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GREENLIGHT CAPITAL RE, LTD. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References to "we," "us," "our," "our company," or "the Company" refer toGreenlight 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 ReUK "), andVerdant Holding Company, Ltd. ("Verdant"), 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 in our
annual report on Form 10-K for the fiscal year ended
The following is a discussion and analysis of our results of operations for the six months endedJune 30, 2022 and 2021 and financial condition atJune 30, 2022 andDecember 31, 2021 .
Special Note About Forward-Looking Statements
Certain statements in Management's Discussion and Analysis, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements generally are identified by the words "believe," "project," "predict," "expect," "anticipate," "estimate," "intend," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially from the forward-looking statements. We have included a detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements in the section entitled "Part II. Item 1A. Risk Factors" included in our Form 10-Q for the three months endedMarch 31, 2022 , as filed with theSecurities and Exchange Commission (the "SEC") onMay 3, 2022 , and in the section entitled "Part I, Item 1A. Risk Factors" contained in our Form 10-K for the fiscal year endedDecember 31, 2021 , as filed with theSEC onMarch 8, 2022 . Such risks and uncertainties include, but are not limited to: •A downgrade or withdrawal of either of ourA.M. Best ratings would materially and adversely affect our ability to implement our business strategy successfully; •Our results of operations will likely fluctuate from period to period and may not be indicative of our long-term prospects; •Our results of operations and financial condition could be adversely affected by the ongoing conflict betweenRussia andUkraine and related disruptions in the global economy; •The impact of COVID-19 and related risks could materially and adversely affect our results of operations, financial position, and liquidity; •SILP may be concentrated in a few large positions, which could result in investment volatility; •The performance of our Innovations investments could result in financial losses and reduce our capital; •If our losses and loss adjustment expenses greatly exceed our loss reserves, our financial condition may be materially and adversely affected; •Inflation may adversely impact our results of operations or financial condition; •The effect of emerging claim and coverage issues on our business is uncertain; •The property and casualty reinsurance market may be affected by cyclical trends; and •The loss of key executives could adversely impact our ability to implement our business strategy. We undertake no obligation to publicly update or revise any forward-looking statements, whether due to new information, future events, or otherwise. Readers are cautioned not to place undue reliance on the forward-looking statements, which speak only to the dates they were made. We intend to communicate certain events that we believe may have a material adverse impact on our operations or financial position, including property and casualty catastrophic events and material losses in our investment portfolio, in a timely manner through a public announcement. Other than as required by the Exchange Act, we do not intend to make public announcements regarding reinsurance or investment events that we do not believe, based on management's estimates and current information, will have a material adverse impact on our operations or financial position. 27
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General
We are a global specialty property and casualty reinsurer headquartered in theCayman 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, 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.
Critical Accounting Policies and Estimates
Our condensed 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 II. Item 1A. Risk Factors" included in our Form 10-Q for the three months endedMarch 31, 2022 , as filed with theSEC onMay 3, 2022 , and in "Part I. Item IA. - Risk Factors" included in our Form 10-K for the fiscal year endedDecember 31, 2021 , as filed with theSEC onMarch 8, 2022 , cause actual events or results to differ materially from our underlying assumptions or estimates. In that case, there could be a material adverse effect on our results of operations, financial condition, or liquidity. "Part II. Item 7. - Management's Discussion and Analysis of Financial Condition and Results on Operations" included in our annual report on Form 10-K for the fiscal year endedDecember 31, 2021 , describes our critical accounting policies and estimates. The most significant estimates relate to premium revenues and risk transfer, loss and loss adjustment expense reserves, investment impairments, allowances for credit losses, and share-based compensation.
Recently issued and adopted accounting standards and their impact on the
Company, if any, are presented under "Recent Accounting Pronouncements"
in Note 2 to the condensed consolidated financial statements.
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 automobile physical damage, personal lines, and
commercial lines exposures. Property business includes both catastrophe and
non-catastrophe coverage. We expect catastrophe business to make up a small
proportion of our property business.
Casualty business covers general liability, motor liability, professional
liability, and workers' compensation exposures. The Company's multi-line
business relates predominantly to casualty reinsurance, and as such, the Company
includes all multi-line business within the casualty category. Casualty business
generally has losses reported and paid over a longer period than property
business. We categorize Lloyd's syndicate contracts, which incorporate
incidental catastrophe exposure, as multi-line (and therefore casualty)
business.
