EDGAR 10-K Filing

Company CIK: 1385613
Filing Year: 2023
Filename: 1385613_10-K_2023_0001385613-23-000012.json

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ITEM 1. BUSINESS
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 name
Greenlight Capital Re Greenlight Capital Re, Ltd.
Greenlight Re Greenlight Reinsurance, Ltd.
GRIL Greenlight Reinsurance Ireland, Designated Activity Company
Verdant Verdant Holding Company, Ltd.
Greenlight Re UK Greenlight Re Marketing (UK) Limited
Syndicate 3456 Greenlight Innovation Syndicate 3456
GCM Greenlight Re Corporate Member Ltd.
We have included a Glossary of Selected Reinsurance Terms at the end of “Part 1, Item 1. Business” of this Form 10-K.
Company Overview
Greenlight Capital Re is a holding company incorporated in July 2004 under the laws of the Cayman Islands. In August 2004, we raised gross proceeds of $212.2 million from private placements of Greenlight Capital Re’s Class A ordinary shares and Class B ordinary shares, or, collectively, the 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, and an additional $50.0 million from a private placement of Class B ordinary shares.
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. We conduct our operations through two licensed and regulated entities: Greenlight Re, based in the Cayman Islands, and GRIL, based in Dublin, Ireland. Greenlight Re provides multi-line property and casualty reinsurance globally, while GRIL focuses mainly on the European market. In 2022, Greenlight Innovation Syndicate 3456 (“Syndicate 3456”) commenced insurance operations under the Lloyd’s syndicate-in-a-box model, with Greenlight Re as the sole capital provider.
The London market specialty business is central to our underwriting portfolio. In 2020, we established a UK marketing Company, Greenlight Re UK, which has increased our London market presence and we expect it to facilitate continued growth in this market.
On January 1, 2023, we acquired a Lloyd’s corporate member, GCM, that provides underwriting capacity for various syndicates (including Syndicate 3456) that underwrite general insurance and reinsurance business at Lloyd’s. Prior to acquiring GCM, we sourced our Funds at Lloyd’s (“FAL”) business through the same corporate member. The ownership of GCM complements our Syndicate 3456 and provides us more control over the FAL business.
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.
We aim to complement our underwriting activities with a non-traditional investment approach designed to achieve higher rates of return over the long term than reinsurance companies that exclusively employ more traditional investment strategies. Our investment portfolio is managed by a value-oriented investment advisor that analyzes companies’ available financial data, business strategies, and prospects to identify undervalued and overvalued securities.
From time to time, we make long-term strategic investments in insurance companies and general agents to complement our strategy and strengthen our client relationships. In 2018, we launched our Greenlight Re Innovations unit, which supports technology innovators in the (re)insurance market by providing investment, risk capacity, and access to a broad insurance network. In certain instances, we utilize Verdant to facilitate strategic investments in property and casualty insurers, general agents, and other entities domiciled in the United States.
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Description of Business
Greenlight Re is licensed and regulated by the Cayman Islands Monetary Authority (“CIMA”) to write property and casualty reinsurance business as well as long-term business (e.g., life insurance, long-term disability, long-term care, etc.) To date, we have not written any long-term business. GRIL is licensed and regulated by the Central Bank of Ireland (“CBI”) to write property and casualty reinsurance business. Currently, we have one operating segment: property and casualty reinsurance. Within that segment, we employ a two-pillar strategy:
1. Traditional property and casualty reinsurance
We offer excess of loss and quota share products across a range of classes in the property and casualty market. Our underwriting approach varies by class and type of opportunity:
● Where our expertise is sufficient to evaluate the risk thoroughly, we will generally seek to participate in syndicated placements negotiated and priced by another party that we judge to have market-leading expertise in the class or as a quota share retrocessionaire of a market-leading reinsurer;
● Where we have domain-specific expertise and a high level of market access, we may seek to act as the lead underwriter to achieve greater influence in negotiating pricing, terms, and conditions.
2. Risk innovation and strategic partnerships
We seek to develop a range of risk products via strategic partnerships and other methods to access fee income, a stream of underwriting business, and investment upside potential. We refer to this pillar as Greenlight Re Innovations (“Innovations”).
In evaluating Innovations opportunities, we generally ensure that each investment meets at least one of the following criteria:
● The value we add to a partnership is derived primarily from the application of our risk expertise, not solely capital or reinsurance support;
● The partnership adds expertise to our company in specific risk areas, technology, product innovation, or other areas;
● The partnership approach provides access to a pool of capital, products, or distribution;
● Overall, the partnership approach creates a combined effort that generates a durable strategic or competitive position in one or more markets and increases our opportunities to achieve revenue growth and margin expansion.
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 strategies 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 focused mainly on long and short positions, primarily in publicly-traded equity and corporate debt instruments.
We measure our success by long-term growth in book value per share, which we believe is the most comprehensive gauge of our performance. Accordingly, we have incorporated a metric based on growth in book value per share in our incentive compensation plan to align employee and shareholder interests.
The size and diversification of our underwriting portfolio will vary based on our perception of the opportunities available in each line of business at each point in time. As our focus on certain lines fluctuates based on market conditions, we may only offer or underwrite a limited number of lines in any given period. We seek to:
● target markets and lines of business where we believe an appropriate risk/reward profile exists;
● attract and retain clients with expertise in their respective lines of business;
● employ strict underwriting discipline; and
● select reinsurance opportunities with anticipated favorable returns on capital.
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The following table sets forth our gross premiums written by line of business, further broken down by class of business:
Year ended December 31
2022 2021 2020
($ in thousands)
Property
Commercial $ 14,750 2.6 % $ 10,853 1.9 % $ 11,190 2.3 %
Motor 2,346 0.4 29,953 5.3 33,054 6.9
Personal 68,227 12.2 12,141 2.1 14,219 3.0
Total Property 85,323 15.2 52,947 9.4 58,463 12.2
Casualty
General Liability 60,276 10.7 18,037 3.2 4,228 0.9
Motor Liability 8,601 1.6 118,251 20.9 127,379 26.5
Professional Liability 1,921 0.3 316 0.1 204 -
Workers' Compensation 28,381 5.0 62,188 11.0 82,189 17.1
Multi-line 225,924 40.1 180,321 31.9 88,237 18.4
Total Casualty 325,103 57.7 379,113 67.1 302,237 63.0
Other
Accident & Health 8,947 1.6 31,612 5.6 56,284 11.7
Financial 66,528 11.8 66,612 11.8 23,231 4.8
Marine 22,700 4.0 10,652 1.9 770 0.2
Other Specialty 54,570 9.7 24,457 4.3 38,806 8.1
Total Other 152,745 27.1 133,333 23.6 119,091 24.8
$ 563,171 100.0 % $ 565,393 100.0 % $ 479,791 100.0 %
The following table sets forth our gross premiums written by the geographic area of the risk insured:
Year ended December 31
2022 2021 2020
($ in thousands)
U.S. and Caribbean $ 295,428 52.4 % $ 316,015 55.9 % $ 390,000 81.3 %
Worldwide (1)
242,561 43.1 240,285 42.5 84,204 17.5
Asia
20,334 3.6 4,609 0.8 5,587 1.2
Europe
4,848 0.9 4,484 0.8 - -
$ 563,171 100.0 % $ 565,393 100.0 % $ 479,791 100.0 %
(1) “Worldwide” comprises contracts that reinsure risks in more than one geographic area and may include risks in the U.S.
Additional information about our business is set forth in “Part II, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Marketing and Distribution
Business transacted using intermediaries
We source a majority of our business through reinsurance brokers. Brokerage distribution channels provide us with access to an efficient, variable cost and global distribution system. In some cases, intermediaries also provide other services, including risk analytics, processing, and clearing.
We aim to build and strengthen long-term relationships with global reinsurance brokers. Our management team has relationships with most primary and specialty broker intermediaries in the reinsurance marketplace. By maintaining close
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relationships with brokers, we believe that we will continue to obtain access to a broad range of reinsurance clients and opportunities.
We seek to strengthen our broker relationships and become the preferred choice of brokers and clients by providing, where applicable:
● demonstrated expertise in the underlying reinsured exposures and the operation of the contracts;
● rapid responses to risk submissions;
● timely claims payments;
● customized solutions that address the specific business needs of our clients;
● financial security; and
● a clear indication of risks we will and will not underwrite.
We focus on the quality and financial strength of any brokerage firm we conduct business with. Brokers do not have the authority to bind us to any reinsurance contract. Their commissions are generally determined based on a percentage of gross premiums written.
We rely on a small number of broker relationships, which has continued to decrease in recent years as a result of consolidation in the broker sector. In 2022, five brokerage firms accounted for 69.4% of our gross premiums written. The following table sets forth the premiums generated through our largest brokers and their subsidiaries and affiliates:
Year ended December 31
($ in thousands)
Aon Benfield $ 159,421 28.3 %
Gallagher Re 91,239 16.2
BMS Group 51,435 9.1
Guy Carpenter (Marsh) 50,626 9.0
Howden 38,376 6.8
Total of largest brokers 391,097 69.4
All other brokers and direct placements 172,074 30.6
Total $ 563,171 100.0 %
We frequently meet in the Cayman Islands, Ireland, U.K. and elsewhere with brokers and senior representatives of clients and prospective clients. We review and (when we deem appropriate) approve all contract submissions in the Cayman Islands or Ireland. Due to our dependence on brokers, the inability to obtain business from them could adversely affect our business strategy. See “Item 1A. Risk Factors - Risks Related to Our Business - The inability to obtain business provided from brokers could materially and adversely affect our business, financial condition and results of operations.” We may assume a degree of the credit risk of our reinsurance brokers. See “Item 1A. Risk Factors - Risks Related to Our Business - We are subject to the credit risk of our brokers, cedents, agents and other counterparties.”
While most of our business is sourced through reinsurance brokers, we also write some insurance and reinsurance business on a direct basis. Our Innovations partnerships are a growing source of directly placed business.
Our FAL business, which represented approximately one third of our gross written premiums in the 2022 fiscal year, was generated through a Lloyd’s corporate member, which we subsequently acquired effective January 1, 2023.
We may also selectively delegate underwriting authority to managing general agents to transact business within the constraints of prescribed underwriting guidelines. We expect to delegate underwriting authority primarily relating to Syndicate 3456, and sporadically through carefully selected managing agents.
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Underwriting and Risk Management
We have established an underwriting platform composed of experienced underwriters and actuaries. We have underwriting operations in three locations: the Cayman Islands, Dublin, Ireland, and London, U.K. These platforms provide access to key markets in the U.S. and Europe. Our experienced team allows us to deploy our capital in various lines of business and capitalize on opportunities that we believe offer favorable returns on equity over the long term. Our underwriters and actuaries have expertise in multiple lines of business. We generally apply the following underwriting and risk management principles:
Economics of Results
Our primary underwriting goal is to build a (re)insurance portfolio that maximizes profitability, subject to risk and volatility constraints.
Underwriting Analysis
Our approach to underwriting analysis begins at the class-of-business level. This analysis includes identifying and assessing the structural drivers of risk and emerging loss trends and understanding the market participants and results, capacity conditions for supply and demand, and other factors. Our underwriting professionals specialize in business lines, and our quantitative professionals assist in evaluating all risks we underwrite. Combined with cross-line management, we believe this approach enables us to build and deploy expertise and insight into the business line’s risk dynamics and external factors that will affect each transaction.
We assign a deal team composed of underwriting and quantitative professionals to evaluate each potential transaction’s pricing and structure. Before committing capital to any transaction, the deal team and the regional Chief Underwriting Officer must obtain approval from the Chief Executive Officer. In seeking this approval, the deal team presents the key components of the proposed transaction, including assumptions and threats, market and individual deal risk factors, market capacity dynamics, transaction structure and pricing, maximum downside, and other factors.
We collaborate with our current and prospective clients and brokers to understand the risks associated with each potential transaction. For most of our business, we follow terms set by recognized market leads. We consider the remainder of our underwriting portfolio, including contracts linked to our Innovations partners or in areas where we have significant market expertise, to be “lead business.” When underwriting lead business, we generally structure the reinsurance agreements to ensure that our cedents’ interests and ours are aligned. Where appropriate, we conduct or contract for on-site audits or reviews of the clients’ underwriting files, systems, and operations. We usually obtain substantial 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’s 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 and its management and underwriting teams;
● the reputation and expertise of the broker; and
● reports provided by independent industry specialists.
We develop proprietary quantitative models and use several commercially available tools to price our business. Our models consider conventional underwriting and risk metrics and incorporate various class-specific and market-specific aspects from our line-of-business analyses. We use models to evaluate the quantitative work’s quality and predictive power and undertake a detailed assessment of the data quality.
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Underwriting Authorities
The Underwriting Committee of our Board of Directors (the “Underwriting Committee”) sets parameters for aggregate property catastrophic caps and limits for maximum loss potential under any individual contract. The Underwriting Committee must approve any exceptions to the established limits. The Underwriting Committee may amend the maximum underwriting authorities periodically to align with our capital base. The Underwriting Committee designs our underwriting authorities to ensure the underwriting portfolio is appropriate on a risk-adjusted basis.
Retrocessional Coverage
We opportunistically purchase retrocessional coverage for one or more of the following reasons: to manage our overall catastrophe events or aggregate exposure, reduce our net liability on individual risks, obtain additional underwriting capacity, and balance our underwriting portfolio.
The retrocessional coverage we purchase varies based on numerous factors, including the inherent volatility and risk accumulation of our underwriting portfolio and capital base. Our portfolio, and by extension our gross risk position, will change in size from year to year depending on market opportunities, so it is difficult to predict the level of retrocessional coverage that we will purchase in any future year.
We generally purchase uncollateralized retrocessional coverage from reinsurers with a minimum financial strength rating of “A- (Excellent)” from A.M. Best Company, Inc. (“A.M. Best”) or an equivalent rating from a recognized rating service. For lower-rated or non-rated reinsurers, we endeavor to obtain and monitor collateral in the form of cash, funds withheld, letters of credit, regulatory trusts, or other collateral in the form of guarantees. At December 31, 2022, the aggregate amount due from reinsurers from retrocessional coverages represented 2.4% (2021: 2.1%) of our gross loss reserves. For further details, please see Note 8 to the consolidated financial statements. We regularly evaluate the financial condition of our reinsurers to assess their ability to honor their obligations. At December 31, 2022, the Company had recorded an allowance for expected credit losses from retrocessionaires of $0.4 million (2021: $0.1 million).
Claims Management
Our claims management process begins upon receiving claims notifications from our clients or third-party administrators. We review reserving and settlement authority under the individual contract requirements and, as necessary, discuss with the contract’s underwriter. Our in-house claims officer oversees claims reviews and approves complex or large claim settlements. Claims above the claims officer’s authority are referred to the General Counsel or Chief Financial Officer, together with the claims officer’s recommendations, for secondary approval. Our Chief Executive Officer must approve claim payments above a certain threshold. We believe that this process ensures that we pay claims in accordance with each contract's terms and conditions.
Where appropriate, we conduct or contract for on-site claims audits at cedents and third-party administrators, particularly for large accounts, Innovations partners, and those whose performance differs from our expectations. Through these audits, we evaluate and monitor the third-party administrators’ and the ceding companies’ organization and claims-handling practices. These practices include:
•fact-finding and investigation techniques;
•loss notifications;
•reserving;
•claims negotiation and settlement;
•adherence to claims-handling guidelines.
We recognize that the fair interpretation of our reinsurance agreements and timely payment of covered claims are essential components of the service we provide to our clients.
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Reserves
Our reserving philosophy is to set reserves at the level representing our best estimate of the amount we will ultimately be required to pay in connection with risks we have underwritten. Our actuarial staff performs quarterly reviews of our portfolio and provides reserving estimates according to our stated reserving philosophy. In doing so, our actuarial staff groups our portfolio into reserving analysis segments based primarily on homogeneity considerations. Currently, this process involves analysis at the individual client or transaction level.
We engage independent external actuaries who review and provide opinions on these reserve estimates at least once a year. Due to the use of different assumptions and loss experience, the amount we establish as reserves with respect to individual risks, clients, transactions, or business lines may be greater or less than those set by our clients or ceding companies. Reserves include claims reported but not yet paid, claims incurred but not reported, and claims in the process of settlement. Additional underwriting liabilities include unearned premiums, premium deposits, and profit commissions earned but not yet paid.
Reserves represent an estimate rather than an exact quantification. Although the methods for establishing reserves are well established, many assumptions about anticipated loss emergence patterns are subject to unanticipated fluctuation. We base our estimates on our assessment of facts and circumstances, future trends in claim severity and frequency, judicial theories of liability, and other factors, including inflation, interest rate changes, political risks and the actions of third parties, which are beyond our control. See Note 7 of the accompanying consolidated financial statements for a reconciliation of claims reserves, loss development tables by accident year, and explanations of significant prior period loss development movements. See “Item 1A. Risk Factors - Risks Relating to Our Business - If our losses and loss adjustment expenses greatly exceed our loss reserves, our financial condition may be materially and adversely affected.”
Collateral Arrangements and Letter of Credit Facilities
We are licensed and admitted as a reinsurer only in the Cayman Islands and the European Economic Area (the “EEA”). Many jurisdictions, including the United States, do not permit clients to take credit for reinsurance on their statutory financial statements if they obtain such reinsurance from unlicensed or non-admitted insurers without appropriate collateral. As a result, our U.S. clients and some non-U.S. clients require us to provide collateral for the contracts we bind with them. We provide collateral as funds withheld, trust arrangements, or letters of credit. At December 31, 2022, we had one letter of credit facility with a limit of $275.0 million (2021: $275.0 million). At December 31, 2022, we had issued letters of credit totaling $203.9 million (2021: $136.8 million) to clients. Additionally, at December 31, 2022, we had pledged $463.7 million (2021: $497.1 million) as collateral through trust arrangements.
Competition
The reinsurance industry is highly competitive. We compete with major reinsurers, most of which are well-established and have significant operating histories, strong financial strength ratings, and long-standing client relationships.
Our competitors vary according to the individual market and situation. Generally, they include Arch Capital, Axis, Everest Re, Hamilton Re, Hannover Re, RenaissanceRe, SiriusPoint, and smaller companies, other niche reinsurers, and Lloyd’s syndicates and their related entities. Although we seek to provide coverage where capacity and alternatives are limited, we directly compete with these and other larger companies due to the breadth of their coverage across the property and casualty market in substantially all lines of business. See “Item 1A - Risk Factors - Risks Relating to Our Business - Competitors with greater resources may make it difficult for us to effectively market our products or offer our products at a profit.”
Ratings
Our current “A- (Excellent)” rating with a stable outlook from A.M. Best is the fourth highest of 13 ratings. We believe a strong rating is important in marketing reinsurance products to clients and brokers. These ratings reflect the rating agency’s opinion of our reinsurance subsidiaries’ financial strength, operating performance, and ability to meet obligations. It is not an evaluation directed toward the investors’ protection or a recommendation to buy, sell or hold our Class A ordinary shares.
The failure to maintain a strong rating may significantly and negatively affect our ability to implement our business strategy. See “Item 1A. Risk Factors - Risks Relating to Our Business - A downgrade or withdrawal of our A.M. Best ratings would materially and adversely affect our ability to implement our business strategy.”
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Regulations
Cayman Islands Insurance Regulation
The legislative framework for conducting insurance and reinsurance business in and from within the Cayman Islands is composed of The Insurance Act, 2010 (as amended) and underlying regulations thereto (the “Act”), which became effective in the Cayman Islands on November 1, 2012.
Greenlight Re holds a Class D insurer license issued in accordance with the terms of the Act and is subject to regulation and supervision by CIMA.
As the holder of a Class D insurer license, Greenlight Re is permitted to carry on reinsurance business from the Cayman Islands but, except with the prior written approval of CIMA, may not carry on any insurance or reinsurance business where the underlying risk originates and resides in the Cayman Islands.
Greenlight Re is required to comply with the following principal requirements under the Act:
● to maintain capital and a margin of solvency in accordance with the capital and solvency requirements prescribed by the Act;
● to carry on its business in accordance with its business plan and the laws of the Cayman Islands, including the regulatory laws, regulations, rules, and statements of guidance, where applicable;
● to maintain adequate arrangements, including internal controls, for the management of risks and a system of governance as approved by CIMA;
● to maintain a minimum of at least two directors and 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 have a place of business in the Cayman Islands and to maintain such resources, including staff and facilities, books and records as CIMA considers appropriate, having regard for the nature and scale of the business of Greenlight Re;
● to submit to CIMA an annual return in the prescribed form together with:
- financial statements prepared in accordance with internationally recognized accounting standards, audited by an independent auditor approved by CIMA;
- an actuarial valuation of Greenlight Re’s assets and liabilities, certified by an actuary approved by CIMA;
- certification of solvency prepared by a person approved by CIMA in accordance with the prescribed requirements;
- confirmation that the information contained in Greenlight Re’s license application, as modified by any subsequent changes, remains correct and up to date;
- such other information as may be prescribed by CIMA; and
● to pay an annual license fee.
It is the duty of CIMA:
● to maintain a general review of insurance practices in the Cayman Islands;
● to examine the affairs or business of any licensee or other person carrying on, or who has carried on, insurance business to ensure that the Act has been complied with and that the licensee is in a sound financial position and is carrying on its business in a fit and proper manner;
● to examine and report on the annual returns delivered to CIMA in terms of the Act; 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.
Greenlight Re is also required to comply with, amongst other standards, the Rule on Corporate Governance for Insurers, the Rule on Risk Management for Insurers, and the Rule on Investment Activities for Insurers and the associated Statement of Guidance. Respectively, these rules require regulated insurers to establish and maintain (a) a corporate governance framework that provides for the sound and prudent management and oversight of the insurer's business, including outsourcing and internal controls, and which adequately recognizes and protects the interests of its policyholders, and (b) a risk management framework that is capable of promptly identifying, measuring, assessing, reporting, monitoring and controlling all sources of risks that could have a material impact on its operations, and (c) implement investment activities that consider all of Greenlight Re’s risks and solvency requirements.
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The Act provides that where CIMA believes a licensee is committing, or is about to commit or pursue, an act that is an unsafe or unsound business practice, CIMA may direct the licensee to cease or refrain from committing the act or pursuing the offending course of conduct. Failure to comply with such a CIMA direction may be punishable on summary conviction by a fine of up to 100,000 Cayman Islands dollars (approximately US$120,000) or to imprisonment for a term of five years or to both, and on conviction on indictment to a fine of 500,000 Cayman Islands dollars (approximately US$600,000) or to imprisonment for a term of ten years or to both and to an additional 10,000 Cayman Islands dollars (approximately US$12,000) for every day after conviction that the breach continues.
The Monetary Authority Act (“MAA”) also provides CIMA with the authority to impose administrative fines on licensees. The recent Monetary Authority (Administrative Fines) (Amendment) Regulations, 2020 (the “Amendment Regulations”) came into force on 26 June 2020. They extended the scope of the fines CIMA may impose for breaches of a range of regulatory laws, including the Act. Breaches are categorized as minor, serious, or very serious, and, depending on the category of the breach, fines range from US$6,100 to US$1,220,000 per breach for very serious breaches. Where a breach is committed by a corporate entity and is shown to have been committed with the consent, connivance, knowledge, or neglect of an individual, that individual may also be subject to an administrative fine.
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 the interests of its creditors or policyholders, has contravened the terms of the Act or has otherwise behaved in such a manner to cause CIMA to call into question the licensee’s fitness, CIMA may take one of several steps. The steps include requiring the licensee 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 Cayman Islands exempted companies, Greenlight Capital Re and Greenlight Re may not carry on business or trade locally in the Cayman Islands except in furtherance of their business outside the Cayman Islands and are prohibited from soliciting the public of the Cayman Islands to subscribe for any of their securities or debt. Both these companies are further required to file a return with the Registrar of Companies in January of each year (“Annual Return”) and to pay an annual registration fee at that time.
Economic substance law requiring a “relevant entity” conducting “relevant activity” to file notifications and, unless exempt, to report to the Tax Information Authority (“TIA”) and maintain economic substance has been introduced in the Cayman Islands.
The International Tax Co-operation (Economic Substance) Act (2020 Revision) and International Tax Co-operation (Economic Substance) Regulations, 2020, were published on January 14, 2020, and August 11, 2020, respectively, and subsequently amended (together, the “ES Act”). The latest version of the Guidance on Economic Substance for Geographically Mobile Activities (“ES Guidance”) was published in July 2022.
Commencing January 2020, Greenlight Capital Re and Greenlight Re are required to confirm their economic substance classification and submit this classification to the TIA as a prerequisite to the Annual Return filing.
The Cayman Islands has no exchange controls restricting dealings in currencies or securities.
Ireland Insurance Regulations
Our Irish subsidiary, GRIL, is authorized as a non-life reinsurance undertaking by the CBI in accordance with the European Union (Insurance and Reinsurance) Regulations 2015 (the "Irish Regulations"). The Irish Regulations give effect in Ireland to EU Directive 2009/138/EC (known as "Solvency II"), which introduced a new European regulatory regime for insurers and reinsurers with effect from January 1, 2016. Solvency II is supplemented by the European Commission Delegated Regulation (EU) 2015/35, other European Commission “delegated acts” and binding technical standards, and guidelines issued by the European Insurance and Occupational Pensions Authority (“Delegated Acts and Guidelines”). GRIL is required to comply at all times with the Irish Regulations, the Irish Insurance Acts 1909 to 2018, regulations relating to insurance business or reinsurance business promulgated under the European Communities Act 1972, the Irish Central Bank Acts 1942 to 2018 as amended, regulations promulgated thereunder and directions, guidelines and codes of conduct issued by CBI (collectively the
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“Irish Insurance Acts and Regulations”). In addition, GRIL is required to comply with the Delegated Acts and Guidelines and must meet risk-based solvency requirements imposed under Solvency II on insurers and reinsurers across all member states, including Ireland. Solvency II and the Delegated Acts and Guidelines set out classification and eligibility requirements, including the characteristics that capital, including any capital contribution, must display to qualify as regulatory capital.
