The following table sets forth our selected historical consolidated statement of operations data for the fiscal years ended December 31, 2020, 2019, 2018, 2017, and 2016, as well as our selected historical consolidated balance sheet data as of December 31, 2020, 2019, 2018, 2017, and 2016, which are derived from our audited consolidated financial statements. The audited consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been audited by BDO USA, LLP, an independent registered public accounting firm.
These historical results presented below are not necessarily indicative of results for any future period and should be read in conjunction with our consolidated financial statements and related notes thereto contained in “Item 8. Financial Statements and Supplementary Data” and “
References to “we,” “us,” “our,” “our company,” or “the Company” refer to Greenlight Capital Re, Ltd. (“GLRE”) and our wholly-owned subsidiaries, Greenlight Reinsurance, Ltd, (“Greenlight Re”), Greenlight Reinsurance Ireland, Designated Activity Company (“GRIL”), Greenlight Re Marketing (UK) Limited (“Greenlight Re UK”) and Verdant Holding Company, Ltd. (“Verdant”), unless the context dictates otherwise. References to our “Ordinary Shares” refers collectively to our Class A Ordinary Shares and Class B Ordinary Shares.
We have omitted discussion of the earliest of the three years covered by our consolidated financial statements presented in this report because that disclosure was already included in our Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 27, 2020. You are encouraged to reference Part II, Item 7, within that report, for a discussion of our financial condition and result of operations for the fiscal year ended December 31, 2019 compared to the fiscal year ended December 31, 2018.
We are a global specialty property and casualty reinsurer, headquartered in the Cayman Islands, with a reinsurance and investment strategy that we believe differentiates us from most of our competitors. Our goal is to build long-term shareholder value by providing risk management products and services to the insurance, reinsurance and other risk marketplaces. We focus on delivering risk solutions to clients and brokers who value our expertise, analytics and customer service offerings.
The Company’s subsidiaries hold an A.M. Best Financial Strength Rating of A- (Excellent) with a negative outlook.
While the COVID-19 uncertainty has caused reserving challenges throughout the industry, it has also led to underwriting opportunities. The lack of clarity that we face is impacting the insurance and reinsurance market as a whole on a significantly larger scale. As reinsurers’ reserves must accommodate a wide range of loss estimates, they could have less capital to deploy to new underwriting opportunities. We have already seen widespread pricing improvements, and this dynamic may be a significant driver of the increases.
Compared to most of our competitors, we are small and have low overhead expenses. We believe that our current expense efficiency, agility, and existing relationships have provided support to our competitive position and enable us to participate in lines of business that fit within our strategy. However, the current size of our capital base may reduce the number of high-quality underwriting opportunities that brokers refer to us. Additionally, a prolonged negative outlook from A.M. Best or an A.M. Best revision to our subsidiaries’ ratings below A- (Excellent) may adversely impact our ability to execute our business strategy. See “Risks Relating to our Business” in “Part I, Item 1A. Risk Factors.”
Our growing Innovations business is increasing in importance as a source of attractive and lasting underwriting opportunities. Our Innovations partnerships generally enable us to add value to the relationship in multiple ways: as a strategic partner, a provider of risk capacity, and an investor. Investor interest in later-stage “InsurTechs” has surged in 2020, a development that is well-suited to our early-stage investment strategy.
We have one operating segment, Property & Casualty reinsurance, and we analyze our business based on the following categories:
Property business covers automobile physical damage, personal lines (including homeowners’ insurance) and commercial lines exposures. Property business includes both catastrophe as well as non-catastrophe coverage. We expect catastrophe business to make up a small proportion of our property business.
● gains (or losses) from our other investments including Innovations and an investment accounted for as equity method investment;
● interest income and gains (or losses) from promissory notes receivable.
Acquisition costs consist primarily of brokerage fees, ceding commissions, premium taxes, profit commissions, letters of credit and trust fees, and federal excise taxes. We amortize deferred acquisition costs relating to successfully bound reinsurance contracts over the related contract term.
Interest expense consists of interest paid and accrued on senior convertible notes and the amortization of (i) issuance expenses and (ii) the note discount.
Investment-related expenses primarily consist of management fees and performance compensation paid to the investment advisor. We net these expenses against investment income (loss) in our consolidated financial statements.
At the inception of each of our reinsurance contracts, we receive premium estimates from the client, which, we use in conjunction with historical and and industry data to estimate what we believe will be the ultimate premium payable under each contract. We receive actual premiums written by each client as the client reports the actual results of the underlying insurance
We confirm the accuracy and completeness of premiums reported by our clients by reviewing the client’s statutory filings or performing an audit of the client under the contract terms. Discrepancies between premiums ceded and reported under a contract are, in our experience, rare. To date, we have not had any material difference in premiums reported by a client that required a formal dispute resolution process.
