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, 2008


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.)





The
Grand Pavilion, 802 West Bay Road


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 oNo 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 xNo 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 oAcceleratedfiler  xNon-accelerated filero 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, 2008 was $667,404,101 based on
the closing price of the registrant’s Class A ordinary shares reported on the
Nasdaq Global Select Market on June 30, 2008, 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, 2009, there were 29,781,736 Class A ordinary shares
outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE




Portions
of the proxy statement for the registrant’s 2009 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,
2009 are incorporated by reference in Part III of this
annual report on Form 10-K.







Table of Contents







TABLE OF CONTENTS




PagePART I
                
                
                3ITEM 1.
                BUSINESS
                
                
                4ITEM 1A.
                RISK
      FACTORS
                
                
                17ITEM 1B.
                UNRESOLVED
      STAFF
      COMMENTS
                
                
                36ITEM 2.
                PROPERTIES
                
                
                36ITEM 3.
                LEGAL
      PROCEEDINGS
                
                
                36ITEM 4.
                SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                
                
                36PART II
                
                
                37ITEM 5.
                MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
                
                
                37ITEM 6.
                SELECTED
      FINANCIAL
      DATA
                
                
                39ITEM 7.
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                
                
                41ITEM 7A.
                QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                
                
                57ITEM 8.
                FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
                
                
                59ITEM 9.
                CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
                
                
                59ITEM 9A.
                CONTROLS
      AND
      PROCEDURES
                
                
                59ITEM 9B.
                OTHER
      INFORMATION
                
                
                60PART III
                
                
                61ITEM 10.
                DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                
                
                61ITEM 11.
                EXECUTIVE
      COMPENSATION
                
                
                61ITEM 12.
                SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
                
                
                61ITEM 13.
                CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                
                
                61ITEM 14.
                PRINCIPAL
      ACCOUNTANT FEES AND
      SERVICES
                
                
                61PART IV
                
                
                62ITEM 15.
                EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
                
                
                62







2
 Table of Contents







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.




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 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 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 select, customized reinsurance solutions 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;




4
 Table of Contents




•
            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
securities 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. As of December 31,
2008, 82.9%
of our investments in securities were invested in publicly-traded equity
securities primarily traded on exchanges in North America and Western Europe.
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.




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. 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.






5
 Table of Contents




While we
expect to establish a diversified 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:






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






•
            employ
      strict underwriting discipline; and






•
            select
      reinsurance opportunities with favorable returns on equity over the life
      of the contract.






The
      following table sets forth our gross premiums written by line of business
      for the years ended December 31, 2008, 2007 and
  2006:




2008
                
                
                2007
                
                
                2006($
      in thousands)PropertyCommercial
      lines
                
                $
                13,591
                
                
                
                8.4
                %
                
                $
                17,532
                
                
                
                13.8
                %
                
                $
                9,875
                
                
                
                13.3
                %Personal
      lines
                
                
                (4,071
                )
      (1)
                
                
                (2.5
                )
                
                
                41,291
                
                
                
                32.5
                
                
                
                58,063
                
                
                
                78.3CasualtyGeneral
      liability
                
                
                16,948
                
                
                
                10.4
                
                
                
                17,597
                
                
                
                13.8
                
                
                
                4,388
                
                
                
                5.9Marine
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,825
                
                
                
                2.5Motor
      liability
                
                
                72,578
                
                
                
                44.7
                
                
                
                795
                
                
                
                0.6
                
                
                
                —
                
                
                
                —Professional
      liability
                
                
                2,150
                
                
                
                1.3
                
                
                
                27,230
                
                
                
                21.4
                
                
                
                —
                
                
                
                —SpecialtyHealth
                
                
                40,210
                
                
                
                24.7
                
                
                
                16,489
                
                
                
                13.0
                
                
                
                —
                
                
                
                —Medical
      malpractice
                
                
                4,641
                
                
                
                2.9
                
                
                
                6,197
                
                
                
                4.9
                
                
                
                —
                
                
                
                —Workers
      compensation
                
                
                16,348
                
                
                
                10.1
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —$
                162,395
                
                
                
                100.0
                %
                
                $
                127,131
                
                
                
                100.0
                %
                
                $
                74,151
                
                
                
                100.0
                %




The
following table sets forth our gross premiums written by the geographic area of
the risk insured for the years ended December 31, 2008, 2007 and
2006:




2008
                
                
                2007
                
                
                2006($
      in thousands)USA
                
                $
                142,604
                
                
                
                87.8
                %
                
                $
                79,647
                
                
                
                62.6
                %
                
                $
                64,409
                
                
                
                86.9
                %Worldwide(2)
                
                
                18,991
                
                
                
                11.7
                
                
                
                44,722
                
                
                
                35.2
                
                
                
                4,388
                
                
                
                5.9Europe
                
                
                —
                
                
                
                —
                
                
                
                2,157
                
                
                
                1.7
                
                
                
                3,521
                
                
                
                4.7Caribbean
                
                
                800
                
                
                
                0.5
                
                
                
                605
                
                
                
                0.5
                
                
                
                500
                
                
                
                0.7Japan
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,333
                
                
                
                1.8$
                162,395
                
                
                
                100.0
                %
                
                $
                127,131
                
                
                
                100.0
                %
                
                $
                74,151
                
                
                
                100.0
                %





(1)
              Represents
      gross return premiums based on updated information received from
      client.(2)
              ‘‘Worldwide’’
      risk comprises 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.




6
 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 intend
to build 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 intend
to 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. During 2007, we 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, 2008, 2007 and 2006:




2008
                
                
                2007
                
                
                2006($
      in thousands)Name
      of BrokerAccess
      Re
                
                $
                —
                
                
                
                —
                %
                
                $
                —
                
                
                
                —
                %
                
                $
                4,000
                
                
                
                5.4
                %Aon
      Ltd
                
                
                8,241
                
                
                
                5.1
                
                
                
                35,417
                
                
                
                27.9
                
                
                
                5,375
                
                
                
                7.3Cornerstone
      Re
                
                
                25,552
                
                
                
                15.7
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Denis
      M Clayton
                
                
                7,500
                
                
                
                4.6
                
                
                
                7,500
                
                
                
                5.9
                
                
                
                2,325
                
                
                
                3.1Frontline
      Insurance Managers(1)
                
                
                (4,071
                )(2)
                
                
                (2.5
                )
                
                
                41,291
                
                
                
                32.5
                
                
                
                58,063
                
                
                
                78.3Gallagher
      Re
                
                
                27,495
                
                
                
                16.9
                
                
                
                1,997
                
                
                
                1.6
                
                
                
                —
                
                
                
                —Guy
      Carpenter & Co
                
                
                9,910
                
                
                
                6.1
                
                
                
                1,958
                
                
                
                1.5
                
                
                
                2,025
                
                
                
                2.7Lainston
      International Mgmt
                
                
                5,955
                
                
                
                3.7
                
                
                
                12,112
                
                
                
                9.5
                
                
                
                —
                
                
                
                —RIB
      Intermediaries
                
                
                9,329
                
                
                
                5.7
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Risk
      & Insurance Consulting, Inc
                
                
                12,450
                
                
                
                7.7
                
                
                
                14,981
                
                
                
                11.8
                
                
                
                —
                
                
                
                —Reinsurance
      Cooperative Associates, LLC
                
                
                50,000
                
                
                
                30.8
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Other
                
                
                10,034
                
                
                
                6.2
                
                
                
                11,875
                
                
                
                9.3
                
                
                
                2,363
                
                
                
                3.2Total
                
                $
                162,395
                
                
                
                100.0
                %
                
                $
                127,131
                
                
                
                100.0
                %
                
                $
                74,151
                
                
                
                100.0
                %
  
 (1)
              Frontline
      Insurance Managers, Inc. is a related party of First Protective Insurance
      Company, the counterparty to our largest contract bound in
      2006.
 (2)
              Represents
      our share of gross return premiums based on updated information received
      from client.


7
 Table of Contents





We
believe that by maintaining close relationships with brokers, we are able to
obtain access to a broad range of potential clients. 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 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 will help reduce any potential adverse
effects arising out of the termination of any one of our business
relationships.




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, will allow 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 will 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 favorable
return on equity over the life of the contract. In pricing our products, we
assume investment returns which approximate the risk-free rate, which we intend
to 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 meets or exceeds our
return on equity requirements before we commit capital. We price each
transaction based on the merits and structure of the transaction.




8
 Table of Contents




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 the 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, 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;




•
            allow
      the client to perform all claims adjusting and audits, as well as the
      funding and paying of claims, 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 the reinsurance contracts. 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.




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






9
 Table of Contents




•
            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 as our capital base increases.




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. 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 Standard & Poor's Rating Services. For
non-rated reinsurers, we monitor and obtain collateral in the form of cash,
funds withheld, or letters of credit.  As of December 31, 2008, the
aggregate amount due from reinsurers from retrocessional coverages represents
14.3% of our outstanding loss reserves. As of December 31, 2008, 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 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
not experienced a high volume of claims to date. Our claims management process
initiates upon receipt of reports from our clients.




We have
implemented a ‘‘cradle to grave’’ service philosophy where the same individual
underwrites and administers the reinsurance contracts.




Underwriters
review claims submissions 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 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 is a valuable service to our
clients.




10
 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,
2008, we have two separate letter of credit facilities in an aggregate maximum
amount of $425.0 million. As of December 31, 2008, we have issued letters of
credit totaling $167.3 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.




11
 Table of Contents




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.”




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 practice 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.




12
 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 carryforward provision.




The loss
carryforward 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 fee 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.




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. Each
of the Greenlight Funds utilizes an investment strategy that may compete with or
diverge from our investment strategy.




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.




13
 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 securities, selling
securities short and investing in trade claims, debt securities of distressed
issuers, arbitrages, bank loan participations, derivatives (including options,
warrants, swaps and futures), commodities, currencies, leases, break-ups,
consolidations, reorganizations, limited partnerships and similar securities of
non-U.S. issuers.




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 and governments
      of the Organization of Economic Co-operation and Development, or the OECD,
      high income countries and cash, cash equivalents or United States
      government obligations.




•
            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. No more than 10% of the assets in the investment portfolio will
      be held in private equity
securities.




•
            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 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.




14
 Table of Contents




Investment
Results




Composition




Our
investment portfolio managed by DME Advisors contains investments in securities,
cash and funds held with brokers, derivatives, and securities sold, not yet
purchased. The following table represents the fair value of our total long
positions as reported in the financial statements as of December 31, 2008 and
2007:




As
      of
                  December
      31, 2008
              
              
              As
      of
                  December
      31, 2007($
      in thousands)Debt
      securities
              
              $
              70,214
              
              
              
              11.8
              %
              
              $
              1,520
              
              
              
              0.2
              %Equities
      – listed (*)
              
              
              409,329
              
              
              
              69.0
              
              
              
              570,440
              
              
              
              84.7Equities
      – unlisted
              
              
              11,897
              
              
              
              2.0
              
              
              
              10,835
              
              
              
              1.6Options
              
              
              2,526
              
              
              
              0.5
              
              
              
              6,215
              
              
              
              0.9Futures
              
              
              —
              
              
              
              —
              
              
              
              1,526
              
              
              
              0.3Investments
      in securities
              
              
              493,966
              
              
              
              83.3
              
              
              
              590,536
              
              
              
              87.7Cash
      and funds held with brokers
              
              
              94,814
              
              
              
              16.0
              
              
              
              100,495
              
              
              
              14.9Financial
      contracts, net
              
              
              4,279
              
              
              
              0.7
              
              
              
              (17,524
              )
              
              
              (2.6
              )Total
      long investments
              
              $
              593,059
              
              
              
              100.0
              %
              
              $
              673,507
              
              
              
              100.0
              %





(*) As described
in Note 3 to our financial statements, "Equities - listed" includes securities
held in exchange traded funds (ETF), predominantly comprised of a gold
ETF.




The
following table represents the fair value of our total short positions as
reported in the financial statements as of December 31, 2008 and
2007:




As
      of
                  December
      31, 2008
              
              
              As
      of
                  December
      31, 2007($
      in thousands)Equities
      – listed
              
              $
              234,301
              
              
              
              100.0
              %
              
              $
              332,706
              
              
              
              100.0
              %Total
      short investments
              
              $
              234,301
              
              
              
              100.0
              %
              
              $
              332,706
              
              
              
              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 and futures contracts is reported at its 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
equity option is the sensitivity of the option price to the underlying stock
price. The delta adjusted basis is the number of shares underlying the option
multiplied by the delta and the underlying stock price. The following table
represents the composition of our investment portfolio based on the holdings in
our investment account managed by DME Advisors as of December 31, 2008 and
2007:




As
      of
                  December
      31, 2008
              
              
              As
      of
                  December
      31, 2007Long
      %
              
              
              Short
      %
              
              
              Long
      %
              
              
              Short
      %Debt
      securities
              
              
              11.8
              %
              
              
              0.0
              %
              
              
              0.1
              %
              
              
              0.0
              %Equities
      & related derivatives
              
              
              65.8
              
              
              
              (39.3
              )
              
              
              91.0
              
              
              
              (51.7
              )Equities
      – unlisted
              
              
              1.9
              
              
              
              —
              
              
              
              1.2
              
              
              
              0.0Other
      investments
              
              
              —
              
              
              
              (0.2
              )
              
              
              0.7
              
              
              
              (7.6
              )Total
              
              
              79.5
              %
              
              
              (39.5
              )%
              
              
              93.0
              %
              
              
              (59.3
              )%




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, 2008:




Sector
              
              Long
      %
              
              
              Short
      %
              
              
              Net
      %Basic
      Materials
              
              
              5.3
              %
              
              
              (5.3
              )%
              
              
              0.0
              %Consumer
      Cyclical
              
              
              5.5
              
              
              
              (5.8
              )
              
              
              (0.3
              )Consumer
      Non-Cyclical
              
              
              2.5
              
              
              
              (3.4
              )
              
              
              (0.9
              )Energy
              
              
              6.3
              
              
              
              (1.5
              )
              
              
              4.8Financial
              
              
              20.6
              
              
              
              (18.4
              )
              
              
              2.4Healthcare
              
              
              1.9
              
              
              
              (2.6
              )
              
              
              (0.7
              )Industrial
              
              
              20.9
              
              
              
              (2.5
              )
              
              
              18.4Technology
              
              
              12.6
              
              
              
              (0.1
              )
              
              
              12.5Utilities
              
              
              3.9
              
              
              
              0.0
              
              
              
              3.9Total
              
              
              79.5
              %
              
              
              (39.5
              )%
              
              
              40.1
              %




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,
2008:




Capitalization
              
              Long
      %
              
              
              Short
      %
              
              
              Net
      %Large
      Cap Equity (≥$5 billion)
              
              
              16.9
              %
              
              
              (22.1
              )%
              
              
              (5.1
              )%Mid
      Cap Equity (≥$1 billion)
              
              
              32.7
              
              
              
              (16.2
              )
              
              
              16.6Small
      Cap Equity (<$1 billion)
              
              
              16.2
              
              
              
              (1.1
              )
              
              
              15.1Debt
      Instruments
              
              
              11.8
              
              
              
              (0.0
              )
              
              
              11.6Other
      Investments
              
              
              1.9
              
              
              
              (0.2
              )
              
              
              1.9Total
              
              
              79.5
              %
              
              
              (39.5
              )%
              
              
              40.1
              %





15
 Table of Contents


Investment
Returns
  A summary
of our consolidated net investment (loss) income for the years ended December
31, 2008, 2007 and 2006 is as follows:
  2008
                
                
                2007
                
                
                2006($
      in thousands)Realized
      gains (losses) and change in unrealized gains and losses,
    net
                
                $
                (118,667
                )
                
                $
                28,051
                
                
                $
                70,272Interest,
      dividend and other income
                
                
                31,093
                
                
                
                23,443
                
                
                
                11,704Interest,
      dividend and other expenses
                
                
                (28,651
                )
                
                
                (9,219
                )
                
                
                (4,775
                )Investment
      advisor compensation
                
                
                (9,901
                )
                
                
                (14,633
                )
                
                
                (18,692
                )Net
      investment (loss) income
                
                $
                (126,126
                )
                
                $
                27,642
                
                
                $
                58,509
  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
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                20041st
                
                
                (0.9
                )%
                
                
                (4.2
                )%
                
                
                7.5
                %
                
                
                2.2
                %
                
                
                —
                %2nd
                
                
                4.5
                %
                
                
                6.8
                
                
                
                2.9
                
                
                
                5.4
                
                
                
                —3rd
                
                
                (15.9
                )%
                
                
                (0.8
                )
                
                
                6.2
                
                
                
                3.0
                
                
                
                1.34th
                
                
                (5.3
                )%
                
                
                4.2
                
                
                
                5.9
                
                
                
                2.9
                
                
                
                3.9Full
      Year
                
                
                (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.
  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. Backup information is stored off-site in order to minimize the risk of a
loss of data in the event of a disaster.




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, 2008, we had 13 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.




16
 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;




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




•
            the
      performance of our investment
portfolio.