GRIL is also required to comply with the European Union (Insurance Distribution) Regulations 2018 (the "2018 Regulations"), which apply to distributors of insurance and reinsurance products (including insurers and reinsurers). The 2018 Regulations give effect in Ireland to Directive (EU) 2016/97 (known as the "IDD") and strengthen the regulatory regime applicable to distribution activities through increased transparency, information, and conduct requirements. On May 25, 2018, the General Data Protection Regulation (the "GDPR") came into force across the EU. The GDPR significantly increases organizations’ obligations and responsibilities in collecting, using, storing, and protecting personal data. Organizations in breach of the GDPR may incur sizable financial penalties up to, the higher of €10 million or 4% of annual global turnover.
UK Regulations
Lloyd’s Oversight
Syndicate 3456 is subject to oversight by Lloyd’s, substantially effected through the Lloyd’s Council. Our business plan for Syndicate 3456, including maximum underwriting capacity, requires annual approval by Lloyd’s. Lloyd’s may require changes to any business plan presented to it or additional capital to be provided to support the underwriting plan. We have deposited certain assets with Lloyd’s to support GCM’s underwriting business at Lloyd’s.
By entering into a membership agreement with Lloyd’s, GCM has undertaken to comply with all Lloyd’s by-laws and regulations as well as the provisions of the Lloyd’s Acts and the Financial Services and Markets Act 2000, as amended by the Financial Services Act 2012. This arrangement subjects us to the following:
● Capital Requirements. The underwriting capacity of a member of Lloyd’s must be supported by providing a deposit, referred to as “Funds at Lloyd’s” or “FAL,” in an amount determined on the basis of such entity’s solvency and capital requirements. The amount of such deposit is calculated for each member through the completion of an annual capital adequacy exercise. In addition, if the FAL are not sufficient to cover all losses, the Lloyd’s Central Fund provides an additional level of security for policyholders. Dividends from a Lloyd’s managing agent and a Lloyd’s corporate member can be declared and paid provided the relevant company has sufficient profits available for distribution.
● Ratings. The financial security of the Lloyd’s market as a whole is regularly assessed by three independent rating agencies (A.M. Best, S&P and Fitch). Syndicates at Lloyd’s take their financial security rating from the rating of the Lloyd’s market. A satisfactory credit rating issued by an accredited rating agency is necessary for Lloyd’s syndicates to be able to trade in certain classes of business at current levels.
● Intervention Powers. The Lloyd’s Council has wide discretionary powers to regulate members’ underwriting at Lloyd’s, including, the power to withdraw a member’s permission to underwrite business or to underwrite a particular class of business and to change the basis on which syndicate expenses are allocated.
● Assessments. If Lloyd’s determines that the Central Fund needs to be increased, it has the power to assess premium levies on current Lloyd’s members up to 5% of a member’s underwriting capacity in any one year.
PRA and FCA Regulation.
The Prudential Regulation Authority (“PRA”) and the Financial Conduct Authority (“FCA”) regulate all financial services firms in the U.K. including the Lloyd’s market, and Syndicate 3456, and have substantial powers of intervention in relation to regulated firms. Lloyd’s is required to implement certain rules prescribed by the PRA and the FCA. If it appears to either the PRA or the FCA that either Lloyd’s is not fulfilling its delegated regulatory responsibilities or that managing agents are not complying with the applicable regulatory rules and guidance, the PRA or the FCA may intervene at their discretion.
Lloyd’s is subject to an annual PRA solvency test which measures whether Lloyd’s has sufficient assets in the aggregate to meet all outstanding liabilities of its members, both current and run-off. If Lloyd’s fails this test, the PRA may require the entire Lloyd’s market to cease underwriting or individual Lloyd’s members may be required to cease or reduce their underwriting.
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Overview of Investments
Our investment portfolio is managed by DME Advisors, LP (“DME Advisors”), a value-oriented investment advisor that analyzes companies’ available financial data, business strategies, and prospects 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.
We have entered into an amended and restated exempted limited partnership agreement (the “SILP LPA”) of Solasglas Investments, LP (“SILP”), with DME Advisors II, LLC (“DME II”), as General Partner, Greenlight Re, GRIL and the initial limited partner (each, a “Partner”). We present our investment in SILP under the caption “Investment in related party investment fund” in our consolidated balance sheets.
On September 1, 2018, SILP entered into an investment advisory agreement (the “IAA”) with DME Advisors, with an initial term ending on August 31, 2023, subject to automatic extensions for successive three-year terms. DME Advisors has the contractual right to manage substantially all of our investable assets and is required to follow our investment guidelines and act in a fair and equitable manner in allocating investment opportunities to SILP. However, DME Advisors is not otherwise restricted with respect to the nature or timing of making investments for SILP.
On February 26, 2019, effective as of September 1, 2018, we entered into Amendment No. 1 to the SILP LPA. The
amendment revised the mechanics for calculating the Carryforward Account and Performance Allocation (as defined in the SILP LPA) to consider withdrawals from and subsequent recontributions of capital to SILP. On January 7, 2021, effective as of January 1, 2021, we entered into a second amended and restated SILP LPA, which amended (a) the definition of “Additional Investment Ratio” and (b) each of the defined terms “Greenlight Re Surplus” and “GRIL Surplus.” The amendment to the SILP LPA also incorporated the requirement that the Investment Portfolio, as defined in the SILP LPA, will not exceed 50% of GLRE Surplus. Effective January 1, 2023, we amended the SILP LPA to increase the maximum Investment Portfolio to 60% of GLRE Surplus.
DME Advisors receives a monthly management fee at an annual rate of 1.5% of each limited partner’s Investment Portfolio, as provided in the SILP LPA. DME II receives a performance allocation based on the positive performance change of each limited partner’s capital account equal to 20% of net profits calculated per annum, subject to a loss carryforward provision.
The loss carryforward provision allows DME II to earn a reduced performance allocation of 10% on net profits in any year after the year in which a limited partner’s capital account incurs a loss until the limited partner has recouped all losses and has earned an additional amount equal to 150% of the loss. DME II is not entitled to a performance allocation in a year in which a capital account incurs a loss.
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 and SILP. However, the IAA does not otherwise impose any specific obligations or requirements concerning the allocation of time, effort, or investment opportunities to us and SILP or any restrictions on the nature or timing of investments for our or SILP’s account or other accounts that DME Advisors or its affiliates may manage. DME Advisors can outsource to sub-advisors without our consent or approval. If DME Advisors and any of its affiliates attempt to invest in the same opportunity simultaneously, DME Advisors and its affiliates may allocate the opportunity as they determine reasonably. Affiliates of DME Advisors presently serve as the general partner or the investment advisor of Greenlight Capital, LP, Greenlight Capital Offshore Qualified, Ltd., GCOQ Intermediate, LP, Greenlight Capital Offshore Partners, Ltd., Greenlight Capital Investors, LP, Greenlight Capital Offshore Investors, Ltd., GCOI Intermediate, LP, Greenlight Capital Offshore Master, Ltd., Greenlight Masters, LP, Greenlight Masters Qualified, LP, Greenlight Masters Offshore, Ltd., Greenlight Masters Offshore I, Ltd., Greenlight Masters Offshore Partners and Greenlight Masters Partners (collectively, the “Greenlight Funds”).
We have agreed to use commercially reasonable efforts to cause all our current and future subsidiaries to enter into the SILP LPA. Under the SILP LPA, we are contractually obligated to use commercially reasonable efforts to cause substantially all investable assets of Greenlight Re and GRIL, with limited exceptions, to be contributed to SILP.
We have agreed to release DME II and DME Advisors and their affiliates from any liability arising out of the IAA or the SILP LPA, subject to certain exceptions. Furthermore, DME II has agreed to indemnify us against any liability incurred in connection with certain actions.
Under the SILP LPA, either GLRE Limited Partner may voluntarily withdraw all or part of its capital account for its operating needs by giving DME II at least three business days’ notice. Either of the GLRE Limited Partners may withdraw as a
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partner and fully withdraw all of its capital account from SILP on three business days’ notice if the limited partner’s board declares that a cause for withdrawal exists as per the SILP LPA.
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 returns 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 would not be achieved, the volatility of the cash flows, the leverage of the underlying business, and the security’s liquidity, among others.
Our Board of Directors reviews our investment portfolio activities and oversees our investment guidelines to meet our investment objectives. We believe our investment approach, while generating returns less predictable than those of traditional fixed-income portfolios, 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. We have designed our investment guidelines to maintain adequate liquidity to fund our reinsurance operations.
DME Advisors is contractually obligated to adhere to our investment guidelines and make investment decisions on our behalf. These decisions may include buying publicly listed equity securities and corporate debt, selling securities short, and investing in private placements, futures, currencies, commodities, credit default swaps, interest rate swaps, sovereign debt, derivatives, and other instruments.
Investment Guidelines
The investment guidelines adopted by the respective Boards of Directors of Greenlight Re and GRIL, which may be amended, modified, or waived 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.
At the date hereof, Greenlight Re’s investment guidelines, which Greenlight Re’s board of directors may amend at any time, are as follows:
● Composition of Investments: At least 80% of the assets in its Investment Portfolio (as defined in the SILP LPA) will be held in debt or equity securities (including swaps) of publicly-traded companies (or their subsidiaries), governments of the Organization of Economic Co-operation and Development high-income countries, cash, cash equivalents, and gold. No more than 10% of Greenlight Re Surplus (as defined in the SILP LPA) will be held in private equity securities.
● Concentration of Investments: Other than cash, cash equivalents, United States government obligations, and gold, no single investment in its Investment Portfolio will constitute more than 10% of Greenlight Re Surplus.
● Liquidity: Assets will be invested in such fashion that Greenlight Re has a reasonable expectation that it can meet any of its liabilities as they become due. Greenlight Re will review with the Investment Advisor the liquidity of the portfolio on periodic basis.
● Monitoring: Greenlight Re will require the Investment Advisor to re-evaluate each position in its Investment Portfolio and to monitor changes in intrinsic value and trading value and provide monthly reports on its Investment Portfolio to Greenlight Re as Greenlight Re may reasonably determine.
● Leverage: No new investments to increase net long exposure shall be made when Greenlight Re’s pro-rata share of Assets (excluding cash equivalents) exceeds its Investment Portfolio. In any event, Greenlight Re’s pro-rata share of Assets (excluding cash equivalents) may not exceed 110% of its Investment Portfolio.
● Currency hedging activities are excluded from leverage calculations. In addition to currency hedging, where the Investment Advisor enters into a secondary investment with the primary purpose of reducing the risk of another existing investment, then the investment advisor may exclude the secondary investment from the calculation of leverage provided that the Investment Advisor receives approval from Greenlight Re’s Chief Financial Officer. Such authority is limited such that no more than 10% of gross exposure may be excluded from leverage calculations and may be netted from the primary investment for concentration limits.
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The investment guidelines for GRIL are identical to Greenlight Re’s except for (a) currency hedging guidelines, which do not apply to GRIL, and (b) Concentration of Investments and Credit default swaps, which for GRIL are as follows:
● Concentration of Investments: Other than cash, cash equivalents, and United States government obligations, (1) no single investment in its Investment Portfolio will constitute more than 7.5% of GRIL Surplus (as defined in the SILP LPA), (2) the ten largest investments shall not constitute greater than 40% of GRIL Surplus, and (3) its Investment Portfolio shall at all times be composed of a minimum of 50 debt or equity securities of publicly traded companies (or their subsidiaries).
● Credit default swaps: The sale of credit default swaps is prohibited.
At December 31, 2022, taking into account a waiver provided by the Board of Directors of Greenlight Re, relating to SILP’s concentration in a single investment, DME Advisors was in compliance with each of Greenlight Re’s and GRIL’s investment guidelines. See “Part I, Item 1A. Risk Factors - Risks Relating to Our Investment Strategy - SILP may be concentrated in a few large positions, which could result in investment volatility and large losses.”
Investment Results
Composition
The following table summarizes the investments as reported in the consolidated financial statements:
December 31
2022 2021
($ in thousands)
Investment in related party investment fund $ 178,197 71.7 % $ 183,591 79.5 %
Private investments and unlisted equities 62,433 25.1 47,049 20.4
Derivative financial instruments (not designated as hedging instruments) - - 335 0.1
Debt and convertible debt securities 1,846 0.8 - -
Certificates of deposit 6,000 2.4 - -
Total investments $ 248,476 100.0 % $ 230,975 100.0 %
DME Advisors reports the composition of SILP’s portfolio on a delta-adjusted basis, which it believes is the appropriate manner to assess the exposure and profile of investments and reflects how it manages the portfolio. An option’s delta is the option price’s sensitivity to the underlying stock (or commodity) price. The delta-adjusted basis is the number of shares or contracts underlying the option multiplied by the delta and the underlying stock (or commodity) price.
The following table represents the composition of SILP’s investments at December 31, 2022 and 2021:
December 31
2022 2021
Long % Short % Long % Short %
Debt instruments 0.6 % - % 1.1 % - %
Equities and related derivatives 84.4 49.7 79.1 45.0
Private and unlisted equity securities 3.2 - 4.0 -
Total 88.2 % 49.7 % 84.2 % 45.0 %
The above exposure analysis does not include cash (U.S. dollar and foreign currencies), gold and other commodities, credit default swaps, sovereign debt, foreign currency derivatives, interest rate options, and other macro positions. Under this methodology, a total return swap’s exposure is reported at its full notional amount. Options are reported at their delta-adjusted basis. At December 31, 2022, SILP’s exposure to gold on a delta-adjusted basis was 15.2% (2021: 8.1% ).
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The following table represents the composition of SILP by industry sector at December 31, 2022:
Sector Long % Short % Net %
Communication Services 0.9 % (3.9) % (3.0) %
Consumer Discretionary 29.8 (18.5) 11.3
Consumer Staples 0.8 (0.6) 0.2
Energy 13.0 (0.2) 12.8
Financial 13.8 (3.4) 10.4
Healthcare 6.8 (6.6) 0.2
Industrials 3.3 (4.2) (0.9)
Materials 7.6 - 7.6
Real Estate 0.3 (2.3) (2.0)
Technology 10.3 (9.7) 0.6
Utilities 0.3 (0.3) -
Other 1.3 - 1.3
Total 88.2 % (49.7) % 38.5 %
The following table represents the composition of our investments in SILP, by the market capitalization of the underlying security, at December 31, 2022:
Capitalization Long % Short % Net %
Mega Cap Equity (≥$25 billion) 12.6 % (14.8) % (2.2) %
Large Cap Equity (≥$10 billion and <$25 billion) 5.8 (9.3) (3.5)
Mid Cap Equity (≥$2 billion and <$10 billion) 43.5 (20.0) 23.5
Small Cap Equity (<$2 billion) 22.5 (5.6) 16.9
Debt Instruments 0.6 - 0.6
Other Investments 3.2 - 3.2
Total 88.2 % (49.7) % 38.5 %
Investment Returns
In accordance with the SILP LPA, DME Advisors constructs a levered investment portfolio as agreed with the Company (the “Investment Portfolio” as defined in the SILP LPA). Investment returns, net of all fees and expenses, by quarter for the last five years are as follows: (1)
Quarter 2022 2021 2020 2019 2018
1st 1.7 % 1.5 % (8.1) % 6.2 % (11.8)%
2nd 4.9 (0.9) 0.3 2.7 (3.8)
3rd 3.6 (2.7) 1.4 1.2 (8.4)
4th 13.4 9.9 8.4 (1.0) (10.2)
Full Year 25.3 % 7.5 % 1.4 % 9.3 % (30.3) %
(1) Investment returns are calculated monthly and compounded to calculate the quarterly and annual returns generated by our Investment Portfolio. Past performance is not necessarily indicative of future results. The monthly investment return is calculated by dividing the investment income/loss (net of fees and expenses) by the Investment Portfolio. Effective January 1, 2021, the Investment Portfolio is calculated on the basis of 50% of GLRE Surplus, or the shareholders’ equity of Greenlight Capital Re, Ltd., as reported in Greenlight Capital Re, Ltd.’s then most recent quarterly financial statements prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). It is adjusted monthly for the Company’s net profits and net losses as reported by SILP during any intervening period. This basis was increased to 60% effective January 1, 2023. Prior to January 1, 2021, the Investment Portfolio was calculated on the basis of several factors, including the Companies’ shares of SILP’s net asset value, collateral posted by the Companies, and the Companies’ net reserves.
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Internal Risk Management
Our Chief Risk Officer is responsible for constructing and reviewing our internal risk management function. A primary objective of our risk management function is to ensure that our underwriting efforts comply with explicitly stated underwriting appetites. We design these appetites to balance our risk position size with our expertise and the available margins while containing the cost of incorrectly assessing risks and rewards. In doing so, our risk management function designs, implements, and oversees a range of operational and underwriting controls to support the organization. We frequently review our investment and underwriting portfolios to assess the impact on capital under stressed scenarios. With the assistance of DME Advisors, we analyze our investment assets and liabilities, including the numerous risk components in our portfolio, such as concentration and liquidity risks.
Information Technology
We have most of our information technology infrastructure primarily at an off-site, secure data center hosted by Microsoft. We have increased our use of cloud-based services as the security and reliability have proven cost-effective and provide the high levels of service and redundancy required.
We have implemented backup procedures to ensure we save key data daily and that we can restore it promptly as needed.
We have a disaster recovery plan for our information technology infrastructure that includes data and system snapshots with restore points. We believe we can access our core systems with minor outages and restore our primary systems within our mean time to restore.
We protect our information systems with physical, electronic, and software safeguards considered appropriate by our management. We employ a specialist vendor to monitor our systems for security events and risks within our network. We regularly provide security risk awareness education and training to our staff. Despite these efforts, computer viruses, hackers, employee misuse or misconduct, and other internal or external hazards could expose our data systems to security breaches, cyber-attacks, or other disruptions. See “Item 1A. Risk Factors - Risks Related to Our Business - Operational risks, including human or systems failures, are inherent in our business.” and “- Technology breaches or failures, including those resulting from a malicious ransomware or cyber-attack on us or our business partners and service providers, could disrupt or otherwise negatively impact our business.”
Human Capital
At March 3, 2023, we had 48 full-time employees, 31 of whom were based in Grand Cayman, Cayman Islands, 12 in Dublin, Ireland, and 5 in London, United Kingdom. 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. We also engage consultants and contract with third parties, as needed, to provide additional resources to support our business activities.
We are committed to advancement and innovation through investing in our employees’ professional development. We have implemented an employee training and development policy to encourage our employees to take advantage of training and development opportunities.
We have designed our performance-driven compensation policy to attract and retain talent. We use short-term compensation composed of base salary and annual cash bonuses and long-term compensation composed of stock options, restricted share units, and restricted shares, as applicable, to align our employees’ and executive officers’ interests with those of our shareholders. In addition, from time to time and under certain circumstances, we award sign-on bonuses, retention bonuses, and other bonus opportunities. We also offer welfare benefits and other perquisites, including a defined contribution pension plan and medical insurance coverage for our employees. As part of our commitment to supporting our employees, we match any contributions made by our employees to charities and not-for-profit organizations.
We believe our employees are fairly compensated without regard to gender, race, and ethnicity. We believe in creating and maintaining a workplace free from discrimination and harassment. Each of our employees annually acknowledges complying with our Code of Business Conduct and Ethics, which provides employees with access to an anonymous whistleblower hotline to report any violations. Our Code of Business Conduct and Ethics is available on our website.
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Additional Information
Our website address is www.greenlightre.com, and we make available, free of charge, on or through our website, links to our annual reports on Form 10-K and 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. Information contained on our website is not incorporated by reference into this annual report.
Glossary of Selected Reinsurance Terms
Accident & Health insurance Insurance against loss by illness or bodily injury. Health insurance provides
coverage for medicine, visits to the doctor or emergency room, hospital stays, and
other medical expenses.
Acquisition costs Ceding commissions, profit commissions, brokerage fees, premium taxes, and other direct expenses relating directly to premium production.
Acquisition cost ratio The acquisition cost ratio is calculated by dividing net acquisition costs by net premiums earned.
Actuary A person professionally trained in the mathematical and technical aspects of insurance and related fields, particularly in calculating premiums, loss reserves, and other values.
Broker An intermediary who negotiates contracts of insurance or reinsurance, receiving a commission for placement and other services rendered, between (1) a policyholder and a primary insurer, on behalf of the policyholder, (2) a primary insurer and a reinsurer, on behalf of the primary insurer, or (3) a reinsurer and a retrocessionaire, on behalf of the reinsurer.
Capacity Capacity is the percentage of surplus that an insurer or reinsurer is willing or able to place at risk or the dollar amount of exposure it is willing to assume. Capacity may apply to a single risk, a program, a business line, or an entire book of business. Capacity may be constrained by legal restrictions, corporate restrictions, or indirect financial restrictions such as capital adequacy requirements.
Casualty reinsurance Casualty reinsurance is primarily concerned with the losses caused by injuries to third persons (persons other than the policyholder) and the legal liability imposed on the policyholder resulting therefrom. Casualty reinsurance includes but is not limited to workers’ compensation, automobile liability, and general liability. A greater degree of unpredictability is generally associated with casualty risks known as ‘‘long-tail risks,’’ where losses take time to become known, and a claim may be separated from the circumstances that caused it by several years. An example of a long-tail casualty risk includes the use of certain drugs that may cause cancer or birth defects. There tends to be a greater delay in the reporting and settlement of casualty reinsurance claims due to the long-tail nature of the underlying casualty risks and their greater potential for litigation.
Catastrophe A severe loss, typically involving multiple claimants. Common perils include earthquakes, hurricanes, tsunamis, hailstorms, tornados, derechos, severe winter weather, floods, fires, explosions, volcanic eruptions, and other natural or human-made disasters. Catastrophe losses may also arise from acts of war, acts of terrorism, and geopolitical instability.
Cede; cedent When a party reinsures its liability to another party, it ‘‘cedes’’ business to the reinsurer and is referred to as the ‘‘client.’’
Claim Request by an insured or reinsured for indemnification by an insurance or reinsurance company for loss incurred from an insured peril or event.
Client A party whose liability is reinsured by a reinsurer, also known as a cedent.
Combined ratio The combined ratio is the sum of the loss ratio, acquisition cost ratio, and underwriting expense ratio.
Composite ratio The composite ratio is the ratio of underwriting losses incurred, loss adjustment expenses, and acquisition costs, excluding underwriting-related general and administrative expenses, to net premiums earned, or equivalently, the sum of the loss ratio and acquisition cost ratio.
Corporate expenses Corporate expenses include those costs associated with operating as a publicly listed entity and an allocation of other general and administrative expenses.
Deposit assets and liabilities Assets (or liabilities) representing the consideration paid (or received) in connection with contracts that do not incorporate sufficient risk transfer to merit reinsurance accounting.
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Development The difference between the amount of reserves for losses and loss adjustment expenses initially estimated by an insurer or reinsurer and the amount re-estimated in an evaluation at a later date.
Excess of loss reinsurance Reinsurance that indemnifies the reinsured against all or a specified portion of losses above a specified dollar or percentage loss ratio amount.
Financial strength rating The opinion of rating agencies regarding an insurance or reinsurance company’s financial ability to meet its financial obligations under its policies.
Funds at Lloyd’s (FAL) Funds of an approved form that are lodged and held in trust at Lloyd's as security for a member’s underwriting activities. They comprise the member’s deposit, personal reserve fund, and special reserve fund. They may be drawn down if the member’s syndicate-level premium trust funds are insufficient to cover its liabilities. The amount of the deposit is related to the member's premium income limit and also the nature of the underwriting account.
Gross premiums written Total premiums for assumed reinsurance during a given period.
Health insurance Insurance against loss by illness or bodily injury. Health insurance covers medicine, visits to the doctor or emergency room, hospital stays, and other medical expenses.
Incurred but not reported (IBNR) Reserves for estimated loss and loss adjustment expenses incurred by insureds and reinsureds but not yet reported to the insurer or reinsurer, including unknown future developments on loss and loss adjustment expenses known to the insurer or reinsurer.
Lloyd’s Depending on the context, this term may refer to - (a) the society of individual and corporate underwriting members that insure and reinsure risks as members of one or more syndicates. Lloyd’s is not an insurance company; (b) the underwriting room in the Lloyd’s Building in which managing agents underwrite insurance and reinsurance on behalf of their syndicate members. In this sense, Lloyd’s should be understood as a marketplace; or (c) the Corporation of Lloyd’s, which regulates and provides support services to the Lloyd’s market.
Loss adjustment expenses (LAE) The expenses of settling claims, including legal and other fees, and the portion of general expenses allocated to claim settlement costs. Also known as claim adjustment expenses.
Loss ratio The loss ratio is calculated by dividing net loss and loss adjustment expenses incurred by net premiums earned.
Loss reserves and loss adjustment expense reserves Liabilities established by insurers and reinsurers to reflect the estimated cost of claims payments and the related expenses that the insurer or reinsurer will ultimately be required to pay in respect of insurance or reinsurance contracts it has written. Reserves are established for losses and loss adjustment expenses and consist of reserves established for individual reported claims and incurred but not reported losses.
Multi-line Contracts that cover more than one line of business.
Net financial impact The net impact of prior period loss development after taking into account net losses and loss expenses incurred, earned reinstatement premiums assumed and ceded, and adjustments to assumed and ceded acquisition costs and profit commissions.
Net premiums written An insurer’s gross premiums written, less premiums ceded to reinsurers.
Non-admitted insurers An insurer not licensed to do business in the jurisdiction in question. Also known as an unauthorized insurer and unlicensed insurer.
Premiums; written, earned, and unearned Premiums represent the cost of insurance paid by the cedent or insured to the insurer or reinsurer. Written represents the total amount of premiums received, and earned represents the amount recognized as income over a period of time. Unearned is the difference between written and earned premiums.
Probable maximum loss (PML) PML is the anticipated loss, taking into account contract terms and limits, caused by a natural catastrophe affecting a broad geographic area, such as that caused by an earthquake or hurricane.