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Other business covers accident and health, financial lines (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.
Outlook and Trends
InFebruary 2022 , the Russian army commenced military actions againstUkraine . The ongoing Russian-Ukrainian conflict has resulted in theU.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. Our underwriting results for the first half of 2022 include$13.6 million of losses attributed to the Russian-Ukrainian conflict. If this conflict is prolonged, we may incur additional losses in future periods. During the first half of 2022 we saw improved rates in most of the classes of business we write, which enabled us to selectively expand our specialty book while taking advantage of improved rates. Our in-force portfolio reflects increased diversification across the classes of business we write and a lower concentration of risk to individual counterparties than at any other time in our history. The widespread inflation we have seen 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 high 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 costs also bring a benefit with increased demand for coverage limits,
which we believe will extend the currently favorable market conditions.
We expect that the rising interest rate environment will have a mixed impact on
our financial results. While we have some exposure to interest rate risk from
fixed income securities held by the Lloyd's syndicates in which we participate,
we expect that the higher interest rates will improve the yield on our
restricted cash and cash equivalents.
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 accounted for
approximately 13% of our net premiums written in the first half of 2022. We see
the potential for significant growth from Innovations-derived underwriting
opportunities going forward.
In the second quarter of 2022, we launched our Lloyd's approved
insurtech-focused syndicate ("Syndicate 3456"). We have received a significant
amount of interest from our current and prospective counterparties as we prepare
for Syndicate 3456 to enable us to provide capacity to our growing portfolio of
Innovations partners. The underwriting volume in Syndicate 3456 was immaterial
in the second quarter, but we are pleased with the volumes that are committed
for the third quarter and beyond.
Key Financial Measures and Non-GAAP Measures
Management uses certain key financial measures, some of which are not prescribed underU.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 underU.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 underU.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 measures are described below.
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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 comparableU.S. GAAP measures. We calculate basic book value per share as (a) ending shareholders' equity, divided by (b) aggregate of Class A and ClassB Ordinary shares issued and outstanding, including all unvested service-based restricted shares, and the earned portion of performance-based restricted shares granted afterDecember 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. 30
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The following table presents a reconciliation of the non-GAAP financial measures basic and fully diluted book value per share to the most comparableU.S. GAAP measure: December 31, September 30, June 30, 2022 March 31, 2022 2021 2021 June 30, 2021 ($ 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)$ 484,293 $
468,407
Denominator for basic and fully diluted book value per share: (1) Ordinary shares issued and outstanding as presented in the Company's condensed consolidated balance sheets 34,721,231 34,721,231 33,844,446 33,844,446 34,171,068 Less: Unearned performance-based restricted shares granted after December 31, 2021 (560,927) (581,593) - - - Denominator for basic book value per share 34,160,304 34,139,638 33,844,446 33,844,446 34,171,068 Add: In-the-money stock options, service-based RSUs granted, and earned performance-based RSUs granted 179,988 176,379 154,134 154,134 154,134 Denominator for fully diluted book value per share 34,340,292 34,316,017 33,998,580 33,998,580 34,325,202 Basic book value per share$ 14.18 $
13.72
Increase (decrease) in basic book value per
share ($)
$ 0.46 $
(0.33)
Increase (decrease) in basic book value per
share (%)
3.4 % (2.3) % 4.3 % (2.6) % 0.8 % Fully diluted book value per share$ 14.10 $
13.65