Assessing whether 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 to merit reinsurance accounting treatment, the premium we receive is reported as a deposit liability. Similarly, we report the premium we pay as a deposit asset for ceded contracts that do not transfer sufficient risk to merit reinsurance accounting. Any gains or losses on deposit accounted contracts are calculated using the interest method and recorded in the consolidated statements of operations under the caption “Other income (expense).”
The nature and extent of our judgment in the reserving process depend in part upon the type of business. Some of our property treaty reinsurance contracts represent business with both a low frequency of claims occurrence and a high potential severity of loss, such as claims arising from natural catastrophes. Given the high-severity, low-frequency nature of these events, the losses typically generated by them do not lend themselves to traditional actuarial reserving methods, such as statistical calculations of a range of estimates surrounding the best point estimate of our loss and LAE reserves. Therefore, our reserving approach for this type of business estimates the ultimate cost associated with a single loss event rather than analyzing the historical development patterns of past losses as a means of estimating the ultimate losses for an entire accident year. We estimate our reserves for these large events on a contract-by-contract basis by reviewing policies with known or potential exposure to a particular loss event.
For non-catastrophe losses, we often apply trend-based actuarial methodologies in setting reserves, including paid and incurred loss development, Bornheutter-Ferguson, and frequency and severity techniques. We also utilize industry loss ratio and development pattern information in conjunction with our own experience. The weight given to a particular method will depend on many factors, including the homogeneity within the class of business, the volume of losses, the maturity of the accident year, and the length of the expected development tail. For example, development methods rely on reported losses, while expected loss ratio methods typically rely on expectations established before notification of loss. Therefore, as an accident year matures, we may migrate from an expected loss ratio method to an incurred development method.
Reserving can prove especially difficult should a significant loss occur near the end of a financial reporting period, particularly if the loss involves a catastrophic event. These factors further contribute to the degree of uncertainty in our reserving process.
Time lags are inherent in loss reporting, especially in the case of excess-of-loss reinsurance contracts. The combined characteristics of low claim frequency and high claim severity make the available data less useful for predicting ultimate losses. In the case of proportional contracts, we rely on an analysis of a cedent’s historical experience, industry information, and the underwriters’ professional judgment in estimating reserves for these contracts. We also utilize ultimate loss ratio forecasts when reported by cedents and brokers, which are ordinarily subject to three to six-month lags for proportional business. Due to the degree of reliance we place on ceding companies for claims reporting, our reserve estimates are highly dependent on ceding companies’ judgment. Furthermore, during the loss settlement period, which may last several years, additional facts regarding individual claims and trends will often become known and case law may change, affecting ultimate expected losses.
The uncertainties inherent in the reserving process, together with the potential for unforeseen developments, including changes in laws and the prevailing interpretation of policy terms, may result in our loss and LAE reserves being materially greater or less than the loss and LAE reserves we initially established. We reflect adjustments to our loss and LAE reserves in our financial results during the period in which they are determined. Changes to our prior year loss reserves will impact our
Bonus Accruals. Under the Company’s bonus program, most employees’ target bonuses consist of two components: a discretionary component based on a qualitative assessment of each employee’s performance and a quantitative component based on the return on deployed equity (“RODE”) for each underwriting year relating to reinsurance operations. The qualitative portion of an employee’s annual bonus is accrued quarterly at each employee’s pro rata target amount and updated to actual at year-end. We accrue the quantitative portion of each employee’s annual bonus based on the expected RODE for each underwriting year. We then adjust this accrual for changes in the expected RODE and actual investment return each quarter until we have settled all losses, or the Compensation Committee of our Board of Directors declares the underwriting year closed. We incorporate any subsequent changes to any open underwriting year’s quantitative bonus into the following underwriting year. The Compensation Committee of our Board of Directors approves all quantitative bonuses before their payment dates. The initial RODE calculation utilizes proprietary models which require significant estimation and judgment. Actual RODE may vary significantly from the expected RODE, and any adjustments to the quantitative bonus estimates, which may be material, are recorded in the period in which they are determined.
If actual results differ significantly from these estimates and assumptions, particularly concerning our estimation of volatility and forfeiture rates, share-based compensation expense, primarily relating to future share-based awards, could be materially impacted.
The following table presents a reconciliation of the non-GAAP financial measures basic and fully diluted book value per share to the most comparable U.S. GAAP measure.
(1) All unvested restricted shares, including those with performance conditions, are included in the “basic” and “fully diluted” denominators. As of December 31, 2020, the number of unvested restricted shares with performance conditions was 193,149 (December 31, 2019: 356,900, December 31, 2018: 30,660).