Professional liability insurance Professional liability insurance protects a company and its representatives against legal claims arising from error or misconduct in providing or failing to provide professional services. This coverage includes errors and omissions policies, directors and officers coverage, and specialty coverage like employment practices liability insurance.
Profit commission A commission paid by a reinsurer to a ceding insurer based on a predetermined percentage of the profit realized by the reinsurer on the ceded business.
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Property insurance Property insurance covers a business’s building and its contents-money and securities, records, inventory, furniture, machinery, supplies, and even intangible assets such as trademarks-when damage, theft, or loss occurs.
Property catastrophe reinsurance Property catastrophe reinsurance contracts are typically ‘‘all risk’’ in nature, protecting against losses from natural and human-made catastrophes. Losses on these contracts typically stem from direct property damage and business interruption.
Proportional reinsurance All forms of reinsurance in which the reinsurer shares a proportional part of the original premiums and losses of the reinsured. In proportional reinsurance, the reinsurer generally pays the client a ceding commission. The ceding commission is generally based on the client’s cost of acquiring the business being reinsured (including commissions, premium taxes, assessments, and miscellaneous administrative expenses) and may include a profit component. Frequently referred to as quota-share reinsurance.
Quota-share reinsurance A form of proportional reinsurance in which the reinsurer assumes an agreed percentage of each underlying insurance contract being reinsured.
Reinstatement premium Premium charged for the reinstatement of the amount of reinsurance coverage to its full amount otherwise reduced as a result of a reinsurance loss payment.
Reinsurance An arrangement in which a reinsurer agrees to indemnify an insurance company, the client, against all or a portion of the insurance risks underwritten by the client under one or more policies. Reinsurance can provide a client with several benefits, including reducing net liability on individual risks and catastrophe protection from large or multiple losses. Reinsurance also provides a client with additional underwriting capacity by permitting it to accept larger risks and write more business than would be possible without a related increase in capital and surplus, and facilitates the maintenance of acceptable financial ratios by the client. Reinsurance does not legally discharge the client from its liability with respect to its obligations to the insured.
Reinsurer An insurance company that assumes part of the risk in exchange for part of the premium to a primary insurer.
Retrocession; retrocessional coverage A transaction whereby a reinsurer cedes to another reinsurer, commonly referred to as the retrocessionaire, all or part of the reinsurance that the first reinsurer has assumed. Retrocessional reinsurance does not legally discharge the ceding reinsurer from its liability with respect to its obligations to the reinsured.
Risk-free rate The interest rate on a riskless or safe asset, usually taken to be a short-term U.S. government security.
Risk transfer The shifting of all or a part of a risk to another party.
Severity business Insurance/reinsurance characterized by contracts containing the potential for significant losses emanating from one event.
Surety and fidelity insurance Surety and fidelity insurance includes (1) insurance guaranteeing the fidelity of persons holding positions of public or private trust; (2) insurance guaranteeing the performance of contracts other than insurance policies and guaranteeing and executing bonds, undertakings, and contracts of suretyship; and (3) insurance indemnifying banks, bankers, brokers, financial or moneyed corporations or associations against loss.
Underwriter An insurance or reinsurance company employee who examines, accepts, or rejects risks and classifies risks to charge an appropriate premium for each accepted risk.
Underwriting The process of evaluating, defining, and pricing reinsurance risks including, where appropriate, the rejection of such risks, and the acceptance of the obligation to pay the reinsured under the terms of the contract.
Underwriting expense Underwriting expenses include those expenses directly related to underwriting activities that are not eligible to be capitalized and an allocation of other general and administrative expenses.
Underwriting expense ratio The underwriting expense ratio includes those expenses directly related to underwriting activities and an allocation of other general and administrative expenses. Therefore, the underwriting expense ratio is the ratio of underwriting expenses to net premiums earned. The underwriting expense ratio also incorporates interest income and expenses from deposit-accounted contracts.
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Workers’ compensation insurance Workers’ compensation insurance provides medical, disability, and lost-wage benefits to employees for injuries and illness sustained in the course of their employment.
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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
The following risk factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.
Risk Factors Summary
The following is a summary of the principal risks that could adversely affect our business, operations, and financial results.
Risks Relating to Our Business
•Our results of operations fluctuate from period to period and may not be indicative of our long-term prospects.
•A downgrade or withdrawal of our A.M. Best ratings would materially and adversely affect our ability to implement our business strategy.
•If our losses and loss adjustment expenses greatly exceed our loss reserves, our financial condition may be materially and adversely affected.
•Our property and casualty reinsurance operations make us vulnerable to losses from catastrophes and may cause our results of operations to vary significantly from period to period.
•The inability to obtain business provided from brokers could materially and adversely affect our business, financial condition and results of operations.
Risks Relating to Insurance and Other Regulations
•Any suspension or revocation of any of our licenses would materially and adversely affect our business, financial condition and results of operations
•Our reinsurance subsidiaries are subject to minimum capital and surplus requirements, and our failure to meet these requirements could subject us to regulatory action.
•We are subject to the risk of possibly becoming an investment company under U.S. federal securities law.
•A failure by Syndicate 3456 to comply with rules and regulations could materially and adversely interfere with our business strategy.
Risks Relating to Our SILP Investment Strategy
•Our investment performance depends in part on the performance of SILP and may suffer as a result of adverse financial market developments or other factors that impact SILP’s liquidity, which could materially and adversely affect our investment results, financial condition and results of operations.
•SILP may be concentrated in a few large positions, which could result in material adverse valuation movements.
•Under the SILP LPA, we are contractually obligated to invest substantially all our assets in SILP with certain exceptions. SILP’s performance depends on the ability of DME Advisors to select and manage appropriate investments.
Risks Relating to Our Innovations Strategy
•The carry values of our Innovations investments may differ significantly from those that would be used if we carried these investments at fair value.
•Our Innovations investments support our underwriting operations and the failure to identify and consummate investment opportunities may materially and adversely affect our ability to implement our business strategy.
•Investments in privately held early-stage companies involve significant risks.
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Risks Relating to Our Class A Ordinary Shares
•Our level of debt may have an adverse impact on our liquidity, restrict our current and future operations, particularly our ability to respond to business opportunities, and increase our vulnerability to adverse economic and industry conditions.
•We may not be able to repay or refinance our convertible notes, pay interest on the convertible notes, or settle conversions of the convertible notes in cash or to repurchase the convertible notes upon a fundamental change, and our future debt, if any, may contain limitations on our ability to pay cash upon conversion or repurchase of the convertible notes.
•Provisions of our Articles, the Companies Act of the Cayman Islands (the “Companies Act”) and our corporate structure may each impede a takeover, which could adversely affect the value of our Class A ordinary shares.
Risks Relating to Taxation
•Greenlight Capital Re, Greenlight Re and/or GRIL may be subject to United States federal income taxation.
•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.
•The Tax Cuts and Jobs Act of 2017 (the “TCJA”) may cause us to undertake changes to the manner in which we conduct our business and could subject United States persons who own Class A ordinary shares to United States income taxation on our undistributed earnings.
•The impact of the initiative of the Organization for Economic Co-operation and Development (“OECD”) and the European Union (“EU”) to eliminate harmful tax practices is uncertain and could adversely affect our tax status in the Cayman Islands, where we are exempt from income taxes.
Additional details relating to the above and other risk factors are described below:
Risks Relating to Our Business
Our results of operations fluctuate from period to period and may not be indicative of our long-term prospects.
Our results of operations fluctuate from period to period due to a variety of factors, including:
● our assessment of the quality of available reinsurance and renewal opportunities;
● loss experience on our reinsurance contracts;
● reinsurance contract pricing;
● the volume and mix of reinsurance products we underwrite; and
● our ability to assess and integrate our risk management strategy.
In addition, our SILP investment strategy and Innovations investments are likely to be more volatile than traditional fixed-income portfolios composed primarily of investment-grade bonds. See “- Risks Relating to Our SILP Investment Strategy” and “- Risks Relating to Our Innovations Investments.” Accordingly, our short-term results of operations may not be indicative of our long-term prospects.
A downgrade or withdrawal of our A.M. Best ratings would materially and adversely affect our ability to implement our business strategy.
If A.M. Best downgrades or withdraws either of our ratings, we could be severely limited or prevented from writing any new reinsurance contracts, which would materially and adversely affect our ability to implement our business strategy. Additionally, if A.M. Best downgrades or withdraws our ratings, we cannot provide assurance that our regulators, the Cayman Islands Monetary Authority and the Central Bank of Ireland, would continue to authorize our current business strategy and investment strategy. See “-Risks Relating to Insurance and Other Regulations - Any suspension or revocation of our reinsurance licenses would materially and adversely impact our ability to do business and implement our business strategy.”
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Greenlight Re’s A.M. Best rating of “A- (Excellent)” with a stable outlook is the fourth highest of 13 ratings that A.M. Best issues. A.M. Best periodically reviews our ratings and may revise one or more of our ratings downward or revoke them at its sole discretion based primarily on its analysis of our balance sheet strength, operating performance, and business profile. Potential developments that may affect such an analysis include:
● if A.M. Best alters its capital adequacy assessment methodology in a manner that would adversely affect the rating of our reinsurance entities;
● if A.M. Best alters its approach regarding our SILP investment strategy or our Innovations investments;
● if our actual losses significantly exceed our loss reserves;
● if unfavorable financial or market trends impact us;
● if we change our business practices from our organizational business plan in a manner that no longer supports our A.M. Best ratings;
● if we are unable to retain our senior management and other key personnel or implement succession plans; or
● if our investments incur significant losses.
If A.M. Best downgrades or withdraws either of our ratings, we could be severely limited or prevented from writing new or renewal reinsurance contracts, which would materially and adversely affect our ability to implement our business strategy. In addition, substantially all 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 A.M. Best ratings below specified levels or a reduction of our capital or surplus below specified levels over the course of the agreement.
We expect that similar provisions will also be included in future contracts. Whether a client would exercise such cancellation rights would likely depend on, among other things, the prevailing market conditions, the degree of unexpired coverage, and the pricing and availability of replacement reinsurance coverage. We cannot predict how many of our clients would ultimately exercise such rights. The exercise of such rights in the aggregate could significantly affect our financial condition, results of operations, and our underwriting capacity.
If our losses and loss adjustment expenses greatly exceed our loss reserves, our financial condition may be materially and adversely affected.
Our results of operations and financial condition depend upon our ability to accurately assess the potential losses and loss adjustment expenses associated with the risks we reinsure. Reserves are liabilities established by insurers and reinsurers to reflect the estimated cost of claims payments and the related expenses that the insurer or reinsurer will ultimately be required to pay in respect of insurance or reinsurance contracts it has written. The Company estimates these reserves based upon facts and circumstances then known, estimates of future trends in claim severity, and other variable factors. The inherent uncertainties associated with estimating loss reserves are generally greater for reinsurance companies than for primary insurance companies due primarily 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 settlement delays associated with the reporting delays;
● the diversity of development patterns among different types of reinsurance treaties;
● the necessary reliance on clients for information regarding claims; and
● other macro-economic changes which may impact reserves generally.
Our reserve estimates may be less reliable than the reserve estimations of a reinsurer with a greater volume of business and more 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 and could negatively affect our results of operations. If we determine our loss reserves to be inadequate, we will increase our loss reserves with a corresponding reduction in our net income and capital in the period in which we identify the deficiency. If our losses and loss adjustment expenses greatly exceed our loss reserves, our financial condition may be materially and adversely affected. For a summary of the effects of reserve re-estimation on prior year reserves and net income, see “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates, Loss and Loss Adjustment Expense Reserves”.
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.
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We may need to raise additional capital in the future through public or private equity or debt offerings or otherwise in order to:
● repay our convertible notes;
● fund liquidity needs or replace lost capital resulting from underwriting or investment losses;
● meet rating agency capital requirements;
● satisfy collateral requirements that may be imposed by our clients or by regulators;
● meet applicable statutory jurisdiction requirements; or
● respond to competitive pressures.
Additional capital may not be available on terms favorable to us, or at all. Increases in interest rates could result in higher interest expense on our outstanding debt. Further, any additional capital raised through the sale of equity could dilute existing 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.
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, including Arch Capital, Axis, Everest Re, Hamilton Re, Hannover Re, Renaissance Re, and Sirius Point, as well as smaller companies, other niche reinsurers, and Lloyd’s syndicates and their related entities. Competition in the types of business that we underwrite is based on many factors, including:
● the perceived financial strength and general reputation of the reinsurer, including its level of service, trustworthiness, business practices, and other subjective matters;
● ratings assigned by independent rating agencies;
● relationships with reinsurance brokers;
● pricing;
● terms and conditions of products offered;
● speed of claims payment; and
● the experience and reputation of the members of our underwriting team in the particular lines of reinsurance we seek to underwrite.
We cannot assure you that we will be able to compete successfully in the reinsurance market. Our failure to compete effectively could materially and adversely affect our financial condition and results of operations, and may increase the likelihood that we will be deemed a passive foreign investment company or an investment company. See “- Risks Relating to Taxation - 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.” and “-Risks Relating to Insurance and Other Regulations - We are subject to the risk of possibly becoming an investment company under U.S. federal securities law.”
Consolidation in the reinsurance industry could adversely affect us.
The reinsurance industry, including our competitors, customers, and insurance and reinsurance brokers, has experienced significant consolidation over the last several years. Consolidated entities may try to use their enhanced market power to negotiate price reductions for our products and services. If competitive pressures reduce our prices, we would expect to write less business. If the insurance industry further consolidates, competition for customers may intensify, and the importance of acquiring and servicing each customer may become greater. We could incur greater expenses relating to customer acquisition and retention, further reducing our operating margins. In addition, insurance companies that merge may be able to spread their risks across a larger capital base so that they require less reinsurance. The number of companies offering retrocessional reinsurance may decline. Reinsurance intermediaries could also consolidate, potentially adversely impacting our ability to access business and distribute our products. We could also experience more robust competition from larger, better-capitalized competitors. Any of the foregoing could materially and adversely affect our business, financial condition and results of operations.
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Inflation may adversely impact our results of operations or financial condition.
Steps taken by governments throughout the world in response to the COVID-19 pandemic, expansionary monetary policies, the military conflict between Russia and Ukraine and other factors have led to an inflationary environment. Our operations are susceptible to inflation, and underestimating inflation levels could result in underpricing the risks we reinsure. Additionally, our reserving models include assumptions about future payments for the settlement of claims and claims-handling expenses, such as the value of replacing property, associated labor costs for the property business we write, and litigation costs. Inflation may cause costs to increase above loss reserves established for claims. In that case, we will be required to increase our loss reserves with a corresponding reduction in net income in the period the deficiency is identified, which may have a material adverse effect on our results of operations and financial condition. Unanticipated higher inflation could also lead to higher interest rates, potentially negatively impacting the value of any rate-sensitive financial instruments held by SILP and could also impact our Innovations investments. See “-Risks Related to Our SILP Investment Strategy” and “-Risks Related to Our Innovations Investments.”
The effect of emerging claim and coverage issues on our business is uncertain.
As industry practices and social, political, legal, judicial, and regulatory conditions change, unexpected issues related to claims and coverage have emerged and adversely affected our results. Examples of emerging claims and coverage issues include, but are not limited to:
● new theories of liability and disputes regarding medical causation with respect to certain diseases;
● assignment-of-benefits agreements, where rights of insurance claims and benefits of the insurance policy are transferred to third parties, which can result in inflated repair costs and legal expenses to insurers and reinsurers;
● claims related to political unrest, geopolitical instability, or other politically driven events, such as the military conflict between Russia and Ukraine, including loss claims relating to expropriation, forced abandonment, license cancellation, trade embargo, contract frustration, non-payment, war on land or political violence (including terrorism, revolution insurrection, and civil unrest);
● claims related to data security breaches, information system failures, or cyber-attacks; and
● claims related to business interruption including protocols enlisted by governments in connection with pandemics, and ransomware and cyber-attacks.
Additionally, various provisions of our contracts, such as limitations or exclusions from coverage or choice of forum, may be difficult to enforce in the manner we intend due to, among other things, disputes relating to coverage and choice of legal forum. These issues may adversely affect our business by either extending coverage beyond the period that we intended or by increasing the number or size of claims. In some instances, these changes may not manifest themselves until many years after we have issued reinsurance contracts that are affected by these changes. As a result, we may not be able to ascertain the full extent of our liabilities under our reinsurance contracts for many years following the issuance of our contracts.
The property and casualty reinsurance market may be affected by cyclical trends.
We write reinsurance in the property and casualty markets, which are subject to pricing cycles. These cycles, as well as other factors that influence aggregate supply and demand for property and casualty reinsurance products, are outside our control. 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 return on capital realized in the reinsurance industry, the frequency and severity of losses, and prevailing general economic and market conditions.
As a result, the reinsurance business historically has been a cyclical industry characterized by periods of intense price competition due to high levels of available underwriting capacity and periods when shortages of capacity have permitted favorable premium levels and changes in terms and conditions. The supply of available reinsurance capital could increase in future years, either due to capital provided by new entrants or by the commitment of additional capital by existing insurers or reinsurers.
Continued increases in the supply of reinsurance may have consequences for the reinsurance industry generally and for us, including fewer contracts written, lower premium rates, increased expenses for customer acquisition and retention, less favorable policy terms and conditions, and/or lower premium volume. The effects of cyclicality could materially and adversely affect our financial condition and results of operations.
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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 or to obtain proper internal authorization, failure to comply with regulatory requirements, information technology failures, or external events.
We believe that our modeling, underwriting, information technology, and application systems are critical to our business. We utilize modeling tools to facilitate the pricing, reserving, and risk management of our reinsurance portfolio. These models help us to control risk accumulation, inform management and other stakeholders of capital requirements and to improve the risk/return profile or minimize the amount of capital required to cover the risks in each reinsurance contract. However, given the inherent uncertainty of modeling techniques and the application of such techniques, these models and databases may not accurately address the emergence of a variety of matters that might be deemed to impact certain of our coverages. These models have been developed internally, and in some cases, they make use of third-party software. The construction of these models and the selection of assumptions require significant actuarial judgment. Furthermore, these models typically rely on either cedent or industry data, which may be incomplete or may be subject to errors. Accordingly, these models, and the assumptions and judgements made in connection therewith, may understate the exposures we are assuming, and our financial results may be materially and adversely impacted.
Technology breaches or failures, including those resulting from a malicious ransomware or cyber-attack on us or our business partners and service providers, could disrupt or otherwise negatively impact our business.
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 service providers or that our information technology or application systems will continue to operate as intended. In addition, we cannot be certain that we would be able to replace these systems without slowing our underwriting response time. Like all companies, we have information technology and application systems that are vulnerable to data breaches, interruptions or failures due to events that may be beyond our control, including, but not limited to, natural disasters, theft, terrorist attacks, malicious ransomware cyber-attacks, computer viruses, hackers and general technology failures.
A major defect or failure in our internal controls or information technology and application systems could result in management distraction, a violation of applicable privacy or other laws, harm our reputation, a loss of customers, or monetary fines or penalties or otherwise increased expenses. We believe appropriate controls and mitigation procedures are in place to prevent significant data breaches, interruptions, or failures in, information technology and application systems. However, internal controls provide only a reasonable, not absolute, assurance as to the absence of errors or irregularities, and the ineffectiveness of such controls and procedures could have a material adverse effect on our business.
The cybersecurity regulatory environment is evolving, and we expect the costs of complying with new or developing regulatory requirements to increase. In addition, as our operations expand to other jurisdictions, we will be required to comply with cybersecurity laws in those jurisdictions, which will further increase our cost of compliance.
Epidemics, pandemics, and other public health threats, including COVID-19, could have a material adverse effect on our business, including our results of operations, financial position and/or liquidity, in a manner and to a degree that cannot be predicted.
We continue to monitor the developments relating to the COVID-19 pandemic, including actions taken or recommended by governments and other authorities to reduce the spread of the virus and to assess its impact on our business and the insurance and reinsurance sectors. The future impact of the pandemic on us is uncertain and could have a material adverse impact on inflation, global financial markets, and our results of operations, financial position, and/or liquidity. The extent of the impact will depend on future developments, including actions taken to limit the spread of COVID-19 and the uncertain impact of potential judicial, legislative, and regulatory actions by local, state, and national governmental and regulatory bodies. Risks presented by the ongoing effects of COVID-19 include possible higher loss and loss adjustment expenses, inflation, potential impairment on SILP’s investment strategy or performance, Innovations investments’ performance and heightened cybersecurity risks.
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Our property and casualty reinsurance operations make us vulnerable to losses from catastrophes and may cause our results of operations to vary significantly from period to period.
Certain of our reinsurance operations expose us to claims arising out of unpredictable catastrophic events, including weather-related and other natural catastrophes and man-made disasters such as acts of war or terrorism. The incidence and severity of catastrophes are inherently unpredictable. Increases in the frequency and severity of natural catastrophes and the losses that result from them are possible. In particular, climate change, to the extent that it produces extreme changes in temperatures and weather patterns, could impact the frequency or severity of weather events and wildfires. Changes in weather patterns could also affect the frequency and severity of other natural catastrophe events to which we may be exposed. Further, such catastrophes could impact the affordability and availability of homeowners insurance, which could impact pricing. Additionally, increases in the value and geographic concentration of insured property, particularly along coastal regions, could cause the cost of such losses to increase.
Catastrophic losses are a function of the insured exposure in the affected area and the event’s severity. Claims from catastrophic events could cause substantial volatility in our financial results for any fiscal quarter or year and could materially and adversely affect our business, financial condition and results of operations.
The inability to obtain business provided from brokers could materially and adversely affect our business, financial condition and results of operations.
A significant portion of our business is placed through brokered transactions, which involve a limited number of reinsurance brokers, which has continued to decrease in recent years as a result of consolidation in the broker sector. Our two largest brokers each accounted for more than 10% of our gross written premiums, and in the aggregate, they accounted for approximately 44.5% of our gross premiums written in 2022. Because broker-produced business is concentrated with a small number of brokers, we are exposed to concentration risk. To lose or fail to expand all or a substantial portion of the business provided through brokers could materially and adversely affect our business, 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 our proportional reinsurance business, in which we assume an agreed percentage of each underlying insurance contract, we do not expect to separately evaluate each of the original individual risks assumed under these reinsurance contracts. Therefore, we are largely dependent on the original underwriting decisions made by ceding companies. We are 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 separately evaluate each of the individual claims made on the underlying insurance contracts under quota share contracts, rendering us dependent on the claims decisions our clients make.
We are subject to the credit risk of our brokers, cedents, agents and other counterparties.
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.
We are also exposed to the credit risk of our cedents and agents, who, pursuant to their contracts with us, may be required to pay us profit commission, additional premiums, reinstatement premiums, and adjustments to ceding commissions over a period of time, which in some cases may extend beyond the initial period of risk coverage. Insolvency, liquidity problems, distressed financial condition, or the general effects of an economic recession may increase the risk that our cedents or agents may not pay some or all of their obligations to us. To the extent our cedents or agents become unable to pay us, we would be required to recognize a downward adjustment to our reinsurance balances receivable or loss and loss expenses recoverable, as applicable, in our financial statements. While we generally seek to mitigate this risk through, among other things, collateral agreements, funds withheld, corporate guarantees, and the right to offset receivables against any losses payable, an increased inability of customers to fulfill their obligations to us could have an adverse effect on our financial condition and results of operations.
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Our reinsurance balances receivable from brokers and cedents at December 31, 2022 totaled $505.6 million, which included premiums, ceding commissions receivable, and funds at Lloyd’s, a majority of which are not collateralized. We cannot provide assurance that such receivables will be collected or that valuation allowances or write-downs for uncollectible balances will not be required in future periods.
We may be unable to purchase reinsurance for the liabilities we reinsure, and if we successfully purchase such reinsurance, we may be unable to collect, which could adversely affect our business, financial condition, and results of operations.
From time to time, we seek to purchase reinsurance for certain liabilities we reinsure 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 our obligations to our clients would remain. At certain times, market conditions have limited, and in some cases have prevented, reinsurers from obtaining the types and amounts of retrocessional coverage they consider necessary for their business needs. Accordingly, we may not be able to obtain our desired amounts of retrocessional coverage, negotiate terms that we deem appropriate or acceptable, or obtain retrocessional coverage from entities with satisfactory creditworthiness. Our inability to establish adequate retrocessional arrangements or the failure of our retrocessional arrangements to protect us from overly concentrated risk exposure could materially and adversely affect our business, financial condition, and results of operations.
Our failure to comply with restrictive covenants contained in our current or future credit facilities could trigger prepayment obligations, which could adversely affect our business, financial condition, and results of operations.
Our credit facility requires us and/or certain of our subsidiaries to comply with certain covenants, including restrictions on our ability to place a lien or charge on pledged assets, issue debt, and in certain circumstances, on the payment of dividends. Our failure to comply with these or other covenants could result in an event of default under the credit facility or any credit facility we may enter into in the future, which, if not cured or waived, could result in us being required to repay the amounts outstanding under these facilities prior to maturity. As a result, our business, financial condition, and results of operations could be materially and adversely affected.
If we lose or are unable to retain or implement succession plans for our senior management and other key personnel, our ability to implement our business strategy could be delayed or hindered, which, in turn, could materially and adversely affect our business, financial condition and results of operations.
Our 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 and we currently do not maintain key life insurance with respect to any of our senior management. We could face challenges and incur expenses in attracting and retaining personnel in the Cayman Islands, U.K., and Ireland. 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 implement succession plans or hire and retain other key personnel, could prevent us from continuing to implement our business strategy and, consequently, materially and adversely affect our business.
Our ability to implement our business strategy could be adversely affected by Cayman Islands employment restrictions.
Under Cayman Islands law, persons who are not Caymanian, do not possess Caymanian status, or are not otherwise entitled to reside and work in the Cayman Islands pursuant to provisions of the Immigration Act (as amended) of the Cayman Islands, which we refer to as the Immigration Act, 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 nine years (after having been legally and ordinarily resident in the Cayman Islands for a period of eight years a person may apply for permanent residence in accordance with the provisions of the Immigration Act) 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 prevent us from continuing to implement our business strategy.