Increase (decrease) in fully diluted book
value per share ($)
$ 0.45 $ (0.34) $ 0.57 $ (0.35) $ 0.11 Increase (decrease) in fully diluted book value per share (%) 3.3 % (2.4) % 4.2 % (2.6) % 0.8 % (1) For periods prior toJanuary 1, 2022 , all unvested restricted shares are included in the "basic" and "fully diluted" denominators. Restricted shares with performance-based vesting conditions granted afterDecember 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. AtJune 30, 2022 , the aggregate number of unearned restricted shares with performance conditions not included in the "basic" and "fully diluted" denominators was 754,076 (March 31, 2022 : 774,742,December 31, 2021 : 193,149,September 30, 2021 : 193,149,June 30, 2021 : 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 that 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 underU.S. GAAP. We calculate net underwriting income (loss) as net premiums earned, plus other 31
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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 or 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 not related 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 forU.S. GAAP net income before income taxes. The reconciliations of net underwriting income (loss) to income (loss) before income taxes (the most directly comparableU.S. GAAP financial measure) on a consolidated basis are shown below: Three months ended June 30 Six months ended June 30 2022 2021 2022 2021 ($ in thousands)
Income (loss) before income tax
$ 9,054 $ 10,860 Add (subtract): Total investment (income) loss (17,156) (2,040) (24,893) (20,714) Other non-underwriting (income) expense 5,957 31 6,590 734 Corporate expenses 4,578 4,382 8,589 8,586 Interest expense 1,166 1,562 2,320 3,106
Net underwriting income (loss) $ 9,342
$ 1,660 $ 2,572 32
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Results of Operations
The table below summarizes our operating results for the three and six months
ended
Three months ended June 30 Six months ended June 30
2022 2021 2022 2021
(in thousands, except percentages)
Underwriting revenue
Gross premiums written $ 134,780 $ 141,579 $ 280,666 $ 311,514
Gross premiums ceded (7,163) (1) (13,172) 54
Net premiums written 127,617 141,578 267,494 311,568
Change in net unearned premium reserves (17,398) (9,099) (31,350) (43,693)
Net premiums earned $ 110,219 $ 132,479 $ 236,144 $ 267,875
Underwriting related expenses
Net loss and loss adjustment expenses
incurred
Current year $ 63,706 $ 87,420 $ 158,788 $ 185,281
Prior year * (2,883) (463) (558) (603)
Net loss and loss adjustment expenses
incurred 60,823 86,957 158,230 184,678
Acquisition costs 36,335 37,631 69,280 71,012
Underwriting expenses 3,528 3,357 6,749 6,694
Deposit accounting and other reinsurance
expense (income) 191 (28) 225 2,919
Net underwriting income (loss) $ 9,342 $ 4,562 $ 1,660 $ 2,572
Income (loss) from investment in related
party investment fund $ 11,876 $ (2,006) $ 15,953 $ 2,018
Net investment income (loss) 5,280 4,046 8,940 18,696
Total investment income (loss) $ 17,156 $ 2,040 $ 24,893 $ 20,714
Net underwriting and investment income
(loss) $ 26,498 $ 6,602 $ 26,553 $ 23,286
Corporate expenses $ 4,578 $ 4,382 $ 8,589 $ 8,586
Other (income) expense, net 5,957 31 6,590 734
Interest expense 1,166 1,562 2,320 3,106
Income tax expense (benefit) 9 (1) (7) 3,733
Net income (loss) $ 14,788 $ 628 $ 9,061 $ 7,127
Earnings (loss) per share
Basic $ 0.44 $ 0.02 $ 0.27 $ 0.21
Diluted $ 0.37 $ 0.02 $ 0.23 $ 0.21
Underwriting ratios
Loss ratio - current year 57.8 % 66.0 % 67.2 % 69.2 %
Loss ratio - prior year (2.6) % (0.4) % (0.2) % (0.3) %
Loss ratio 55.2 % 65.6 % 67.0 % 68.9 %
Acquisition cost ratio 33.0 % 28.4 % 29.3 % 26.5 %
Composite ratio 88.2 % 94.0 % 96.3 % 95.4 %
Underwriting expense ratio 3.4 % 2.5 % 3.0 % 3.6 %
Combined ratio 91.6 % 96.5 % 99.3 % 99.0 %
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* 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$3.5 million and$3.6 million for the three months endedJune 30, 2022 , and 2021, respectively, and a loss of$6.1 million and$3.4 million for the six months endedJune 30, 2022 , and 2021, respectively.
Three months ended
For the three months endedJune 30, 2022 , the fully diluted book value per share increased by$0.45 per share, or 3.3%, to$14.10 per share from$13.65 per share atMarch 31, 2022 . For the three months endedJune 30, 2022 , the basic book value per share increased by$0.46 per share, or 3.4%, to$14.18 per share from$13.72 per share atMarch 31, 2022 .