“Combined ratio” is a commonly used measure in the property and casualty insurance industry, and is calculated using U.S. GAAP components. We use the combined ratio, as well as an adjusted combined ratio that excludes the impacts of certain items, to evaluate our underwriting performance. We believe this adjusted non-GAAP measure provides management and financial statement users with a better understanding of the factors influencing our underwriting results.
* The net adverse financial impact associated with changes in the estimate of losses incurred in prior years, which incorporates earned reinstatement premiums assumed and ceded, adjustments to assumed and ceded acquisition costs, and adjustments to deposit accounted contracts, was $3.7 million, $30.1 million, and $7.4 million in 2020, 2019, and 2018, respectively.
For the year ended December 31, 2020, the fully diluted book value per share increased by $0.54 per share, or 4.2%, to $13.42 per share from $12.88 per share on December 31, 2019. For the year ended December 31, 2020, the basic book value per share increased by $0.57 per share, or 4.4%, to $13.47 per share from $12.90 per share on December 31, 2019. The increases in basic and fully diluted book value per share for the year ended December 31, 2020 were due primarily to (i) share repurchases executed, (ii) net income earned, and (iii) restricted shares forfeited during the year.
•Investments: Our total investment income for the year ended December 31, 2020 was $25.5 million compared to total investment income of $52.3 million reported during 2019. Investment income for the year ended December 31, 2020 included a) $4.4 million on our investment in SILP, b) $10.2 million gain on our Innovations and other strategic investments and c) $5.8 million gain on settlement of a note receivable.
We analyze our business based on three categories: “property”, “casualty”, and “other.”
As a result of our underwriting philosophy, the total premiums we write, and the mix of premiums between property, casualty, and other business, may vary significantly from period to period depending on the market opportunities that we identify.
For the year ended December 31, 2020, our gross premiums written decreased by $44.2 million, or 8.4%, compared to the same period in 2019. The changes in gross premiums written for the year ended December 31, 2020, were attributable to the following:
For the year ended December 31, 2020, premiums ceded decreased by $46.4 million, or 95.3%, to $2.3 million compared to $48.7 million for the year ended December 31, 2019. During the comparative period in 2019 we retroceded a portion of our overall exposure to an inward motor contract. The decrease in premiums ceded for the year ended December 31, 2020, was primarily related to our decision not to renew the associated inward motor contract. In general, we use retrocessional coverage to manage our net portfolio exposure, leverage areas of expertise, and improve our strategic position in meeting clients’ and brokers’ needs.
The movement in net premiums written resulted from the changes in gross premiums written and ceded during the periods.
Details of net premiums earned are provided in the following table:
Details of net losses incurred are provided in the following table:
The below table summarizes the loss ratios for the years ended December 31, 2020, and 2019:
The changes in net losses incurred and loss ratios during the year ended December 31, 2020, compared to the year ended December 31, 2019, were attributable to the following:
See “Part II, Item 7. Summary of Critical Accounting Estimates, Loss and Loss Adjustment Expense Reserves” and “Note 7. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES” in our Notes to the consolidated financial statements for additional discussion of our reserving techniques and prior year development of net claims and claim expenses.
The acquisition cost ratios for the years ended December 31, 2020, and 2019, were as follows:
A summary of our total investment income (loss) is as follows:
For the year ended December 31, 2020, the decrease in interest income compared to the equivalent period in 2019, related to lower interest rates offered by financial institutions on the restricted cash and cash equivalents pledged as collateral to our clients.
The $15.0 million realized loss noted above related to a note receivable against which we had recorded a valuation allowance as of December 31, 2019. As a result, when we realized this loss during 2020, we offset it with a $15.0 million unrealized gain during the same period. This unrealized gain is reflected in the caption “Change in unrealized gains and losses” in the table above which also includes unrealized gains on investment related to Innovations.
1 “Other income and expenses” excludes performance compensation but includes management fees. “Net investment return” incorporates both of these amounts.
We are not obligated to pay taxes in the Cayman Islands on either income or capital gains. The Governor-In-Cabinet has granted us an exemption from any income taxes that may be imposed in the Cayman Islands for a period of 20 years, expiring on February 1, 2025.
During the year ended December 31, 2020, reinsurance balances receivable increased by $99.8 million, or 43.3%, to $330.2 million from $230.4 million, as of December 31, 2019. The increase was primarily related to Funds at Lloyd’s to support the reinsurance contracts with Lloyd’s syndicates. To a lesser extent, the increase related to premiums written and not yet collected from cedents on new and renewed contracts.
Our property business, and to a lesser extent our casualty and other business, incorporate contracts that contain natural peril loss exposure. We estimate catastrophe loss exposure in terms of the PML. We anticipate that the PML will vary from period to period depending upon the modeled simulated losses and the composition of the in-force book of business. The projected severity levels are described in terms of a 1-in-250 year return period. The 1-in-250 year return period PML means that we believe there is a 0.4% chance in any given year that an occurrence of a natural catastrophe will lead to losses exceeding the stated estimate. In other words, it corresponds to a 99.6% probability that the loss from an event will fall below the indicated PML.