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We may face risks arising from future strategic transactions such as acquisitions, dispositions, mergers, or joint ventures.
We may pursue strategic transactions from time to time, which could involve acquisitions or dispositions of businesses or assets. Any strategic transactions could have an adverse impact on our reputation, business, results of operation, or financial condition. Sources of risk arising from these types of transactions include financial, accounting, tax, and regulatory challenges; difficulties with integration, business retention, execution of strategy, unforeseen liabilities or market conditions; and other managerial or operating risks and challenges. Any future transactions could also subject us to risks such as failure to obtain appropriate value, post-closing claims being levied against us, and disruption to our other businesses during the negotiation or execution process or thereafter. Accordingly, these risks and difficulties may prevent us from realizing the expected benefits from such strategic transactions. For example, businesses that we acquire or our strategic alliances or joint ventures may underperform relative to the price paid or resources committed by us; we may not achieve anticipated cost savings; we may otherwise be adversely affected by transaction-related charges; we may assume unknown or undisclosed business, operational, tax, regulatory and other liabilities; fail to accurately assess known contingent liabilities; or assume businesses with internal control deficiencies. Risk-mitigating provisions that we put in place in the course of negotiating and executing these transactions, such as due diligence efforts and indemnification provisions, may not be sufficient to fully address these risks and contingencies.
Non-compliance with laws, regulations, and taxation regarding transactions with international counterparties may adversely affect our business.
As we provide reinsurance on a worldwide basis, we are subject to an expanding legal, regulatory, and tax environment intended to help detect and prevent anti-trust activity, money laundering, terrorist financing, proliferation financing, fraud, tax avoidance, and other illicit activity. These requirements include, among others, regulations promulgated and administered by CIMA, the U.S. Department of the Treasury's Office of Foreign Assets Control, The Foreign Corrupt Practices Act of 1977, the Iran Freedom and Counter-Proliferation Act of 2012, and the Foreign Account Tax Compliance Act. These and other programs prohibit or restrict dealings with certain persons, entities, countries, governments and, in certain circumstances, their nationals and may require detailed reporting to various administrative parties. Non-compliance with any of these regulations could have a material adverse effect on our ability to conduct our business.
Currency fluctuations could result in exchange rate losses and negatively impact our business.
Our functional currency is the U.S. dollar. However, we expect to write a portion of our business in currencies other than the U.S. dollar. We may incur foreign currency exchange gains or losses as we ultimately receive premiums and settle claims in foreign currencies. In addition, SILP may invest in securities or cash denominated in currencies other than the U.S. dollar. Consequently, we may experience exchange rate losses to the extent that our foreign currency exposure is not hedged, which could materially and adversely affect our business. If we or SILP hedge our foreign currency exposure through forward foreign currency exchange contracts or currency swaps, we will be subject to the risk that the hedging counterparties to such arrangements may fail to perform.
Risks Relating to Insurance and Other Regulations
Any suspension or revocation of any of our licenses would materially and adversely affect our business, financial condition and results of operations.
We are licensed as a reinsurer in the Cayman Islands and the EEA. We are also licensed to write insurance business in the U.K. and the EEA through our Syndicate 3456. The suspension or revocation of any of our licenses to do business in either of these jurisdictions for any reason would mean that we would not be able to enter into any new reinsurance contracts in that jurisdiction until the suspension ended or we became licensed in another jurisdiction. The process of obtaining licenses is time-consuming and costly, and we may not be able to become licensed in another jurisdiction in the event we choose to. Any such suspension or revocation of our license would negatively impact our reputation in the (re)insurance marketplace, could have a material adverse effect on any potential license application and would materially and adversely affect our business, financial condition and results of operations.
CIMA and the CBI may take a number of actions, including suspending or revoking a reinsurance license whenever the regulatory body believes that a licensee is or may become unable to meet its financial obligations, is carrying on business in a manner likely to be detrimental to the public interest or the interest of its creditors or policyholders, has contravened the terms of the Act, or has otherwise behaved in such a manner so as to cause such regulatory body to call into question the licensee’s fitness to conduct regulated activity.
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Further, based on statutes, regulations, and policies in their respective jurisdictions, CIMA and CBI may suspend or revoke our licenses if certain events occur, including without limitation:
● we cease to carry on reinsurance business;
● the direction and management of our reinsurance business have not been conducted in accordance with laws and regulations;
● we cease to meet certain capital and surplus requirements;
● a person holding a position as a director, manager or officer is not deemed to be a fit or proper person to hold the respective position; or
● we become bankrupt, go into liquidation, or are wound up or otherwise dissolved.
Similarly, if either CIMA or the CBI suspended or revoked our licenses, we could lose our exemption under the Investment Company Act of 1940, as amended (the “Investment Company Act”) (See “- We are subject to the risk of possibly becoming an investment company under U.S. federal securities law.”)
Our reinsurance subsidiaries are subject to minimum capital and surplus requirements, and our failure to meet these requirements could subject us to regulatory action.
The Insurance (Capital and Solvency) (Classes B, C, and D Insurers) Regulations (2018 Revision) (the “Capital and Solvency Regulations”) impose on Greenlight Re a minimum capital requirement of US$50 million, a prescribed capital requirement of US$226.5 million and a requirement to maintain solvency equal to greater than the total prescribed capital requirement (the “Capital Requirements”). At December 31, 2022, Greenlight Re was in compliance with the Capital Requirements.
GRIL, our Irish subsidiary, is required to comply with risk-based solvency requirements under the European legislation known as “Solvency II,” including calculating and maintaining a minimum capital requirement and solvency capital requirement. At December 31, 2022, GRIL’s minimum capital requirement and solvency capital requirement was approximately $10.5 million and $41.9 million, respectively. At December 31, 2022, GRIL was in compliance with the capital requirements required under the Irish Insurance Acts and Regulations.
Any failure to meet applicable requirements or minimum statutory capital requirements could subject us to further examination or action by regulators, including restrictions on dividend payments, limitations on our writing of additional business or engaging in financial or other activities, enhanced supervision, financial or other penalties, or liquidation. Further, any changes in existing risk-based capital requirements or minimum statutory capital requirements may require us to increase our statutory capital levels, which we might be unable to do.
We are a holding company that depends on the ability of our subsidiaries to pay dividends.
We are a holding company and do not have any significant operations or assets other than our ownership of the shares of our subsidiaries. Dividends and other permitted distributions from our subsidiaries are our primary source of funds to meet ongoing cash requirements, including future debt service payments, if any, and other corporate expenses, and to repurchase shares or pay dividends to our shareholders if we choose to do so. Some of our subsidiaries are subject to significant regulatory restrictions limiting their ability to declare and pay dividends. The inability of our subsidiaries to pay dividends in an amount sufficient to enable us to meet our cash requirements at the holding company level could have an adverse effect on our operations and our ability to repurchase shares or pay dividends to our shareholders if we choose to do so and/or meet our debt service obligations, if any.
To the extent any of our subsidiaries located in jurisdictions other than the Cayman Islands consider declaring dividends, such subsidiaries are required to comply with restrictions set forth under applicable law and regulations in such other jurisdictions. These restrictions could adversely impact the Company.
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We are subject to the risk of possibly becoming an investment company under U.S. federal securities law.
In the United States, 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 be limited partners in SILP unless we obtained board and shareholder approvals under the Investment Company Act. If we did not invest in SILP, 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 materially and adversely impact our investment results, financial condition, and 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, or 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 regulations to which we are, or may become, subject, and potential changes thereto, could have a significant and negative effect on our business.
We currently are admitted to do reinsurance business in the Cayman Islands and the European Economic Area. We are also licensed to write insurance business in the U.K. and the EEA through our Syndicate 3456. Our operations in these jurisdictions are subject to varying degrees of regulation and supervision. The laws and regulations of the jurisdictions in which our subsidiaries are domiciled require that, among other things, these subsidiaries maintain minimum levels of statutory or regulatory capital, surplus, and liquidity, meet solvency standards, submit to periodic examinations of their financial condition, and restrict payments of dividends and reductions of capital. Statutes, regulations, and policies that our subsidiaries are subject to may also restrict the ability of these subsidiaries to write insurance and reinsurance policies, make certain investments, and distribute funds.
More specifically, with respect to GRIL, Solvency II was introduced with effect from January 1, 2016, and governs the prudential regulation of insurers and reinsurers, and requires insurers and reinsurers in Europe to meet risk-based solvency requirements. It also imposes group solvency and governance requirements on groups with insurers and/or reinsurers operating in the European Economic Area. A number of European Commission delegated acts and technical standards have been adopted, which set out more detailed requirements based on the overarching provisions of the Solvency II Directive. However, further delegated acts, technical standards, and guidance are likely to be published on an ongoing basis.
Although we presently are admitted to do business in the Cayman Islands, U.K. and the EEA, we cannot provide assurance that insurance regulators in the United States 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 Greenlight Re and GRIL, with whom domestic companies may place business. We do not know of any such proposed legislation pending at this time.
We may not be able to comply fully with, or obtain desired exemptions from, revised statutes, regulations, and policies that currently, or may in the future, govern the conduct of our business. Failure to comply with, or to obtain desired
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authorizations and/or exemptions under, any applicable laws could result in restrictions on our ability to do business or undertake activities that are regulated in one or more of the jurisdictions in which we operate and could subject us to fines and other sanctions. The MAA includes amendments that provide for a specific administrative fines framework whereby CIMA has been granted the power to issue monetary penalties of up to 1 million Cayman Dollars for a very serious breach.
In addition, governmental authorities worldwide have become increasingly interested in potential risks posed by the insurance industry as a whole, and to the commercial and financial systems in general. While we cannot predict the exact nature, timing, or scope of possible governmental initiatives, there may be increased regulatory intervention in our industry in the future. Changes in the laws or regulations to which our subsidiaries are subject or may become subject, or in the interpretations thereof by enforcement or regulatory agencies, could have a material adverse effect on our business.
There are differences between 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.
As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect
to the company and therefore it is considered that they owe the following duties to the company: a duty to act in good faith and
in what they consider to be in the best interests of the company; a duty not to make a profit out of their position as director
(unless the company permits them to do so); a duty to exercise their powers for the purposes for which they are conferred; and a
duty not to put themselves in a position where the interests of the company conflict with their personal interest or their duty to a
third party. A director of a Cayman Islands company owes to the company a duty to act with skill and care. A director will need
to exhibit in the performance of their duties both the degree of skill that may reasonably be expected from a subjective
perspective determined by reference to their knowledge and experience and the skill and care objectively to be expected from a
person occupying office as a director of the company.
Under Cayman Islands corporate law and pursuant to our Third Amended and Restated Memorandum and Articles of Association (the “Articles”), 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 duly disclosed to the Board. In exercising any such vote, such director's duties remain as described above. Pursuant to our Articles none of our contracts will be deemed to be void purely because any director is an interested party in such transaction and in such circumstances, interested parties will generally not be held liable for monies owed to the Company. Under Delaware law, interested party transactions are voidable.
A failure by Syndicate 3456 to comply with rules and regulations could materially and adversely interfere with our business strategy.
Syndicate 3456 is subject to Lloyd’s oversight. The PRA and the FCA regulate all financial services firms in the U.K., including Lloyd’s and Syndicate 3456. Both the PRA and the FCA have substantial powers of intervention in relation to Lloyd’s Syndicates, including the power to remove Lloyd’s authorization to manage such Syndicates. See “- Item 1. Business - Regulations - UK Regulations” for further discussion of such regulations.
Failure to comply with, or any future regulatory changes or rulings to, the regulations of the PRA and/or the FCA could interfere with the business strategy of Syndicate 3456, which could materially and adversely affect our business, financial condition and results of operations.
Risks Relating to Our SILP Investment Strategy
Our investment performance depends in part on the performance of SILP and may suffer as a result of adverse financial market developments or other factors that impact SILP’s liquidity, which could materially and adversely affect our investment results, financial condition and results of operations.
Our operating results depend in part on the performance of SILP. We cannot provide assurance that DME Advisors, on behalf of SILP, will successfully structure investments in relation to our liquidity needs or liabilities. Failure to do so could force us to make redemptions from SILP that cause DME Advisors to liquidate investments at a significant loss or at prices that are not optimal, which could materially and adversely affect our financial results.
The risks associated with the value-oriented investment strategy expected to be employed by SILP may be substantially greater than the risks associated with traditional fixed-income investment strategies. In addition, long equity investments may generate losses if the market declines. Similarly, short equity investments may generate losses in a rising market. The success of the investment strategy may also be affected by general economic conditions. Unexpected market volatility and illiquidity associated with our investment in SILP could materially and adversely affect our investment results, financial condition, or
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results of operations.
SILP may be concentrated in a few large positions, which could result in material adverse valuation movements.
Our Board of Directors has adopted our investment guidelines, which provide that SILP may commit up to, but not more than, 10% of Greenlight Re Surplus (as defined in the SILP LPA) and 7.5% of GRIL Surplus (as defined in the SILP LPA) to any single investment, unless a waiver has been obtained by the board of directors of Greenlight Re or GRIL, as applicable. At December 31, 2022, SILP, along with certain affiliates of DME Advisors, collectively owned 37.2% of Green Brick Partners, Inc., a publicly traded company (NYSE: GRBK), or the “GRBK Shares”. At December 31, 2022, SILP had invested more than 10% of Greenlight Re Surplus in GRBK. Under applicable securities laws, DME Advisors may be unable to, or limited in its ability to trade GRBK Shares on behalf of SILP. As of the date of this filing, the board of directors of Greenlight Re had waived the applicable investment guidelines to allow SILP’s investment in the GRBK Shares to exceed the 10% threshold. The board of directors of Greenlight Re and GRIL may grant future waivers relating to the GRBK Shares.
In addition, GRIL’s investment guidelines require that the ten largest investments shall not constitute more than 40% of the GRIL Surplus, and GRIL’s investment portfolio shall at all times, unless waived by the GRIL board of directors, be composed of a minimum of 50 debt or equity securities of publicly traded companies. From time to time, SILP may hold a small number of relatively large security positions in relation to our capital accounts. Since SILP may not be widely diversified by security or by industry, it may be subject to more rapid changes in value than would be the case if our investment portfolio were required to maintain a wide diversification among companies, securities industries, and types of securities.
Under the SILP LPA, we are contractually obligated to invest substantially all our assets in SILP with certain exceptions. SILP’s performance depends on the ability of DME Advisors to select and manage appropriate investments.
DME Advisors acts as the exclusive investment advisor for SILP. Apart from funds required for collateral purposes, funds allocated to our Innovations investment strategy, risk management, and other operational needs, we are contractually obligated to use commercially reasonable efforts to cause substantially all investable assets of Greenlight Re and GRIL to be contributed to SILP. Additionally, we are restricted from making additional contributions of assets that would cause the capital account balances of Greenlight Re and GRIL to represent more than 90% of the aggregate capital account balances of all of the partners of SILP. Although DME Advisors is contractually obligated to follow the investment guidelines of both Greenlight Re and GRIL, we cannot provide assurance as to how DME Advisors will allocate our investable assets to different investment opportunities. DME Advisors may allocate our capital accounts to long and short equity positions, debt, and derivatives, which could increase the level of risk to which our investment portfolio will be exposed.
The performance of the SILP investment portfolio depends to a great extent on the ability of DME Advisors to select and manage appropriate investments for SILP. We cannot assure you that DME Advisors will successfully meet our investment objectives. The diminution or loss of the services of DME Advisors’ principals (or loss or diminution of their market reputation) or the failure of DME Advisors to perform adequately could materially and adversely affect our business, results of operations, and financial condition. In addition, the loss of DME Advisors’ key personnel, or DME Advisors’ inability to hire and retain other key personnel, over which we have no control, could delay or prevent DME Advisors from fulfilling its obligations, which could materially and adversely affect SILP’s performance and, correspondingly, our business and financial performance.
Under our investment management structure, we have limited control over SILP.
Under the SILP LPA, subject to our investment guidelines and certain other conditions, DME II, as the general partner of SILP, has complete and exclusive power and responsibility for all investment and investment management decisions to be undertaken on behalf of SILP and for managing and administering the affairs of SILP. DME II has the power and authority to do all things that it considers necessary or desirable to carry out its duties thereunder, including the power to delegate its authorities. While SILP is not, and is not expected to be registered as an “investment company” under the Investment Company Act or any comparable U.S. regulatory requirements, the general partner, or its designee, may resign or withdraw from SILP and may admit new limited partners to SILP without our consent, which may cause SILP to be deemed an “investment company” under the Investment Company Act.
The SILP LPA limits our ability to use another investment manager.
The SILP LPA contains exclusivity and limited termination provisions. Accordingly, we are unable to use other investment managers for so long as Greenlight Re and GRIL are limited partners in SILP. Greenlight Re and GRIL, as limited partners of SILP may withdraw upon notice only on the Greenlight Re Relevant Date or the GRIL Relevant Date or “for cause” (each as defined in the SILP LPA). Additionally, while GRIL may withdraw as a limited partner in SILP due to
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unsatisfactory long-term performance of DME II or DME Advisors, as determined solely by the Board of Directors of GRIL at the end of each fiscal year during the term of the SILP LPA, Greenlight Re may not.
The historical performance of DME Advisors and its affiliates should not be considered indicative of the future results of the SILP investment portfolio, our future results, or any returns expected on our Class A ordinary shares.
The historical returns of SILP and other funds managed by DME Advisors and its affiliates are not directly linked to our Class A ordinary shares. Results for the SILP investment portfolio could differ from those of other funds managed by DME Advisors and its affiliates due to restrictions imposed by our investment guidelines and other factors.
Potential conflicts of interest with DME Advisors and its affiliates may exist that could adversely affect us.
DME Advisors and its affiliates, in addition to managing SILP, may engage in investment and trading activities for their own accounts and/or for the accounts of third parties. None of DME Advisors or its affiliates, including David Einhorn, Chairman of our Board of Directors and the President of Greenlight Capital, Inc., is obligated to devote any specific amount of time, effort or allocation, or prioritize any investment opportunity, to SILP or to address possible or actual conflicts among the accounts they may manage, which may adversely affect SILP’s investment returns, and, correspondingly, our investment returns.
In addition, under Cayman Islands laws, Mr. Einhorn is not legally restricted from participating in making decisions with respect to Greenlight Re’s investment guidelines. Accordingly, his involvement as a member of the Boards of Directors of Greenlight Capital Re, Ltd. and Greenlight Re 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 those of SILP, which may cause DME Advisors and its affiliates to effect trading in one account that may have an adverse effect on another account, including SILP. We do not have the contractual right to inspect the trading records of DME Advisors or its principals.
Certain investments made by SILP may have limited liquidity and lack valuation data which could create a conflict of interest.
Our investment guidelines allow SILP to invest in certain securities with limited liquidity or no public market. This lack of liquidity may adversely affect the ability of SILP to execute trade orders at desired prices and may impact our ability to fulfill our underwriting payment obligations. To the extent that SILP invests in securities or instruments for which market quotations are not readily available, the valuation of such securities and instruments for purposes of compensation 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.
In addition, for all securities traded on public exchanges, each exchange typically has the right to suspend or limit trading in all securities it lists. Such a suspension could render it impossible to liquidate positions and thereby expose SILP and, correspondingly us, to losses.
If DME Advisor’s risk management methodologies are ineffective, we may be exposed to material unanticipated losses.
DME Advisors and its affiliates continually refine its risk management techniques, strategies, and assessment methods. However, its risk management techniques and strategies do not fully mitigate the risk exposure of its funds and managed accounts, including SILP, in all economic or market environments or against all types of risk, including risks that it might fail to identify or anticipate. Any failures in DME Advisors’ risk management techniques and strategies to accurately quantify risk exposure could affect the risk-adjusted returns of SILP. In addition, any risk management failures could cause losses to be significantly greater than historical measures predict. DME Advisors’ approach to managing those risks could prove insufficient, exposing SILP, and correspondingly our SILP investment portfolio, to material unanticipated or material losses.
The compensation arrangements of SILP may create an incentive to effect transactions that are risky or speculative.
Pursuant to the SILP LPA, each of Greenlight Re and GRIL is obligated to pay a performance allocation of 20% to DME II at the end of each performance period based on its positive performance change to its capital account, subject to a modified loss carry forward provision.
The loss carry forward provision contained in the SILP LPA allows DME II to earn a reduced performance allocation of 10% of profits in any year subsequent to the year in which SILP has incurred a loss until all losses are recouped and an additional amount equal to 150% of the loss is earned.
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While the performance compensation arrangement contained in the SILP LPA provides that losses will be carried forward as an offset against net profits in subsequent periods, DME II and DME Advisors generally will not otherwise be penalized for losses or decreases in the value of our portfolio under the SILP LPA. These performance compensation arrangements may incentivize 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 SILP has invested. While such representation may enable DME Advisors to enhance the sale value of SILP’s investments, it may also prevent SILP from freely disposing of investments. The IAA provides for the indemnification of DME Advisors or any other person designated by DME Advisors for claims arising from such board representation.
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 SILP 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 only uses soft dollars to pay for expenses that would otherwise be borne by SILP and certain other co-managed funds. However, 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.
Increased regulation or scrutiny of alternative investment advisors may affect DME Advisors’ ability to manage SILP or affect our business reputation.
The regulatory environment for investment managers is evolving, and changes in the regulation of managers may adversely affect the ability of DME Advisors to obtain the leverage it might otherwise obtain or to pursue its trading strategies. In addition, the securities and futures markets are subject to comprehensive statutes, regulations, and margin requirements. The SEC, other regulators, and self-regulatory organizations and exchanges are authorized to take extraordinary actions in the event of market emergencies. The regulation of derivatives transactions and funds that engage in such transactions is an evolving area of law and is subject to modification by government and judicial action. Any future regulatory change could have a significant negative impact on our financial condition and results of operations.
We and SILP are exposed to credit risk from counterparties that may default on their obligations to us.
We and SILP are exposed to credit risk from counterparties that may default on their obligations to us or it. The amount of the maximum exposure to credit risk is indicated by the carrying value of our and SILP’s financial assets. In addition, SILP holds the securities of our investment portfolio with prime brokers and has credit risk from the possibility that one or more of them may default on their obligations to SILP. Other than our investment in derivative contracts and corporate debt, if any, and the fact that our investments are held by prime brokers and custodians on our behalf, we have no other significant concentrations of credit risk in our investment portfolio.
Issuers or borrowers whose securities or debt SILP holds, customers, reinsurers, clearing agents, exchanges, clearing houses, and other financial intermediaries and guarantors may default on their obligations to us and/or SILP 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 us and/or SILP and, correspondingly, our investment portfolio and our results of operations, financial condition, and cash flows.
SILP effectuates short sales that subject our capital accounts to material and adverse loss potential.
SILP enters 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 subject our capital accounts in SILP to material and adverse loss potential since the market price of securities sold short may continuously increase.
Short-sale transactions have been subject to increased regulatory scrutiny, including the imposition of restrictions on
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short selling certain securities and reporting requirements. SILP’s ability to execute a short selling strategy may be materially and adversely impacted by new temporary and/or permanent rules, interpretations, prohibitions, and restrictions adopted in response to these adverse market events. Temporary restrictions and/or prohibitions on short selling activity may be imposed by regulatory authorities with little or no advance notice and may impact prior and future trading activities of our investment portfolio. Additionally, the SEC, its non-U.S. counterparts, other governmental authorities, and/or self-regulatory organizations may at any time promulgate permanent rules or interpretations consistent with such temporary restrictions or that impose additional or different permanent or temporary limitations or prohibitions.
Further, regulatory authorities may, from time to time, impose restrictions that adversely affect SILP’s ability to borrow certain securities in connection with short sale transactions. As a result, SILP may be unable to effectively pursue a short-selling strategy which may adversely affect SILP’s investment returns, and correspondingly, our investment returns.
SILP may trade on margin and use other forms of financial leverage, which may increase the risk of our investment portfolio.
Our investment guidelines allow SILP to trade on margin and use other forms of financial leverage. SILP relies on prime
brokers to extend leverage and such prime brokers may elect not to provide leverage to SILP. Fluctuations in the market value of our investment in SILP could have a disproportionately large effect in relation to our capital. Any event which may adversely affect the value of positions SILP holds could materially and adversely affect the net asset value of our investment portfolio and our results of operations.
SILP may transact in derivatives trading, which may increase the risks associated with 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, a relatively small adverse market movement may result in a substantial loss and may expose us to a loss exceeding the original amount invested. Derivatives may also expose SILP, and correspondingly, our investment portfolio, to liquidity risk as there may not be a liquid market within which to close or dispose of outstanding derivative contracts. The counterparty risk lies with each party with whom SILP contracts for the purpose of making derivative investments. In the event of the counterparty’s default, SILP will generally only rank as an unsecured creditor and risk the loss of all or a portion of the amounts SILP is contractually entitled to receive.
SILP may invest in securities based outside the United States, which may be riskier than securities of United States issuers.
Under our investment guidelines, SILP 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, regulatory oversight, practices, and requirements than those applicable to U.S. issuers.
Risks Relating to Our Innovations Strategy
The carry values of our Innovations investments may differ significantly from those that would be used if we carried these investments at fair value.
Our Innovations investments include private investments and unlisted equities in early-stage or start-up entities for which no active market may exist. We carry these investments on our consolidated balance sheets at cost, less impairment, plus or minus observable price changes. These carry values may differ significantly from those that would be used if we carried them at fair value. If we were required to liquidate all or a portion of these investments quickly, we could realize significantly less than the carrying value. Furthermore, our Innovations investments are generally subject to restrictions on redemptions and sales that limit our ability to liquidate these investments in the short term. The carry value of our Innovations investments may become concentrated in a limited number of entities or have significant exposure to certain geographic areas or economic sectors. The concentration of investments can increase investment risk and volatility. Any of the foregoing could result in a decline in our investment performance and capital resources and, accordingly, could materially and adversely affect our financial results and results of operations.