For the three months ended
compared to net income of
The developments that most significantly affected our financial performance
during the three months ended
period, are summarized below:
•Underwriting: The underwriting income for the three months endedJune 30, 2022 , was$9.3 million . By comparison, the equivalent period in 2021 reported an underwriting income of$4.6 million . The improved underwriting result was driven primarily by a change in the business mix. As we have been reducing our exposure to low-margin motor and workers' compensation business, the higher-margin lines of business have elevated the underwriting income. Our combined ratio was 91.6% for the three months endedJune 30, 2022 , compared to 96.5% during the equivalent 2021 period. The casualty (including multi-line) business was the largest contributor to the improvement in our combined ratio. •Investments: Our total investment income for the three months endedJune 30, 2022 , was$17.2 million , compared to total investment income of$2.0 million reported for the same period in 2021. Our investment in SILP reported a gain of$11.9 million during the three months endedJune 30, 2022 , compared to a loss of$2.0 million during the equivalent period in 2021. Other investment income totaled$5.3 million and$4.0 million during the three months endedJune 30, 2022 , and 2021, respectively, driven primarily by gains in our Innovations portfolio. •Other income (expense): For the three months endedJune 30, 2022 , we incurred$6.0 million of other non-underwriting expenses, primarily as a result of foreign exchange losses. The weakening of the pound sterling against theU.S. dollar drove the foreign exchange loss. In addition, the other income (expense) included our share of Lloyd's syndicates' investment losses on the Funds at Lloyd's business, which is generally conducted on a funds withheld basis. The 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 these to us, generally one quarter in arrears.
Six months ended
For the six months endedJune 30, 2022 , fully diluted book value per share increased by$0.11 , or 0.8%, to$14.10 per share from$13.99 per share atDecember 31, 2021 . For the six months endedJune 30, 2022 , basic book value per share increased by$0.13 , or 0.9%, to$14.18 per share from$14.05 per share atDecember 31, 2021 . The increase in fully diluted book value per share during the six months endedJune 30, 2022 , was net of$0.07 , or 0.5%, adverse impact relating to the adoption of ASU 2020-06 (see Note 2 of the accompanying condensed consolidated financial statements for recently issued accounting standards adopted).
For the six months ended
compared to a net income of
period.
The developments that most significantly affected our financial performance
during the six months ended
period, are summarized below:
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•Underwriting: The underwriting income for the six months endedJune 30, 2022 , was$1.7 million , driven primarily by$13.6 million of losses related to the Russian-Ukrainian conflict and$2.8 million of losses related toTennessee wildfires. By comparison, the underwriting income for the equivalent period in 2021 was$2.6 million , driven by losses from the winter storm Uri and deposit-accounted contracts. Our combined ratio was 99.3% for the six months endedJune 30, 2022 , compared to 99.0% for the same period in 2021. The Russian-Ukrainian conflict contributed 5.8 percentage points to the combined ratio for the six months endedJune 30, 2022 . •Investments: Our total investment income for the six months endedJune 30, 2022 , was$24.9 million compared to a total investment income of$20.7 million incurred during the equivalent 2021 period. For the six months endedJune 30, 2022 , our investment in SILP reported a gain of$16.0 million , while our Innovations-related investments reported an unrealized gain of$9.2 million . The investment income during the equivalent 2021 period reflected a$14.2 million gain realized on the sale of our investment in AccuRisk. •Other income (expense): For the six months endedJune 30, 2022 , other expense of$6.6 million was driven primarily by the mark-to-market adjustments and foreign exchange losses for the reasons explained above for the three months endedJune 30, 2022 . Underwriting results
We analyze our business based on three categories: "property," "casualty," and
"other."
Gross Premiums Written
Details of gross premiums written are provided in the following table:
Three months ended June 30 Six months ended June 30
2022 2021 2022 2021
($ in thousands) ($ in thousands)
Property $ 23,129 17.2 % $ 16,508 11.7 % $ 41,664 14.8 % $ 31,423 10.1 %
Casualty 75,804 56.2 102,634 72.5 154,073 54.9 216,308 69.4
Other 35,847 26.6 22,437 15.8 84,929 30.3 63,783 20.5
Total $ 134,780 100.0 % $ 141,579 100.0 % $ 280,666 100.0 % $ 311,514 100.0 %
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 three months ended June 30, 2022 , our gross premiums written decreased
by $6.8 million , or 4.8%, compared to the equivalent 2021 period. The primary
drivers for this change are the following:
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Gross Premiums Written
Three months ended June 30, 2022
Increase
(decrease) % change Explanation
($ in millions)
Property $6.6 40.1%
The increase in property gross premiums written during
the three months ended
comparable 2021 period was due primarily to personal
lines business, driven by the growth of one of our
Innovations partners.
The increase was partially offset by our motor contracts
on which we previously elected to reduce or not renew
our participation.