In
particular, we seek to 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 securities, 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, 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;






17
 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.’’




Our
losses may exceed our loss reserves, which could significantly and negatively
affect our business.




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 a focus on 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




18
 Table of Contents




rates of
return on investments 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 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.




A recession and other 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.




Global market and economic conditions have been severely
disrupted. These conditions may potentially 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. Continued volatility
in the U.S. and other securities markets may adversely affect 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 which may affect such an analysis include:




•
            if
      we change our business practices from our organizational business plan in
      a manner that no longer supports 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.




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.




19
 Table of Contents




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, including underwriters, 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 delayed or 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 (2006 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.




20
 Table of Contents




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.




As of
December 31, 2008, we had letter of credit facilities in a maximum amount of
$425.0 million, of which $167.3 million had been issued. 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 the letter of credit facility,
we have the right, at our option, to reduce the outstanding obligations under
the 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 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 our letter of credit facility 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.




21
 Table of Contents




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.




Markets in the United States and elsewhere have been
experiencing extreme volatility and disruption for more than 12 months, due in
part to financial stresses affecting the liquidity of the banking system and the
financial markets generally. In recent months, this volatility and disruption
has reached unprecedented levels. These circumstances have also exerted downward
pressure on stock prices and reduced access to the equity and debt markets for
many issuers, including us. This unprecedented market volatility and general
decline in the markets has affected our investment portfolio, results of
operations,and may reduce ouraccess to capital and may increase the cost of
capital.




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.




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.




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




22
 Table of Contents




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.




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.




For the
year ended December 31, 2008, we had purchased $16.4 million in reinsurance for
the liabilities we reinsure, which we refer to as retrocessional coverage. From
time to time, we may purchase retrocessional coverage for our own account 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.




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.




23
 Table of Contents




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
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.




In
addition, CIMA could revoke or suspend our license if we are deemed to be a
passive foreign investment company, or PFIC, or an investment company under the
Investment Company Act of 1940, as amended, or the Investment Company Act.
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




24
 Table of Contents




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.




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 do not
presently expect that we will be admitted to do business in any jurisdiction
other than 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 United Kingdom 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 United Kingdom 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 Statement of
Financial Accounting Standards, or SFAS, No. 113, ‘‘Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts’’ 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 analyses with respect to risk transfer and
believe that to date all of our contracts contain sufficient risk transfer under
SFAS 113 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




25
 Table of Contents




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.




The
outcome of recent industry investigations and regulatory proposals could
adversely affect our financial condition and results of operations and cause the
price of our shares to be volatile.




The
insurance industry has attracted increased scrutiny by regulatory and law
enforcement authorities relating to allegations of improper special payments,
price-fixing, bid-rigging, improper accounting practices and other alleged
misconduct. Formal and informal inquiries have been made of a large segment of
the industry, and a number of companies in the insurance industry have received
subpoenas, requests for information from regulatory agencies or other inquiries
relating to these and similar matters. These efforts have resulted in both
enforcement actions and proposals for new regulation. Although some of these
enforcement actions have been settled and we are not subject to the United
States regulatory regime, we cannot predict the outcome of this increased
regulatory scrutiny or whether it will expand into other areas, whether
activities and practices currently thought to be lawful will be characterized as
unlawful, what form new regulations will have when finally adopted or the
impact, if any, of increased regulatory and law enforcement action on our
business and results of operations.




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. The loss of DME Advisors' principals or other 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. 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.




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. Our investment income
(loss) for the years ended December 31, 2008, 2007 and 2006 were $(126.1)
million, $27.6 million, and $58.5 million, respectively, compared to total
revenue of $(11.2) million, $125.7 million, and $86.1 million,
respectively.




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.




Deterioration in the public debt and equity markets
could lead to additional investment losses.




The prolonged and severe disruptions in the public debt
and equity markets, including among other things, widening of credit spreads,
bankruptcies and government intervention in a number of large financial
institutions, have resulted in significant realized and unrealized losses in our
investment portfolio. For the year endedDecember 31, 2008, we incurrednetinvestment
lossesof $126.1 million.We continue to closely monitor current market
conditions and evaluate the long term impact of this recent market volatility on
all of our investment holdings. Depending on market conditions, we could incur
additional realized and unrealized losses in future periods, which could have a
significant and negative effect on our results of operations, financial
condition and business. In addition, our reinsurers and retrocessionaires may be
affected by such developments in the financial markets, which could adversely
affect their ability to meet their obligations to us.




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




26
 Table of Contents


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, 2008, we were invested in approximately 100 equity securities
and the top five long and short positions in equity securities comprised an
aggregate of 23% and 16% 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 on our behalf, we have no significant concentrations of credit
risk.




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.




27
 Table of Contents


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.




The
loss by DME Advisors of key employees could materially adversely affect our
investment results.




DME
Advisors, and consequently our investment portfolio, 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. 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.




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.




DME
Advisors is entitled to two forms of compensation under the advisory
agreement:




•
            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 carryforward provision.




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.




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.




28
 Table of Contents




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, 2008, 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. Additionally, as of December 31, 2008,
representatives of DME Advisors sat on the board of directors of Ark Real Estate
Partners LP, a privately-held company. As of December 31, 2008, our portfolio
included investments in each of BioFuel Energy Corp., Einstein Noah Restaurant
Group and Ark Real Estate Partners LP.




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.




29
 Table of Contents


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.




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.




In 2005,
the SEC considered stricter oversight of the alternative investment industry.
Effective February 10, 2005, the SEC adopted a new rule under the Investment
Advisers Act of 1940 to require certain unregistered investment advisors to
register with the SEC. In June 2006, a federal court of appeals vacated the
SEC's rule, but we cannot assure you that other legislation or regulations will
not be proposed and enacted. It is possible that increased regulation of
alternative investment advisors would 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.




During
2008, the SEC and regulators in other countries imposed certain restrictions on
shorting of securities for an extended period of time. We cannot provide any
assurance that regulators will not impose the same or similar restrictions in
the future. Such restrictions, if imposed again, could have a material negative
impact on our ability to carry out our business strategy.




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.




DME
Advisors is entitled to receive management fees regardless of the performance of
our investment portfolio.




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




30
 Table of Contents




• 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




•







The loss
carryforward 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.




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.




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.




Unlike
many jurisdictions in the United States, Cayman Islands law does not provide for
mergers as that term is understood under corporate law in the United States.
Cayman Islands law does have statutory provisions that provide for the
reconstruction and amalgamation of companies, which are commonly referred to in
the Cayman Islands as ‘‘schemes of arrangement.’’ The procedural and legal
requirements necessary to consummate these transactions are 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 in relation to a Cayman Islands company 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.




The
convening of these meetings and the terms of the amalgamation must also 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:




31
 Table of Contents




•
              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.




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.




Turner
& Roulstone, our Cayman Islands counsel, has advised us that 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 offeror 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.




32
 Table of Contents


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.




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 at
December 31, 2008, David Einhorn owned 17.4% 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.




33
 Table of Contents




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.’’




We
may be subject to United States federal income taxation.




We 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 our 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, we cannot assure you that the
United States Internal Revenue Service, or the IRS, will not successfully assert
that we are engaged in a trade or business within the United
States.  If the IRS were to successfully assert that we have been
engaged in a trade or business within the United States in any taxable year,
various adverse tax consequences could result, including the following: we may
become subject to current United States federal income taxation on our net
income from sources within the United States; we may be subject to United States
federal income tax on a portion of our net investment income, regardless of its
source; we may not be entitled to deduct certain expenses that would otherwise
be deductible from the income subject to United States taxation;  and
we 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 was a PFIC for 2007 through 2008. We cannot provide assurance
that either Greenlight Capital Re or Greenlight Re will not be a PFIC in 2009 or
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.




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




34
 Table of Contents




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




35
 Table of Contents




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.




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 Cayman Islands’ letter of commitment or other concessions to 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. In the OECD’s 2000 report, the Cayman Islands was
not listed as a tax haven jurisdiction because it had previously committed
itself to eliminate harmful tax practices and to embrace international tax
standards for transparency, exchange of information and the elimination of any
aspects of the regimes for financial and other services that attract business
with no substantial domestic activity. We are not able to predict what changes
will arise from the commitment or whether such changes will subject us to
additional taxes.




ITEM 1B.   UNRESOLVED STAFF COMMENTS




There are
no unresolved staff comments regarding our current or periodic
reports.




ITEM 2.    PROPERTIES




We
currently lease office space in Grand Cayman, Cayman Islands under an operating
lease that expires on August 31, 2010. On July 9, 2008, we entered into an
additional operating lease agreement for new office space in the Cayman Islands
which expires on June 30, 2018. Once we have occupied the new office space, we
will no longer require the use of our current office space and we believe that
for the foreseeable future the new office space will be sufficient for us to
conduct 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, 2008.




36
 Table of Contents




PART II




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




(A)  
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.




2008
              
              
              2007High
              
              
              Low
              
              
              High
              
              
              LowFirst
      Quarter
              
              $
              21.46
              
              
              $
              16.30
              
              
              
              n/a
              
              
              
              n/aSecond
      Quarter
              
              $
              23.85
              
              
              $
              16.75
              
              
              $
              25.50
              
              
              $
              21.96Third
      Quarter
              
              $
              23.50
              
              
              $
              15.80
              
              
              $
              24.58
              
              
              $
              18.88Fourth
      Quarter
              
              $
              19.00
              
              
              $
              8.67
              
              
              $
              22.25
              
              
              $
              18.92




(B)  
Holders




As of
February 1, 2009, the number of holders of record of our Class A ordinary shares
was approximately 42, not including beneficial owners of shares registered in
nominee or street name.




(C)  
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, 2008, Greenlight Re exceeded the minimum statutory capital requirement by
$488.1 million. Any dividends we pay will be declared and paid in U.S.
dollars.




(D)  
Securities Authorized for Issuance Under Equity Compensation Plans




The
following table provides information as of December 31, 2008 with respect to the
Company’s Class A ordinary shares that may be issued upon the exercise of
options, warrants and restricted stock granted to employees, consultants or
members of the board of directors under all of our existing compensation plans,
including the 2004 Stock Incentive Plan, or the Stock Incentive Plan, each as
amended.




Plan
      category
                                    
                                    Number of securities
                                        to
      be issued
                                        upon exercise of
                                        outstanding options,
                                        warrants
      and rights
                                    
                                    
                                    Weighted-average
                                        exercise
      price of
                                        outstanding options,
                                        warrants
      and rights
                                    
                                    
                                    Number
      of securities
                                        remaining
      available for
                                        future issuance under
                                        equity compensation
      plans
                                        (excluding securities
                                        reflected in column
      (a))(a)
                                    
                                    
                                    (b)
                                    
                                    
                                    (c)Equity
      compensation plans approved by security holders
                                    
                                    
                                    1,608,340
                                    (1)
                                    
                                    $
                                    12.56
                                    
                                    
                                    
                                    439,054
                                    (2)Equity
      compensation plans not approved by security holders
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Total
                                    
                                    1,608,340
                                    (1)
                                    
                                    $
                                    12.56
                                    
                                    
                                    439,054
                                    (2)







(1)
            Includes
      1,258,340 Class A ordinary shares issuable upon the exercise of options
      that were outstanding under the Stock Incentive Plan as of
      December 31, 2008. Also includes 400,000 Class A ordinary shares
      issuable upon the exercise of share purchase options granted in 2004 to a
      consultant, First International Capital Holdings, Ltd., or FIC, less
      50,000 Class A ordinary shares relating to the re-purchase of share
      purchase options from FIC in December
2007.




(2)
            Represents
      the difference between the number of securities issuable under the Stock
      Incentive Plan (2,000,000) and the number of securities issued under
      the Stock Incentive Plan as of December 31, 2008 (1,560,946). The
      number of securities to be issued under the Stock Incentive Plan consists
      of options to acquire 1,259,000 Class A ordinary shares as well as 301,946
      issued shares.






37
 Table of Contents




(E)   
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, 2008 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.




(F)   
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers




The
following table provides information with respect to purchases of our Class A
ordinary shares during the three months ended December 31, 2008:




Period
                
                Total
      Number of
                    Shares
      Purchased
                
                
                Average
      Price
                    Paid
      per Share
                
                
                Total
      Number of
                    Shares
      Purchased
                    as
      Part of Publicly
                    Announced
      Plans
                    or
      Programs1
                
                
                Maximum
      Number of
                    Shares
      that May Yet
                    Be
      Purchased Under
                    the
      Plans or Programs1October
      1, 2008 to October 31, 2008
                
                
                0
                
                
                $
                0
                
                
                
                0
                
                
                
                2,000,000November
      1, 2008 to November 30, 2008
                
                
                63,900
                
                
                $
                10.19
                
                
                
                63,900
                
                
                
                1,936,100December
      1, 2008 to December 31, 2008
                
                
                165,000
                
                
                $
                10.16
                
                
                
                165,000
                
                
                
                1,771,100Total
                
                
                228,900
                
                
                $
                10.17
                
                
                
                228,900
                
                
                
                1,771,100





1On
August 5, 2008 the Company’s Board of Directors adopted a share repurchase plan
authorizing the Company to purchase up to two 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.


38
 Table of Contents




ITEM 6. SELECTED FINANCIAL
DATA
  The
following table sets forth our selected historical statement of income data for
the fiscal years ended December 31, 2008, 2007, 2006 and 2005 and the period
from inception on July 13, 2004 to December 31, 2004, as well as our selected
balance sheet data as of December 31, 2008, 2007, 2006, 2005 and 2004, 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




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,
                  
                  
                  July
      13, 2004
                      to
      December 31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004($
      in thousands, except per share and share amounts)Summary
      Statement of Income DataGross
      premiums written
                  
                  $
                  162,395
                  
                  
                  $
                  127,131
                  
                  
                  $
                  74,151
                  
                  
                  $
                  —
                  
                  
                  $
                  —Net
      premiums earned
                  
                  
                  114,949
                  
                  
                  
                  98,047
                  
                  
                  
                  26,605
                  
                  
                  
                  —
                  
                  
                  
                  —Net
      investment income (loss)
                  
                  
                  (126,126
                  )
                  
                  
                  27,642
                  
                  
                  
                  58,509
                  
                  
                  
                  27,934
                  
                  
                  
                  9,636Loss
      and loss adjustment expenses incurred, net
                  
                  
                  55,485
                  
                  
                  
                  39,507
                  
                  
                  
                  9,671
                  
                  
                  
                  —
                  
                  
                  
                  —Acquisition
      costs, net
                  
                  
                  41,649
                  
                  
                  
                  38,939
                  
                  
                  
                  10,415
                  
                  
                  
                  —
                  
                  
                  
                  —General
      and administrative expenses
                  
                  
                  13,756
                  
                  
                  
                  11,918
                  
                  
                  
                  9,063
                  
                  
                  
                  2,992
                  
                  
                  
                  3,377Net
      income (loss)
                  
                  $
                  (120,904
                  )
                  
                  $
                  35,325
                  
                  
                  $
                  56,999
                  
                  
                  $
                  26,265
                  
                  
                  $
                  6,775Earnings
      (Loss) Per Share Data(1)Basic
                  
                  $
                  (3.36
                  )
                  
                  $
                  1.17
                  
                  
                  $
                  2.67
                  
                  
                  $
                  1.24
                  
                  
                  $
                  0.32Diluted
                  
                  
                  (3.36
                  )
                  
                  
                  1.15
                  
                  
                  
                  2.66
                  
                  
                  
                  1.24
                  
                  
                  
                  0.32Weighted
      average number of ordinary shares used in the determination
    ofBasic
                  
                  
                  35,970,479
                  
                  
                  
                  30,311,639
                  
                  
                  
                  21,366,140
                  
                  
                  
                  21,226,868
                  
                  
                  
                  21,225,000Diluted
                  
                  
                  35,970,479
                  
                  
                  
                  30,813,243
                  
                  
                  
                  21,457,443
                  
                  
                  
                  21,265,801
                  
                  
                  
                  21,234,350Selected
      Ratios (based on U.S. GAAP Statement of Income data)Loss
      ratio(2)
                  
                  
                  48.3
                  %
                  
                  
                  40.3
                  %
                  
                  
                  36.4
                  %
                  
                  
                  —
                  
                  
                  
                  —Acquisition
      cost ratio(3)
                  
                  
                  36.2
                  %
                  
                  
                  39.7
                  %
                  
                  
                  39.1
                  %
                  
                  
                  —
                  
                  
                  
                  —Internal
      expense ratio(4)
                  
                  
                  12.0
                  %
                  
                  
                  12.2
                  %
                  
                  
                  34.1
                  %
                  
                  
                  —
                  
                  
                  
                  —Combined
      ratio(5)
                  
                  
                  96.5
                  %
                  
                  
                  92.2
                  %
                  
                  
                  109.6
                  %
                  
                  
                  —
                  
                  
                  
                  —


39
 Table of Contents






As
      of December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004($
      in thousands, except per share and share amounts)Selected
      Balance Sheet Data:Total
      investments in securities
                
