
            
            
            $
            245,542
            
            
            
            105
            %2008
      Property & Casualty
            
            $
            —
            
            
            $
            16,396
            
            
            $
            162,395
            
            
            $
            145,999
            
            
            
            111
            %2007
      Property & Casualty
            
            $
            —
            
            
            $
            26,150
            
            
            $
            127,131
            
            
            $
            100,981
            
            
            
            126
            %











F-33










































































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