Although GLRE is not subject to any significant legal prohibitions on the payment of dividends, Greenlight Re and GRIL are each subject to regulatory minimum capital requirements and regulatory constraints that affect their ability to pay dividends to GLRE. In addition, any dividend payment would have to be approved by the relevant regulatory authorities prior to payment. During the year ended December 31, 2020, we received regulatory approval for a return of $15.0 million of Greenlight Re’s share premium to GLRE to facilitate the share repurchases. In October 2020, we received regulatory approval for return of up to $25.0 million of Greenlight Re’s share premium to GLRE in order to provide additional capital to GRIL. For the year ended December 31, 2020, we used $17.8 million to repurchase 2.5 million Class A ordinary shares. As of December 31, 2020, Greenlight Re and GRIL both exceeded the regulatory minimum capital requirements.
As of December 31, 2020, we had one (2019: one) letter of credit facility available with an aggregate capacity of $275.0 million (2019: $400.0 million). See Note 15 of the accompanying consolidated financial statements for details on the letter of credit facility. We provide collateral to cedents in the form of letters of credit and trust arrangements. As of December 31, 2020, the aggregate amount of collateral provided to cedents under such arrangements was $743.0 million (2019: $733.2 million). As of December 31, 2020, the letters of credit and trust accounts were secured by restricted cash and cash equivalents with a total fair value of $745.4 million (2019: $742.1 million).
On March 26, 2020, the Board of Directors extended the share repurchase plan to June 30, 2021 and increased the number of shares authorized to be repurchased to 5.0 million Class A ordinary shares or securities convertible into Class A ordinary shares in the open market, through privately negotiated transactions or Rule 10b5-1 stock trading plans. In addition, the Board of Directors also authorized the Company to repurchase up to $25.0 million aggregate face amount of the Company’s 4.00% Convertible Senior Notes due 2023 (the “Notes”) in privately negotiated transactions, in open market repurchases or pursuant to one more tender offers. The Company is not required to repurchase any of the Class A ordinary shares or the Notes and the repurchase plans may be modified, suspended or terminated at the election of our Board of Directors at any time without prior notice. During the year ended December 31, 2020, 2.5 million Class A ordinary shares were repurchased by the Company. As of December 31, 2020, 2.5 million Class A ordinary shares and $25.0 million of the Notes, remained available for repurchase under the repurchase plans.
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 December 31, 2020, the loss and loss adjustment expense reserves are expected to payout as follows:
(2)Includes interest payments due on $100.0 million of senior convertible note payable at 4.0% per annum, as well as the payment of principal upon maturity on August 1, 2023.
Greenlight Re had entered into lease agreements for office space in the Cayman Islands. The leases expired on December 31, 2020 and the Company is currently in negotiations with the lessor for renewal of the leases. Subsequent to December 31, 2020, both parties agreed to extend the lease until December 31, 2021.
Pursuant to the IAA between SILP and DME Advisors, DME Advisors is entitled to a monthly management fee equal to 0.125% (1.5% on an annual basis) of each limited partner’s Investment Portfolio, as provided in the SILP LPA. The IAA has an initial term ending on August 31, 2023 subject to automatic extension for successive three-year terms. For the year ended December 31, 2020 and December 31, 2019, management fees paid by SILP to DME Advisors were $2.8 million and $4.9 million, respectively. Pursuant to the SILP LPA, DME II is entitled to a performance allocation equal to 20% of the net profit, calculated per annum, of each limited partner’s share of the capital account managed by DME Advisors, subject to a loss carry forward provision. DME II is not entitled to earn a performance allocation in a year in which SILP incurs a loss. The loss carry forward provision contained in the SILP LPA allows DME II to earn reduced performance allocation of 10% of net profits in years subsequent to the year in which the capital accounts of the limited partners incur a loss, until all losses are recouped and an additional amount equal to 150% of the loss is earned. For the year ended December 31, 2020, a performance allocation of $0.4 million (2019: $5.0 million) was netted against income in the caption “Investment in related party investment fund” in the Company’s consolidated statement of operations.
Our related party transactions are presented in Note 14 to the accompanying consolidated financial statements.
Inflation generally affects the cost of claims and claim expenses, as well as asset values in our investment portfolio. The onset, duration and severity of an inflationary period cannot be predicted or estimated with precision.The anticipated effects of inflation on our claim costs are considered in our pricing and reserving models. However, the actual effect of increases in claim costs due to inflation cannot be accurately known until claims are ultimately settled, and may differ significantly from our estimate.