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Our Innovations investments support our underwriting operations and the failure to identify and consummate investment opportunities may materially and adversely affect our ability to implement our business strategy.
We operate in a competitive market for Innovations investment opportunities. Many of our competitors have considerably greater resources than we do. If we fail to compete for or otherwise lose the opportunity to make Innovations investments, which support our underwriting strategy, our ability to implement our business strategy may be materially and adversely impacted.
Investments in privately held early-stage companies involve significant risks.
Our Innovations unit primarily invests in privately held U.S. early-stage companies. Investments in privately held early-stage companies involve a number of significant risks, including the following:
•these companies may have limited financial resources and may be unable to meet their operating obligations;
•they typically have limited operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns;
•they typically depend on the management talents and efforts of a small group of persons. Therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse effect on such investment and, in turn, on us;
•there is generally little public information about these companies. These companies and their financial information are generally not subject to the Exchange Act and other regulations that govern public companies, and we may be unable to uncover all material information about these companies, which may prevent us from making a fully informed investment decision and cause us to lose money on our investments;
•they generally have less predictable operating results and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position;
•changes in laws and regulations (including applicable tax laws), as well as their interpretations, may adversely affect their business, financial structure or prospects; and
•they may have difficulty accessing the capital markets to meet future capital needs.
Economic recessions or downturns could impair our Innovations investment and harm our operating results.
The current macroeconomic environment is characterized by record-high inflation, supply chain challenges, labor shortages, high interest rates, foreign currency exchange volatility, volatility in global capital markets and growing recession risk. The risks associated with our Innovations investments and the businesses of the entities in which we have invested are more severe during periods of economic slowdown or recession.
Many of our Innovations investments may be susceptible to economic downturns or recessions. Therefore, during these periods the carry values of our Innovations portfolio may decrease if we are required to write down the values of our investments. Adverse economic conditions may also decrease the value of our investments. Economic slowdowns or recessions could lead to financial losses in our Innovations portfolio and a decrease in revenues, net income and assets.
Our Innovations investments are made in entities that may incur debt or issue equity securities that rank equally with, or senior to, our investments in such companies.
Our Innovations investments are made in entities that have, or may be permitted to incur, other debt, or issue other equity securities, that rank equally with, or senior to, our investments. By their terms, such instruments may provide that the holders are entitled to receive payment of dividends, interest or principal on or before the dates on which we are entitled to receive payments in respect of our investments. These debt instruments would usually prohibit the investments from paying interest on or repaying our investments in the event and during the continuance of a default under such debt. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of an entity, holders of securities ranking senior to our investment typically are entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying such holders, the entity may not have any remaining assets for repaying its obligation to us. In the case of securities ranking equally with our investments, we would have to share on an equal basis any distributions with other security holders in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant entity.
As a minority equity investor, we are often not in a position to influence the entity, and other equity holders and management of such entity may make decisions that could decrease the value of our investment in such entity.
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When we make a minority equity investment through our Innovations unit, we are subject to the risk that an entity may make business decisions with which we disagree. The other equity holders and management of the entity may take risks or otherwise act in ways that do not serve our interests. As a result, an entity may make decisions that could decrease the value of our investment.
Our Innovations investments are in entities that may be highly leveraged.
Some of our Innovations investments are made in entities that may be highly leveraged, which may have adverse consequences for those companies and for us as a shareholder. The entity may be subject to restrictive financial and operating covenants and their leverage may impair the ability to finance their future operations and capital needs. As a result, such entity’s flexibility to respond to changing business and economic conditions and to take advantage of business opportunities may be limited.
Our failure to make follow-on investments in our existing Innovations investments could impair the value of our
portfolio.
Following an initial investment in an entity, we may make additional investments in the entity as “follow-on” investments to: (1) increase or maintain in whole or in part our equity ownership percentage; (2) exercise warrants, options or convertible securities that we acquired in the original or subsequent financing or (3) attempt to preserve or enhance the value of our investment.
We may elect not to make follow-on investments, be constrained in our ability to employ available funds, or otherwise lack sufficient funds to make those investments. We have the discretion to make any follow-on investments, subject to the availability of capital resources. The failure to make follow-on investments may, in some circumstances, jeopardize the continued viability of an entity, dilute our investment, or result in a missed opportunity for us to increase our participation in a successful operation. Even if we have sufficient capital to make a follow-on investment, we may elect not to make it because we may not want to increase our concentration of risk, we prefer other opportunities, or we are constrained under the Investment Company Act. See “-Risks Relating to Insurance and Other Regulations - We are subject to the risk of possibly becoming and investment company under U.S. federal securities laws.”
Risks Relating to Our Class A Ordinary Shares
Our ability to achieve our business objectives depends on our ability to manage and deploy capital.
Our ability to achieve our business objectives depends on our ability to manage and deploy capital, which depends, in
turn, on our management’s ability, with oversight from our Board of Directors, to identity, evaluate and monitor our
underwriting and investment results, our liquidity and competing needs for capital. We cannot assure you that our management
and deployment of capital will enable us to achieve our business objectives, and our failure to effectively manage and deploy
our capital could materially and adversely affect our financial condition and results of operations.
Our level of debt may have an adverse impact on our liquidity, restrict our current and future operations, particularly our ability to respond to business opportunities, and increase our vulnerability to adverse economic and industry conditions.
At March 1, 2023, we had $65.8 million of convertible notes outstanding (December 31, 2022: $79.6 million) that mature on August 1, 2023. Our level of debt and the provisions of such debt could have significant consequences, which include, but are not limited to, the following:
•limit our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, or other general corporate purposes;
•require a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions, and other general corporate purposes;
•discourage an acquisition of us by a third party;
•place us at a competitive disadvantage to competitors carrying less debt; and
•make us more vulnerable to economic downturns and limit our ability to withstand competitive pressures or take advantage of new opportunities to grow our business.
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We may refinance some or all of our indebtedness by issuing new debt or equity securities in one or more offerings. We cannot assure you that we will be able to refinance our indebtedness on acceptable terms or at all. Such securities offerings may dilute our existing shareholders, reduce the value of our Class A ordinary shares, or both. Because our decision to issue securities depends on, among other things, market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, or nature of any future offerings. Thus, holders of our Class A ordinary shares bear the risk of our future offerings diluting and potentially reducing the value of our Class A ordinary shares.
Conversion of our convertible notes or future sales or issuances of Class A ordinary shares may dilute the ownership interest of existing shareholders, including holders who have previously converted their notes. Such dilution may adversely affect the trading price of our Class A ordinary shares,and the convertible notes and the conversion rate of the convertible notes may not be adjusted for all dilutive events.
We may issue equity or debt securities in the future for a number of reasons, including to finance our operations and business strategy, to acquire assets or companies, to adjust our ratio of debt to equity, or in connection with our incentive and stock option plans. Any issuance of equity securities, including the issuance of shares, if any, upon conversion of the convertible notes, could dilute the interests of our existing shareholders, including holders who have previously received shares upon conversion of their notes, and could substantially affect the trading price of our Class A ordinary shares and the convertible notes. In addition, conversion of our convertible notes into our Class A ordinary shares could depress the price of our Class A ordinary shares.
We may not be able to repay or refinance our convertible notes, pay interest on the convertible notes, or settle conversions of the convertible notes in cash or to repurchase the convertible notes upon a fundamental change, and our future debt, if any, may contain limitations on our ability to pay cash upon conversion or repurchase of the convertible notes.
Our convertible notes mature in August 2023. Further, holders of our convertible notes have the right to require us to repurchase all or a portion of their notes for cash upon the occurrence of a fundamental change under the indenture governing the convertible notes. In addition, upon conversion of the convertible notes, unless we elect to deliver solely Class A ordinary shares to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the convertible notes being converted. However, we may not have enough available cash or be able to obtain financing on favorable terms, if at all, at the time we are required to make repurchases of convertible notes surrendered therefor or pay cash with respect to the convertible notes being converted.
In addition, our ability to make the required repurchase upon a fundamental change may be limited by law or the terms of other debt agreements or securities. Our failure to pay interest on the convertible notes or to make the required cash repurchase or cash payment, as the case may be, would constitute an event of default under the indenture governing the convertible notes which, in turn, could constitute an event of default under other debt agreements or securities, thereby resulting in their acceleration and required prepayment and thereby further restricting our ability to make such interest payments and repurchases. If, due to a default, the repayment of related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay such indebtedness and the convertible notes. We may be required to refinance all or part of our debt, sell important strategic assets at unfavorable prices, incur additional indebtedness or issue ordinary shares or other equity securities, which we may be unable to do on terms acceptable to us, in amounts sufficient to meet our needs or at all.
A shareholder may be required to sell its Class A ordinary shares.
Our 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 Act of the Cayman Islands (the “Companies Act”) 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 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 the votes cast at a meeting at which more than 50% of our issued and outstanding Class A ordinary shares are represented. Further, under the Amended and Restated Memorandum and Articles of Association of Greenlight Re, a director may only be removed without cause upon the affirmative vote of not less than 80% of the votes cast at a meeting at which more than 50% of our issued and outstanding Class A ordinary shares are represented.
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Our Articles permit our Board of Directors to issue preferred shares from time to time, with such rights and preferences as they consider appropriate. Our Board of Directors may authorize the issuance of preferred shares with terms and conditions and under circumstances that could have an effect of discouraging a takeover or other transaction, deny shareholders the receipt of a premium on their Class A ordinary shares in the event of a tender or other offer for Class A ordinary shares and have a depressive effect on the market price of the Class A ordinary shares.
As compared to mergers under corporate law in the United States, it may be more difficult to consummate a merger of two or more companies in the Cayman Islands or the merger of one or more Cayman Islands companies with one or more overseas companies, even if such transaction would be beneficial to our shareholders.
In certain circumstances, the Companies Act allows for mergers or consolidations between two Cayman Islands
companies, or between a Cayman Islands exempted company and a company incorporated in another jurisdiction (provided that
is facilitated by the laws of that other jurisdiction).
Where the merger or consolidation is between two Cayman Islands companies, the directors of each company must
approve a written plan of merger or consolidation containing certain prescribed information. That plan or merger or
consolidation must then be authorized by: (a) a special resolution of the shareholders of each company; and (b) such other
authorization, if any, as may be specified in such constituent company’s articles of association. No shareholder resolution is
required for a merger between a parent company (i.e., a company that holds issued shares that together represent 90% of the
votes at a general meeting of the subsidiary company) and its subsidiary company if a copy of the plan of merger is given to
every member of each subsidiary company to be merged unless that member agrees otherwise. The consent of each holder of a
fixed or floating security interest of a constituent company must be obtained, unless the court waives such requirement. If the
Cayman Islands Registrar of Companies is satisfied that the requirements of the Companies Act (which includes certain other
formalities) have been complied with, the Registrar of Companies will register the plan of merger or consolidation.
Where the merger or consolidation involves a foreign company, the procedure is similar, save that with respect to the
foreign company, the directors of the Cayman Islands exempted company are required to make a declaration to the effect that,
having made due enquiry, they are of the opinion that the following requirements have been met: (i) that the merger or
consolidation is permitted or not prohibited by the constitutional documents of the foreign company and by the laws of the
jurisdiction in which the foreign company is incorporated, and that those laws and any requirements of those constitutional
documents have been or will be complied with; (ii) that no petition or other similar proceeding has been filed and remains
outstanding or order made or resolution adopted to wind up or liquidate the foreign company in any jurisdictions; (iii) that no
receiver, trustee, administrator or other similar person has been appointed in any jurisdiction and is acting in respect of the
foreign company, its affairs or its property or any part thereof; and (iv) that no scheme, order, compromise or other similar
arrangement has been entered into or made in any jurisdiction whereby the rights of creditors of the foreign company are and
continue to be suspended or restricted.
Where the surviving company is the Cayman Islands exempted company, the directors of the Cayman Islands exempted company are further required to make a declaration to the effect that, having made due enquiry, they are of the opinion that the following requirements have been met: (i) that the foreign company is able to pay its debts as they fall due and that the merger or consolidation is bona fide and not intended to defraud unsecured creditors of the foreign company; (ii) that in respect of the transfer of any security interest granted by the foreign company to the surviving or consolidated company (a) consent or approval to the transfer has been obtained, released or waived; (b) the transfer is permitted by and has been approved in accordance with the constitutional documents of the foreign company; and (c) the laws of the jurisdiction of the foreign company with respect to the transfer have been or will be complied with; (iii) that the foreign company will, upon the merger or consolidation becoming effective, cease to be incorporated, registered or exist under the laws of the relevant foreign
jurisdiction; and (iv) that there is no other reason why it would be against the public interest to permit the merger or
consolidation.
The Companies Act also includes statutory provisions that facilitate the reconstruction and amalgamation of companies,
provided that such a scheme of arrangement is approved by (i) in respect of shareholders, 75% in value of the shareholders or
each class of shareholder who attend and vote, either in person or by proxy, at a meeting or meetings convened for that purpose;
or (ii) in respect of creditors, a majority in number representing 75% in value of creditors or each class of creditors who attend
and vote, either in person or by proxy, at a meeting or meetings convened for that purpose.
The convening of the scheme meetings and subsequently the terms of the arrangement must be sanctioned by the Grand
Court of the Cayman Islands. While a dissenting shareholder has the right to express to the court the view that the transaction
ought not to be approved, the court can be expected to approve the arrangement if it determines that:
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● the company is not proposing to act illegally or beyond the scope of its corporate authority and the statutory provisions as to majority vote have been complied with;
● the shareholders have been fairly represented at the meeting in question and the classes properly delineated;
● the scheme of arrangement is such as a businessperson would reasonably approve; and
● the scheme of arrangement is not one that would more properly be sanctioned under some other provision of the Companies Act or that would amount to a “fraud on the minority”.
If a scheme of arrangement is thus approved, the dissenting shareholders would have no rights comparable to appraisal
rights, which would otherwise ordinarily be available to dissenting shareholders of a Delaware corporation.
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.
We are an exempted company limited by shares incorporated under the laws of the Cayman Islands and conduct a majority of our operations outside the United States. A significant amount of our assets are located outside the United States. A majority of our officers and directors reside outside the United States and substantial portion of the assets of those persons are located outside of the United States. As a result, it could be difficult or impossible for you to bring an action against us or against these individuals outside of the United States in the event that you believe that your rights have been infringed upon under the applicable securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands could render you unable to enforce a judgment against our assets or the assets of our directors and officers.
Our corporate affairs are governed by our Articles, the Companies Act and the common law of the Cayman Islands. The
rights of shareholders to take legal action against our directors and us, actions by minority shareholders and the fiduciary
responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the
Cayman Islands. The common law of the Cayman Islands is derived in part from judicial precedent in the Cayman Islands as
well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under the laws of the Cayman Islands are not as clearly defined as under statutes or judicial precedent in existence in jurisdictions in the United States. Therefore, you may have more difficulty protecting your interests than would shareholders of a corporation incorporated in a jurisdiction in the United States, due to the comparatively less well developed Cayman Islands law in this area.
Shareholders of Cayman Islands exempted companies such as ours have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of shareholders. Our directors have discretion under our Articles to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you 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.
The courts of the Cayman Islands are unlikely (i) to recognize or enforce against us judgments of courts of the United
States predicated upon the civil liability provisions of the federal securities laws of the United States or any state; and (ii) in
original actions brought in the Cayman Islands, to impose liabilities against us predicated upon the civil liability provisions of
the federal securities laws of the United States or any state, so far as the liabilities imposed by those provisions are penal in
nature. In those circumstances, although there is no statutory enforcement in the Cayman Islands of judgments obtained in the
United States, the courts of the Cayman Islands will recognize and enforce a foreign money judgment of a foreign court of
competent jurisdiction without retrial on the merits based on the principle that a judgment of a competent foreign court imposes
upon the judgment debtor an obligation to pay the sum for which judgment has been given provided certain conditions are met.
For a foreign judgment to be enforced in the Cayman Islands, such judgment must be final and conclusive and for a liquidated
sum, and must not be in respect of taxes or a fine or penalty, inconsistent with a Cayman Islands judgment in respect of the
same matter, impeachable on the grounds of fraud or obtained in a manner, or be of a kind the enforcement of which is, contrary to natural justice or the public policy of the Cayman Islands (awards of punitive or multiple damages may well be held to be contrary to public policy). A Cayman Islands Court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.
We are not aware nor have we been advised of any reported class action having been brought in a Cayman Islands court.
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Derivative actions have been brought in the Cayman Islands courts, and the Cayman Islands courts have confirmed the
availability for such actions. In most cases, we will be the proper plaintiff in any claim based on a breach of duty owed to us,
and a claim against (for example) our officers or directors usually may not be brought by a shareholder. However, based both
on Cayman Islands authorities and on English authorities, which would in all likelihood be of persuasive authority and be
applied by a court in the Cayman Islands, exceptions to the foregoing principle apply in circumstances in which:
● a company is acting, or proposing to act, illegally or beyond the scope of its authority;
● the act complained of, although not beyond the scope of the authority, could be effected if duly authorized by more
● than the number of votes which have actually been obtained; or
● those who control the company are perpetrating a “fraud on the minority.”
A shareholder may have a direct right of action against us where the individual rights of that shareholder have been
infringed or are about to be infringed.
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% of the total issued and outstanding ordinary shares, 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.
At December 31, 2022, David Einhorn owned 18.0% 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.
We do not intend to pay dividends on our Class A ordinary shares and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common shares.
We do not intend to declare and pay dividends on our Class A ordinary shares for the foreseeable future. Therefore, you are not likely to receive any dividends on your Class A ordinary shares for the foreseeable future. The success of an investment in our Class A ordinary shares will depend upon any future appreciation in their value. There is no guarantee that our Class A ordinary shares will appreciate in value or even maintain the price at which our shareholders have purchased their shares.
In the event that we did declare a dividend, such dividends and other distributions on issued and outstanding ordinary
shares may only be paid out of the funds of the Company lawfully available for such purpose. Dividends and other distributions
will be distributed among the holders of our Class A ordinary shares on a pro rata basis
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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 materially and adversely affected.
Greenlight Capital Re, Greenlight Re and/or GRIL may be subject to United States federal income taxation.
Greenlight Capital Re and Greenlight Re are incorporated under the laws of the Cayman Islands, and GRIL is incorporated under the laws of Ireland. These entities intend to operate in a manner that will not cause us to be treated as engaging in a trade or business within the United States and will not cause us to be subject to current United States federal income taxation on Greenlight Capital Re’s, Greenlight Re’s and/or GRIL’s 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 provide assurance that the United States Internal Revenue Service (the “IRS”), will not successfully assert that Greenlight Capital Re, Greenlight Re and/or GRIL are engaged in a trade or business within the United States. If the IRS were to successfully assert that Greenlight Capital Re, Greenlight Re, and/or GRIL 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: Greenlight Capital Re, Greenlight Re and/or GRIL may become subject to current United States federal income taxation on its net income from sources within the United States; Greenlight Capital Re, Greenlight Re and/or GRIL may be subject to United States federal income tax on a portion of its net investment income, regardless of its source; Greenlight Capital Re, Greenlight Re, and/or GRIL may not be entitled to deduct certain expenses that would otherwise be deductible from the income subject to United States taxation; and Greenlight Capital Re, Greenlight Re and/or GRIL 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, including certain reporting requirements, generally apply to any United States person who owns shares in a passive foreign investment company, or a “PFIC”. We do not expect that any of Greenlight Capital Re, Greenlight Re, or GRIL will be a PFIC for the current taxable year. However, we cannot provide assurance that none of Greenlight Capital Re, Greenlight Re, or GRIL will be a PFIC for the current taxable year or any future taxable year.
In general, any of Greenlight Capital Re, Greenlight Re or GRIL 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”, or are held for the production of passive income. Passive income generally includes interest, dividends and other investment income. However, under an “active insurance” exception, income is not treated as passive if it is derived in the active conduct of an insurance business by a qualifying insurance corporation. A qualifying insurance corporation is an insurance company which has applicable insurance liabilities, as reported on its annual financial statement, exceeding 25% of its total assets. Applicable insurance liabilities means, with respect to our property and casualty reinsurance business, reserves for loss and loss adjustment expenses, and excluding unearned premium reserves.
The exception for insurance companies is intended to ensure that a qualifying 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 intend to operate our business with financial reserves and applicable insurance liabilities at levels that should not cause us to be deemed PFICs, although we cannot provide assurance that we will be successful in structuring our operations to meet such levels nor can we ensure that the IRS will not successfully challenge our status. If we are unable to underwrite sufficient amount of risks and maintain a sufficient amount of applicable insurance liabilities, any of Greenlight Capital Re, Greenlight Re or GRIL 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 an insurance business, are subjective in nature and there is little authoritative tax guidance on these issues. We cannot provide assurance that the IRS will
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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 provide assurance 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 the total combined voting power or value of our 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 their pro-rata share of the CFC’s “subpart F income” and “global intangible low-tax income” in their gross income in the year earned by the CFC, even if no distributions are made. In general, a foreign insurance company will be treated as a CFC only if during the taxable year United States 10% shareholders collectively own more than 25% of the total combined voting power or total value of the entity’s shares. 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 , will in most cases prevent shareholders who acquire Class A ordinary shares from being United States 10% shareholders. We cannot provide assurance, however, that these rules will not apply to you if you are or become a United States 10% shareholder. In particular, recent changes to the definition of a United States 10% Shareholder, whereby both vote and value are tested, and recent changes to the constructive ownership rules, whereby shares owned by non-United States persons can be attributed to United States persons, may increase the likelihood of these rules applying. 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 provide assurance that this is or will continue to be the case. Consequently, we cannot provide assurance 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 shares, 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 Capital Re is not directly engaged in the insurance business and because proposed United States Treasury regulations applicable to this situation appear to apply only in the case of shares of corporations that are directly engaged in the insurance business. We cannot provide assurance, 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 provide assurance 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.
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The TCJA may cause us to undertake changes to the manner in which we conduct our business and could subject United States persons who own Class A ordinary shares to United States income taxation on our undistributed earnings.
On December 22, 2017, the TCJA was signed into law. The TCJA provides a bright-line test that a non-U.S. insurance company only will receive the benefit, for passive foreign investment company purposes, of being engaged in the active conduct of an insurance business if its applicable insurance liabilities constitute more than 25% of its total assets. For this purpose, the term “applicable insurance liabilities” does not include unearned premium reserves. One of the TCJA’s potential impacts is that this limitation could result in the treatment of offshore insurers or reinsurers that write business on a low frequency/high severity basis, such as property catastrophe companies and financial guaranty companies, as PFICs, as significant reserves for losses may not be recorded until a catastrophic event actually occurs. Accordingly, subject to any future corrections or clarifications that may be made to the TCJA, or any additional regulations that may be promulgated thereunder, the Company will be treated as a PFIC for any taxable year in which it does not meet the bright-line applicable insurance liabilities requirement of the TCJA.
At December 31, 2022, 2021, and 2020 the Company met the bright-line applicable insurance liabilities test. However, there is still substantial uncertainty regarding the application of the test. The Company cannot guarantee that it will continue to meet the bright-line applicable insurance liabilities test in future periods. In the event that the Company cannot meet this test, shareholders that are United States persons will be subject to United States income taxation on the Company’s undistributed earnings.
Further changes in United States tax regulations and laws including the rules regarding passive foreign investment companies could have a material impact on our ability to qualify for the insurance company exemption and/or change our status for United States persons who own Class A ordinary shares.
The IRS or Congress may issue additional regulations or legislation regarding the applicable insurance liabilities bright-line test of the passive foreign investment company (“PFIC”) rules or other aspects of the PFIC rules applicable to foreign insurance companies. On December 4, 2020, the IRS issued proposed regulations (the “2020 Proposed Regulations”) and final regulations (the “2020 Final Regulations”) that would provide additional guidance and requirements regarding the exclusion from the definition of “passive income” for income derived in the active conduct of an insurance business by a qualified insurance corporation (“QIC”) and the application of certain look-through rules with respect to assets held, and income earned, through subsidiaries.
Under the 2020 Proposed Regulations, a QIC is in the “active conduct” of an insurance business only if it satisfies either a “factual requirements test” or an “active conduct percentage test.” The factual requirements test requires that the officers and employees of the QIC carry out substantial managerial and operational activities on a regular and continuous basis with respect to its core functions and that they perform virtually all of the active decision-making functions relevant to underwriting functions. The active conduct percentage test generally requires that (i) the total costs incurred by the QIC with respect to its officers and employees for services rendered with respect to its core functions (other than investment activities) equal or exceed 50 percent of total costs incurred by the QIC with respect to its officers and employees and any other person or entities for services rendered with respect to its core functions (other than investment activities) and (ii) to the extent the QIC outsources any part of its core functions to unrelated entities, officers and employees of the QIC with experience and relevant expertise must select and supervise the person that performs the outsourced functions, establish objectives for performance of the outsourced functions and prescribe rigorous guidelines relating to the outsourced functions which are routinely evaluated and updated. Under certain exceptions, however, a QIC (a) that has no or only a nominal number of employees or (b) that is a vehicle that (x) has the effect of securitizing or collateralizing insurance risks underwritten by other insurance or reinsurance companies or (y) is an insurance linked securities fund that invests in securitization vehicles, is deemed not engaged in the active conduct of an insurance business. A QIC’s officers and employees include those of certain affiliates for these purposes. The 2020 Final Regulations contain guidance on the treatment of the assets and income of certain look-through subsidiaries of a QIC, among other provisions related to QICs and PFICs.
We currently expect that the Company would not be a PFIC for the 2023 taxable year under the rules described above, were they effective for such year. However, the rules are subject to varying interpretations and are highly dependent on the facts and circumstances, which may change from year to year or within a year. We can offer no assurance whether, in what form or when the 2020 Proposed Regulations could be adopted. We also can offer no assurance as to the potential impact of the 2020 Proposed Regulations or the 2020 Final Regulations for the Company in any year.