                $
                493,966
                
                
                $
                590,536
                
                
                $
                243,522
                
                
                $
                219,211
                
                
                $
                162,204Cash
      and cash equivalents
                
                
                94,144
                
                
                
                64,192
                
                
                
                82,704
                
                
                
                7,218
                
                
                
                30,664Restricted
      cash and cash equivalents
                
                
                248,330
                
                
                
                371,607
                
                
                
                154,720
                
                
                
                99,719
                
                
                
                96,791Total
      assets
                
                
                958,005
                
                
                
                1,094,145
                
                
                
                518,608
                
                
                
                327,935
                
                
                
                290,764Loss
      and loss adjustment expense reserves
                
                
                81,425
                
                
                
                42,377
                
                
                
                4,977
                
                
                
                —
                
                
                
                —Unearned
      premium reserves
                
                
                88,926
                
                
                
                59,298
                
                
                
                47,546
                
                
                
                —
                
                
                
                —Total
      liabilities
                
                
                472,623
                
                
                
                488,563
                
                
                
                206,441
                
                
                
                96,113
                
                
                
                94,240Total
      shareholders' equity
                
                
                485,382
                
                
                
                605,582
                
                
                
                312,167
                
                
                
                231,822
                
                
                
                196,524Adjusted
      book value(6)
                
                $
                485,382
                
                
                $
                605,582
                
                
                $
                312,167
                
                
                $
                248,034
                
                
                $
                221,024Ordinary
      shares outstanding:Basic
                
                
                36,036,685
                
                
                
                36,102,736
                
                
                
                21,557,228
                
                
                
                21,231,666
                
                
                
                21,225,000Diluted
                
                
                37,357,685
                
                
                
                37,631,736
                
                
                
                23,094,900
                
                
                
                22,175,000
                
                
                
                21,645,000Per
      Share Data:Basic
      adjusted book value per share(7)
                
                $
                13.47
                
                
                $
                16.77
                
                
                $
                14.48
                
                
                $
                11.68
                
                
                $
                10.41Diluted
      adjusted book value per share(8)
                
                
                13.39
                
                
                
                16.57
                
                
                
                14.27
                
                
                
                11.63
                
                
                
                10.21






(1)
            Basic
      earnings per share is calculated by dividing net income by the weighted
      average number of shares outstanding for the period, exclusive of unvested
      stock awards. Diluted earnings per share is calculated by taking into
      account the effects of exercising all dilutive stock options and stock
      awards. For a period in which there is a net loss, stock options and
      unvested stock awards are excluded from the weighted average number of
      ordinary shares, when computing diluted earnings per share, since their
      inclusion would have been anti-dilutive for the
  year.




(2)
            The
      loss ratio is calculated by dividing loss and loss adjustment expenses 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 plus 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)
            Basic
      adjusted book value per share is calculated by dividing adjusted book
      value by the number of shares issued and outstanding at year
      end.




(8)
            Diluted
      adjusted book value per share is calculated by dividing the aggregate of
      adjusted book value and the proceeds from the exercise of options by the
      diluted number of shares and share equivalents outstanding at year
      end.






40
 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, 2008, 2007 and 2006 and financial condition as of
December 31, 2008 and 2007. 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.




In
September 2008, the Cayman Islands Monetary Authority granted approval for the
Company's request to amend its business plan enabling 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 program. As of the
date of this filing, we had not written any long-term business. However, as part
of our opportunistic strategy, we now have
the license to selectively evaluate opportunities relating
to long-term business.




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 are not yet possible and may not be meaningful. In addition, our
historical investment results may not necessarily be indicative of future
performance. In addition, 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 SFAS No. 131, ‘‘Disclosure about Segments of an Enterprise and
Related Information.’’ 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.




41
 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.




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 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 management and performance fees we pay to our
investment advisor. We net these expenses against investment income in our
financial statements.




General
and administrative expenses consist primarily of salaries and benefits and
related costs, including costs associated with our incentive compensation plan,
stock compensation expenses, 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.




42
 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. 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 the client’s initial
estimates and then adjust the estimates as advised by our client. We believe
that the client's estimate of the volume of business it expects to cede to us
represents the best estimate of gross premiums written at the beginning of the
contract. 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.




We
account for reinsurance contracts in accordance with Statement of Financial
Accounting Standards (SFAS) No. 60, ‘‘Accounting and Reporting by Insurance
Enterprises,’’ and SFAS No. 113, ‘‘Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts.’’ 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,
we account for the contract as a deposit liability.




Investments. 
Effective January 1, 2008, we adopted SFAS No. 157, “Fair Value
Measurements,” which resulted in no material changes in the valuation techniques
we previously used for measuring fair values.  Our investments in debt
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 last reported price on the balance sheet date as reported by a
recognized exchange. The fair values of private debt securities 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 securities are
valued using cash flow models using assumptions and estimates that may be
subjective and non-observable.





Our other
investments in private equity securities, limited partnerships, futures,
exchange traded options and over-the-counter (“OTC”) options, 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 market value based on quoted prices in active markets. For OTC
options or 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 SFAS No. 159,  “The Fair
Value Option for Financial Assets and Financial Liabilities,” 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.


43
 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. 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 any adjustments to the estimates are recorded in the period in
which they are determined. Under generally accepted accounting principles in the
United States (“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 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.




Loss and
loss adjustment expense reserves as of December 31, 2008 and 2007 were comprised
of the following:




December
      31, 2008
              
              
              December
      31, 2007Case
      Reserves
              
              
              IBNR
              
              
              Total
              
              
              Case
      Reserves
              
              
              IBNR
              
              
              Total($
      in thousands)Frequency
              
              $
              6,666
              
              
              $
              49,127
              
              
              $
              55,793
              
              
              $
              1,712
              
              
              $
              34,477
              
              
              $
              36,189Severity
              
              
              —
              
              
              
              25,632
              
              
              
              25,632
              
              
              
              —
              
              
              
              6,188
              
              
              
              6,188Total
              
              $
              6,666
              
              
              $
              74,759
              
              
              $
              81,425
              
              
              $
              1,712
              
              
              $
              40,665
              
              
              $
              42,377




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 in the pricing analysis. In our pricing
analyses, we typically utilize a significant amount of information both from the
individual client and from industry data. Where practical, we compare 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. 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 complete our analyses for all
contracts for all lines of business. The information 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 also
may receive information by class or subclass of business. As we are a new
company, we currently rely more on client and industry data than our own data to
identify unusual trends requiring changes in reserve estimates. Where
available, we 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. 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. 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




44
 Table of Contents




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.




•
            Bornheutter-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
      use this method for lines of business and contracts where there are
      limited historical paid losses.




•
            Bornheutter-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 use this method for lines of business and contracts
      where there are limited historical reported
  losses.




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. In setting our reserves, we do not use a range of estimates that may
be subject to adjustment. Accordingly, at the end of each period, we will
establish reserves at a point estimate based upon all information then
available. 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.




Our
aggregate reserves are the sum of the point estimate of all contracts. Because
our reserves are the sum of our point estimates, we do not adjust our reserves
from the amounts our actuaries determine. We perform a quarterly loss reserve
analysis on each contract. This analysis may incorporate some or all of the
information described above, using some or all of the methodologies described
above. Each contract is analyzed every quarter regardless of the line of
business. 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. We also have our loss
reserves reviewed, at least on an annual basis, by an independent outside
actuary who tests and reviews the work done by our actuaries to corroborate that
reserves we report are being established consistently and
appropriately.




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. 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.




Share-Based
Payments. We have established a Stock Incentive Plan for directors,
employees and consultants which we account under SFAS 123R, ‘‘Share-Based
Payments.’’ SFAS 123R 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




45
 Table of Contents




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
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 the most 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




During
2008 the insurance industry as a whole suffered significant loss of capital as a
result of combined investment and underwriting losses.  As a result we
believe there is very little, if any, excess capacity in the industry.  We
expect the 2009 underwriting year to begin presenting opportunities for us to
expand our business in both frequency and severity risks.  We believe
insurance pricing will increase generally and volatile lines of business may
experience significant pricing increases along with tightening terms and
conditions.  Due to worldwide economic conditions and the lack of capital
expected to enter the industry, we believe that these conditions will persist
during 2010.  Countering these developments, we also believe that a
slowdown in worldwide economic activity will lead to reduced insurable
risk exposures, which in turn will somewhat decrease the demand for
insurance.





Due to
our increasing market recognition, and the development of strategic
relationships in 2007 and 2008, we expect to see an increase in frequency
business written in 2009 compared to 2008, and continued diversification of
business by client, line of business, broker and geography. In the second
quarter of 2008, we believed there was an excess of capacity in the
property and casualty reinsurance business, primarily due to two consecutive
years of below-average natural peril losses. During the third quarter of
2008, there were two hurricanes (Gustav and Ike) that made landfall in the
United States; preliminary estimates indicate total
industry-wide insured losses range from $20 to $25 billion.
We do not expect to experience any losses from
these hurricanes.  In addition, there are a number of
insurers and reinsurers that have had significant investment-related issues that
have created uncertainty in their businesses. We expect write downs of
certain asset classes in the fourth quarter of 2008 to continue to reduce the
capital positions of a number of reinsurers. Finally, we believe that the
financial and credit crisis currently underway in the U.S. and the rest of the
world has the potential to cause significant losses in certain lines of
business.





If the
current challenges facing the insurance industry create significant
dislocations, we believe we will be well positioned to capitalize on resulting
opportunities. In early 2009, we have seen pricing of property catastrophe
retrocession business increase substantially. While it is unclear what
other businesses could be most affected by the current financial and
credit issues, we believe that opportunities are likely to arise in
two areas.  The first area is lines of business that have experiencedpoor
loss experience.  The second area is lines of business
where current market participants are experiencing financial distress or
uncertainty. Lines of
businessthat are
likely to be affected by either of these areas include property catastrophe
reinsurance, marine reinsurance, marine retrocession, general liability, surety,
directors and officers liability and errors and omissions liability, among
others.  In addition, we believe that we can also continue
to find attractive opportunities in motor liability, workers compensation,
health and medical malpractice risks.





Any
significant market dislocations that increase the pricing of certain
insurance coverages could create the need for insureds to retain risks and
thus fuel the opportunity for new captives to form.  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.


46
 Table of Contents


Our
investment strategy has been affected by the difficulties faced by the overall
financial markets.  We believe that over the past few months, the
marketplace has increased the risk premium on most asset classes as a
result of headline news events, including corporate
failures, recent government interventions, current economic slowdown and
the ever-widening credit crisis. We believe that when the macro economic
and political uncertainties eventually subside, security selection will
again be the primary driver of performance. This is a basic premise of our
value oriented investment strategy.  While this has created
disappointing investment results for our strategy over the last 12 months, we
believe that this also creates long-term opportunities for us due
to a significant number of mispriced securities.




The
significant economic slowdown has resulted in an increased number of corporate
failures. We believe that corporate default rates will continue to increase
through 2009. As opportunistic investors, we have started to
purchase distressed debt of corporate issuers in the last quarter of 2008,
and expect to continue doing so in 2009.




We intend
to continue monitoring market conditions to be positioned 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, 2008, 2007 and 2006




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




For the
year ended December 31, 2007, our net income decreased by $21.7 million as
compared to the same period in 2006 due to a decrease of $30.9 million in net
investment income which was partially offset by income generated from expanded
underwriting operations. Our investment portfolio reported a return of 5.9% for
the year ended December 31, 2007 compared to a return of 24.4% for the year
ended December 31, 2006.




Our
primary financial goal is to increase the long-term value in fully diluted book
value per share. During the year ended December 31, 2008, fully diluted book
value decreased by $3.18 per share or 19.2% to $13.39.




For the
year ended December 31, 2007, fully diluted book value increased by $2.30 per
share or 16.1% to $16.57 per share. This increase included the increase
associated with our initial public offering in May 2007.




Premiums
Written




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




2008
              
              
              2007
              
              
              2006($
      in thousands)Frequency
              
              $
              134,012
              
              
              
              82.5
              %
              
              $
              76,885
              
              
              
              60.5
              %
              
              $
              58,063
              
              
              
              78.3
              %Severity
              
              
              28,383
              
              
              
              17.5
              
              
              
              50,246
              
              
              
              39.5
              
              
              
              16,088
              
              
              
              21.7Total
              
              $
              162,395
              
              
              
              100.0
              %
              
              $
              127,131
              
              
              
              100.0
              %
              
              $
              74,151
              
              
              
              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




47
 Table of Contents




year
ended December 31, 2008, frequency business generated 74.3% higher premiums
written than for the year ended December 31, 2007. The increase reflects the
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 is consistent with our
opportunistic underwriting strategy.




For the
year ended December 31, 2008, the premiums written relating to severity
contracts decreased by 43.5% compared to the year ended December 31, 2007. The
decrease is 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. The premiums on this contract continue to be
earned over the multi-year term of the contract as discussed below under “Net Premiums
Earned.”




For the
year ended December 31, 2007, the increase in premiums written for frequency
business compared to 2006 was due to the fact that no frequency contracts were
written until the third quarter of 2006 while a number of frequency contracts
were entered into throughout 2007. Similarly, premiums written for severity
business in 2007 reflect our first full year of underwriting whereas the 2006
comparative results related to premiums written from April 2006 (commencement of
our underwriting operations) to December 31, 2006.




We
entered into retrocessional contracts with ceded premiums of $16.4 million
and $26.1 million for the years ended December 31, 2008, and 2007 respectively,
relating to risks assumed from certain frequency reinsurance contracts. The
lower ceded premiums for the year ended December 31, 2008 were 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.




We did
not purchase any retrocessional coverage in 2006.




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




2008
              
              
              2007
              
              
              2006($
      in thousands)Frequency
              
              $
              117,616
              
              
              
              80.6
              %
              
              $
              50,735
              
              
              
              50.2
              %
              
              $
              58,063
              
              
              
              78.3
              %Severity
              
              
              28,383
              
              
              
              19.4
              
              
              
              50,246
              
              
              
              49.8
              
              
              
              16,088
              
              
              
              21.7Total
              
              $
              145,999
              
              
              
              100.0
              %
              
              $
              100,981
              
              
              
              100.0
              %
              
              $
              74,151
              
              
              
              100.0
              %




Our severity
business includes contracts that contain or may contain natural peril loss
exposure. As of February 1, 2009, our maximum aggregate loss exposure to any
series of natural peril events was $97.1 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,
2009:




Zone
                
                Single
      Event
                    Loss
                
                
                Aggregate
                    Loss($
      in thousands)USA(1)
                
                $
                79,375
                
                
                $
                97,125Europe
                
                
                71,375
                
                
                
                79,125Japan
                
                
                71,375
                
                
                
                79,125Rest
      of the world
                
                
                51,375
                
                
                
                59,125Maximum
      aggregate
                
                
                79,375
                
                
                
                97,125


(1)
            Includes
      the Caribbean





48
 Table of Contents




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:




2008
                
                
                2007
                
                
                2006($
      in thousands)Frequency
                
                $
                81,133
                
                
                
                70.6
                %
                
                $
                71,596
                
                
                
                73.0
                %
                
                $
                15,645
                
                
                
                58.8
                %Severity
                
                
                33,816
                
                
                
                29.4
                
                
                
                26,451
                
                
                
                27.0
                
                
                
                10,960
                
                
                
                41.2Total
                
                $
                114,949
                
                
                
                100.0
                %
                
                $
                98,047
                
                
                
                100.0
                %
                
                $
                26,605
                
                
                
                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 13.3% reflects the additional quota share contracts written
throughout the 2008 year.For the year ended
December 31, 2008, 73.6% of the earned premiums on frequency contracts related
to motor liability and health lines of business. For the year ended December 31,
2008, severity earned premiums increased 27.8% compared to the 2007 year. As
mentioned above under the section “Premiums
Written,” the earned premiums on severity contracts increased while the
written premiums on severity contracts decreased during the year ended December
31, 2008. This was due to a multi-year professional liability contract written
during the year ended December 31, 2007, which continues 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.




For the
year ended December 31, 2007, the significant increases in net premiums earned
were attributable principally to increased premiums written during 2007 as well
as further earning of premiums for those contracts written during 2006 whose
coverage continued into 2007.




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:




2008
                
                
                2007
                
                
                2006($
      in thousands)Frequency
                
                $
                36,013
                
                
                
                64.9
                %
                
                $
                34,252
                
                
                
                86.7
                %
                
                $
                8,737
                
                
                
                90.3
                %Severity
                
                
                19,472
                
                
                
                35.1
                
                
                
                5,255
                
                
                
                13.3
                
                
                
                934
                
                
                
                9.7Total
                
                $
                55,485
                
                
                
                100.0
                %
                
                $
                39,507
                
                
                
                100.0
                %
                
                $
                9,671
                
                
                
                100.0
                %




The loss
ratio on our frequency business was 44.4%, 47.9% and 55.9% for the years ended
December 31, 2008, 2007 and 2006, respectively. The decrease in loss ratio is
mainly due to the favorable loss development on a personal lines contract
written in 2006.