Casualty $(26.8) (26.1)%
The decrease in casualty gross premiums written during
the three months ended
comparable 2021 period was due primarily to non-renewed
motor contracts as described above. In addition,
workers' compensation premiums decreased as we elected
not to renew certain contracts during 2021.
The decrease in casualty gross premiums written was
partially offset by an increase in general liability
premiums driven primarily by new contracts bound during
2022.
Other$13.4 59.8%
The increase in "other" gross premiums written during
the three months ended
2021 period was related primarily to marine, energy, and
financial lines. New business drove most of the increase
in marine and energy premiums. The growth in financial
lines was driven primarily by an increase in underlying
transactional liability business.
The increase was partially offset by a decrease in
premiums, due primarily to changing certain exposures
from a proportional basis to excess of loss.
For the six months ended
drivers of this change are the following:
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Gross Premiums Written
Six months ended June 30, 2022
Increase (decrease) % change Explanation
($ in millions)
Property $10.2 32.6%
The increase in property gross premiums written during the
six months ended June 30, 2022, over the comparable 2021
period was due primarily to personal lines business as
discussed above. In addition, the commercial lines gross
premiums written also increased, driven by new contracts
bound during 2022.
The increase was partially offset by our motor contracts on
which we had previously elected to reduce or not renew our
participation.
Casualty $(62.2) (28.8)% The decrease in casualty premiums written during the six
months ended June 30, 2022 over the comparable 2021 period
was due primarily to motor and workers' compensation
contracts on which we elected to reduce or not renew our
participation.
The decrease in casualty premiums was partially offset by
growth in general liability and multi-line premiums, driven
by new and renewed contracts, including Lloyd's syndicates
and Innovations-related business.
Other $21.1 33.2% The increase in "other" premiums written during the six
months ended June 30, 2022, over the comparable 2021 period
was due primarily to:
•financial lines, including transactional liability
business;
•new marine and energy contracts bound during 2022; and
•new contracts bound during 2022 relating to other specialty
classes.
The increase was partially offset by a decrease in premiums,
due primarily to changing certain exposures from a
proportional basis to excess of loss.
Premiums Ceded
For the three and six months endedJune 30, 2022 , premiums ceded were$(7.2) million and$(13.2) million , respectively, compared to insignificant premiums ceded for the three and six months endedJune 30, 2021 . In 2022, we entered into new retrocession agreements to reduce our exposure to marine, energy, and property losses.
Net Premiums Written
Details of net premiums written are provided in the following table:
Three months ended June 30 Six months ended June 30
2022 2021 2022 2021
($ in thousands) ($ in thousands)
Property $ 16,891 13.2 % $ 16,506 11.7 % $ 33,326 12.5 % $ 31,462 10.1 %
Casualty 75,803 59.4 102,634 72.5 154,072 57.6 216,339 69.4
Other 34,923 27.4 22,438 15.8 80,096 29.9 63,767 20.5
Total $ 127,617 100.0 % $ 141,578 100.0 % $ 267,494 100.0 % $ 311,568 100.0 %
For the three and six months ended June 30, 2022 , net premiums written decreased
by $14.0 million , or 9.9%, and by $44.1 million , or 14.1%, respectively,
compared to the three and six months ended June 30, 2021 . The movement in net
premiums written resulted from the changes in gross premiums written and ceded
during the periods.