We are monitoring developments with respect to both the applicable insurance liabilities test and the IRS regulations. At this time, we cannot predict whether or what, if any, additional regulations will be adopted or additional legislation will be enacted. If regulations are adopted or legislation enacted that cause us to fail to meet the requirements of the insurance company
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exception, or if we fail to meet the applicable insurance liabilities test such failure could have a material adverse effect on the taxation of our shareholders who are U.S. persons. In that event we may undertake further changes to the manner in which we conduct our business, which also could have a material effect on our results of operations.
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. 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 TCJA may have a detrimental effect on the Company and its assets.
The regulatory and tax environment globally is evolving, and changes in the regulation or taxation of the Company and its assets may materially adversely shareholders. The TCJA among other things, made significant changes to the rules applicable to the taxation of the Company and its assets, such as changing the rules applicable to active insurance income for passive foreign investment company purposes (discussed above), changing rules applicable to controlled foreign investment company purposes, new base erosion rules, changing the general corporate tax rate to a flat 21% rate, modifying the rules regarding limitations on certain deductions, introducing a capital investment deduction in certain circumstances, placing certain limitations on the interest deduction, modifying the rules regarding the usability of certain net operating losses, and the migration from a worldwide system of taxation to a modified territorial system. At this time the ultimate outcome of the legislation on the Company and its shareholders is uncertain and could be adverse. Shareholders should consult their own tax advisors regarding potential changes in tax laws.
If investments held by GRIL are determined not to be integral to the reinsurance business carried on by GRIL, additional Irish tax could be imposed and our business and financial results could be materially adversely affected.
Based on administrative practice, taxable income derived from investments made by GRIL is generally taxed in Ireland at the rate of 12.5% on the grounds that such investments either form part of the permanent capital required by regulatory authorities, or are otherwise integral to the reinsurance business carried on by GRIL. GRIL intends to operate in such a manner so that the level of investments held by GRIL does not exceed the amount that is integral to the reinsurance businesses carried on by GRIL. If, however, investment income earned by GRIL exceeds these thresholds or if the administrative practice of the Irish Revenue Commissioners changes, Irish corporation tax could apply to such investment income at a higher rate (currently 25%) instead of the general 12.5% rate, and our results of operations could be materially adversely affected.
The impact of the initiative of the OECD and the EU to eliminate harmful tax practices is uncertain and could adversely affect our tax status in the Cayman Islands where we are exempt from income taxes.
The 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 neutral jurisdictions and preferential tax regimes in countries around the world. While the Cayman Islands is currently on the list of jurisdictions that have substantially implemented the internationally agreed tax standard, we are not able to predict if additional requirements will be imposed, and if so, whether changes arising from such additional requirements will subject us to additional taxes. The Cayman Islands’ economic substance legislation had already been evaluated in June 2019 by the OECD’s Forum on Harmful Tax Practices as “not harmful”, which is the highest rating possible. There are no immediate regulatory, tax, trade or other legal impacts to the Company, but we are not able to predict any future EU actions and whether the EU will deem the newly enacted laws to be compliant with its requirements in order to remove the Cayman Islands from Annex 1.
On October 8, 2021, the OECD announced an accord endorsing and providing an implementation plan for a global minimum tax rate of at least 15% for large multinational corporations on a jurisdiction-by-jurisdiction basis, known as the “two pillar plan.” The global minimum tax rate would apply to overseas profits of multinational firms with annual revenue of more than €750 million. While the implementation of the accord is uncertain and the minimum tax is not expected to apply to the Company as currently proposed, adjustments to the threshold could impact the Company in future periods.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
We currently occupy our office space in Grand Cayman, Cayman Islands under an operating lease arrangement which expires in 2026. Additionally, we have an operating lease agreement for office space in Dublin, Ireland which expires in 2031, but provides us an option to terminate the lease in 2026 without any penalty. We believe that for the foreseeable future the office spaces in the Cayman Islands and Ireland will be sufficient for conducting our operations.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
From time to time, in the normal course of business, we may be involved in formal and informal dispute resolution procedures, which may include arbitration or litigation, the outcomes of which determine our rights and obligations under our reinsurance contracts and other contractual agreements. In some disputes, we may seek to enforce our rights under an agreement or to collect funds owing to us. In other matters, we may resist attempts by others to collect funds or enforce alleged rights. While the final outcome of legal disputes cannot be predicted with certainty, we do not believe that any of our existing contractual disputes, when finally resolved, will have a material adverse effect on our business, financial condition or operating results.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and number of holders
Our Class A ordinary shares began publicly trading on the Nasdaq Global Select Market on May 24, 2007, under the symbol “GLRE.”
At March 3, 2023, the number of holders of record of our Class A ordinary shares was approximately 54, not including beneficial owners of shares registered in nominee or street name who represent approximately 91.7% of the Class A ordinary shares issued and outstanding.
Dividends
Since inception, we have not paid any cash dividends on our Class A ordinary shares or Class B ordinary shares, or collectively, our ordinary shares.
Holders of ordinary shares are entitled to receive dividends when, as, and if declared by the Board of Directors in accordance with the provisions of our Articles and the Companies Law. In the event of a liquidation, dissolution, or winding-up of the Company, the holders of ordinary shares are entitled to share equally and ratably in our assets, if any remain after the payment of all of our debts and liabilities and the liquidation preference of any outstanding preferred shares.
We currently do not intend to declare and pay dividends on our ordinary shares in the foreseeable future. Our Board of Directors would only approve a dividend after taking into account our capital and liquidity position. 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 are 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 and GRIL are subject to regulatory constraints that affect their ability to pay dividends and include minimum net worth requirements. At December 31, 2022, Greenlight Re and GRIL both exceeded the minimum statutory capital requirements. Any dividends we pay will be declared and paid in U.S. dollars.
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Performance Graph
Presented below is a line graph comparing the yearly change in the cumulative total shareholder return on our Class A ordinary shares for the five year period commencing December 31, 2017 through December 31, 2022 against the total return index for the Russell 2000 Index, or RUT, and the S&P 500 Property & Casualty Insurance Index, or S&P Insurance Index, for the same period. The performance graph assumes $100 invested on December 31, 2017 in the ordinary shares of Greenlight Capital Re, the RUT and the S&P Insurance Index. The performance graph also assumes that all dividends are reinvested.
The performance reflected in the graph above is not necessarily indicative of future performance.
This graph is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference in any filing by us under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Our Board of Directors has adopted a share repurchase plan authorizing the Company to repurchase Class A ordinary shares. From time to time, the repurchase plan has been re-approved or modified at the election of our Board of Directors. The previous plan expired on June 30, 2022. On April 26, 2022, the Board of Directors re-approved the share repurchase plan effective from July 1, 2022, until June 30, 2023, authorizing the Company to repurchase up to $25.0 million of 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.
The Company is not required to repurchase any Class A ordinary shares and the repurchase plan may be modified, suspended or terminated at any time without prior notice.
There were no share repurchases made under the plan during the three months ended December 31, 2022.
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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [RESERVED]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References to “we,” “us,” “our,” “our company,” or “the Company” refer to Greenlight Capital Re, Ltd. (“GLRE”) and its 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”), and Greenlight Innovation Syndicate 3456 (“Syndicate 3456”), unless the context dictates otherwise. References to our “Ordinary Shares” refer collectively to our Class A Ordinary Shares and Class B Ordinary Shares.
The following discussion should be read in conjunction with the audited consolidated financial statements and accompanying notes, which appear elsewhere in this filing.
The following is a discussion and analysis of our results of operations for the years ended December 31, 2022 and 2021 and financial condition at December 31, 2022 and 2021.
We have omitted discussion of the earliest of the three years covered by our consolidated financial statements presented in this report because we included that disclosure in our Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 8, 2022. 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, 2021, compared to the fiscal year ended December 31, 2020.
General
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 solutions 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.
We aim to complement our underwriting activities with a non-traditional investment approach designed to achieve higher rates of return over the long term than reinsurance companies that exclusively employ more traditional investment strategies. Our investment portfolio is managed according to a value-oriented philosophy, in which our investment advisor takes long positions in perceived undervalued securities and short positions in perceived overvalued securities.
Through Greenlight Re Innovations, we support technology innovators in the (re)insurance market by providing investment capital, risk capacity, and access to a broad insurance network.
Because we seek to capitalize on favorable market conditions and opportunities, period-to-period comparisons of our underwriting results may not be meaningful. Also, our historical investment results are not necessarily indicative of future performance. Due to the nature of our reinsurance and investment strategies, our operating results will likely fluctuate from period to period.
The Company’s subsidiaries hold an A.M. Best Financial Strength Rating of A- (Excellent) with a stable outlook.
Outlook and Trends
We operate in a business where we expect volatility in our underwriting results. Hurricane Ian, which struck the southeast U.S. in September 2022, is likely to prove one of the costliest natural disasters ever in terms of insured losses. This storm, the Russian-Ukraine conflict, and several smaller events have combined to make 2022 another challenging year for companies that participate in the global reinsurance market. We were not immune from these events; our combined ratio for the year ended December 31, 2022, was 102.3%.
Further, the ongoing Russian-Ukrainian conflict has resulted in the U.S., United Kingdom, European Union, and other countries imposing financial and economic sanctions, which have caused disruption in the global economy and have increased economic and geopolitical uncertainty. If this conflict is prolonged, we and other reinsurers may incur additional losses in future periods.
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The continuing widespread inflation is a significant concern to the industry, as it can add uncertainty to the cost of claims, particularly for classes of business with long payout tails. As a result, it creates pricing challenges for new business and valuation challenges in claims reserves. We are addressing these concerns in multiple ways:
•Our underwriting strategy focuses on relatively short-tailed business, which is inherently less exposed to inflation than long-tailed lines. We estimate the payout duration of our existing reserves at approximately two years.
•We incorporate inflation assumptions in all our pricing and reassess these assumptions frequently.
•We are minimizing our exposure to classes that are experiencing severe supply-chain-driven inflation.
The rising interest rate environment has had a mixed impact on our financial results. While we have experienced losses driven by fixed-income securities held by Lloyd’s syndicates in which we participate, the higher interest rates have improved the yield on our restricted cash and cash equivalents. To the extent interest rates continue to increase, we expect to see these trends continue.
The combination of the recent loss events, continued inflation, and rising interest rates led to a significant reduction in the amount of reinsurance capital available for deployment, which in turn has led to market conditions that we consider more favorable than any we have experienced in more than a decade. The January 1 renewal season saw widespread pricing improvements in the aviation, war and terror, and marine classes and even higher increases in the property catastrophe rates. These short-tailed specialty and property catastrophe classes represents a significant portion of our 2023 business plan. Elsewhere in our portfolio, average percentage rate improvements were in the single digits.
Additionally, we continue to be encouraged by our Innovations unit, whose central objective is to enhance our underwriting return and risk profile by establishing a range of strategic partnerships. Our Innovations-related premiums, included premiums written by Syndicate 3456, accounted for approximately 18% of our net premiums written in 2022. We see the potential for significant growth from Innovations-derived underwriting opportunities in the future.
SILP generated a net return of 25.3% in 2022, compared to an 18.1% loss for the S&P 500 index. Effective January 1, 2023, the Company increased its allocation to SILP to a maximum of 60% of surplus.
Segments
We have one operating segment, Property & Casualty reinsurance, and we analyze our business based on the following categories:
● Property
● Casualty
● Other
Property business covers personal lines, commercial lines exposures and automobile physical damage. Property business includes both catastrophe and non-catastrophe coverage. We expect property business to account for a small portion of our overall catastrophe exposure.
Casualty business covers general liability, motor liability, professional liability, and workers’ compensation exposures. The Company’s multi-line business includes the Funds at Lloyd’s business. As our Lloyd’s syndicate contracts incorporate property (including incidental catastrophe), casualty, and other exposures, we categorize them as multi-line (and therefore casualty) business. However, these contracts are composed of primarily short-tailed risks.
Other business covers accident and health, financial (including transactional liability, mortgage insurance, surety, and trade credit), marine, energy, as well as other specialty business such as aviation, crop, cyber, political, and terrorism exposures.
Revenues
We derive our revenues from two principal sources:
● premiums from reinsurance on property and casualty business assumed (net of any premiums ceded); and
● income from investments.
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We recognize premiums written as revenues, net of any applicable underlying reinsurance coverage, over the term of the related policy or contract. Depending on the contract structure, the earnings period could be the same as the reinsurance contract or based on the terms of the underlying insurance policies.
Income from our investments is primarily composed of:
● income (or loss) generated from our investment in SILP;
● gains (or losses) from our other investments, including Innovations and investments accounted for under the equity method;
● interest income on our restricted cash and cash equivalents and Funds at Lloyd’s;
● foreign exchange gains (or losses); and
● interest income and gains (or losses) from promissory notes receivable.
In addition, we may from time to time derive other income from interest on deposit-accounted contracts, fees generated from advisory services, and fees relating to overrides, profit commissions, and fees due upon the early termination of contracts.
Expenses
Our expenses consist primarily of the following:
● underwriting losses and loss adjustment expenses;
● acquisition costs;
● general and administrative expenses;
● interest expense;
● investment-related expenses.
The extent of our loss and LAE is a function of the amount and type of reinsurance contracts we write and the loss experience of the underlying coverage. As described below, loss and loss adjustment expenses include an actuarially determined estimate of losses incurred, including losses incurred during the period and changes in estimates from prior periods. The period over which we pay loss and LAE reserves depends on the nature of the coverage provided and generally extends over multiple years.
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.
General and administrative expenses consist primarily of salaries and benefits and related costs, including costs associated with our incentive compensation plan, bonuses, and stock compensation expenses. General and administrative expenses also include professional fees, travel and entertainment, information technology, rent, and other general operating costs. General and administrative expenses reported in our consolidated statements of operations include both underwriting and corporate expenses.
Interest expense consists of interest paid and accrued on senior convertible notes and the amortization of issuance expenses. In addition, we incur interest expenses on some deposit-accounted contracts.
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 statements of operations.
Critical Accounting Policies and Estimates
Our consolidated financial statements contain certain amounts that are inherently subjective and have required management to make assumptions and best estimates to determine reported values. If certain factors, including those described in “Part I. Item IA. - 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 the following accounting policies affect the more significant estimates used to prepare our consolidated financial statements. We have summarized the descriptions below for clarity. We have included a more detailed description of our significant accounting policies and recently issued accounting standards in Note 2 to the consolidated financial statements.
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Premium Revenues and Risk Transfer. We record our property and casualty reinsurance premiums as premiums written based on contract terms and information received from ceding companies and their brokers. Excess of loss reinsurance contracts typically state premiums as a percentage of the subject premiums written by the client, subject to a minimum and deposit premium. The minimum and deposit premium is generally 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.
Certain contracts provide for reinstatement premiums in the event of a loss. Reinstatement premiums are written and earned when a triggering loss event occurs.
Our clients estimate the gross premiums they expect to write at the contract’s inception for each proportional contract we underwrite. Our underwriters initially utilize the client’s estimate to determine our best estimate. In subsequent periods, we adjust our estimates based on our client’s actual reports and our expectations of market conditions for the applicable line of business. As the contract progresses, we monitor premiums received in conjunction with the client’s correspondence to refine our estimate. Variances from initial gross premiums estimates are generally greater for proportional contracts than for non-proportional ones. We earn premiums over the risk coverage period. Unearned premiums represent the unexpired portion of reinsurance provided.
At the inception of each of our reinsurance contracts, we receive premium estimates from the client, which we use in conjunction with historical 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 writings to us monthly or quarterly (depending on the contract). We book the actual premiums written when we receive them from our client. Each reporting period, we estimate the premiums written for stub periods that have not yet been reported to us by the client. For example, at year-end, we may have to estimate December premiums ceded under certain contracts since the client may not be required to report the actual results to us until after we have issued our audited consolidated financial statements. Typically, we only use premium estimates for unreported stub periods, which account for a small percentage of our total premiums written.
We confirm the accuracy and completeness of premiums reported by our clients by reviewing the client’s statutory filings, where available, 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, we report the premium we receive 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 income and expense on deposit-accounted contracts is calculated using the interest method and recorded in the consolidated statements of operations under the captions “Other income (expense)” and “Deposit interest expense,” respectively.
Investments. We carry our investment in SILP at fair value, based on the most recent net asset value obtained from SILP’s third-party administrator. The caption “Other investments” in our consolidated balance sheets includes private and unlisted equity securities that do not have readily determinable fair values. We determine these private equity securities’ carrying value based on the original cost, less impairment, plus or minus observable price changes in orderly transactions for an identical or similar investment of the same issuer. At each reporting date, we qualitatively consider whether the investment is impaired on the basis of certain impairment indicators. If we determine that the equity security is impaired on the basis of the qualitative assessment and the estimated fair value is less than the carrying value, we recognize an impairment loss in the caption “Net investment income (loss)” in the consolidated statements of operations. We determine realized gains and losses from other investments based on the specific identification method (by reference to cost or amortized cost, as appropriate). These gains and losses are included in the captions “Net investment income (loss)” in the consolidated statements of operations.
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Loss and Loss Adjustment Expense Reserves. Estimating our loss and LAE reserves involves a considerable degree of judgment, and our estimates as of any given date are inherently uncertain. Estimating loss and LAE reserves requires us to make assumptions regarding reporting and development patterns, frequency and severity trends, claims settlement practices, potential changes in legal environments, inflation, loss amplification, foreign exchange movements, and other factors. These estimates and judgments are based on numerous considerations and are often revised as (i) we receive changes in loss amounts reported by ceding companies and brokers; (ii) we obtain additional information, experience, or other data; (iii) we develop new or improved methodologies; or (iv) we observe changes in the legal environment.
Our loss and LAE reserves relating to short-tail property risks are typically reported to us and settled more promptly than those relating to long-tail risks. However, the timeliness of loss reporting can be affected by such factors as the nature of the event causing the loss, the location of the loss, whether the loss is from policies in force with primary insurers or with reinsurers, and where our exposure falls within the cedent’s overall reinsurance program.
Our loss and LAE reserves are composed of case reserves (based on claims reported to us) and IBNR reserves, including the associated claims handling costs.
We determine case reserve estimates based on loss reports received. We determine our IBNR reserve estimates using standard actuarial methods and a combination of our own historical and current loss experience, insurance industry loss experience, assessments of pricing adequacy trends, and our professional judgment. In estimating our IBNR reserve, we estimate the total ultimate loss and LAE we expect to incur and subtract paid claims and case reserves.
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 a low frequency of claims occurrence and a high potential loss severity, such as claims arising from natural catastrophes. Given the nature of these events, traditional actuarial reserving methods may not be reliable indicators of the final outcome. As such, for contracts or losses of this type, we estimate the ultimate cost associated with a single loss event rather than perform analysis on the historical development patterns of past events to estimate the ultimate losses for an entire accident year. We estimate our reserves for these large events on a by-contract basis by reviewing policies with known or potential exposure to a particular loss event.
For non-catastrophe losses, we apply standard actuarial methodologies in setting reserves, including paid and incurred loss development, Bornheutter-Ferguson, burning cost, and frequency and severity techniques. We supplement our analysis with 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, the expected loss ratio method assumes that the ratio of premiums and losses remains constant. In contrast, development methods rely on observable patterns within reported losses, both historical and newly reported, to establish a view of the ultimate loss incurred. Therefore, as an accident year matures, we may migrate from an expected loss ratio method to an incurred development method.
As a predominantly broker-market reinsurer for both excess-of-loss and proportional contracts, we rely on loss information reported to brokers by primary insurers who, in turn, must estimate their losses at the policy level, often based on incomplete and changing information. The information we receive varies by cedent and may include paid losses, estimated case reserves, and an estimated provision for IBNR reserves. Reserving practices and data-reporting quality differ among ceding companies, which adds further uncertainty to our estimation of ultimate losses. The nature and extent of information received from ceding companies and brokers also vary widely depending on the type of coverage, the contractual reporting terms (which are affected by market conditions and practices), and other factors. Due to the lack of standardization of the terms and conditions of reinsurance contracts, the differences in coverage provided to individual clients, and the tendency of those coverages to change rapidly in response to market conditions, we cannot always reliably measure the ongoing economic impact of such uncertainties and inconsistencies.
Time lags are inherent in loss reporting, especially in the case of excess-of-loss reinsurance contracts. The time lags, coupled with the combined characteristics of low claim frequency and high claim severity on such contracts, 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. 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 our reliance 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.
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Since we rely on ceding company data in establishing our loss and LAE reserves, we maintain procedures designed to mitigate the risk that such information is incomplete or inaccurate. These procedures include: (i) comparisons of expected premiums to reported premiums, which helps us to identify delinquent client periodic reports; (ii) ceding company audits to identify inaccurate or incomplete reporting of claims and ensure that claims are actively and appropriately managed in line with agreed protocols and settlement authority limits; and (iii) underwriting reviews to ascertain that the losses ceded are covered as provided under the contract terms. These procedures are incorporated in our internal controls and are regularly evaluated and amended as market conditions, risk factors, and unanticipated areas of exposure develop.
We engage an independent third-party actuarial firm to perform a quarterly reserve review and annually opine on the reasonableness and adequacy of the aggregate loss reserves. We provide the third-party actuarial firm with our pricing models, reserving analysis, and other data. The actuarial firm may also inquire about the various assumptions and estimates used in the reserving analysis. The actuarial firm independently creates its own reserving models based on industry loss information, augmented by client-specific loss information and independent assumptions and estimates. Based on various reserving methodologies that the actuarial firm considers appropriate, it creates a loss reserve estimate for each segment in the portfolio. It recommends an aggregate loss reserve, including IBNR. In the event of material differences between our aggregated booked reserves and the actuarial firm's recommended reserves, the reserving committee would be notified, with the reserves adjusted as deemed appropriate. To date, there have been no material differences resulting from the external actuary’s reviews requiring adjustments to our booked reserves.
We monitor the development of our prior-year losses during subsequent calendar years by comparing the actual reported losses against previous estimates and current expectations. The analysis of this loss development is important to the ongoing refinement of our reserving assumptions. Each additional year of loss experience with a given cedent provides additional insight into the accuracy and timeliness of previously reported information.
Estimating loss reserves for our book of longer-tail casualty reinsurance business, which we write on both a proportional and non-proportional basis, involves further uncertainties. In addition to the uncertainties described above, casualty business is generally subject to longer reporting lags than property business, and claims often take several years to settle. During this period, additional factors and trends will be revealed, and we may adjust our reserves accordingly. Therefore, any factors that extend the time until our cedents settle claims add uncertainty to the reserving process.
The uncertainties inherent in the reserving process and 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 they are determined. Changes to our prior year loss reserves will impact our current underwriting results by improving our results if the prior year reserves prove redundant or impairing our results if the prior year reserves prove insufficient.
We believe that our reserves for loss and LAE are sufficient to cover losses that fall within the terms of our policies and agreements with our insured and reinsured customers based on the methodologies used to estimate those reserves. However, we can provide no assurance that actual losses will not (i) be less than or (ii) exceed our total established reserves.
Please refer to Notes 2 and 7 of our consolidated financial statements for a more detailed explanation of our loss reserving methodology and the loss development tables by accident year, respectively, as required under U.S. GAAP.
Share-Based Payments. We have established a stock incentive plan for directors, employees, and consultants. We recognize share-based compensation transactions using the fair value at the award’s grant date. We calculate the compensation for restricted stock awards and restricted stock units (“RSUs”) based on the price of the Company’s common shares at the grant date. For restricted stock awards that include both service and performance conditions, we recognize the associated expense when we determine that it is probable that the performance conditions will be achieved. For restricted stock awards with only service conditions, we recognize the associated expense, adjusted for estimated forfeitures, over the vesting period. We estimate the forfeiture rate for restricted stock awards and RSUs based on our historical experience and expectations of future forfeitures. The forfeiture rate reduces the unamortized grant date fair value of unvested outstanding restricted stock awards and RSUs and the associated stock compensation expense. As restricted shares and RSUs are forfeited, we reduce the number of outstanding restricted shares and RSUs and compare the remaining unamortized grant date fair value to the assumed forfeiture levels, adjusting the unamortized balance as necessary. For the year ended December 31, 2022, we have assumed a forfeiture rate of 8.0% (2021: 9.0% and 2020: 7.0%) for restricted stock awards and RSUs granted.
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.
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Key Financial Measures and Non-GAAP Measures
Management uses certain key financial measures, some of which are not prescribed under U.S. GAAP rules and standards (“non-GAAP financial measures”), to evaluate our financial performance, financial position, and the change in shareholder value. Generally, a non-GAAP financial measure, as defined in SEC Regulation G, is a numerical measure of a company’s historical or future financial performance, financial position, or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented under U.S. GAAP. We believe that these measures, which may be calculated or defined differently by other companies, provide consistent and comparable metrics of our business performance to help shareholders understand performance trends and facilitate a more thorough understanding of the Company’s business. Non-GAAP financial measures should not be viewed as substitutes for those determined under U.S. GAAP.
The key non-GAAP financial measures used in this report are:
•Basic book value per share and fully diluted book value per share; and
•Net underwriting income (loss)
These non-GAAP financial measures are described below.
Basic Book Value Per Share and Fully Diluted Book Value Per Share
We believe that long-term growth in fully diluted book value per share is the most relevant measure of our financial performance because it provides management and investors a yardstick to monitor the shareholder value generated. Fully diluted book value per share may also help our investors, shareholders, and other interested parties form a basis of comparison with other companies within the property and casualty reinsurance industry. Basic book value per share and fully diluted book value per share should not be viewed as substitutes for the comparable U.S. GAAP measures.
We calculate basic book value per share as (a) ending shareholders' equity, divided by (b) aggregate of Class A and Class B Ordinary shares issued and outstanding, including all unvested service-based restricted shares, and the earned portion of performance-based restricted shares granted after December 31, 2021. We exclude shares potentially issuable in connection with convertible notes if the conversion price exceeds the share price.
Fully diluted book value per share represents basic book value per share combined with any dilutive impact of in-the-money stock options, unvested service-based RSUs, and the earned portion of unvested performance-based RSUs granted. Fully diluted book value per share also includes the dilutive effect, if any, of ordinary shares expected to be issued upon settlement of the convertible notes.