49
 Table of Contents




We expect
losses incurred on our severity business to be volatile from period to period.
Losses incurred on the natural peril exposed portion of our severity business
have benefited from no material natural peril losses during 2008, as well as
benign natural peril loss experiences during 2007 and 2006. Additionally, given
the seasonality of wind exposure, we expect that the first six months of a
calendar year generally will report lower losses incurred on natural peril
business than the last six months of a calendar year. The loss ratios for our
severity business were 57.7%, 19.9%, and 8.5% for the years ended December 31,
2008, 2007 and 2006, respectively.




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.




The
increase in the loss ratio during 2007 primarily is due to the different
composition of the severity underwriting portfolio. During the year ended
December 31, 2006, the severity underwriting portfolio was composed entirely of
natural peril business. Because of benign natural peril loss experience, we
incurred a very low loss ratio. This contrasts with the severity underwriting
portfolio for the year ended December 31, 2007 which included casualty and
liability exposures in addition to natural peril risks, which accounted for the
increase in the reported loss ratio for the year ended December 31,
2007. Unlike natural peril coverages in which zero losses are booked until
a covered natural peril event occurs, casualty and liability severity coverages
typically have the potential for an unreported event to occur during the term of
the coverage and thus IBNR reserves are booked based on an expected loss ratio
for the business underwritten, resulting in a higher initial loss ratio being
reported.




Losses
incurred can be further broken down into losses paid and changes in loss
reserves. Losses incurred for the years ended December 31, 2008, 2007 and 2006
were comprised as follows:




2008
                              
                              
                              2007
                              
                              
                              2006Gross
                              
                              
                              Ceded
                              
                              
                              Net
                              
                              
                              Gross
                              
                              
                              Ceded
                              
                              
                              Net
                              
                              
                              Gross
                              
                              
                              Ceded
                              
                              
                              Net($
      in thousands)Losses
      paid
                              
                              $
                              29,791
                              
                              
                              $
                              (8,440
                              )
                              
                              $
                              21,351
                              
                              
                              $
                              15,505
                              
                              
                              $
                              (6,677
                              )
                              
                              $
                              8,828
                              
                              
                              $
                              4,694
                              
                              
                              $
                              0
                              
                              
                              $
                              4,694Increase
      (decrease) in reserves
                              
                              
                              39,075
                              
                              
                              
                              (4,941
                              )
                              
                              
                              34,134
                              
                              
                              
                              37,400
                              
                              
                              
                              (6,721
                              )
                              
                              
                              30,679
                              
                              
                              
                              4,977
                              
                              
                              
                              0
                              
                              
                              
                              4,977Total
                              
                              $
                              68,866
                              
                              
                              $
                              (13,381
                              )
                              
                              $
                              55,485
                              
                              
                              $
                              52,905
                              
                              
                              $
                              (13,398
                              )
                              
                              $
                              39,507
                              
                              
                              $
                              9,671
                              
                              
                              
                              0
                              
                              
                              $
                              9,671




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 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;




·
            Extinguishing $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:




2008
                
                
                2007
                
                
                2006($
      in thousands)Frequency
                
                $
                37,989
                
                
                
                91.2
                %
                
                $
                33,174
                
                
                
                85.2
                %
                
                $
                6,386
                
                
                
                61.3
                %Severity
                
                
                3,660
                
                
                
                8.8
                
                
                
                5,765
                
                
                
                14.8
                
                
                
                4,029
                
                
                
                38.7Total
                
                $
                41,649
                
                
                
                100.0
                %
                
                $
                38,939
                
                
                
                100.0
                %
                
                $
                10,415
                
                
                
                100.0
                %






50
 Table of Contents




Increased
acquisition costs for the year ended December 31, 2008 compared to the same
period for 2007 are a direct result of the increases in premiums written as well
as the accrual of higher profit commission on frequency contracts that have had
favorable underwriting results. For the years ended December 31, 2008, 2007 and
2006 the acquisition cost ratios for frequency business were 46.8%, 46.3% and
40.8%, respectively. We expect that acquisition costs will be higher for
frequency business than for severity business. The acquisition cost ratios for
severity business were 10.8%, 21.8% and 36.8% for the years ended December 31,
2008, 2007 and 2006, respectively.




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, had no acquisition costs associated with
them.




For
the year ended December 31, 2007, the decrease in severity acquisition cost
ratio was due to the change in composition of the severity portfolio from being
composed entirely of natural peril business, to a portfolio that included
casualty and professional liability exposures as well as natural peril
business.




General
and Administrative Expenses




Our
general and administrative expenses for the years ended December 31, 2008, 2007
and 2006 were $13.8 million, $11.9 million and $9.1 million, respectively. For
the year ended December 31, 2008, the increase in general and administrative
expenses of $1.9 million primarily relates to higher personnel costs including
employee bonus accruals relating to the 2007 year.




For the
year ended December 31, 2007, the increase in general and administrative
expenses of $2.8 million reflected the continued expansion of our underwriting
operations, as well as increased expenses incurred as a publicly-traded company,
including hiring additional staff and other related expenses. General and
administrative expenses for the years ended December 31, 2008, 2007 and 2006
include $3.0 million, $2.9 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:




2008
                
                
                2007
                
                
                2006($
      in thousands)Realized
      gains (losses) and change in unrealized gains and losses,
    net
                
                $
                (118,667
                )
                
                $
                28,051
                
                
                $
                70,272Interest,
      dividend and other income
                
                
                31,093
                
                
                
                23,443
                
                
                
                11,704Interest,
      dividend and other expenses
                
                
                (28,651
                )
                
                
                (9,219
                )
                
                
                (4,775
                )Investment
      advisor compensation
                
                
                (9,901
                )
                
                
                (14,633
                )
                
                
                (18,692
                )Net
      investment income (loss)
                
                $
                (126,126
                )
                
                $
                27,642
                
                
                $
                58,509




Investment
loss, net of all fees and expenses, resulted in a loss of 17.6% on our
investment portfolio for the year ended December 31, 2008. This compares
to returns of 5.9% and 24.4% reported for the years ended December 31, 2007
and 2006, 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. Given the net
investment loss for the year ended December 31, 2008, no performance fee 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 have been recouped and an additional amount equal to
150% of the investment loss is earned.




51
 Table of Contents




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.




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,
2008, 2007 and 2006, we reported the following ratios:




2008
              
              
              2007
              
              
              2006Frequency
              
              
              Severity
              
              
              Total
              
              
              Frequency
              
              
              Severity
              
              
              Total
              
              
              Frequency
              
              
              Severity
              
              
              TotalLoss
      ratio
              
              
              44.4
              %
              
              
              57.7
              %
              
              
              48.3
              %
              
              
              47.9
              %
              
              
              19.9
              %
              
              
              40.3
              %
              
              
              55.9
              %
              
              
              8.5
              %
              
              
              36.4
              %Acquisition
      cost ratio
              
              
              46.8
              %
              
              
              10.8
              %
              
              
              36.2
              %
              
              
              46.3
              %
              
              
              21.8
              %
              
              
              39.7
              %
              
              
              40.8
              %
              
              
              36.8
              %
              
              
              39.1
              %Composite
      ratio
              
              
              91.2
              %
              
              
              68.5
              %
              
              
              84.5
              %
              
              
              94.2
              %
              
              
              41.7
              %
              
              
              80.0
              %
              
              
              96.7
              %
              
              
              45.3
              %
              
              
              75.5
              %Internal
      expense ratio
              
              
              
              
              
              
              
              
              
              
              12.0
              %
              
              
              
              
              
              
              
              
              
              
              12.2
              %
              
              
              
              
              
              
              
              
              
              
              34.1
              %Combined
      ratio
              
              
              
              
              
              
              
              
              
              
              96.5
              %
              
              
              
              
              
              
              
              
              
              
              92.2
              %
              
              
              
              
              
              
              
              
              
              
              109.6
              %




The loss
ratio is calculated by dividing 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. The internal expense ratio for year ended December 31,
2008 decreased to 12.0% from 12.2% for the year ended December 31, 2007. We
expect our internal expense ratio to decrease as we continue to expand our
underwriting operations. The high internal expense ratio of 34.1% reported for
the year ended December 31, 2006 reflected that underwriting operations only
commenced in April 2006 and as such start up costs were high relative to the
initial premiums earned.




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.




52
 Table of Contents




Financial
Condition




Investments
in Securities




Total
investments in securities reported as of December 31, 2008 were $494.0 million
compared to $590.5 million as of December 31, 2007, a decrease of 16.3%. The
decrease in investments was principally due to an investment loss of $126.1
million for the year ended December 31, 2008. This decrease was partially offset
by investments purchased from the net positive cash
flows generated from underwriting operations.




Effective
January 1, 2008, we adopted SFAS No. 157. Consistent with SFAS No. 157, our
entire 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, 2008, 84.3% of
our investment portfolio (excluding restricted and unrestricted cash and
cash equivalents) was comprised of securities valued based on quoted prices
in actively traded markets (Level 1), 13.7% comprised of securities valued based
on observable inputs other than quoted prices (Level 2) and 2.0% was
comprised of securities valued based on non-observable inputs (Level
3).





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,
2008, $82.2
million of our investments in securities were valued based on broker
quotes, of which $80.5 millionwere
based on observable market information and classified as level 2, and $1.7 million were based
on non-observable inputs and classified as level 3.




Non-observable
inputs used by our investment advisor include discounted cash flow models for
valuing certain corporate debt securities. 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




Restricted
cash totaled $248.3 million as of December 31, 2008 compared to $371.6 million
as of December 31, 2007, a decrease of 33.2%. The decrease in restricted cash
was principally due to a decrease in securities sold, not yet purchased
since restricted cash balances are used to support the liability created from
securities sold, not yet purchased.




Loss
and Loss Adjustment Expense Reserves




Loss
reserves totaled $81.4 million as of December 31, 2008 compared to $42.4 million
as of December 31, 2007. The increase is principally attributable to estimated
losses associated with premiums earned during the year ended December 31, 2008
resulting from our increased underwriting activities. Case reserves increased
$5.0 million, while reserves for losses incurred but not reported increased by
approximately $34.1 million as of December 31, 2008.




Shareholders’
Equity




Our
shareholders’ equity decreased to $485.4 million as of December 31, 2008 from
$605.6 million as of December 31, 2007, a decrease of 19.8%. The decrease is
principally attributable to the net loss of $120.9 million for the year ended
December 31, 2008.




53
 Table of Contents




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
operations are conducted through our sole reinsurance subsidiary, Greenlight
Reinsurance, Ltd., which underwrites risks associated with our property and
casualty reinsurance programs. There are restrictions on Greenlight Reinsurance,
Ltd.’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, 2008, the financial strength of our reinsurance subsidiary 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, including realized gains. 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. Our investment portfolio is primarily comprised of publicly-traded
securities, which we classify as trading securities and can be liquidated to
meet current liabilities. We believe that we have sufficient flexibility to
liquidate the long securities that we own in a rising market to generate
liquidity. Similarly, we can generate liquidity in a declining market from our
short portfolio by covering securities and by freeing up restricted cash no
longer required for collateral.




For the
year ended December 31, 2008, we generated $46.4 million in net cash flow from
operations, used $14.1 million in investing activities, and used $2.3
million to repurchase ordinary shares. Effective January 1, 2008, we
adopted SFAS No. 159 and as a result 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.




For the
year ended December 31, 2007, we used $273.7 million for operating
activities. Included in operating activities were securities and restricted cash
and cash equivalents purchased  from the proceeds of our initial public
offering. During the year ended December 31, 2007, substantially all our cash
provided by financing activities related to the proceeds from our initial
public offering and there were no cash flows reported from investing
activities.




As of
December 31, 2008, 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




54
 Table of Contents




requirement
for Greenlight Re is $120,000. As of December 31, 2008 Greenlight Re exceeded
the minimum required by $488.1 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 not licensed or admitted as a reinsurer in any jurisdiction other than the
Cayman Islands. Because many jurisdictions do not permit domestic insurance
companies to take credit on their statutory financial statements unless
appropriate measures are in place from 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.




Greenlight
Re has a letter of credit facility of $400.0 million as of December 31, 2008
with Citibank, N.A. with a termination date of October 11, 2009. 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, 2008, the Company had a $25.0 million letter of credit
facility with Butterfield Bank (Cayman) Limited (“Butterfield Bank”). This
facility is the result of a novation to Butterfield Bank of a letter of credit
facility previously issued by UniCredit Bank Cayman Islands Ltd (formerly Bank
Austria Cayman Islands Ltd).





As of
December 31, 2008, $167.3 million in letters of credit were issued from the
available $425.0 million facilities. Under the letter of credit facilities, we
provide collateral that may consist of equity securities. As of December 31,
2008, we had pledged $220.2 million of equity securities and cash equivalents as
collateral for the above letter of credit facilities. The letter of credit
facilities agreements contain various covenants that, in part, restrict
Greenlight Re’s ability to place a lien or charge on the pledged assets and
further restricts 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, 2008, the Company
was in compliance with all of the covenants under each of the letter of credit
facility agreements.




Capital




As of
December 31, 2008, total shareholders’ equity was $485.4 million compared
to $605.6 million at December 31, 2007. This decrease in total
shareholders’ equity principally is due to the net loss of $120.9 million
reported during the year ended December 31, 2008.




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 as part of our capital structure. However, we cannot provide
assurances that in the future, we will not be required to raise additional
equity or incur indebtedness to implement our business strategy, pay claims or
make acquisitions. We have not made any significant capital expenditures during
the period from inception to December 31, 2008. We anticipate incurring
approximately $1.0 million in capital expenditures during 2009 primarily related
to leasehold improvements. We anticipate funding these capital expenditures from
existing operations and do not anticipate requiring additional equity or
indebtedness relating to these expenditures.




On
August 5, 2008, the Board adopted a share repurchase plan authorizing
management to repurchase up to two million Class A ordinary shares.
Management may from time to time repurchase these 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


55
 Table of Contents




variety
of factors including price, market conditions and applicable regulatory and
corporate requirements. The plan, which expires on June 30, 2011, does not
require management to repurchase any specific number of shares and may be
modified, suspended or terminated at any time without prior notice. As of
December 31, 2008, 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, 2008:




Less
      than
                    1
      year
                
                
                1-3
      years
                
                
                3-5
      years
                
                
                More
      than 5 years
                
                
                Total($
      in thousands)Operating
      leases obligations(1)
                
                $
                376
                
                
                $
                621
                
                
                $
                552
                
                
                $
                1,243
                
                
                $
                2,792Specialist
      service agreement
                
                
                610
                
                
                
                550
                
                
                
                —
                
                
                
                —
                
                
                
                1,160Private
      equity investments(2)
                
                
                19,695
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                19,695Loss
      and loss adjustment expense reserves(3)
                
                
                34,379
                
                
                
                25,130
                
                
                
                10,418
                
                
                
                11,498
                
                
                
                81,425Total
                
                $
                55,060
                
                
                $
                26,301
                
                
                $
                10,970
                
                
                $
                12,741
                
                
                $
                105,072




(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, 2008 we have made total commitments of $29.6 million in
      private investments, of which we have invested $9.9 million, and
      our remaining commitments to these investments total $19.7 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 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.




As of
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.




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
commence from the earlier of December 1, 2008 or when we occupy the
premises. As of December 31, 2008, we had not occupied the premises. 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 the accompanying consolidated
financial statements.


56
 Table of Contents







Effective
September 1, 2007, we entered into a service agreement with a specialist
service provider whereby the specialist service provider provides administration
and support in developing and maintaining relationships, reviewing and
recommending programs and managing risks on 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 after two years, the Company is obligated to make
minimum payments for another two years to ensure any bound contracts are
adequately run-off by the specialist service provider.




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 advisory agreement is January 1, 2008
through December 31, 2010, with automatic three-year renewals unless either
Greenlight Re or DME Advisors terminate 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.




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




Equity Price
Risk. As of December 31, 2008, our investment portfolio consisted
primarily of 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, 2008, a 10% decline in the price of each of these
listed equity securities and equity-based derivative instruments would result in
a $15.9 million, or 2.7%, decline in the fair value of the total investment
portfolio.




57
 Table of Contents




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, 2008, 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 and investments in securities denominated in foreign currencies, we are
exposed to foreign currency risk. Foreign currency exchange rate risk is the
potential for loss in the U.S. dollar value of investments and speculative
foreign cash positions due to a decline in the exchange rate of the foreign
currency in which the cash and investments are denominated. As of December 31,
2008, our gross exposure to foreign denominated cash and securities was
approximately $204.6 million. As of December 31, 2008, none of our currency
exposures resulting from these foreign denominated securities were hedged,
therefore leading to a net exposure to foreign currencies of
$204.6 million. As of December 31, 2008, a 10% increase in the value of the
U.S. dollar against select foreign currencies would result in a $20.5 million,
or 3.5%, decrease in the value of the investment portfolio. A summary of our
total net exposure to foreign currencies as of December 31, 2008 is as
follows:




Original
      Currency
              
              US$
      Equivalent
                  Fair
      Value($
      in thousands)European
      Union euro
              
              $
              130,568Hong
      Kong dollar
              
              
              31,638Japanese
      yen
              
              
              27,667Canadian
      dollar
              
              
              10,736Other
              
              
              4,031Total
              
              $
              204,640




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 securities, 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 in interest rates and a 100 basis point decrease in
interest rates would have on the value of our investment
portfolio.