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Net Premiums Earned
Details of net premiums earned are provided in the following table:
Three months ended June 30 Six months ended June 30
2022 2021 2022 2021
($ in thousands) ($ in thousands)
Property $ 12,166 11.0 % $ 14,761 11.1 % $ 26,656 11.3 % $ 28,916 10.8 %
Casualty 67,546 61.3 85,690 64.7 148,774 63.0 172,781 64.5
Other 30,507 27.7 32,028 24.2 60,714 25.7 66,178 24.7
Total $ 110,219 100.0 % $ 132,479 100.0 % $ 236,144 100.0 % $ 267,875 100.0 %
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:
Three months ended June 30 Six months ended June 30
2022 2021 2022 2021
($ in thousands) ($ in thousands)
Property $ 5,789 9.5 % $ 7,261 8.4 % $ 15,502 9.8 % $ 18,646 10.1 %
Casualty 43,621 71.7 65,333 75.1 98,994 62.6 129,485 70.1
Other 11,413 18.8 14,363 16.5 43,734 27.6 36,547 19.8
Total $ 60,823 100.0 % $ 86,957 100.0 % $ 158,230 100.0 % $ 184,678 100.0 %
The below table summarizes the loss ratios for the six months ended June 30,
2022 , and 2021:
Three months ended June 30 Six months ended June 30
Increase / (decrease) in Increase / (decrease) in
2022 2021 loss ratio points 2022 2021 loss ratio points
Property 47.6 % 49.2 % (1.6) 58.2 % 64.5 % (6.3)
Casualty 64.6 76.2 (11.6) 66.5 74.9 (8.4)
Other 37.4 44.8 (7.4) 72.0 55.2 16.8
Total 55.2 % 65.6 % (10.4) 67.0 % 68.9 % (1.9)
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The changes in net losses incurred for the three months ended
compared to the equivalent 2021 period, were attributable to the following:
Net Losses Incurred
Three months ended June 30, 2022
Increase (decrease) Increase / (decrease) Explanation
($ in millions) in loss ratio points
Property $(1.5) (1.6)
The decrease in property losses incurred during the
three months ended June 30, 2022, compared to the
same period in 2021, was due primarily to a reduction
in motor business related to contracts on which we
elected to reduce or non-renew our participation.
Higher personal lines losses partially offset the
decrease.
The property loss ratio decreased 1.6 percentage
points during the three months ended June 30, 2022,
over the equivalent 2021 period, due primarily to the
reasons described above.
Casualty $(21.7) (11.6) The decrease in losses incurred during the three
months ended June 30, 2022, over the comparable 2021
period was due primarily to reductions in motor and
workers' compensation exposures. The decrease was
partially offset by increased attritional losses on
new and renewed general liability and multi-line
contracts.
The casualty loss ratio decreased 11.6 percentage
points during the three months ended June 30, 2022,
over the equivalent 2021 period, due primarily to
changes in our business mix. We significantly reduced
our motor and workers' compensation exposures and
increased our general liability and multi-line
business, which generally incorporates lower loss
ratios. Adverse loss development on certain motor and
workers' compensation contracts partially offset the
loss ratio decreases.
Other $(3.0) (7.4) The decrease in "other" losses incurred during the
three months ended June 30, 2022, over the comparable
2021 period was due primarily to:
•health contracts on which we previously elected to
reduce or not renew our participation;
•the release of loss reserves on certain mortgage
contracts; and
•crop losses incurred in the prior period.
The decrease was partially offset by increased
losses on:
•new and renewed marine and energy contracts; and
•our growing book of transactional liability
business.
The "other" loss ratio decreased 7.4 percentage
points during the three months ended June 30, 2022,
over the equivalent 2021 period, due primarily to the
reasons described above.
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The changes in net losses incurred and loss ratios during the six months ended
Net Losses Incurred
Six months ended June 30, 2022
Increase Increase /
(decrease) (decrease) in loss Explanation
($ in millions) ratio points
Property $(3.1) (6.3)
The decrease in property losses incurred during the six
months ended
2021, was due primarily to a reduction in motor business
related to contracts on which we elected to reduce or
non-renew our participation. The decrease was partially
offset by losses from a growing personal lines book and
of
2022.
The property loss ratio decreased 6.3 percentage points
during the six months ended
equivalent 2021 period. This decrease was due primarily to
the reduction in our motor business. Higher personal lines
losses partially offset the decrease.
Casualty $(30.5) (8.4)
The decrease in casualty losses incurred during the six
months ended
2021, was due primarily to a reduction in motor and
worker's compensation business related to contracts on
which we elected to reduce or non-renew our participation.
In
addition, the prior period included losses from winter
storm Uri.
The decrease was partially offset by higher incurred
losses relating to general liability and multi-line
business, reflecting the growth in our Lloyd's syndicate
business.
The casualty loss ratio decreased 8.4 percentage points
during the six months ended
equivalent 2021 period, due primarily to changes in our
business mix. We significantly reduced our motor and
workers' compensation exposures and increased our general
liability and multi-line business, which generally
incorporates lower loss ratios. Adverse loss development
on
certain motor and workers' compensation contracts
partially offset the loss ratio decreases.
Other $7.2 16.8
The increase in "other" losses incurred during the six
months ended
2021, was due primarily to losses relating to the
Russian-Ukrainian conflict. Our growing book of
transactional liability and marine and energy business
also contributed to the increase.