Our primary financial goal is to increase fully diluted book value per share over the long term. We use fully diluted book value per share as a financial measure in our annual incentive compensation.
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:
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December 31, 2022 December 31, 2021 December 31, 2020
($ in thousands, except per share and share amounts)
Numerator for basic and fully diluted book value per share:
Total equity (U.S. GAAP) (numerator for basic and fully diluted book value per share) $ 503,120 $ 475,663 $ 464,857
Denominator for basic and fully diluted book value per share: (1)
Ordinary shares issued and outstanding as presented in the Company’s consolidated balance sheets 34,824,061 33,844,446 34,514,790
Less: Unearned performance-based restricted shares granted after December 31, 2021 (516,489) - -
Denominator for basic book value per share 34,307,572 33,844,446 34,514,790
Add: In-the-money stock options, service-based RSUs granted, and earned performance-based RSUs granted 187,750 154,134 116,722
Denominator for fully diluted book value per share 34,495,322 33,998,580 34,631,512
Basic book value per share $ 14.66 $ 14.05 $ 13.47
Increase (decrease) in basic book value per share ($) $ 0.61 $ 0.58 $ 0.57
Increase (decrease) in basic book value per share (%) 4.3 % 4.3 % 4.4 %
Fully diluted book value per share $ 14.59 $ 13.99 $ 13.42
Increase (decrease) in fully diluted book value per share ($) $ 0.60 $ 0.57 $ 0.54
Increase (decrease) in fully diluted book value per share (%) 4.3 % 4.2 % 4.2 %
(1) For periods prior to January 1, 2022, all unvested restricted shares are included in the “basic” and “fully diluted” denominators. Restricted shares with performance-based vesting conditions granted after December 31, 2021, are included in the “basic” and “fully diluted” denominators to the extent that the Company has recognized the corresponding share-based compensation expense. At December 31, 2022, the aggregate number of unearned restricted shares with performance conditions not included in the “basic” and “fully diluted” denominators was 709,638 (2021: 193,149; 2020: 193,149).
Net Underwriting Income (Loss)
One way that we evaluate the Company’s underwriting performance is by measuring net underwriting income (loss). We do not use premiums written as a measure of performance. Net underwriting income (loss) is a performance measure used by management to evaluate the fundamentals underlying the Company’s underwriting operations. We believe that the use of net underwriting income (loss) enables investors and other users of the Company’s financial information to analyze our performance in a manner similar to how management analyzes performance. Management also believes this measure follows industry practice and allows the users of financial information to compare the Company’s performance with that of our industry peer group.
Net underwriting income (loss) is considered a non-GAAP financial measure because it excludes items used to calculate net income before taxes under U.S. GAAP. We calculate net underwriting income (loss) as net premiums earned, plus other income relating to reinsurance and deposit-accounted contracts, less deposit interest expense, less net loss and loss adjustment expenses, acquisition costs, and underwriting expenses. The measure excludes, on a recurring basis: (1) investment income (loss); (2) other income (expense) not related to underwriting, including foreign exchange gains or losses, Lloyd’s interest income and expense, and adjustments to the allowance for expected credit losses; (3) corporate general and administrative expenses; and (4) interest expense. We exclude total investment income or loss, foreign exchange gains or losses, Lloyd’s interest income or expense and expected credit losses as we believe these items are influenced by market conditions and other factors unrelated to underwriting decisions. We exclude corporate and interest expenses because these costs are generally fixed and not incremental to or directly related to our underwriting operations. We believe all of these amounts are largely independent of our underwriting process, and including them could hinder the analysis of trends in our underwriting operations. Net underwriting income (loss) should not be viewed as a substitute for U.S. GAAP net income before income taxes.
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The reconciliations of net underwriting income (loss) to income (loss) before income taxes (the most directly comparable U.S. GAAP financial measure) on a consolidated basis are shown below:
Year ended December 31
2022 2021 2020
($ in thousands)
Income (loss) before income tax $ 24,526 $ 21,324 $ 4,290
Add (subtract):
Total investment (income) loss (68,983) (50,152) (25,532)
Other non-underwriting (income) expense 11,777 880 (686)
Corporate expenses 17,793 16,489 14,036
Interest expense 4,201 6,263 6,280
Net underwriting income (loss) $ (10,686) $ (5,196) $ (1,612)
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Results of Operations
The table below summarizes our operating results for the years ended December 31, 2022, 2021, and 2020:
2022 2021 2020
(in thousands, except percentages)
Underwriting revenue
Gross premiums written $ 563,171 $ 565,393 $ 479,791
Gross premiums ceded (33,429) (41) (2,268)
Net premiums written 529,742 565,352 477,523
Change in net unearned premium reserves (60,265) (26,073) (22,112)
Net premiums earned 469,477 539,279 455,411
Underwriting related expenses
Net loss and loss adjustment expenses incurred
Current year 316,367 389,080 333,096
Prior year * 118 (14,100) 4,737
Net loss and loss adjustment expenses incurred 316,485 374,980 337,833
Acquisition costs 143,148 144,960 109,288
Underwriting expenses 13,813 12,880 12,365
Deposit accounting and other reinsurance expense (income) 6,717 11,655 (2,463)
Net underwriting income (loss) 1
(10,686) (5,196) (1,612)
Income (loss) from investment in related party investment fund 54,844 18,087 4,431
Net investment income (loss) 14,139 32,065 21,101
Total investment income (loss) $ 68,983 $ 50,152 $ 25,532
Net underwriting and investment income (loss) $ 58,297 $ 44,956 $ 23,920
Corporate expenses $ 17,793 $ 16,489 $ 14,036
Other (income) expense, net 11,777 880 (686)
Interest expense 4,201 6,263 6,280
Income tax expense (benefit) (816) 3,746 424
Net income (loss) $ 25,342 $ 17,578 $ 3,866
Earnings (loss) per share (Class A and Class B)
Basic $ 0.75 $ 0.51 $ 0.11
Diluted $ 0.73 $ 0.51 $ 0.11
Underwriting ratios
Loss ratio - current year 67.4 % 72.1 % 73.1 %
Loss ratio - prior year - % (2.6) % 1.1 %
Loss ratio 67.4 % 69.5 % 74.2 %
Acquisition cost ratio 30.5 % 26.9 % 24.0 %
Composite ratio 97.9 % 96.4 % 98.2 %
Underwriting expense ratio 4.4 % 4.5 % 2.2 %
Combined ratio 102.3 % 100.9 % 100.4 %
* The net financial impacts associated with changes in the estimate of losses incurred in prior years, which incorporate earned reinstatement premiums assumed and ceded, and adjustments to assumed and ceded acquisition costs, were a loss of $12.2 million in 2022, a gain of $8.3 million in 2021, and a loss of $3.7 million in 2020.
1 Net Underwriting income (loss) is a non-GAAP financial measure. See “- Key Financial Measures and Non-GAAP Measures” above for discussion and reconciliation of non-GAAP financial measures.
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Year ended December 31, 2022, compared to 2021
For the year ended December 31, 2022, fully diluted book value per share increased by $0.60, or 4.3%, to $14.59 per share from $13.99 per share at December 31, 2021. For the year ended December 31, 2022, basic book value per share increased by $0.61, or 4.3%, to $14.66 per share from $14.05 per share at December 31, 2021. The increase in fully diluted book value per share during the year ended December 31, 2022, is net of $0.07, or 0.5%, adverse impact relating to the adoption of ASU 2020-06 (see Note 2 of the accompanying consolidated financial statements for recently issued accounting standards adopted).
For the year ended December 31, 2022, our net income was $25.3 million, compared to net income of $17.6 million reported for the equivalent 2021 period.
The developments that most significantly affected our financial performance during the year ended December 31, 2022, compared to the equivalent 2021 period, are summarized below:
•Underwriting: The underwriting loss for the year ended December 31, 2022, was $10.7 million, driven primarily by $13.6 million of losses related to the Russian-Ukrainian conflict and $25.7 million of losses related to Hurricane Ian, Typhoon Nanmadol, and wildfires in Tennessee. By comparison, the underwriting loss for the equivalent period in 2021 was $5.2 million, driven by losses from Hurricane Ida, the winter storm Uri, the European floods and hailstorms, U.S. tornados, and South African riots.
Our combined ratio was 102.3% for the year ended December 31, 2022, compared to 100.9% for the same period in 2021. The Russian-Ukrainian conflict and natural catastrophe losses contributed 8.4 percentage points to the combined ratio for the year ended December 31, 2022. During the comparable period in 2021, catastrophe losses contributed 6.1 percentage points to the combined ratio.
•Investments: Our total investment income for the year ended December 31, 2022, was $69.0 million, compared to $50.2 million earned during the equivalent 2021 period. For the year ended December 31, 2022, our investment in SILP reported a gain of $54.8 million, compared to a gain of $18.1 million during the equivalent period in 2021.
Other investment income from our Innovations investments and restricted cash and cash equivalents totaled $14.1 million and $32.1 million during the year ended December 31, 2022, and 2021, respectively.
•Other income (expense): For the year ended December 31, 2022, other expense of $11.8 million was driven primarily by:
◦foreign exchange losses, due mainly to the weakening of the pound sterling against the U.S. dollar; and
◦our share of Lloyd’s syndicates’ investment losses on Funds at Lloyd’s business, which is generally conducted on a funds withheld basis. The Lloyd’s syndicates invest a portion of these funds in fixed-maturity securities and investment funds, which were negatively impacted by rising interest rates and market volatility. We record our share of these mark-to-market adjustments when the syndicates report them to us, generally one quarter in arrears.
Underwriting results
We analyze our business based on three categories: “property,” “casualty,” and “other.”
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Gross Premiums Written
Details of gross premiums written are provided in the following table:
Year ended December 31
2022 2021
($ in thousands)
Property $ 85,323 15.2 % $ 52,947 9.4 %
Casualty 325,103 57.7 379,113 67.0
Other 152,745 27.1 133,333 23.6
Total $ 563,171 100.0 % $ 565,393 100.0 %
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 we identify.
For the year ended December 31, 2022, our gross premiums written decreased by $2.2 million, or 0.4%, compared to the same period in 2021. The changes in gross premiums written for the year ended December 31, 2022, were attributable to the following:
Gross Premiums Written
Year ended December 31, 2022
Increase (decrease)
($ in millions) % change Explanation
Property $32.4 61.1% The increase in property gross premiums written during the year ended December 31, 2022, over the comparable 2021 period was due primarily to personal lines business, driven by our Innovations partners. During the 2022 year, we added new Innovations partners to our portfolio, and one of our existing partners grew its personal lines premium volume.
Our decision to reduce or terminate our participation in certain motor business partially offset this increase.
Casualty $(54.0) (14.2)% The decrease in casualty premiums written during the year ended December 31, 2022, over the comparable 2021 period was due primarily to motor and workers’ compensation lines which decreased by $109.7 million and $33.8 million, respectively. These decreases related to contracts on which we elected to reduce or not renew our participation.
Growth in general liability and multi-line premiums, driven primarily by new and renewed Lloyd’s and Innovations-related business, partially offset the decrease in casualty premiums.
Other $19.4 14.6% The increase in “other” premiums written during the year ended December 31, 2022, over the comparable 2021 period was due primarily to the following:
•new marine and energy contracts bound during 2022; and
•new contracts bound during 2022 relating to other specialty classes, including Innovations business.
The increase was partially offset by a decrease in health premiums, due primarily to changing certain exposures from a proportional basis to excess of loss.
Premiums Ceded
For the year ended December 31, 2022, our ceded premiums were $33.4 million compared to insignificant ceded premiums for the year ended December 31, 2021. In 2022, we entered into new retrocession agreements to reduce our exposure to marine, energy, health, and property losses.
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Net Premiums Written
Details of net premiums written are provided in the following table:
Year ended December 31
2022 2021
($ in thousands)
Property $ 67,680 12.8 % $ 53,014 9.4 %
Casualty 315,935 59.6 379,145 67.0
Other 146,127 27.6 133,193 23.6
Total $ 529,742 100.0 % $ 565,352 100.0 %
For the year ended December 31, 2022, net premiums written decreased by $35.6 million, or 6.3%, compared to the year ended December 31, 2021. The movement in net premiums written resulted from the changes in gross premiums written and ceded during the periods.
Net Premiums Earned
Details of net premiums earned are provided in the following table:
Year ended December 31
2022 2021
($ in thousands)
Property $ 52,397 11.2 % $ 56,075 10.4 %
Casualty 289,820 61.7 351,390 65.2
Other 127,260 27.1 131,814 24.4
Total $ 469,477 100.0 % $ 539,279 100.0 %
Net premiums earned are primarily a function of the amount and timing of net premiums written during the current and prior periods.
Loss and Loss Adjustment Expenses Incurred, Net
Details of net losses incurred are provided in the following table:
Year ended December 31
2022 2021
($ in thousands)
Property $ 40,885 12.9 % $ 45,987 12.3 %
Casualty 205,641 65.0 256,830 68.5
Other 69,959 22.1 72,163 19.2
Total $ 316,485 100.0 % $ 374,980 100.0 %
The below table summarizes the loss ratios for the years ended December 31, 2022, and 2021:
Year ended December 31
2022 2021 Increase / (decrease) in loss ratio points
Property 78.0 % 82.0 % (4.0) %
Casualty 71.0 73.1 (2.1)
Other 55.0 54.7 0.3
Total 67.4 % 69.5 % (2.1) %
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The changes in net losses incurred for the year ended December 31, 2022, as compared to the year ended December 31, 2021, were attributable to the following:
Increase (decrease)
($ in millions) Increase / (decrease) in loss ratio points Explanation
Property $(5.1) (4.0)% Our decision to reduce or terminate our participation in certain motor business was the primary driver of the decrease in property losses incurred during the year ended December 31, 2022, compared to the same period in 2021. To a lesser extent, favorable loss development relating to prior years’ catastrophe events also contributed to the decrease in property losses incurred during the year ended December 31, 2022.
The $18.4 million decrease in motor losses was partially offset by the following:
•our growing personal lines portfolio; and
•losses relating to Russian-Ukrainian conflict and natural catastrophes that occurred during 2022, including Hurricane Ian, Typhoons Nanmadol and Hinnamnor, and Tennessee wildfires.
The property loss ratio decreased 4.0 percentage points during the year ended December 31, 2022, over the equivalent 2021 period. This decrease was due primarily to improved loss ratios within the personal and commercial lines business, which was partially offset by higher loss ratio on our shrinking motor business.
Casualty $(51.2) (2.1)% Our decision to reduce or terminate our participation in certain motor and workers’ compensation business was the primary driver of the decrease in casualty losses incurred during the year ended December 31, 2022, compared to the same period in 2021.
The decreases in motor and workers’ compensation losses of $65.3 million and $22.7 million, respectively, were partially offset by higher incurred losses relating to the following:
•Hurricane Ian; and
•growth in our general liability and multi-line contracts.
The casualty loss ratio decreased 2.1 percentage points during the year ended December 31, 2022, over the equivalent 2021 period, due primarily to changes in our business mix. We increased our general liability and multi-line business, which generally incorporates lower loss ratios than the motor and workers’ compensation business it replaced. Adverse loss development on certain motor, workers’ compensation, and multi-line contracts partially offset the loss ratio decreases.
Other $(2.2) 0.3% The decrease in “other” losses incurred during the year ended December 31, 2022, compared to the same period in 2021, was due primarily to certain health contracts on which we elected to reduce or not renew our participation. To a lesser extent, the decrease related to the following:
•loss reserves released on certain mortgage contracts; and
•crop losses incurred in the equivalent 2021 period.
The decrease was partially offset by the following:
•losses relating to the Russian-Ukrainian conflict; and.
•growth in transactional liability and marine and energy business.
The “other” loss ratio increased 0.3 percentage points during the year ended December 31, 2022, over the equivalent 2021 period, due primarily due to the decrease in “other” net earned premiums.
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Russian-Ukrainian Conflict
Our loss and loss adjustment expenses from the Russian-Ukrainian conflict relate primarily to marine, energy, political violence, and terrorism (“MEPVT”) policies and whole account contracts, which are included in our Other - Specialty book of business. We have purchased excess of loss reinsurance to reduce our net exposure relating to MEPVT exposures. As of December 31, 2022, we have not recorded any reinsurance recoveries, as the estimated losses had not impacted the excess layers. However, we may generate recoveries under the retroceded contracts if we recognize significant further MEPVT losses from the Russian-Ukrainian conflict.
See “Critical Accounting Policies and Estimates, Loss and Loss Adjustment Expense Reserves” and “Note 7. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES” in our Notes to the consolidated financial statements for additional discussion of our reserving techniques and prior year development of net claims and claim expenses.
Acquisition Costs, Net
Details of acquisition costs are provided in the following table.
Year ended December 31
2022 2021
($ in thousands)
Property $ 11,638 8.1 % $ 11,936 8.2 %
Casualty 83,936 58.7 93,499 64.5
Other 47,574 33.2 39,525 27.3
Total $ 143,148 100.0 % $ 144,960 100.0 %
The acquisition cost ratios for the years ended December 31, 2022, and 2021, were as follows:
2022 2021 Increase / (decrease)
Property 22.2 % 21.3 % 0.9 %
Casualty 29.0 26.6 2.4
Other 37.4 30.0 7.4
Total 30.5 % 26.9 % 3.6 %
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The changes in the acquisition cost ratios during the year ended December 31, 2022, compared to the year ended December 31, 2021, were attributable to the following:
Increase / (decrease) in acquisition cost ratio points Explanation
Property 0.9% The increase in property acquisition cost ratio for the year ended December 31, 2022, over the comparable 2021 period, was driven by the higher ceding commissions on our growing portfolio of personal property quota share contracts relative to the reduction in our motor business.
Casualty 2.4% The increase in the casualty acquisition cost ratio for the year ended December 31, 2022, over the comparable 2021 period, was due primarily to changes in our business mix. The motor and workers’ compensation premiums, which decreased in 2022, generally incorporate a lower ceding commission rate than the general liability and multi-line business, which grew in 2022.
Other 7.4% The increase in the “other” acquisition cost ratio for the year ended December 31, 2022, over the comparable 2021 period, was due primarily to the following:
•growth in transactional liability business, which carries higher ceding commission rates than most other specialty business;
•increased profit commissions on mortgage contracts driven by favorable loss development;
•new specialty quota share contracts bound in 2022, which incorporate relatively high acquisition costs; and
•decreases health business, which generally carries relatively low ceding commissions.
Ratio Analysis
The following table provides our underwriting ratios by line of business:
Year ended December 31 Year ended December 31
2022 2021
Property Casualty Other Total Property Casualty Other Total
Loss ratio 78.0 % 71.0 % 55.0 % 67.4 % 82.0 % 73.1 % 54.7 % 69.5 %
Acquisition cost ratio 22.2 29.0 37.4 30.5 21.3 26.6 30.0 26.9
Composite ratio 100.2 % 100.0 % 92.4 % 97.9 % 103.3 % 99.7 % 84.7 % 96.4 %
Underwriting expense ratio 4.4 4.5
Combined ratio 102.3 % 100.9 %
General and Administrative Expenses
Details of general and administrative expenses are provided in the following table:
Year ended December 31
2022 2021
($ in thousands)
Underwriting expenses $ 13,813 $ 12,880
Corporate expenses 17,793 16,489
General and administrative expenses $ 31,606 $ 29,369
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For the year ended December 31, 2022, general and administrative expenses increased by $2.2 million, or 7.6%, compared to the equivalent 2021 period. The increase was due primarily to (i) a $1.5 million increase in share-based compensation and (ii) $1.1 million of separation and severance costs incurred in 2022. Lower personnel bonus expense partially offset the increase.
For the year ended December 31, 2022, and 2021, general and administrative expenses included $4.7 million and $3.2 million, respectively, of costs related to share-based compensation granted to employees and directors.
Total Investment Income (Loss)
Total investment income (loss) incorporates (i) changes in the net asset value of our investment in SILP managed by DME Advisors, (ii) interest income earned on the restricted cash and cash equivalents pledged as collateral to our clients, and (iii) gains (or losses) and interest on our portfolio of strategic and Innovations investments, and investments accounted for under the equity method. We expect our total investment income, including any change in the net asset value of our investment in SILP, to fluctuate from period to period.
A summary of our total investment income (loss) is as follows:
Year ended December 31
2022 2021
($ in thousands)
Interest and dividend income, net of withholding taxes $ 10,865 $ 200
Change in unrealized gains and losses 9,858 19,560
Realized gains (losses) - 14,210
Investment-related foreign exchange gains (losses) (185) (45)
Interest, dividend, and other expenses (6,399) (1,860)
Net investment-related income (loss) $ 14,139 $ 32,065
Income (loss) from investments in related party investment fund 54,844 18,087
Total investment income (loss) $ 68,983 $ 50,152
The caption “Income (loss) from investment in related party investment fund” in the above table is net of management fees paid by SILP to DME Advisors and performance compensation, if any, allocated from the Company’s investment in SILP to DME II. No performance compensation is allocated in periods of loss reported by SILP. For further information about management fees and performance compensation for the years ended December 31, 2022, and 2021, please refer to Note 3 of the consolidated financial statements.
For the year ended December 31, 2022, the Investment Portfolio managed by DME Advisors reported a gain of 25.3%, compared to a gain of 7.5% for the year ended December 31, 2021. On a gross basis, the long and the short portfolio earned 0.0%, and 26.1%, respectively, while macro and other positions gained 2.0%, during the year ended December 31, 2022. For the year ended December 31, 2022, the most significant contributors to SILP’s investment return were long positions in Twitter and Consol Energy, and a short position in a basket of stocks perceived to be overvalued. The most significant detractors for the year ended December 31, 2022, were long positions in Green Brick Partners, Danimer Scientific, and GoPro.
During the year ended December 31, 2022, some of our Innovations-related investees completed new financing rounds. The associated carry-value increases contributed to a net unrealized gain of $9.9 million (2021: $19.6 million). The unrealized gains are net of a $1.7 million valuation allowance recorded on certain Innovations-related investments during the year ended December 31, 2022 (2021: $0.5 million).
The increase in interest income for the year ended December 31, 2022, was primarily related to our restricted cash and cash equivalents, which benefited from rising U.S. interest rates. The interest, dividend, and other expenses primarily relate to interest payable on funds withheld.
For the year ended December 31, 2021, we realized gains of $14.2 million related to the sale of a strategic investment.
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For the years ended December 31, 2022, and 2021, the gross investment return (loss) on our investments managed by DME Advisors (excluding the investment advisor performance allocation) was composed of the following:
2022 2021
Long portfolio gains (losses) - % 24.3 %
Short portfolio gains (losses) 26.1 (7.9)
Macro gains (losses) 3.8 (6.0)
Other income and expenses 1
(1.8) (2.1)
Gross investment return 28.1 % 8.3 %
Net investment return 1
25.3 % 7.5 %
1 “Other income and expenses” excludes performance compensation but includes management fees. “Net investment return” incorporates both of these amounts.
For the years ended December 31, 2022, and 2021, the Investment Portfolio was calculated based on 50% of GLRE Surplus, or the Company's shareholders' equity, as reported in the Company’s then most recent quarterly U.S. GAAP financial statements adjusted monthly for our share of the net profits and net losses reported by SILP during any intervening period (the “adjusted GLRE Surplus”). Effective January 1, 2023, the Investment Portfolio is calculated based on 60% of adjusted GLRE Surplus.
Each month, we post on our website (www.greenlightre.com) the returns from our investment in SILP.
Income Taxes
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 the 20 years expiring February 1, 2025.
GRIL is incorporated in Ireland and is subject to the Irish corporation tax. We expect GRIL to be taxed at 12.5% on its taxable trading income and 25% on its non-trading income, if any. Greenlight Re UK and GCM are incorporated in the United Kingdom and therefore are subject to the U.K. corporate tax rate of 19% on their profits.
Verdant is incorporated in Delaware and is subject to taxes under the U.S. federal rates and regulations prescribed by the Internal Revenue Service. We expect Verdant’s future taxable income to be taxed at 21%. For the year ended December 31, 2021, the income tax expense of $0.8 million was due primarily to the gain on the sale of our investment in AccuRisk.
At December 31, 2022, we have included a gross deferred tax asset of $2.8 million (December 31, 2021: $3.2 million) in the caption “Other assets” in the Company’s consolidated balance sheets. At December 31, 2022, a valuation allowance of $2.3 million (2021: $2.7 million) partially offset this gross deferred tax asset. We have concluded that it is more likely than not that the Company will fully realize the recorded deferred tax asset (net of the valuation allowance) in the future. We have based this conclusion on the expected timing of the reversal of the temporary differences and the likelihood of generating sufficient taxable income to realize the future tax benefit. We have not taken any other tax positions that we believe are subject to uncertainty or reasonably likely to have a material impact on the Company.
Financial Condition
Total investments
The total investments reported in the consolidated balance sheets at December 31, 2022, was $248.5 million, compared to $231.0 million at December 31, 2021, an increase of $17.5 million, or 7.6%. The increase was primarily related to gains on SILP and Innovations-related investments and the purchase of certificates of deposit. The increase was partially offset by net redemptions from SILP.
At December 31, 2022, 91.6% of SILP’s portfolio was valued based on quoted prices in actively traded markets (Level 1), 6.3% was composed of instruments valued based on observable inputs other than quoted prices (Level 2), and a nominal amount was composed of instruments valued based on non-observable inputs (Level 3). At December 31, 2022, 2.1% of SILP’s portfolio consisted of private equity funds valued using the funds’ net asset values as a practical expedient.
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At December 31, 2022, 86% of our Innovations-related portfolio was carried at fair value on a nonrecurring basis, measured as of the investees’ most recently completed financing round, and 14% was carried at the original cost.
Other than our investment in SILP (see Notes 3 and 4 of the accompanying consolidated financial statements), we have not participated in transactions that created relationships with unconsolidated entities or financial partnerships, including VIEs, established to facilitate off-balance sheet arrangements.