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
      securities
              
              $
              (558
              )
              
              
              (0.09
              )%
              
              $
              594
              
              
              
              0.10
              %Credit default
      swaps
              
              
              (524
              )
              
              
              (0.09
              )
              
              
              436
              
              
              
              0.07Interest rate
      options
              
              
              1,725
              
              
              
              0.29
              
              
              
              (1,001
              )
              
              
              (0.17
              )Net exposure
      to interest rate risk
              
              $
              643
              
              
              
              0.11
              %
              
              $
              29
              
              
              
              0.01
              %




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 and cash in our investment portfolio are
held with several prime brokers 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


58
 Table of Contents


any, and
the fact that our investments and majority of cash balances are held by prime
brokers 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.




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.




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, 2008
that have materially affected, or are


59
 Table of Contents




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.




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, 2008. 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




On
February 18, 2009, the compensation committee of the Board of Directors
recommended, and the Board of Directors approved, an amendment to the Amended
and Restated Employment Agreement of Tim Courtis, our chief financial officer,
dated as of December 30, 2008 (the “Courtis Agreement”). This amendment
increased Mr. Courtis’ target bonus from 50% of his annual base salary to 60% of
his annual base salary effective January 1, 2009.  In
addition, on February 18, 2009, the compensation committee of the Board of
Directors recommended, and the Board of Directors approved, an amendment to the
Amended and Restated Employment Agreement of Barton Hedges, the president and
chief underwriting officer of Greenlight Re, dated as of December 30, 2008 (the
“Hedges Agreement”). This amendment increased Mr. Hedges' annual base salary
from $450,000 to $500,000 effective January 1, 2009.
  The
foregoing descriptions are qualified in its entirety by reference to the Courtis
Agreement and Hedges Agreement, which are attached hereto as Exhibit 10.26 and
Exhibit 10.27, respectively.




"Carryforward Account" means a memorandum
account to be recorded by DME in the books and records of the venture with
respect to each Participant that has an initial balance of zero and that is
adjusted as follows:




As of the
first day after the close of each Performance Period for such Participant (prior
to giving effect to the Performance Allocation, if any), the balance of the
Carryforward Account (a) is increased by the amount, if any, equal to two and a
half times such Participant's Negative Performance Charge for such
Performance Period and (b) is reduced (but not below zero) by the amount,
if any, of such Participant's Positive Performance Charge for such Performance
Period."




The
foregoing description is qualified in its entirety by reference to the advisory
agreement amendment (Amendment No. 1) which is attached hereto as Exhibit
10.28.








60
 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.




61
 Table of Contents




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, 2008 and
      2007
              
              
              F-3Consolidated
      Statements of Income for the Years Ended December 31, 2008, 2007 and
      2006
              
              
              F-4Consolidated
      Statements of Shareholders’ Equity for the Years Ended December 31,
      2008, 2007 and 2006
              
              
              F-5Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008, 2007
      and 2006
              
              
              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-30Schedule
      II – Condensed Financial Information of
      Registrant
              
              
              F-31Schedule
      III – Supplementary Insurance
      Information
              
              
              F-33Schedule
      IV – Supplementary Reinsurance
      Information
              
              
              F-34






62
 Table of Contents


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)


63
 Table of Contents





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 Courtis10.27
                    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 Hedges10.28
                    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,
    LP21.1
                    Subsidiaries
      of the registrant23.1
                    Consent
      of BDO Seidman, LLP24.1
                    Power
      of Attorney (included on the signature page of this
  filing)31.1
                    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












†
            Confidential
      treatment has been requested with respect to certain portions of this
      exhibit pursuant to Rule 406 of the Securities Act. Omitted portions
      have been filed separately with the Securities and Exchange
      Commission.




64
 Table of Contents







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 23,
      2009







65
 Table of Contents







POWER
OF ATTORNEY






Each
person whose signature appears below hereby constitutes and appoints Leonard
Goldberg, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments or supplements to this
annual report on Form 10-K and to file the same with all exhibits thereto and
other documents in connection therewith, with the SEC, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing necessary or appropriate to be done with this annual report
on Form 10-K and any amendments or supplements hereto, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.




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 23, 2009
            
            Date:
      February 23, 2009/s/ FRANK
      D. LACKNER
            
            /s/ ALAN
      BROOKSFrank
      D. Lackner
              Director
            
            Alan
      Brooks
              DirectorDate:
      February 23, 2009
            
            Date:
      February 23, 2009/s/ IAN
      ISAACS
            
            /s/ JOSEPH
      P. PLATTIan
      Isaacs
              Director
            
            Joseph
      P. Platt
              DirectorDate:
      February 23, 2009
            
            Date:
      February  23,2009/s/ TIM
      COURTIS
            
            /s/
      BRYAN MURPHYTim
      Courtis
                Chief
      Financial Officer
                (principal
      financial and accounting officer)
            
            Bryan
      Murphy
              DirectorDate:
      February 23, 2009
            
            Date:
      February 23, 2009





66
 Table of Contents


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, 2008, based on criteria established in Internal Control – Integrated
Framework issued 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’s 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, 2008,
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, 2008 and 2007, and the related
consolidated statements of income, shareholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2008 and our report dated
February 23, 2009 expressed an unqualified opinion thereon.




/s/ BDO
Seidman, LLP
 Grand
Rapids, Michigan
 February
23, 2009




F-1
 Table of Contents




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, 2008 and 2007 and the related consolidated statements of
income, shareholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2008. 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, 2008 and 2007, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2008, 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, 2008, based on criteria established
in Internal Control –
Integrated Frameworkissued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) and our report dated February 23, 2009
expressed an unqualified opinion thereon.







/s/ BDO
Seidman, LLP


Grand
Rapids, Michigan


February
23, 2009







F-2
 Table of Contents


GREENLIGHT
CAPITAL RE, LTD.


CONSOLIDATED
BALANCE SHEETS




December
31, 2008 and 2007


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




2008
              
              
              2007AssetsInvestments
      in securitiesDebt
      securities, trading, at fair value
              
              $
              70,214
              
              
              $
              1,520Equity
      securities, trading, at fair value
              
              
              409,329
              
              
              
              570,440Other
      investments, at fair value
              
              
              14,423
              
              
              
              18,576Total
      investments in securities
              
              
              493,966
              
              
              
              590,536Cash
      and cash equivalents
              
              
              94,144
              
              
              
              64,192Restricted
      cash and cash equivalents
              
              
              248,330
              
              
              
              371,607Financial
      contracts receivable, at fair value
              
              
              21,419
              
              
              
              222Reinsurance
      balances receivable
              
              
              59,573
              
              
              
              43,856Loss
      and loss adjustment expense recoverables
              
              
              11,662
              
              
              
              6,721Deferred
      acquisition costs, net
              
              
              17,629
              
              
              
              7,302Unearned
      premiums ceded
              
              
              7,367
              
              
              
              8,744Other
      assets
              
              
              3,915
              
              
              
              965Total
      assets
              
              $
              958,005
              
              
              $
              1,094,145Liabilities
      and Shareholders’ EquityLiabilitiesSecurities
      sold, not yet purchased, at fair value
              
              $
              234,301
              
              
              $
              332,706Financial
      contracts payable, at fair value
              
              
              17,140
              
              
              
              17,746Loss
      and loss adjustment expense reserves
              
              
              81,425
              
              
              
              42,377Unearned
      premium reserves
              
              
              88,926
              
              
              
              59,298Reinsurance
      balances payable
              
              
              34,963
              
              
              
              19,140Funds
      withheld
              
              
              3,581
              
              
              
              7,542Other
      liabilities
              
              
              6,229
              
              
              
              2,869Minority
      interest in joint venture
              
              
              6,058
              
              
              
              —Performance
      compensation payable to related party
              
              
              —
              
              
              
              6,885Total
      liabilities
              
              
              472,623
              
              
              
              488,563Shareholders’
      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, 29,781,736 (2007: 29,847,787): Class B: par value $0.10;
      authorized, 25,000,000; issued and outstanding, 6,254,949(2007:
      6,254,949))
              
              
              3,604
              
              
              
              3,610Additional
      paid-in capital
              
              
              477,571
              
              
              
              476,861Retained
      earnings
              
              
              4,207
              
              
              
              125,111Total
      shareholders’ equity
              
              
              485,382
              
              
              
              605,582Total
      liabilities and shareholders’ equity
              
              $
              958,005
              
              
              $
              1,094,145










F-3
 Table of Contents


GREENLIGHT
CAPITAL RE, LTD.


CONSOLIDATED
STATEMENTS OF INCOME




Years
ended December 31, 2008, 2007 and 2006


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




2008
              
              
              2007
              
              
              2006RevenuesGross
      premiums written
              
              $
              162,395
              
              
              $
              127,131
              
              
              $
              74,151Gross
      premiums ceded
              
              
              (16,396
              )
              
              
              (26,150
              )
              
              
              —Net
      premiums written
              
              
              145,999
              
              
              
              100,981
              
              
              
              74,151Change
      in net unearned premium reserves
              
              
              (31,050
              )
              
              
              (2,934
              )
              
              
              (47,546
              )Net
      premiums earned
              
              
              114,949
              
              
              
              98,047
              
              
              
              26,605Net
      investment income (loss)
              
              
              (126,126
              )
              
              
              27,642
              
              
              
              58,509Interest
      income on related party promissory note receivable
              
              
              —
              
              
              
              —
              
              
              
              1,034Total
      revenues
              
              
              (11,177
              )
              
              
              125,689
              
              
              
              86,148ExpensesLoss
      and loss adjustment expenses incurred, net
              
              
              55,485
              
              
              
              39,507
              
              
              
              9,671Acquisition
      costs, net
              
              
              41,649
              
              
              
              38,939
              
              
              
              10,415General
      and administrative expenses
              
              
              13,756
              
              
              
              11,918
              
              
              
              9,063Total
      expenses
              
              
              110,890
              
              
              
              90,364
              
              
              
              29,149Net
      income (loss) before minority interest
              
              
              (122,067
              )
              
              
              35,325
              
              
              
              56,999Minority
      interest in loss of joint venture
              
              
              1,163
              
              
              
              —
              
              
              
              —Net
      income (loss)
              
              $
              (120,904
              )
              
              $
              35,325
              
              
              $
              56,999Earnings
      (loss) per shareBasic
              
              $
              (3.36
              )
              
              $
              1.17
              
              
              $
              2.67Diluted
              
              
              (3.36
              )
              
              
              1.15
              
              
              
              2.66Weighted
      average number of ordinary shares used in the determination
    ofBasic
              
              
              35,970,479
              
              
              
              30,311,639
              
              
              
              21,366,140Diluted
              
              
              35,970,479
              
              
              
              30,813,243
              
              
              
              21,457,443







F-4
 Table of Contents


GREENLIGHT
CAPITAL RE, LTD.


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY




Years
ended December 31, 2008, 2007 and 2006


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




2008
              
              
              2007
              
              
              2006Ordinary
      share capitalBalance
      – beginning of year
              
              $
              3,610
              
              
              $
              2,156
              
              
              $
              2,123Issue
      of Class A ordinary share capital
              
              
              17
              
              
              
              1,191
              
              
              
              33Issue
      of Class B ordinary share capital
              
              
              —
              
              
              
              263
              
              
              
              —Repurchase
      of Class A ordinary shares
              
              
              (23
              )
              
              
              —
              
              
              
              —Balance
      – end of year
              
              $
              3,604
              
              
              $
              3,610
              
              
              $
              2,156Additional
      paid-in capitalBalance
      – beginning of year
              
              $
              476,861
              
              
              $
              219,972
              
              
              $
              212,871Issue
      of Class A ordinary share capital
              
              
              9
              
              
              
              207,144
              
              
              
              4,237Issue
      of Class B ordinary share capital
              
              
              —
              
              
              
              49,737
              
              
              
              —Repurchase
      of Class A ordinary shares
              
              
              (2,311
              )
              
              
              —
              
              
              
              —Options
      repurchased
              
              
              —
              
              
              
              (247
              )
              
              
              —Share-based
      compensation expense
              
              
              3,000
              
              
              
              2,884
              
              
              
              2,864Initial
      public offering expenses
              
              
              —
              
              
              
              (2,629
              )
              
              
              —Short-swing
      sale profit from shareholder
              
              
              12
              
              
              
              —
              
              
              
              —Balance
      – end of year
              
              $
              477,571
              
              
              $
              476,861
              
              
              $
              219,972Related
      party promissory note receivableBalance
      – beginning of year
              
              $
              —
              
              
              $
              —
              
              
              $
              (16,212
              )Principal
      repayments received
              
              
              —
              
              
              
              —
              
              
              
              16,212Balance
      – end of year
              
              $
              —
              
              
              $
              —
              
              
              $
              —Retained
      earningsBalance
      – beginning of year
              
              $
              125,111
              
              
              $
              90,039
              
              
              $
              33,040Net
      income (loss)
              
              
              (120,904
              )
              
              
              35,325
              
              
              
              56,999Options
      repurchased
              
              
              —
              
              
              
              (253
              )
              
              
              —Balance
      – end of year
              
              $
              4,207
              
              
              $
              125,111
              
              
              $
              90,039Total
      shareholders’ equity
              
              $
              485,382
              
              
              $
              605,582
              
              
              $
              312,167






F-5
 Table of Contents


GREENLIGHT
CAPITAL RE, LTD.


CONSOLIDATED
STATEMENTS OF CASH FLOWS




Years
ended December 31, 2008, 2007 and 2006


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




2008
              
              
              2007
              
              
              2006Cash
      provided by (used in)Operating
      activitiesNet income
      (loss)
              
              $
              (120,904
              )
              
              $
              35,325
              
              
              $
              56,999Adjustments
      to reconcile net income (loss) to net cash provided by (used in)
      operating activitiesNet
      change in unrealized gains and losses on securities and financial
      contracts
              
              
              151,064
              
              
              
              (23,719
              )
              
              
              (12,499
              )Net
      realized gains on securities and financial contracts
              
              
              (8,923
              )
              
              
              (13,215
              )
              
              
              (65,692
              )Foreign
      exchange gain on restricted cash and cash equivalents
              
              
              (23,474
              )
              
              
              —
              
              
              
              —Minority
      interest in loss of joint venture
              
              
              1,163
              
              
              
              —
              
              
              
              —Share-based
      compensation expense
              
              
              3,000
              
              
              
              2,884
              
              
              
              2,864Depreciation
      expense
              
              
              40
              
              
              
              40
              
              
              
              20Purchases
      of securities
              
              
              —
              
              
              
              (1,044,933
              )
              
              
              (244,645
              )Sales
      of securities
              
              
              —
              
              
              
              943,515
              
              
              
              335,051Change
      inRestricted
      cash and cash equivalents
              
              
              —
              
              
              
              (216,887
              )
              
              
              (55,001
              )Financial
      contracts receivable, at fair value
              
              
              —
              
              
              
              (222
              )
              
              
              —Reinsurance
      balances receivable
              
              
              (15,717
              )
              
              
              (24,234
              )
              
              
              (19,622
              )Loss
      and loss adjustment expense recoverables
              
              
              (4,941
              )
              
              
              (6,721
              )
              
              
              —Deferred
      acquisition costs, net
              
              
              (10,327
              )
              
              
              8,980
              
              
              
              (16,282
              )Unearned
      premiums ceded
              
              
              1,377
              
              
              
              (8,744
              )
              
              
              —Other
      assets
              
              
              (2,990
              )
              
              
              753
              
              
              
              (308
              )Financial
      contracts payable, at fair value
              
              
              —
              
              
              
              9,106
              
              
              
              7,918Loss
      and loss adjustment expense reserves
              
              
              39,048
              
              
              
              37,400
              
              
              
              4,977Unearned
      premium reserves
              
              
              29,628
              
              
              
              11,752
              
              
              
              47,546Reinsurance
      balances payable
              
              
              15,823
              
              
              
              14,904
              
              
              
              4,236Funds
      withheld
              
              
              (3,961
              )
              
              
              7,542
              
              
              
              —Other
      liabilities
              
              
              3,360
              
              
              
              495
              
              
              
              1,483Performance
      compensation payable to related party
              
              
              (6,885
              )
              
              
              (7,739
              )
              
              
              7,642Net
      cash provided by (used in) operating activities
              
              
              46,381
              
              
              
              (273,718
              )
              
              
              54,687Investing
      activitiesPurchases
      of securities and financial contracts
              
              
              (1,570,683
              )
              
              
              —
              
              
              
              —Sales
      of securities and financial contracts
              
              
              1,404,904
              
              
              
              —
              
              
              
              —Restricted
      cash and cash equivalents
              
              
              146,751
              
              
              
              —
              
              
              
              —Minority
      interest in joint venture
              
              
              4,895
              
              
              
              —
              
              
              
              —Purchase
      of fixed assets
              
              
              —
              
              
              
              —
              
              
              
              (200
              )Proceeds
      on disposal of fixed assets
              
              
              —
              
              
              
              —
              
              
              
              38


Net
      cash used in investing activities
                  
                  
                  (14,133
                  )
                  
                  
                  —
                  
                  
                  
                  (162
                  )Financing
      activitiesNet
      proceeds from share issue
                  
                  
                  17
                  
                  
                  
                  255,706
                  
                  
                  
                  4,270Options
      repurchased
                  
                  
                  —
                  
                  
                  
                  (500
                  )
                  
                  
                  —Net
      proceeds from exercise of stock options
                  
                  
                  9
                  
                  
                  
                  —
                  
                  
                  
                  —Repurchase
      of Class A ordinary shares
                  
                  
                  (2,334
                  )
                  
                  
                  —
                  
                  
                  
                  —Short-swing
      sale profit from shareholder
                  
                  
                  12
                  
                  
                  
                  —
                  
                  
                  
                  —Collection
      of related party promissory note receivable
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  16,212Net
      change in interest receivable on related party promissory note
      receivable
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  479Net
      cash (used in) provided  by financing activities
                  
                  
                  (2,296
                  )
                  
                  
                  255,206
                  
                  
                  
                  20,961Net
      increase (decrease) in cash and cash equivalents
                  
                  $
                  29,952
                  
                  
                  
                  (18,512
                  )
                  
                  
                  75,486Cash
      and cash equivalents at beginning of the year
                  
                  
                  64,192
                  
                  
                  
                  82,704
                  
                  
                  
                  7,218Cash
      and cash equivalents at end of the year
                  
                  $
                  94,144
                  
                  
                  $
                  64,192
                  
                  
                  $
                  82,704Supplementary
      informationInterest
      paid in cash
                  
                  $
                  14,099
                  
                  
                  $
                  3,699
                  
                  
                  $
                  2,121Interest
      received in cash
                  
                  
                  11,560
                  
                  
                  
                  15,130
                  
                  
                  
                  1,513




F-6
 Table of Contents




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. (the ‘‘Subsidiary’’), provides global
specialty property and casualty reinsurance. The Subsidiary has an unrestricted
Class ‘‘B’’ insurance license under Section 4(2) of the Cayman Islands Insurance
Law. The Subsidiary 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.