The increase was partially offset by:
•lower losses incurred on health contracts on which we
elected to reduce or not renew our participation;
•the release of loss reserves on certain mortgage
contracts; and
•crop losses incurred in the equivalent 2021 period.
The "other" loss ratio increased 16.8 percentage points
during the six months ended
equivalent 2021 period, due primarily to the reasons
described above.
Russian-Ukrainian Conflict
Our loss and loss adjustment expenses from the Russian-Ukrainian conflict relate
primarily to marine, energy, political violence, and terrorism ("MEPVT")
policies and whole account contracts, all of which are included in our Specialty
book of business. We have purchased excess of loss reinsurance to reduce our net
exposure relating to MEPVT exposures. As of June 30, 2022 , we have not recorded
any reinsurance recoveries, as the estimated losses had not impacted the excess
layers. However, we may generate recoveries under the retroceded contracts if we
recognize significant further MEPVT losses from the Russian-Ukrainian conflict.
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See Note 5 of the accompanying condensed consolidated financial statements for additional discussion of our reserving techniques and prior period development of net claims and claim expenses.
Acquisition Costs, Net
Details of acquisition costs are provided in the following table:
Three months ended June 30 Six months ended June 30
2022 2021 2022 2021
($ in thousands) ($ in thousands)
Property $ 3,036 8.4 % $ 3,282 8.7 % $ 6,384 9.2 % $ 6,082 8.6 %
Casualty 19,072 52.5 22,766 60.5 40,318 58.2 44,557 62.7
Other 14,227 39.2 11,583 30.8 22,578 32.6 20,373 28.7
Total $ 36,335 100.0 % $ 37,631 100.0 % $ 69,280 100.0 % $ 71,012 100.0 %
The acquisition cost ratios for the six months ended June 30, 2022 and 2021,
were as follows:
Three months ended June 30 Six months ended June 30
Increase / Increase /
2022 2021 (decrease) 2022 2021 (decrease)
Property 25.0 % 22.2 % 2.8 % 23.9 % 21.0 % 2.9 %
Casualty 28.2 26.6 1.6 27.1 25.8 1.3
Other 46.6 36.2 10.4 37.2 30.8 6.4
Total 33.0 % 28.4 % 4.6 % 29.3 % 26.5 % 2.8 %
The changes in the acquisition cost ratios for the three months ended June 30,
2022 , compared to the equivalent period in 2021, were attributable to the
following:
Change in Acquisition Cost Ratios
Three months ended June 30, 2022
Increase / (decrease) in
acquisition cost ratio Explanation
points
Property 2.8 The increase in
property acquisition cost ratio during the
three months ended
period was due
primarily to higher ceding commissions on the
personal property
quota share contracts relative to motor
business that decreased during the current period.
Casualty 1.6 The increase in
casualty acquisition cost ratio during the
three months ended
period was due
primarily to changes in the mix of business we
write. Our motor and
workers' compensation business, which
decreased in 2022,
generally incorporate lower ceding
commission ratios
than our general liability and multi-line
business, which grew compared to the equivalent 2021 period.
Other 10.4 The increase in the
"other" acquisition cost ratio during the
three months ended
period was due
primarily to:
•increased profit
commissions on mortgage contracts driven by
favorable loss
development;
•growth in
transactional liability business, which carries
higher ceding
commission ratios than other specialty business;
and
•new specialty
quota share contracts bound in 2022, which
incorporate
relatively high acquisition costs.
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The changes in the acquisition cost ratios during the six months endedJune 30, 2022 , compared to the equivalent period in 2021, were attributable to the following: Change in Acquisition Cost Ratios Six months ended June 30, 2022 Increase / (decrease) in acquisition cost ratio Explanation points Property 2.9 The year-to-date
increase was driven by the same trends as
those discussed above in reference to the second quarter.
Casualty 1.3 The year-to-date
increase was driven by the same trends as
those discussed above in reference to the second quarter.
Other 6.4 The year-to-date
increase was driven by the same trends as
those discussed
above in reference to the second quarter. A
decrease in health
business, which generally carries lower
ceding commissions
relative to other specialty business, was
an additional driver
of the increase in the acquisition cost
ratio.