Cash and cash equivalents; Restricted cash and cash equivalents
Unrestricted cash and cash equivalents decreased by $38.1 million, or 49.9%, from $76.3 million at December 31, 2021, to $38.2 million at December 31, 2022, primarily due to cash used for operations, repurchase of senior convertible debt, purchase of Innovations-related investments and collateral posted to our ceding insurers.
We use our restricted cash and cash equivalents for funding trusts and letters of credit issued to our ceding insurers. Our restricted cash increased by $33.5 million, or 5.3%, from $634.8 million at December 31, 2021, to $668.3 million, at December 31, 2022, primarily due to collateral required by our ceding insurers.
Reinsurance balances receivable
During the year ended December 31, 2022, reinsurance balances receivable increased by $100.2 million, or 24.7%, to $505.6 million from $405.4 million at December 31, 2021. This increase was related primarily to funds withheld by cedents. At December 31, 2022, funds held by cedents were $337.4 million, compared to $246.9 million at December 31, 2021. Funds withheld predominantly relate to premiums withheld by Lloyd’s syndicates and funds contributed by the Company to Lloyd's as security for members’ underwriting activities. The remaining increase related to premiums receivable on new contracts bound during the year ended December 31, 2022.
Loss and Loss Adjustment Expense Reserves; Loss and Loss Adjustment Expenses Recoverable
Reserves for loss and loss adjustment expenses were composed of the following:
December 31, 2022 December 31, 2021
Case
Reserves IBNR Total Case
Reserves IBNR Total
($ in thousands)
Property $ 20,354 $ 41,361 $ 61,715 $ 21,357 $ 49,486 $ 70,843
Casualty 146,702 227,979 374,681 151,734 219,949 371,683
Other 17,700 101,372 119,072 17,129 64,355 81,484
Total $ 184,756 $ 370,712 $ 555,468 $ 190,220 $ 333,790 $ 524,010
During the year ended December 31, 2022, the total gross loss and loss adjustment expense reserves increased by $31.5 million, or 6.0%, to $555.5 million from $524.0 million at December 31, 2021. See Note 7 of the accompanying consolidated financial statements for a summary of changes in outstanding loss and loss adjustment expense reserves and a description of prior period loss developments.
During the year ended December 31, 2022, total loss and loss adjustment expenses recoverable increased by $2.1 million, or 19.3%, to $13.2 million from $11.1 million at December 31, 2021. See Note 8 of the accompanying consolidated financial statements for a description of the credit risk associated with our retrocessionaires.
For most of the contracts we write, defined limits of liability limit our risk exposure. Once each contract’s limit of liability has been reached, we have no further exposure to additional losses from that contract. However, certain contracts, particularly quota share contracts covering first-dollar exposure, do not contain aggregate limits.
Our property and Lloyd’s business, and to a lesser extent our casualty and other business, incorporate contracts that contain natural peril loss exposure. We currently monitor our catastrophe loss exposure in terms of our PML.
We anticipate that our PMLs will vary from period to period depending upon the modeled simulated losses and the composition of our in-force book of business.
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We monitor our natural peril PMLs on a worldwide basis, with a particular focus on our peak peril regions. When these perils consist of a large geographic area, we split them into sub-regions, where the underlying geographic components can also be considered individual peril zones.
For our natural catastrophe PMLs, we utilize the output of catastrophe models at the 1-in-250-year return period. The 1-in-250-year return period PML means that we believe there is a 0.4% probability that, in any given year, an occurrence of a natural catastrophe will lead to losses exceeding the stated estimate.
It is important to note that PMLs are best estimates based on the modeled data available for each underlying risk. As a result, we cannot provide assurance that any actual event will align with the modeled event or that actual losses from events similar to the modeled events will not vary materially from the modeled event PML.
Our PML estimates incorporate all significant exposure from our reinsurance operations, including coverage for property, marine and energy, motor, and catastrophe workers’ compensation exposures.
At January 1, 2023, our estimated largest PML (net of retrocession and reinstatement premiums) at a 1-in-250-year return period for a single event and in aggregate was $77.5 million and $83.5 million, respectively, both relating to the peril of North Atlantic Hurricane.
The below table contains the expected modeled loss for each of our peak peril regions and sub-regions for both a single event loss and aggregate loss measures at the 1-in-250-year return period.
January 1, 2023
Net 1-in-250 Year Return Period
Peril Single Event Loss Aggregate Loss
($ in thousands)
North Atlantic Hurricane $ 77,503 $ 83,521
Southeast Hurricane 64,207 65,714
Gulf of Mexico Hurricane 51,106 55,608
Northeast Hurricane 50,603 50,603
North America Earthquake 66,958 69,979
California Earthquake 61,100 64,216
Other N.A. Earthquake 22,914 24,505
Japan Earthquake 21,137 22,586
Japan Windstorm 17,511 19,549
Europe Windstorm 30,758 35,053
Total shareholders’ equity
Total equity reported on the consolidated balance sheet increased by $27.5 million to $503.1 million at December 31, 2022, compared to $475.7 million at December 31, 2021. The increase in shareholders’ equity during the year ended December 31, 2022, was primarily due to the net income of $25.3 million reported for the year, partially offset by the adoption of ASU 2020-06 (see Note 2 of the accompanying consolidated financial statements). For details of other movements in shareholders’ equity, please see the “Consolidated Statements of Changes in Shareholders’ Equity” in the accompanying consolidated financial statements.
Liquidity and Capital Resources
General
Greenlight Capital Re is a holding company with no operations of its own. As a holding company, Greenlight Capital Re has minimal continuing cash needs, most of which are related to the payment of corporate and general administrative expenses and interest expenses. We conduct all our underwriting operations through our wholly-owned reinsurance subsidiaries, Greenlight Re and GRIL, which underwrite property and casualty reinsurance. There are restrictions on Greenlight Re’s and GRIL’s ability to pay dividends described in more detail below. Our current policy is to retain earnings to support the growth of our business. We currently do not expect to pay dividends on our ordinary shares.
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At December 31, 2022, Greenlight Re and GRIL were each rated “A- (Excellent)” with a stable outlook by A.M. Best. The ratings reflect A.M. Best’s opinion of our reinsurance subsidiaries’ financial strength, operating performance, and ability to meet obligations. They are not evaluations directed toward the protection of investors or a recommendation to buy, sell or hold our Class A ordinary shares. If A.M. Best downgrades our ratings below “A- (Excellent)” 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. Our A.M. Best ratings may be revised or revoked at the sole discretion of the rating agency.
Some 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 A.M. Best ratings below A- (Excellent) or a reduction of our capital or surplus below specified levels over the course of the agreement. In the periods presented, there were no such cancellations or other adjustments relating to novations, commutations, or similar actions that had a material impact on our premiums written, net income, or liquidity position, either individually or in the aggregate.
Contracts containing such cancellation rights represented approximately 8% of gross premiums written during 2022. We believe if all additional collateral requirements had been triggered at December 31, 2022, additional required collateral would equal approximately $92 million.
Sources and Uses of Funds
Our sources of funds consist primarily of premium receipts (net of brokerage and ceding commissions), investment income, and other income. We use cash from our operations to pay losses and loss adjustment expenses, profit commissions, interest, and general and administrative expenses. At December 31, 2022, all of our investable assets, excluding strategic and Innovations investments and funds required for business operations and capital risk management, are invested by DME Advisors in SILP, subject to our investment guidelines. We can redeem funds from SILP at any time for operational purposes by providing three days’ notice to the general partner. At December 31, 2022, the majority of SILP’s long investments were composed of cash and cash equivalents and publicly traded equity securities, which can be readily liquidated to meet our redemption requests. We record all investment income (loss), including any changes in the net asset value of SILP, and any unrealized gains and losses, in our consolidated statements of operations for each reporting period.
For the years ended December 31, 2022, and 2021, the net cash used in operating activities was $31.8 million and $56.3 million, respectively. The net cash used in operating activities was used primarily for our underwriting activities and for payment of corporate and general administrative expenses. Generally, if the premiums collected exceed claim payments within a given period, we generate cash from our underwriting activities. Our underwriting activities represented a net use of cash for the years ended December 31, 2022, and 2021, as the losses we paid exceeded the premiums we collected. On our Lloyd’s syndicate contracts, we do not receive any premiums until the year of account is settled, net of losses, at the end of three years. Our Lloyd’s syndicate business has been growing in recent years. The increase in funds contributed to Lloyd's as security for members' underwriting activities has contributed to the net use of cash for underwriting activities. The cash used in and generated from underwriting activities may vary significantly from period to period depending on the mix of business, the nature of underwriting opportunities available, and the volume of claims submitted to us by our cedents.
For the year ended December 31, 2022, our investing activities provided net cash of $47.0 million. We redeemed $60.2 million of cash from SILP (net of contributions) and used $13.2 million for new Innovations and other investments. By comparison, for the same period in 2021, our investing activities provided net cash of $23.1 million.
For the year ended December 31, 2022, we used $19.8 million to repurchase our convertible senior notes. During the same period in 2021, we used $10.0 million to repurchase our Class A ordinary shares.
At December 31, 2022, we believe we have sufficient liquidity to meet our foreseeable financial requirements. We do not expect the recent global events, including Hurricane Ian, the Russian-Ukrainian conflict, and the COVID-19 pandemic, to materially impact our operational liquidity needs. These needs will be met by cash, funds generated from underwriting activities, and investment income, including withdrawals from SILP if necessary. At December 31, 2022, we expect to fund our operations for the foreseeable future from operating and investing cash flows.
We are evaluating various alternatives in relation to the convertible senior notes that mature in August 2023. In addition, we may explore various financing options, including debt refinancing and other capital raising alternatives, to fund our business strategy, improve our capital structure, increase surplus, pay claims, or make acquisitions. We can provide no assurances regarding the terms of such transactions or that any such transactions will occur. If we are unable to refinance the convertible senior notes, we will be required to fund settlement at maturity using cash on hand, or withdrawals from SILP, which may negatively affect our ability to implement our business strategy.
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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 us. In addition, any dividend payment would have to be approved by the relevant regulatory authorities prior to payment. At December 31, 2022, Greenlight Re and GRIL exceeded their regulatory minimum capital requirements.
Letters of Credit and Trust Arrangements
At December 31, 2022, neither Greenlight Re nor GRIL was licensed or admitted as a reinsurer in any jurisdiction other than the Cayman Islands and the European Economic Area, respectively. Many jurisdictions do not permit domestic insurance companies to take credit on their statutory financial statements for loss recoveries or ceded unearned premiums unless appropriate measures are in place for reinsurance obtained from unlicensed or non-admitted insurers. As a result, we anticipate that all of our U.S. clients and some non-U.S. clients will require us to provide collateral through funds withheld, trust arrangements, letters of credit, or a combination thereof.
At December 31, 2022, we had one (2021: one) letter of credit facility available with an aggregate capacity of $275.0 million (2021: $275.0 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. At December 31, 2022, the aggregate amount of collateral provided to cedents under such arrangements was $667.6 million (2021: $633.9 million). At December 31, 2022, the letters of credit and trust accounts were secured by restricted cash and cash equivalents with a total fair value of $668.3 million (2021: $634.8 million).
The letter of credit facility contains customary events of default and restrictive covenants, including but not limited to limitations on liens on collateral, transactions with affiliates, mergers, and sales of assets, as well as solvency and maintenance of certain minimum pledged equity requirements 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 facility, Greenlight Re would be prohibited from paying dividends to its parent company. The Company was in compliance with all the covenants of this facility at December 31, 2022.
Capital
Our capital structure currently consists of senior convertible notes and equity issued in two classes of ordinary shares. We expect that the existing capital base and internally generated funds will be sufficient to implement our business strategy for the foreseeable future. Consequently, we do not presently anticipate that we will incur any additional material indebtedness in the ordinary course of our business. However, to provide us with flexibility and timely access to public capital markets should we require additional capital for working capital, capital expenditures, acquisitions, or other general corporate purposes, we have filed a Form S-3 registration statement, which expires in July 2024. In addition, as noted above, we may explore various financing alternatives, although there can be no assurance that additional financing will be available on acceptable terms when needed or desired. We did not make any significant commitments for capital expenditures during the year ended December 31, 2022.
The Board of Directors had previously approved a share repurchase plan authorizing the Company to repurchase up to $25.0 million of 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.
On April 26, 2022, the Board of Directors renewed and extended the share repurchase plan until June 30, 2023. The Company is not required to repurchase any Class A ordinary shares, and the repurchase plan 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, 2022, the Company repurchased 4,933 Class A ordinary shares at an average share price of $7.04.
The Company may, from time to time, repurchase some of its 4.00% convertible senior notes due 2023 (the “Notes”) in privately negotiated transactions, in open market repurchases, or pursuant to one or more tender offers. During the year ended December 31, 2022, the Company repurchased and retired Notes with a face value of $20.4 million. Subsequent to December 31, 2022, the Company repurchased and retired an additional $13.8 million of Notes.
Under the Company’s stock incentive plan, the number of Class A ordinary shares authorized for issuance is 8.0 million shares. At December 31, 2022, 2,011,426 Class A ordinary shares were available for future issuance under the Company’s stock incentive plan. The Compensation Committee of the Board of Directors administers the stock incentive plan.
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Contractual Obligations and Commitments
Due to the nature of our reinsurance operations, the amount and timing of the cash flows associated with our reinsurance contractual liabilities will fluctuate, perhaps materially, and, therefore, are highly uncertain. At December 31, 2022, we estimate that we will pay the loss and loss adjustment expense reserves as follows:
Less than
1 year 1-3 years 3-5 years More than
5 years Total
($ in thousands)
Loss and loss adjustment expense reserves (1)
275,512 164,974 62,768 52,214 555,468
(1) 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.
Greenlight Re entered into a lease agreement for office space in the Cayman Islands commencing July 1, 2021 and expiring June 30, 2026, unless Greenlight Re exercises its right to renew it for another five years. GRIL entered into a lease agreement for office space in Dublin, Ireland commencing October 1, 2021, and expiring September 30, 2031, unless GRIL exercises the break clause by providing a notice of termination at least nine months prior to September 30, 2026. The aggregate annual lease obligation ranges from $0.5 million to $0.6 million.
At December 31, 2022, the Company has $79.6 million of senior convertible notes payable, which mature on August 1, 2023. The Company is obligated to make semiannual interest payments of $2.0 million at an interest rate of 4.0% per annum. The Company has received regulatory approval to declare dividends from Greenlight Re to meet the interest payments obligation.
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. 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 a 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. At December 31, 2022, we estimate the reduced performance allocation of 10% to continue to be applied until SILP achieves additional investment returns of 148.5%, at which point the performance allocation will revert to 20%. For detailed breakdowns of management fees and performance compensation for the year ended December 31, 2022, and 2021, please refer to Note 3 of the consolidated financial statements.
The Company has 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 service agreement had an initial term of one year and continues for sequential one-year periods until terminated by us or DME Advisors. Either party may terminate the service agreement for any reason with 30 days prior written notice to the other party.
Our related party transactions are presented in Note 14 to the accompanying consolidated financial statements.
Effects of Inflation
Inflation generally affects the cost of claims and claim expenses. Long-tailed lines of business generally have greater exposure to inflation than short-tailed lines, with this differential becoming more pronounced as the severity of inflation increases. Our underwriting portfolio is predominantly short-tailed, and we actively manage our exposures to classes that experience significant inflation. Our pricing and reserving models incorporate the anticipated effects of inflation on our claim costs, and we regularly review and update our assumptions. However, we cannot predict or estimate the onset, duration, and severity of an inflationary period with precision. The actual effect of inflation may differ significantly from our assumptions.
Inflation can also affect the asset values in SILP’s investment portfolio. DME Advisors regularly monitors and re-positions SILP’s investment portfolio to deal with the impact of inflation on its underlying investments, and holds macro positions to benefit from a rising inflationary environment.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We believe we are principally exposed to the following types of market risk:
• equity price risk;
• commodity price risk;
• foreign currency risk;
• interest rate risk;
• credit risk; and
• political risk.
Equity Price Risk
At December 31, 2022, our investments consisted primarily of an investment in SILP. Among SILP’s holdings are equity securities, the carrying values of which are based primarily on quoted market prices. Generally, market prices of common equity securities are subject to fluctuation, which could cause the amount to be realized upon closing a position to differ significantly from its current reported value. This risk is partly mitigated by the presence of both long and short equity securities as part of our investment strategy. At December 31, 2022, a 10% decline in the price of each of the underlying listed equity securities and equity-based derivative instruments would result in an $8.1 million loss to our Investment Portfolio.
Computations of the prospective effects of hypothetical equity price changes are based on numerous assumptions, including the maintenance of the current composition of SILP’s portfolio. The computations should not be relied on as indicative of future results.
Commodity Price Risk
Generally, market prices of commodities are subject to fluctuation. SILP’s investments periodically include long or short investments in commodities or derivatives directly impacted by fluctuations in the prices of commodities. At December 31, 2022, SILP’s investments incorporate unhedged exposure to changes in gold, silver, uranium, and crude oil prices.
The following table summarizes the net impact that a 10% increase and decrease in commodity prices would have on the value of our Investment Portfolio at December 31, 2022. The below table excludes the indirect effect that changes in commodity prices might have on equity securities in our Investment Portfolio.
10% increase in commodity prices 10% decrease in commodity prices
Commodity Change in
fair value Change in
fair value
($ in millions)
Gold $ 3.6 $ (3.6)
Silver 0.3 (0.3)
Uranium 0.3 (0.3)
Crude oil 0.2 (0.2)
Total $ 4.4 $ (4.4)
Foreign Currency Risk
Certain of our reinsurance contracts are denominated in foreign currencies, whereby premiums are receivable and losses are payable in foreign currencies. Foreign currency exchange rate risk exists to the extent that our foreign currency reinsurance balances are more than (or less than) the corresponding foreign currency cash balances, and there is an increase (or decrease) in the exchange rate of that foreign currency.
While we do not seek to precisely 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 may use foreign currency cash and cash equivalents or forward foreign currency exchange contracts to mitigate against adverse foreign currency movements.
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Certain cedents, particularly the Lloyd’s syndicates, report to us in foreign currencies even though some or all of the underlying exposure is denominated in U.S. dollars. Our consolidated statements of operations may report a foreign exchange gain or loss associated with this exposure when reported by the cedents. Additionally, we may report foreign exchange gains or losses due to the mismatch between the currency exchange rates applied to foreign-denominated (i) monetary balances and (ii) non-monetary balances under U.S. GAAP. See Note 2 of the accompanying consolidated financial statements for further information regarding our accounting treatment of foreign currency transactions.
We monitor our foreign currency-denominated assets and liabilities on an “underlying exposure” basis without distinguishing between monetary and non-monetary balances.
At December 31, 2022, our underlying exposure to GBP-denominated net reinsurance asset balance was £5.2 million. At December 31, 2022, a 10% decrease in the U.S. dollar against the GBP (all else constant) would result in an estimated $0.6 million foreign exchange gain. Alternatively, a 10% increase in the U.S. dollar against the GBP would result in an estimated $0.6 million foreign exchange loss. Similarly, at December 31, 2022, our net underlying exposure to Euro-denominated reinsurance liability balances was €10.5 million. At December 31, 2022, a 10% decrease in the U.S. dollar against the Euro (all else constant) would result in an estimated $1.1 million foreign exchange loss. Alternatively, a 10% increase in the U.S. dollar against the Euro would result in an estimated $1.1 million foreign exchange gain.
We may also be exposed to foreign currency risk through SILP’s underlying cash, forwards, options, and investments in securities denominated in foreign currencies. At December 31, 2022, most of SILP’s currency exposures resulting from foreign-denominated securities (longs and shorts) were reduced by offsetting cash balances denominated in the corresponding foreign currencies.
At December 31, 2022, a 10% increase or decrease in the value of the U.S. dollar against foreign currencies would have no meaningful impact on the value of our Investment Portfolio.
Interest Rate Risk
The primary market risk exposure for any debt instrument is interest rate risk. As interest rates rise, the fair value of a long fixed-income portfolio generally falls. Similarly, falling interest rates generally lead to increases in the fair value of fixed-income securities. Additionally, some derivative investments may be sensitive to interest rates, and their value may indirectly fluctuate with changes in interest rates.
The caption “Reinsurance balances receivable” in our consolidated balance sheets incorporates amounts held by cedents, including the Lloyd’s syndicates in which we participate. These syndicates invest a portion of the premiums withheld in fixed-income and variable-yield securities, which expose us to interest rate risk. At December 31, 2022, a 100 basis points increase or decrease in interest rates would result in an estimated $2.2 million loss or gain, respectively, which would be recorded in our consolidated statements of operations under the captions “Other income (expense).”
Our restricted cash and cash equivalents earn interest at rates that generally follow the movements of the short-term U.S. Treasury rates. At December 31, 2022, a 100 basis points increase or decrease in U.S. Federal Funds Rate would result in approximately a $5.7 million increase or decrease, respectively, in our interest income on an annualized basis.
Our investment in SILP includes interest-rate sensitive securities, such as corporate and sovereign debt instruments and interest-rate options. At December 31, 2022, a 100 basis points increase or decrease in interest rates would result in a $4.4 million gain or a $4.9 million loss, respectively, to our Investment Portfolio.
We, along with DME Advisors, monitor the net exposure to interest rate risk and generally do not expect changes in interest rates to have a materially adverse impact on our operations.
Credit Risk
Credit risk relates to the uncertainty of a counterparty’s ability to make timely payments in accordance with the terms of the instrument or contract. Our maximum exposure to credit risk is the carrying value of our financial assets. We evaluate the financial condition of our business partners and clients relating to balances receivable under our reinsurance contracts, including premiums receivable, losses recoverable, and commission adjustments recoverable. We obtain collateral in the form of funds withheld, trusts, and letters of credit from our counterparties to mitigate this credit risk. We monitor our net exposure to each counterparty relative to the financial strength of our counterparties and assess the collectibility of these balances on a regular basis. See Note 2 of the accompanying consolidated financial statements for further details on allowance for credit loss on reinsurance assets.
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In addition, the securities, commodities, and cash in SILP’s investment portfolio are held with several prime brokers and derivative counterparties, subjecting SILP, and indirectly us, to a significant concentration of credit risk. While we have no direct control over SILP, DME Advisors regularly monitors the concentration of credit risk with each counterparty and, if appropriate, transfers cash or securities between counterparties or requests collateral to diversify and mitigate this credit risk.
Political Risk
Through our assumed reinsurance contracts, we currently provide a limited amount of political risk insurance coverage. We do not expect this exposure to have a materially adverse impact on our underwriting results.
We are exposed to political risk to the extent that we underwrite business from entities located in foreign markets and to the extent that DME Advisors, on behalf of SILP and subject to our investment guidelines, trades securities listed on various U.S. and foreign exchanges and markets. The governments in any of these jurisdictions could impose restrictions, regulations, or other measures, which may have a material adverse impact on our underwriting operations and investment strategy. See “Item 1A. Risk Factors - We could face unanticipated losses from political instability, which could have a material adverse effect on our financial condition and results of operations.”

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this Item is set forth under Part IV Item 15.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by Rules 13a-15 and 15d-15 of the Exchange Act, 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 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 Exchange Act 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 frauds. 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 controls. 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.
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Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter ended December 31, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company continues to review its disclosure controls and procedures, including its internal controls over financial reporting, and may, from time to time, make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with its business.
Management’s 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 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, the 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 the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the 2013 framework). Based on this evaluation, our management concluded that our system of internal control over financial reporting was effective as of December 31, 2022. The effectiveness of our internal control over financial reporting has been audited by Deloitte Ltd., an independent registered public accounting firm, as stated in their report, which is included herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Greenlight Capital Re, Ltd.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Greenlight Capital Re, Ltd. and subsidiaries (the “Company”) as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2022, of the Company and our report dated March 8, 2023, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’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 Management’s Annual Report on Internal Controls Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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
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material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
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.
/s/ Deloitte Ltd.
________________________
Hamilton, Bermuda
March 8, 2023

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
This item is omitted because a definitive proxy statement containing such information will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which information required by this item set forth in the proxy statement is incorporated by reference.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
This item is omitted because a definitive proxy statement containing such information will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which information required by this item set forth in the proxy statement is incorporated by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
This item is omitted because a definitive proxy statement containing such information will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which information required by this item set forth in the proxy statement is incorporated by reference.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
This item is omitted because a definitive proxy statement containing such information will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which information required by this item set forth in the proxy statement is incorporated by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
This item is omitted because a definitive proxy statement containing such information will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which information required by this item set forth in the proxy statement is incorporated by reference.
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PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this Form 10-K
Page
(a)(1) Financial Statements
Report of Independent Registered Public Accounting Firm (on the consolidated financial statements) (Deloitte Ltd.; PCAOB ID#5230)
Report of Independent Registered Public Accounting Firm (on the consolidated financial statements) (BDO USA, LLP; Grand Rapids, Michigan, USA.; PCAOB ID#243)
Report of Independent Registered Public Accounting Firm (on the financial statements of Solasglas Investments, LP) (Ernst & Young Ltd.; Grand Cayman, Cayman Islands; PCAOB ID#1655)
Consolidated Balance Sheets as of December 31, 2022 and 2021
Consolidated Statements of Operations for the years ended December 31, 2022, 2021, and 2020
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2022, 2021, and 2020
Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021, and 2020
Notes to the Consolidated Financial Statements
(a)(2) Financial Statement Schedules*
Schedule I - Summary of Investments - Other Than Investments in Related Parties
Schedule II - Condensed Financial Information of Registrant
Schedule III - Supplementary Insurance Information
Schedule IV - Supplementary Reinsurance Information
(a)(3) The exhibits required to be filed by this Item 15. are set forth in the Exhibit Index accompanying this report.
The financial statements of Solasglas Investments, LP required by Rule 3-09 of Regulation S-X are included in this filing as Exhibit 99.1.
*Schedules V and VI have been omitted as the information is provided in Note 7. “Loss and Loss Adjustment Expense Reserves”.