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 subsidiaries. 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 Statement of
Financial Accounting Standards ("SFAS") No. 60, ‘‘Accounting and Reporting by
Insurance Enterprises,’’ and SFAS No. 113, ‘‘Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts.’’ 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. There have been no
contracts to date requiring deposit accounting.




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 as a pro-rata portion of the ultimate estimated
premiums relating to the risks underwritten during the reporting
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.




F-7
 Table of Contents




Premiums
written are generally recognized as earned over the contract period in
proportion to the period of protection. 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 the Company does not hold 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 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.




Funds
Withheld




Funds
withheld include reinsurance balances retained from retrocessionaires for a
period of time in accordance with the contract terms. The Company may incur
interest expense during the period these funds are withheld.




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,
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.




Financial
Instruments




Investments
in Securities and Securities Sold, Not Yet Purchased




Effective
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value
Measurements,” which establishes a framework for measuring fair value by
creating a hierarchy of fair value measurements based on inputs used in deriving
fair values and enhances disclosure requirements for fair value measurements.
The adoption of SFAS No. 157 had no material impact to the Company’s
results of operations or financial condition as there were no material changes
in the valuation techniques used by the Company to measure fair value. The
Company’s investments in debt and equity securities that are classified as
“trading securities” are carried at fair value. The fair values of
the




F-8
 Table of Contents




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 securities 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, debt securities 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 equity
securities, limited partnerships, futures, 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 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. 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 market 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




SFAS No.
133, ‘‘Accounting for Derivative Instruments and Hedging Activities,’’
establishes accounting and reporting standards for derivative instruments and
hedging activities. It 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.




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


F-9
 Table of Contents


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 market 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).




The
Company has adopted SFAS No. 123R, ‘‘Share-Based Payment,’’ to account for the
Company’s stock incentive plan. SFAS No. 123R 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).




F-10
 Table of Contents




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.




Other
Assets




Other
assets consist primarily of investment income receivable, notes receivable,
prepaid expenses and fixed assets. Fixed assets, comprising of computer
software, are recorded at cost and depreciated over the estimated useful life of
three years using the straight-line method.




Other
Liabilities




Other
liabilities consist primarily of dividends payable on securities sold, not yet
purchased, and employee bonus accruals. Also included in other liabilities are
accruals for professional fees and other general expenses.




Minority
Interest




Minority
interest in joint venture represents DME Advisors LP’s, or 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 minority interest in income
or loss of joint venture.




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 is based on weighted average ordinary shares
outstanding and excludes unvested stock awards and dilutive effects of stock
options and stock awards. Diluted earnings per share assumes the exercise
of all dilutive stock options and stock awards using the treasury stock
method.




2008
              
              
              2007
              
              
              2006Weighted
      average shares outstanding
              
              
              35,970,479
              
              
              
              30,311,639
              
              
              
              21,366,140Effect
      of dilutive service provider stock options
              
              
              —
              
              
              
              161,109
              
              
              
              89,093Effect
      of dilutive employee and director options and stock awards
              
              
              —
              
              
              
              340,495
              
              
              
              2,21035,970,479
              
              
              
              30,813,243
              
              
              
              21,457,443




Due to the Company's net loss for the
year ended December 31, 2008, all 1,878,689 stock options and stock awards
outstanding have been excluded from the computation of diluted loss per share as
their inclusion would have been anti-dilutive. As of December 31, 2007 and 2006,
there were 50,000 and 1,131,000 anti-dilutive stock options outstanding,
respectively.




Segment
Information




Under
SFAS No. 131, ‘‘Disclosures about Segments of an Enterprise and Related
Information’’ (‘‘SFAS No. 131’’), operating segments are based on the
internal organization management uses for allocating resources to 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 SFAS No. 131.




F-11
 Table of Contents




Recently
Issued Accounting Standards




In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 157, “Fair Value Measurements.” SFAS No. 157
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. SFAS No. 157 does not
require any new fair value measurements but applies whenever other standards
require or permit assets or liabilities to be measured by fair value. The
Company adopted SFAS No. 157 for its financial assets and financial
liabilities effective January 1, 2008. The adoption of
SFAS No. 157 did not have a material impact on the Company’s
consolidated financial statements.




In
February 2008, the FASB approved the issuance of FASB Staff Position (“FSP”)
FAS 157-2, "Effective Date of FASB Statement No. 157." FSP FAS 157-2
defers the effective date of SFAS No. 157 until January 1, 2009
for non-financial assets and non-financial liabilities except those items
recognized or disclosed at fair value on an annual or more frequently recurring
basis. The implementation of this FSP is not expected to have a material impact
on the Company’s results of operation or financial position.





In
October 2008, the FASB issued FSP FAS 157-3, "Determining the Fair Value of a
Financial Asset when the Market for That Asset is Not Active." This FSP
clarifies the application of SFAS No. 157 in a market that is not active
and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. This FSP is effective from October 10, 2008, including prior periods for
which financial statements have not been issued. The implementation of this FSP
did not have a material impact on the Company’s results of operation or
financial position.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities.” SFAS No. 159 permits
entities to choose to measure eligible items at fair value at specified election
dates. For items for which the fair value option has been elected, unrealized
gains and losses are to be reported in earnings at each subsequent reporting
date. The fair value option is irrevocable unless a new election date occurs,
may be applied instrument by instrument, with a few exceptions, and applies only
to entire instruments and not to portions of instruments. SFAS No. 159
provides an opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting. The Company adopted SFAS No. 159 effective
January 1, 2008. As a result, the unrealized gains and losses on the
Company’s investments in private equity securities and limited partnerships are
now included in net investment income in the consolidated statements of income,
as opposed to other comprehensive income. The adoption of SFAS No. 159
did not have a material impact on the Company’s consolidated financial
statements except for the change in presentation of cash flows relating to
investments in the consolidated statement of cash flows as described
below.





Additionally,
SFAS No. 159 amended SFAS No. 115, “Accounting for Certain
Investments in Debt and Equity Securities,” such that cash flows relating to
“trading securities” must be classified in the consolidated statement of
cash flows based on the nature and purpose for which the securities were
acquired. Prior to adopting SFAS No. 159, the Company classified cash
flows relating to investments as operating activities. The Company has
determined that activities that generate investment income or loss should be
classified under investing activities to reflect the underlying nature and
purpose of the Company’s investing strategies. Therefore, upon adoption of
SFAS No. 159, the Company has classified cash flows relating to
investments in securities, restricted cash and cash equivalents, and financial
contracts receivable and payable, as investing activities. Prior period
comparatives have not been reclassified.





In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations.”
SFAS No. 141R is effective for acquisitions during the fiscal years
beginning after December 15, 2008 and early adoption is prohibited. This
statement establishes principles and requirements for how the


F-12
 Table of Contents


acquirer
of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree. The statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination.
Management is reviewing this guidance; however, the effect of the statement’s
implementation will depend upon the extent and magnitude of acquisitions, if
any, after December 31, 2008.





In
December 2007, the FASB issued SFAS No. 160, “Non-controlling
Interests in Consolidated Financial Statements — an amendment of ARB
No. 51.” SFAS No. 160 is effective for fiscal years beginning on
or after December 15, 2008 and early adoption is prohibited. This statement
establishes accounting and reporting standards for the non-controlling interest
in a subsidiary and for the deconsolidation of a subsidiary. Management is
reviewing this guidance; however, the effect of the statement’s implementation
is not expected to be material to the Company’s results of operations or
financial position.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement
No. 133.” SFAS No. 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008, with early application encouraged. This statement changes the disclosure
requirements for derivative instruments and hedging activities by requiring
enhanced disclosures about how and why an entity uses derivative instruments,
how an entity accounts for the derivatives and hedged items, and how derivatives
and hedged items affect an entity’s financial position, performance and cash
flows. Management is reviewing this guidance; however, the effect of the
statement’s implementation is not expected to be material to the Company’s
derivative disclosures.





In March
2008, the FASB issued SFAS No. 163, “Accounting for Financial
Guarantee Insurance Contracts — an interpretation of FASB Statement
No. 60.” SFAS No. 163 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and all interim
periods within those fiscal years. Earlier application is not permitted except
for disclosures about the risk-management activities of the insurance enterprise
which is effective for the first interim period beginning after the issuance of
SFAS No. 163. This statement requires an insurance enterprise to
recognize a claim liability prior to an insured event when there is evidence
that credit deterioration has occurred in an insured financial obligation. This
statement also clarifies how FASB Statement No. 60 applies to financial
guarantee insurance contracts, including the recognition and measurement to be
used to account for premium revenue and claim liabilities. Finally, this
statement requires expanded disclosures about financial guarantee contracts
focusing on the insurance enterprise’s risk-management activities in evaluating
credit deterioration in its insured financial obligations. The effect of
the statement’s implementation is not expected to be material to the Company’s
results of operations or financial position. As of December 31, 2008, the
Company had no financial guarantee contracts that required expanded disclosures
under this statement.





In
September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, "Disclosures about
Credit Derivatives and Certain Guarantees - An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161." This FSP applies to: (a) credit derivatives within
the scope of SFAS No. 133, (b) hybrid instruments that
have embedded credit derivatives; and (c) guarantees within the
scope of FASB Interpretation (FIN) No. 45,"Guarantor’s Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This FSP amends SFAS No. 133 to require disclosures by
sellers of credit derivatives, including credit derivatives embedded in a hybrid
instrument. This FSP also amends FIN 45 to require additional disclosure about
the current status of the payment/performance risk of a guarantee. In addition,
this FSP clarifies the FASB’s intent that


F-13
 Table of Contents


the
disclosures required by SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities," should be provided for any reporting period (annual or
interim) beginning after November 15, 2008.  The provisions of this
FSP that amend SFAS No. 133 and FIN 45 are effective for reporting periods
(annual or interim) ending after November 15, 2008. The clarification of
the effective date of SFAS No. 161 is effective September 12, 2008. As a result
of adopting this FSP, these consolidated financial statements include the
disclosures relating to credit derivatives sold by the Company.




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 and similar instruments sold, not yet purchased.









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 2008 were $8.9 million
(2007: $13.2 million, 2006: $65.7 million). Gross realized gains were $271.3
million (2007: $101.4 million, 2006: $77.2 million) and gross realized losses
were $262.4 million (2007: $88.2 million, 2006: $11.5 million).




At
December 31, 2008, investments with a fair market value of $220.2 million (2007:
$148.9 million) have been pledged as security against letters of credit
issued.




At
December 31, 2008, there were no investments in excess of 10% of shareholders'
equity (2007: Criteria CaixaCorp S.A. and Arkema with a fair value of $74.2
million and $61.4 million, respectively).




Fair
Value Hierarchy





Effective
January 1, 2008, the Company adopted SFAS No. 157 and
SFAS No. 159. As a result, all of 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 the date the Company adopted
SFAS No. 159, remained unchanged from the carrying values of those
securities immediately prior to electing the fair value option.




F-14
 Table of Contents








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, 2008($
      in thousands)Debt
      securities
                
                $
                —
                
                
                $
                66,099
                
                
                $
                4,115
                
                
                $
                70,214Listed
      equity securities
                
                
                409,329
                
                
                
                —
                
                
                
                —
                
                
                
                409,329Private
      equity securities
                
                
                —
                
                
                
                121
                
                
                
                11,776
                
                
                
                11,897Call
      options
                
                
                2,526
                
                
                
                —
                
                
                
                —
                
                
                
                2,526Financial
      contracts receivable (payable), net
                
                
                —
                
                
                
                4,279
                
                
                
                —
                
                
                
                4,279$
                411,855
                
                
                $
                70,499
                
                
                $
                15,891
                
                
                $
                498,245Listed
      equity securities, sold not yet purchased
                
                $
                (234,301
                )
                
                $
                —
                
                
                $
                —
                
                
                $
                (234,301
                )$
                177,554
                
                
                $
                70,499
                
                
                $
                15,891
                
                
                $
                263,944





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


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




Transfers
from Level 3 represent the fair value on the date of transfer 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, 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-15
 Table of Contents


Investments
in Securities
  Debt
Securities, trading
  At
December 31, 2008, and 2007 included in debt securities, are the following
investments:
 2008
                      
                      Cost/
                          amortized
                          cost
                      
                      
                      Unrealized
                          gains
                      
                      
                      Unrealized
                          losses
                      
                      
                      Fair
      market
                          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 securities
                      
                      $
                      77,811
                      
                      
                      $
                      1,313
                      
                      
                      $
                      (8,910
                      )
                      
                      $
                      70,214


2007
                    
                    Cost/
                        amortized
                        cost
                    
                    
                    Unrealized
                        gains
                    
                    
                    Unrealized
                        losses
                    
                    
                    Fair
      market
                        value($
      in thousands)Corporate
      debt – U.S
                    
                    $
                    1,458
                    
                    
                    $
                    78
                    
                    
                    $
                    (16
                    )
                    
                    $
                    1,520




The
maturity distribution for debt securities held at December 31, 2008 is as
follows:




Cost/
                    amortized
                    cost
                
                
                Fair
      market
                    value($
      in thousands)Within
      one year
                
                $
                2,738
                
                
                $
                2,052From
      one to five years
                
                
                32,690
                
                
                
                30,673From
      five to ten years
                
                
                34,924
                
                
                
                30,655More
      than ten years
                
                
                7,459
                
                
                
                6,834$
                77,811
                
                
                $
                70,214




Investment
in Equity Securities, Trading




At
December 31, 2008 and 2007, included in investment securities, trading are the
following long positions:




2008
                
                Cost
                
                
                Unrealized
                    gains
                
                
                Unrealized
                    losses
                
                
                Fair
      market
                    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







2007
                
                Cost
                
                
                Unrealized
                    gains
                
                
                Unrealized
                    losses
                
                
                Fair
      market
                    value($
      in thousands)Equities
      – listed
                
                $
                561,419
                
                
                $
                53,957
                
                
                $
                (44,936
                )
                
                $
                570,440




Other
Investments




“Other
investments” include options as well as private 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


F-16
 Table of Contents


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, 2008, the Company did not hold any OTC options
(2007: $243,000).




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




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




At
December 31, 2007, included in other investments are the following
securities:




Cost
                  
                  
                  Unrealized
                      gains
                  
                  
                  Unrealized
                      losses
                  
                  
                  Fair
      market
                      value($
      in thousands)Equities
      – unlisted
                  
                  $
                  10,932
                  
                  
                  $
                  150
                  
                  
                  $
                  (247
                  )
                  
                  $
                  10,835Call
      options
                  
                  
                  1,943
                  
                  
                  
                  776
                  
                  
                  
                  (1,409
                  )
                  
                  
                  1,310Put
      options
                  
                  
                  2,821
                  
                  
                  
                  3,266
                  
                  
                  
                  (1,182
                  )
                  
                  
                  4,905Futures
                  
                  
                  —
                  
                  
                  
                  1,526
                  
                  
                  
                  —
                  
                  
                  
                  1,526$
                  15,696
                  
                  
                  $
                  5,718
                  
                  
                  $
                  (2,838
                  )
                  
                  $
                  18,576




During
the years ended December 31, 2008, 2007 and 2006, other-than-temporary
impairment losses on unlisted equities of $0, $323,000 and $1,454,000
respectively, were reported and included in net realized gains on securities
under net investment income in the consolidated statements of
income.




Investments
in Securities Sold, Not Yet Purchased












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




2007
                      
                      
                      Proceeds
                      
                      
                      Unrealized
      gains
                      
                      
                      Unrealized
      losses
                      
                      
                      
                      Fair
      market
                        value($
      in thousands)Equities
      - listed
                      
                      $
                      394,988
                      
                      
                      $
                      (73,379
                      )
                      
                      $
                      11,097
                      
                      
                      $
                      332,706










F-17
 Table of Contents




At
December 31, 2008 and 2007, 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, 2008 and 2007, 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 market value of the
underlying or reference security.




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




Underlying
      security
              Position
              Listing
                  currency
              Fair
      market
                  value
      of
                  underlying
              
              Net
      assets/
                  (obligations)
                  on
      financial
                  contracts($
      in thousands)Interest
      rate options
              Long
              USD
              85,935
              
              $
              2,564Credit
      default swaps, purchased – Corporate debt
              Short
              USD
              54,509
              
              
              5,956Credit
      default swaps, purchased – Sovereign debt
              Short
              USD
              322,516
              
              
              12,881Total
      return swaps - Equities
              Long
              USD
              3,249
              
              
              18Total
      financial contracts receivable, at fair value
              
              
              
              
              $
              21,419Credit
      default swaps, issued – Corporate debt
              Short
              USD
              11,089
              
              $
              (7,024
              )Total
      return swaps - Equities
              Long
              USD
              26,844
              
              
              (10,116
              )Total
      financial contracts payable, at fair value
              
              
              
              
              $
              (17,140
              )





As of
December 31, 2008, 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 term of 5 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, 2008, based on the assessment conducted
by the Company’s investment advisor, the risk of default does not appear to
be likely. As of December 31, 2008, the reference entity had a financial
strength rating of (A2) and a surplus notes rating of (Baa1) from
Moody’s Investors Service. The fair market value of the CDS at December 31,
2008 was $7.0 million which was determined based on broker quotes
obtained for identical or similar contracts traded in an active market
(Level 2 inputs).




The fair
value of financial contracts outstanding at December 31, 2007 is as
follows:




Underlying
      security
              Position
              Listing
                  currency
              
              Fair
      market
                  value
      of
                  underlying
              
              
              Net
      assets/
                  (obligations)
                  on
      financial
                  contracts($
      in thousands)Total
      return swaps - Commodities
              Short
              USD
              
              
              108
              
              
              $
              108Total
      return swaps - Equities
              Long
              CAD
              
              
              512
              
              
              
              114Total
      financial contracts receivable, at fair value
              
              
              
              
              
              
              
              $
              222Total
      return swaps - Equities
              Long
              USD
              
              
              31,368
              
              
              $
              (10,315
              )Total
      return swaps - Commodities
              Short
              USD
              
              
              (7,431
              )
              
              
              (7,431
              )Total
      financial contracts payable, at fair value
              
              
              
              
              
              
              
              $
              (17,746
              )




F-18
 Table of Contents






4.       
CASH AND CASH EQUIVALENTS




2008
              
              
              2007($
      in thousands)Cash
      at banks
              
              $
              17,179
              
              
              $
              2,306Cash
      held with (due to) brokers
              
              
              (89,048
              )
              
              
              1,888Money
      market funds held with brokers
              
              
              166,013
              
              
              
              59,998$
              94,144
              
              
              $
              64,192




Due to
the short term nature of cash and cash equivalents, management believes the
above noted carrying values approximate their fair market 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.




2008
              
              
              2007($
      in thousands)Cash
      held by prime
      brokers
              
              $
              230,481
              
              
              $
              332,998Cash
      held by swap counter-parties
              
              
              17,849
              
              
              
              38,609$
              248,330
              
              
              $
              371,607




Effective
January 1, 2008, upon adoption of SFAS No. 159, 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 SFAS No. 159, 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:




2008
              
              
              2007
              
              
              2006($
      in thousands)Gross
      balance at January 1
              
              $
              42,377
              
              
              $
              4,977
              
              
              $
              —Less:
      Losses recoverable
              
              
              (6,721
              )
              
              
              —
              
              
              
              —Net
      balance at January 1
              
              
              35,656
              
              
              
              4,977
              
              
              
              —Incurred
      losses related to:Current
      year
              
              
              67,473
              
              
              
              40,584
              
              
              
              9,671Prior
      year
              
              
              (11,988
              )
              
              
              (1,077
              )
              
              
              —Total
      incurred
              
              
              55,485
              
              
              
              39,507
              
              
              
              9,671Paid
      losses related to:Current
      year
              
              
              (14,069
              )
              
              
              (7,126
              )
              
              
              (4,694
              )Prior
      year
              
              
              (7,282
              )
              
              
              (1,702
              )
              
              
              —Total
      paid
              
              
              (21,351
              )
              
              
              (8,828
              )
              
              
              (4,694
              )Foreign
      currency revaluation
              
              
              (27
              )
              
              
              —
              
              
              
              —Net
      balance at December 31
              
              
              69,763
              
              
              
              35,656
              
              
              
              4,977Add:
      Losses recoverable
              
              
              11,662
              
              
              
              6,721
              
              
              
              —Gross
      balance at December 31
              
              $
              81,425
              
              
              $
              42,377
              
              
              $
              4,977




F-19
 Table of Contents




For the
year ended December 31, 2008, the incurred losses relating to prior years
include 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;




·
            Extinguishing $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; and




·
            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 related 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, 2008 and 2007, loss and loss adjustment expense reserves were
comprised of the following:




2008
              
              
              2007($
      in thousands)Case
      reserves
              
              $
              6,666
              
              
              $
              1,712IBNR
              
              
              74,759
              
              
              
              40,665Total
              
              $
              81,425
              
              
              $
              42,377




7.       
RETROCESSION




The
Company utilizes retrocession agreements to reduce the risk of loss on business
assumed. The Company currently has in place 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, 2008, loss and loss adjustment expenses
incurred are net of loss and loss expenses recovered and recoverable of $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,
2008, the company had loss and loss adjustment expense recoverables of $0.2
million (2007: $0) with a retrocessionaire rated “A+ (Superior)” by A.M. Best.
At December 31, 2008, the Company had loss recoverables of $0 (2007: $1.3
million) with retrocessionaires rated ‘‘A (Excellent)’’ or higher by A.M. Best.
Additionally, the Company has loss recoverables of $11.5 million (2007: $5.4
million) with unrated retrocessionaires. At December 31, 2008, 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




F-20
 Table of Contents




and after
liquidation of any issued and outstanding preferred shares. At December 31,
2008, 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 financial statements of the registration rights
granted pursuant to the Shareholders' Agreement.




Shares
authorized for issuance are comprised of 350,000 (2007: 350,000) Class A
ordinary shares in relation to share purchase options granted to a service
provider and 2,000,000 (2007: 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, 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.




During
the year ended December 31, 2004, the Company issued 5,050,000 Class B ordinary
shares valued at $50.5 million to Greenlight Capital Investors, LLC (‘‘GCI’’),
an affiliated company. The Company received $26.0 million in cash and the
remaining balance of $24.5 million was secured by a promissory note receivable
which provided that GCI was to pay interest calculated as the one-year London
Interbank Offered Rate (‘‘LIBOR’’) plus 3% per annum and accrued daily. Interest
was to be paid annually on the promissory note anniversary date, and the
principal was to be repaid no later than August 11, 2009. During the year ended
December 31, 2006, GCI repaid the remaining principal balance of $16.2 million
(2005: $8.3 million) and $1.5 million (2005: $1.4 million) of interest relating
to the promissory note receivable.




On
January 10, 2007, 1,426,630 Class B ordinary shares were transferred from 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 two million
of its Class A ordinary shares from time to


F-21
 Table of Contents


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.




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




2008
              
              
              2007
              
              
              2006As
      at December 31,
              
              Class
      A
              
              
              Class
      B
              
              
              Class
      A
              
              
              Class
      B
              
              
              Class
      A
              
              
              Class
      BBalance
      – beginning of year
              
              
              29,847,787
              
              
              
              6,254,949
              
              
              
              16,507,228
              
              
              
              5,050,000
              
              
              
              16,181,666
              
              
              
              5,050,000Issue
      of ordinary shares
              
              
              162,849
              
              
              
              —
              
              
              
              11,913,929
              
              
              
              2,631,579
              
              
              
              325,562
              
              
              
              —Transfer
      from Class B toClass
      A
              
              
              —
              
              
              
              —
              
              
              
              1,426,630
              
              
              
              (1,426,630
              )
              
              
              —
              
              
              
              —Repurchase
      of ordinary shares
              
              
              (228,900
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Balance
      – end of year
              
              
              29,781,736
              
              
              
              6,254,949
              
              
              
              29,847,787
              
              
              
              6,254,949
              
              
              
              16,507,228
              
              
              
              5,050,000




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




The
Subsidiary 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 stock options expense and stock 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, 2008, the Company had reserved for issuance 2,000,000 Class A
ordinary shares (2007: 2,000,000) for eligible participants.




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. On December 24, 2007, the Company repurchased 50,000 share
purchase options at a price of $10 per option.




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, 2008, 141,465 (2007: 108,160) restricted Class A
ordinary shares were issued to employees as part of 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 vest on March 24, 2011
(2007: March 15, 2010) subject to the grantee's continued service with the
Company. The Company also issued to certain directors, 20,724 (2007: 13,264)
restricted shares of Class A ordinary shares as part of the directors’
remuneration. Each of these restricted shares issued to certain directors
contain similar restrictions to those issued to employees and these shares will
vest on the earlier of the first anniversary of the shares’ issuance or the
Company’s next annual general meeting, subject to the grantee’s continued
service with the Company.




F-22
 Table of Contents




The
Company recorded $1.6 million of share-based compensation expense relating to
restricted shares for the year ended December 31, 2008 (2007: $0.6 million,
2006: $0). As of December 31, 2008, there was $0.9 million (2007: $1.3 million)
of unrecognized compensation costs related to non-vested restricted shares which
are expected to be recognized over a weighted average period of 1.67 years
(2007: 2.23 years). For the year ended December 31, 2008, the total fair value
of restricted shares vested was $0.2 million (2007: $0, 2006: $0).




The
restricted share award activity during the year ended December 31, 2008 was as
follows:




Number
      of
                  non-vested
                  restricted
                  shares
              
              
              Weighted
                  average
                  grant
      date
                  fair
      valueBalance
      at December 31, 2007
              
              
              121,424
              
              
              $
              16.43Granted
              
              
              162,189
              
              
              
              18.93Vested
              
              
              (13,264
              )
              
              
              19.00Forfeited
              
              
              —
              
              
              
              —Balance
      at December 31, 2008
              
              
              270,349
              
              
              $
              17.80




Employee
and Director Stock Options




During
the year ended December 31, 2008, the Company granted 80,000 (2007: 50,000)
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 2009, 2010 and 2011 (2007 options vest over three years). 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.




2008
              
              
              2007
              
              
              2006Risk
      free rate
              
              
              3.99
              %
              
              
              4.79
              %
              
              
              4.36%
      – 5.14
              %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, 2008 related to employee and director
stock options was $1.4 million (2007: $2.3 million, 2006: $2.9 million). At
December 31, 2008, the total compensation cost related to non-vested options not
yet recognized was $0.7 million (2007: $1.4 million, 2006: $3.2 million) to be
recognized over a weighted average period of 1.0 year (2007: 1.09 years, 2006:
2.01 years) assuming the employees complete their service period for vesting of
the options.




During
the year ended December 31, 2008, 660 stock options were exercised which
had a weighted average exercise price of $13.85. 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, 2008 was
$6,067.


F-23
 Table of Contents


Employee
and director stock option activity during years ended December 31, 2008 and 2007
was as follows:


Number
      of
                  options
              
              
              Weighted
                  average
                  exercise
                  price
              
              
              Weighted
                  average
                  grant
      date
                  fair
      valueBalance
      at December 31, 2006
              
              
              1,131,000
              
              
              $
              11.83
              
              
              $
              6.01Granted
              
              
              50,000
              
              
              
              19.60
              
              
              
              10.18Exercised
              
              
              —
              
              
              
              —
              
              
              
              —Forfeited
              
              
              (2,000
              )
              
              
              12.05
              
              
              
              6.17Expired
              
              
              —
              
              
              
              —
              
              
              
              —Balance
      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
              
              
              $
              6.35




At
December 31, 2008, the weighted-average remaining contractual term for options
outstanding was 7.25 years (2007: 8.09 years).




At
December 31, 2008, 964,233 (2007: 553,000) stock options were exercisable. These
options had a weighted-average exercise price of $11.26 (2007: $11.61) and a
weighted-average remaining contractual term of 6.68 years (2007: 7.90
years).




The
weighted average grant date fair value of options granted during the year ended
December 31, 2008 was $8.69 (2007: $10.18, 2006: $6.40). The aggregate intrinsic
value of options outstanding and options exercisable at December 31, 2008 was
$1.4 million and $1.3 million, respectively (2007: $10.2 million and $5.1
million). During the year ended December 31, 2008, 411,233 (2007: 376,333, 2006:
176,667) options vested.




10.     
NET INVESTMENT INCOME (LOSS)




2008
                
                
                2007
                
                
                2006($
      in thousands)Realized
      gains (losses) and change in unrealized gains and losses,
    net
                
                $
                (118,667
                )
                
                $
                28,051
                
                
                $
                70,272Interest,
      dividend and other income
                
                
                31,093
                
                
                
                23,443
                
                
                
                11,704Interest,
      dividend and other expenses
                
                
                (28,651
                )
                
                
                (9,219
                )
                
                
                (4,775
                )Investment
      advisor compensation
                
                
                (9,901
                )
                
                
                (14,633
                )
                
                
                (18,692
                )Net
      investment income (loss)
                
                $
                (126,126
                )
                
                $
                27,642
                
                
                $
                58,509




11.     
GENERAL AND ADMINISTRATIVE EXPENSES




2008
                
                
                2007
                
                
                2006($
      in thousands)General
      expenses
                
                $
                10,756
                
                
                $
                9,034
                
                
                $
                6,199Share-based
      compensation expense
                
                
                3,000
                
                
                
                2,884
                
                
                
                2,864$
                13,756
                
                
                $
                11,918
                
                
                $
                9,063




F-24
 Table of Contents




12.     
TAXATION




Under
current Cayman Islands law, no corporate entity, including the Company, is
obligated to pay any 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 obligations,
until February 1, 2025.




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, a performance fee equal to 20% of the net income of
the Company’s share of account managed by DME Advisors is allocated, subject to
a loss carryforward provision, to DME Advisors’ account. For the year ended
December 31, 2008, included in net investment income (loss) (see note 10) is
performance compensation of $0 million (2007: $6.9 million, 2006: $14.6
million). Given the net investment loss for the year ended December 31, 2008,
the performance fee for the subsequent years will be reduced to 10% until all
the investment losses have been recouped and an additional amount equal to 150%
of the investment loss is earned.




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, 2008are management fees of
$9.9 million (2007: $7.7 million, 2006: $4.1 million). The management fees have
been fully paid as of December 31, 2008.




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, 2008, there were no
indemnification payments made by the Company.




Service
Agreement




In
February 2007, the Company 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 has
an initial term of one year, and will continue for sequential one year periods
until terminated by the Company or DME Advisors. Either party may terminate the
agreement for any reason with 30 days prior written notice to the other
party.




14.     
COMMITMENTS AND CONTINGENCIES




Letters
of Credit




At
December 31, 2008, the Company had a $400 million letter of credit facility
with Citibank N.A. This agreement terminates on October 11, 2009, 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.


F-25
 Table of Contents




In
addition, at December 31, 2008, the Company had a $25 million letter of credit
facility with Butterfield Bank (Cayman) Limited (“Butterfield Bank”). This
facility is the result of a novation to Butterfield Bank of a letter of credit
facility previously issued by UniCredit Bank Cayman Islands Ltd (formerly Bank
Austria Cayman Islands Ltd).




As of
December 31, 2008, $167.3 million (2007: $76.5 million) in letters of credit
were issued under the above facilities. Under the letter of credit facilities,
the Company provides collateral that may consist of equity securities and cash
equivalents. At December 31, 2008, total investments and cash equivalents with a
fair market value of $220.2 million (December 31, 2007:
$148.9 million) have been pledged as security against the letters of credit
issued. Each of the credit facilities requires that the Company comply with
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 agreements, Greenlight Re will be
prohibited from paying dividends to the parent company. The Company was in
compliance with all the covenants of each of its letter of credit facilities as
of December 31, 2008 and 2007.




Operating
Lease




Effective
September 1, 2005, the Company entered into a five-year non-cancelable operating
lease agreement to rent office space. The total rent expense for the year ended
December 31, 2008 was $95,000 (2007: $90,000, 2006: $89,000).




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 lease agreement,
the Company is committed to annual rent payments ranging from $253,539 to
$311,821 starting from the earlier of December 1, 2008 or when the premises
are occupied, and ending on June 30, 2018. The Company also 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.




Specialist
Service Agreement




Effective
September 1, 2007, the Company entered into a service agreement with a
specialist whereby the specialist service provider 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. Under the terms of the agreement, the Company has committed to
quarterly payments to the service provider. If the agreement is terminated after
two years, the Company is obligated to make minimum payments for another two
years, as presented in the schedule below, to ensure any bound contracts are
adequately run-off by the service provider.




Private
Equity




Periodically,
the Company makes investments in private equity vehicles. As part of the
Company's participation in such private equity securities, the Company may make
funding commitments. As of December 31, 2008, the Company had commitments to
invest an additional $19.7 million in private equity securities.




Schedule
of Commitments and Contingencies




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




2009
                
                
                2010
                
                
                2011
                
                
                2012
                
                
                2013
                
                
                Thereafter
                
                
                Total($
      in thousands)Operating
      lease obligations
                
                $
                376
                
                
                $
                345
                
                
                $
                276
                
                
                $
                276
                
                
                $
                276
                
                
                $
                1,243
                
                
                $
                2,792Specialist
      service agreement
                
                
                610
                
                
                
                400
                
                
                
                150
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,160Private
      equity and limited partnerships (1)
                
                
                19,695
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                19,695$
                20,681
                
                
                $
                745
                
                
                $
                426
                
                
                $
                276
                
                
                $
                276
                
                
                $
                1,243
                
                
                $
                23,647


__________


(1)Given the nature of these
investments, the Company is unable to determine with any degree of accuracy when
the remaining commitments will be called. Therefore, for purposes of the above
table, the Company has assumed that all commitments will be paid within one
year.







F-26
 Table of Contents




Litigation




In the
normal course of business, the Company may become involved in various claims
litigation and legal proceedings. As of December 31, 2008, 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, 2008, the three largest brokers accounted for $50.0
million, $27.5 million and $25.6 million of gross premiums written, representing
30.8%, 16.9% 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, $35.4 million and $15.0 million of gross premiums
written, representing 32.5%, 27.9% and 11.8%, respectively, of total gross
premiums written. During the year ended December 31, 2006, the gross premiums
written included $58.1 million from one broker, representing 78.3% of total
gross premiums written.




The
following tables provide a breakdown of the Company's premiums written by line
of business and by geographic area of risks insured for the years
indicated:




Gross
Premiums Written by Line of Business




Year
      Ended
                    December
      31,
                    2008
                
                
                Year
      Ended
                    December
      31,
                    2007
                
                
                Year
      Ended
                    December
      31,
                    2006($
      in thousands)PropertyCommercial
      lines
                
                $
                13,591
                
                
                
                8.4
                %
                
                $
                17,532
                
                
                
                13.8
                %
                
                $
                9,875
                
                
                
                13.3
                %Personal
      lines
                
                
                (4,071
                )(1)
                
                
                (2.5
                )
                
                
                41,291
                
                
                
                32.5
                
                
                
                58,063
                
                
                
                78.3CasualtyGeneral
      liability
                
                
                16,948
                
                
                
                10.4
                
                
                
                17,597
                
                
                
                13.8
                
                
                
                4,388
                
                
                
                5.9Marine
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,825
                
                
                
                2.5Motor
      liability.
                
                
                72,578
                
                
                
                44.7
                
                
                
                795
                
                
                
                0.6
                
                
                
                —
                
                
                
                —Professional
      liability
                
                
                2,150
                
                
                
                1.3
                
                
                
                27,230
                
                
                
                21.4
                
                
                
                —
                
                
                
                —SpecialtyHealth
                
                
                40,210
                
                
                
                24.7
                
                
                
                16,489
                
                
                
                13.0
                
                
                
                —
                
                
                
                —Medical
      malpractice
                
                
                4,641
                
                
                
                2.9
                
                
                
                6,197
                
                
                
                4.9
                
                
                
                —
                
                
                
                —Workers
      compensation
                
                
                16,348
                
                
                
                10.1
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —$
                162,395
                
                
                
                100.0
                %
                
                $
                127,131
                
                
                
                100.0
                %
                
                $
                74,151
                
                
                
                100.0
                %


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


F-27
 Table of Contents







Gross
Premiums Written by Geographic Area of Risks Insured




Year
      Ended
                    December
      31,
                    2008
                
                
                Year
      Ended
                    December
      31,
                    2007
                
                
                Year
      Ended
                    December
      31,
                    2006($
      in thousands)USA
                
                $
                142,604
                
                
                
                87.8
                %
                
                $
                79,647
                
                
                
                62.6
                %
                
                $
                64,409
                
                
                
                86.9
                %Worldwide(1)
                
                
                18,991
                
                
                
                11.7
                
                
                
                44,722
                
                
                
                35.2
                
                
                
                4,388
                
                
                
                5.9Europe
                
                
                —
                
                
                
                —
                
                
                
                2,157
                
                
                
                1.7
                
                
                
                3,521
                
                
                
                4.7Caribbean
                
                
                800
                
                
                
                0.5
                
                
                
                605
                
                
                
                0.5
                
                
                
                500
                
                
                
                0.7Japan
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,333
                
                
                
                1.8162,395
                
                
                
                100.0
                %
                
                $
                127,131
                
                
                
                100.0
                %
                
                $
                74,151
                
                
                
                100.0
                %


‘‘Worldwide’’
risk comprises individual policies that insure risks on a worldwide
basis.


16.     
SUBSIDIARY OPERATION




The
Company’s consolidated financial statements include the accounts of the
Subsidiary. Summarized consolidated financial information for the Subsidiary as
of December 31, 2008 and 2007 and for the years ended December 31, 2008, 2007
and 2006, are presented below.




December
      31,
                  2008
              
              
              December
      31,
                  2007($
      in thousands)Total
      assets
              
              $
              960,793
              
              
              $
              1,094,620Total
      liabilities
              
              
              472,623
              
              
              
              488,563Shareholders’
      equity
              
              
              488,170
              
              
              
              606,057Total
      liabilities and shareholders’ equity
              
              $
              960,793
              
              
              $
              1,094,620






2008
              
              
              2007
              
              
              2006($
      in thousands)Total
      revenues
              
              $
              (11,177
              )
              
              $
              125,687
              
              
              $
              85,132Total
      expenses
              
              
              106,710
              
              
              
              87,430
              
              
              
              26,176Net
      income (loss)
              
              $
              (117,887
              )
              
              $
              38,257
              
              
              $
              58,956




17.     
QUARTERLY FINANCIAL RESULTS (UNAUDITED)




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 minority interest
                    
                    
                    (4,783
                    )
                    
                    
                    33,932
                    
                    
                    
                    (119,645
                    )
                    
                    
                    (31,571
                    )Minority
      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
                    )
                    
                    
                    0.92
                    
                    
                    
                    (3.29
                    )
                    
                    
                    (0.87
                    )Weighted
      average number of ordinary shares used in the determination
    ofBasic
                    
                    
                    35,981,312
                    
                    
                    
                    35,981,386
                    
                    
                    
                    35,995,236
                    
                    
                    
                    35,918,309Diluted
                    
                    
                    35,981,312
                    
                    
                    
                    36,652,441
                    
                    
                    
                    35,995,236
                    
                    
                    
                    35,918,309
  F-28
 Table of
Contents


2007
                    Quarter
      endedMarch
      31
                
                
                June
      30
                
                
                September
      30
                
                
                December
      31($
      in thousands)RevenuesGross
      premiums written
                
                $
                38,064
                
                
                $
                65,445
                
                
                $
                19,766
                
                
                $
                3,856Gross
      premiums ceded
                
                
                (13,743
                )
                
                
                (14,534
                )
                
                
                (209
                )
                
                
                2,336Net
      premiums written
                
                
                24,321
                
                
                
                50,911
                
                
                
                19,557
                
                
                
                6,192Changes
      in net unearned premium reserves
                
                
                (3,400
                )
                
                
                (25,939
                )
                
                
                11,155
                
                
                
                15,250Net
      premiums earned
                
                
                20,921
                
                
                
                24,972
                
                
                
                30,712
                
                
                
                21,442Net
      investment income (loss)
                
                
                (14,381
                )
                
                
                19,924
                
                
                
                (4,776
                )
                
                
                26,875Total
      revenues
                
                
                6,540
                
                
                
                44,896
                
                
                
                25,936
                
                
                
                48,317ExpensesLoss
      and loss adjustment expenses incurred, net
                
                
                8,988
                
                
                
                11,138
                
                
                
                11,339
                
                
                
                8,042Acquisition
      costs, net
                
                
                7,712
                
                
                
                9,515
                
                
                
                13,458
                
                
                
                8,254General
      and administrative expenses
                
                
                2,980
                
                
                
                2,926
                
                
                
                3,232
                
                
                
                2,780Total
      expenses
                
                
                19,680
                
                
                
                23,579
                
                
                
                28,029
                
                
                
                19,076Net
      income (loss)
                
                $
                (13,140
                )
                
                $
                21,317
                
                
                $
                (2,093
                )
                
                $
                29,241Earnings
      (loss) per shareBasic
                
                $
                (0.61
                )
                
                $
                0.78
                
                
                $
                (0.06
                )
                
                $
                0.81Diluted
                
                
                (0.61
                )
                
                
                0.76
                
                
                
                (0.06
                )
                
                
                0.80Weighted
      average number of ordinary shares used in the determination
    ofBasic
                
                
                21,558,915
                
                
                
                27,472,993
                
                
                
                35,981,312
                
                
                
                35,981,312Diluted
                
                
                21,558,915
                
                
                
                27,980,421
                
                
                
                35,981,312
                
                
                
                36,639,928







F-29
 Table of Contents




SCHEDULE
I






GREENLIGHT
CAPITAL RE, LTD.


SUMMARY
OF INVESTMENTS — OTHER THAN INVESTMENTS IN RELATED PARTIES


AS
OF DECEMBER 31, 2008




(expressed
in thousands of U.S. dollars)




Type
      of Investment
              
              Cost
              
              
              Fair
      Value
              
              
              Balance
                  Sheet
      Value($
      in thousands)Debt
      securities, trading, at fair value
              
              $
              77,811
              
              
              $
              70,214
              
              
              $
              70,214Equity
      securities, trading, at fair valueCommon
      stocks, listed
              
              
              552,941
              
              
              
              348,590
              
              
              
              348,590Exchange
      traded funds
              
              
              53,364
              
              
              
              60,739
              
              
              
              60,739Total
      equity securities, trading, at fair value
              
              
              606,305
              
              
              
              409,329
              
              
              
              409,329Total
      investments, trading
              
              $
              684,116
              
              
              $
              479,543
              
              
              $
              479,543Other
      investments, at fair value


Equities,
      unlisted
                      
                      $
                      15,395
                      
                      
                      $
                      11,897
                      
                      
                      $
                      11,897Call
      options
                      
                      
                      2,133
                      
                      
                      
                      2,526
                      
                      
                      
                      2,526Total
      other investments, at fair value
                      
                      $
                      17,528
                      
                      
                      $
                      14,423
                      
                      
                      $
                      14,423Total
      investments in securities
                      
                      $
                      701,644
                      
                      
                      $
                      493,966
                      
                      
                      $
                      493,966







F-30
 Table of Contents







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,
                  2008
              
              
              December
      31,
                  2007($
      in thousands)AssetsCash
      and cash equivalents
              
              $
              37
              
              
              $
              25Investment
      in subsidiaries
              
              
              488,170
              
              
              
              606,057Total
      assets
              
              $
              488,207
              
              
              $
              606,082Liabilities
      and shareholders’ equityLiabilitiesDue
      to subsidiaries
              
              $
              2,825
              
              
              $
              500Shareholders’
      equityShare
      capital
              
              
              3,604
              
              
              
              3,610Additional
      paid-in capital
              
              
              477,571
              
              
              
              476,861Retained
      earnings
              
              
              4,207
              
              
              
              125,111Total
      shareholders’ equity
              
              
              485,382
              
              
              
              605,582Total
      liabilities and shareholders’ equity
              
              $
              488,207
              
              
              $
              606,082








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 312008
              
              
              2007
              
              
              2006($
      in thousands)RevenueInvestment
      income
              
              $
              —
              
              
              $
              2
              
              
              $
              1,016ExpensesGeneral
      and administrative expenses
              
              
              3,017
              
              
              
              2,934
              
              
              
              2,973Net
      loss before equity in earnings (loss) of consolidated
      subsidiaries
              
              
              (3,017
              )
              
              
              (2,932
              )
              
              
              (1,957
              )Equity
      in earnings (loss) of consolidated subsidiaries
              
              
              (117,887
              )
              
              
              38,257
              
              
              
              58,956Consolidated
      net income (loss)
              
              $
              (120,904
              )
              
              $
              35,325
              
              
              $
              56,999







F-31
 Table of Contents







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 31,2008
                
                
                2007
                
                
                2006($
      in thousands)Cash
      provided by (used in)Operating
      activitiesNet
      income (loss)
                
                $
                (120,904
                )
                
                $
                35,325
                
                
                $
                56,999Adjustments
      to reconcile net income to cash provided by operating
      activitiesEquity
      in loss (earnings) of consolidated subsidiaries
                
                
                117,887
                
                
                
                (38,257
                )
                
                
                (58,956
                )Stock
      options and stock awards expense
                
                
                3,000
                
                
                
                2,884
                
                
                
                2,864Due
      to subsidiaries
                
                
                2,825
                
                
                
                500
                
                
                
                —Change
      in accounts payable and accrued expenses
                
                
                —
                
                
                
                —
                
                
                
                (59
                )Total
      operating activities
                
                
                2,808
                
                
                
                452
                
                
                
                848Investing
      activityContributed
      surplus to subsidiaries
                
                
                (500
                )
                
                
                (255,656
                )
                
                
                (21,972
                )Financing
      activitiesProceeds
      from share issue
                
                
                17
                
                
                
                255,706
                
                
                
                4,270Repurchase
      of Class A ordinary shares
                
                
                (2,334
                )
                
                
                —
                
                
                
                —Short-swing
      sale profit from shareholder
                
                
                12
                
                
                
                —
                
                
                
                —Net
      proceeds from exercise of stock options
                
                
                9
                
                
                
                —
                
                
                
                —Options
      repurchased
                
                
                —
                
                
                
                (500
                )
                
                
                —Collection
      of related party promissory note receivable
                
                
                —
                
                
                
                —
                
                
                
                16,212Change
      in interest receivable on related party promissory note
      receivable
                
                
                —
                
                
                
                —
                
                
                
                479Total
      financing activities
                
                
                (2,296
                )
                
                
                255,206
                
                
                
                20,961Net
      increase (decrease) in cash and cash equivalents
                
                
                12
                
                
                
                2
                
                
                
                (163
                )Cash
      and cash equivalents at beginning of the year
                
                
                25
                
                
                
                23
                
                
                
                186Cash
      and cash equivalents at end of the year
                
                $
                37
                
                
                $
                25
                
                
                $
                23







F-32
 Table of Contents







SCHEDULE
III






GREENLIGHT
CAPITAL RE, LTD.


SUPPLEMENTARY
INSURANCE INFORMATION


AS
OF AND FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006




(expressed
in thousands of U.S. dollars)




Year
      and Segment
              
              Deferred
                  acquisition
                  costs
              
              
              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
                  written2008
      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
              
              
              $
              127,1312006
      Property & Casualty
              
              $
              16,282
              
              
              $
              4,977
              
              
              $
              47,546
              
              
              $
              26,605
              
              
              $
              58,509
              
              
              $
              9,671
              
              
              $
              10,415
              
              
              $
              9,063
              
              
              $
              74,151







F-33
 Table of Contents







SCHEDULE
IV






GREENLIGHT
CAPITAL RE, LTD.


SUPPLEMENTARY
REINSURANCE INFORMATION


AS
OF AND FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006




(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 net2008
      Property & Casualty
              
              $
              —
              
              
              $
              16,396
              
              
              $
              162,395
              
              
              $
              145,999
              
              
              
              111
              %2007
      Property & Casualty
              
              $
              —
              
              
              $
              26,150
              
              
              $
              127,131
              
              
              $
              100,981
              
              
              
              126
              %2006
      Property & Casualty
              
              $
              —
              
              
              $
              —
              
              
              $
              74,151
              
              
              $
              74,151
              
              
              
              100
              %







F-34
 Table of Contents