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The following table provides our underwriting ratios by line of business:
Three months ended June 30 Three months ended June 30
2022 2021
Property Casualty Other Total Property Casualty Other Total
Loss ratio 47.6 % 64.6 % 37.4 % 55.2 % 49.2 % 76.2 % 44.8 % 65.6 %
Acquisition cost ratio 25.0 28.2 46.6 33.0 22.2 26.6 36.2 28.4
Composite ratio 72.6 % 92.8 % 84.0 % 88.2 % 71.4 % 102.8 % 81.0 % 94.0 %
Underwriting expense ratio 3.4 2.5
Combined ratio 91.6 % 96.5 %
Six months ended June 30 Six months ended June 30
2022 2021
Property Casualty Other Total Property Casualty Other Total
Loss ratio 58.2 % 66.5 % 72.0 % 67.0 % 64.5 % 74.9 % 55.2 % 68.9 %
Acquisition cost ratio 23.9 27.1 37.2 29.3 21.0 25.8 30.8 26.5
Composite ratio 82.1 % 93.6 % 109.2 % 96.3 % 85.5 % 100.7 % 86.0 % 95.4 %
Underwriting expense ratio 3.0 3.6
Combined ratio 99.3 % 99.0 %
The increase in underwriting expense ratio for the three months ended June 30,
2022 , compared to the same period in 2021, was due partially to lower net earned
premiums and partially to higher underwriting expenses driven by stock-based
compensation expenses.
The underwriting expense ratio for the six months ended June 30, 2021 , included
1.1 percentage points relating to interest expense on deposit-accounted
contracts based on revised expectations of ultimate cash flows. There was no
similar impact on the underwriting expense ratio for the six months ended June
30, 2022 . Excluding the deposit-accounted contracts, the underwriting expense
ratio for the six months ended June 30, 2022 , was higher due to lower net earned
premiums.
General and Administrative Expenses
Details of general and administrative expenses are provided in the following
table:
Three months ended June 30 Six months ended June 30
2022 2021 2022 2021
($ in thousands) ($ in thousands)
Underwriting expenses $ 3,528 $ 3,357 $ 6,749 $ 6,694
Corporate expenses 4,578 4,382 8,589 8,586
General and administrative expenses
For the three months endedJune 30, 2022 , general and administrative expenses increased by$0.4 million , or 4.7%, compared to the equivalent 2021 period. The increase was due primarily to higher expenses relating to (i) stock-based compensation and (ii) legal and other professional fees compared to the same period in 2021. The increase was partially offset by lower D&O insurance expenses and reductions in other personnel costs.
For the six months ended
increased by
increase was due primarily to higher expenses relating to (i) stock-based
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compensation, and (ii) legal and other professional fees. The increase was
partially offset by lower D&O insurance expenses and personnel costs.
For the six months endedJune 30, 2022 , and 2021, general and administrative expenses included$2.1 million and$1.6 million , respectively, of costs related to stock compensation granted to employees and directors.
Total Investment Income (Loss)
Total investment income (loss) incorporates (i) changes in the net asset value of our investment in SILP managed byDME Advisors , (ii) interest income earned on the restricted cash and cash equivalents pledged as collateral to our clients, and (iii) gains (or losses) and interest on our portfolio of strategic and Innovations investments, notes receivable and investments accounted for under the equity method. We expect our total investment income, including any change in the net asset value of our investment in SILP, to fluctuate from period to period.
A summary of our total investment income (loss) is as follows:
Three months ended June 30 Six months ended June 30
2022 2021 2022 2021
($ in thousands)
Realized gains (losses) $ - $ - $ - $ 14,210
Change in unrealized gains and losses 5,284 3,995 9,183 5,223
Investment-related foreign exchange gains
(losses) (372) 20 (410) 1
Interest and dividend income, net of
withholding taxes 986 33 1,008 146
Interest, dividend, and other expenses (618) (2) (841) (884)
Net investment-related income (loss) $ 5,280
Income (loss) from investments in related
party investment fund
$ 11,876
Total investment income (loss)
$ 17,156
The caption "Income (loss) from investment in related party investment fund" in the above table is net of management fees paid by SILP toDME Advisors and performance compensation, if any, allocated from the Company's investment in SILP toDME II . No performance compensation is allocated in periods of loss reported by SILP. For detailed breakdowns of management fees and performance compensation for the three and six months endedJune 30, 2022 and 2021, please refer to Note 3 of the condensed consolidated financial statements. For the three months endedJune 30, 2022 , the Investment Portfolio managed byDME Advisors reported a gain of 4.9%, compared to a loss of 0.9% for the three months endedJune 30, 2021 . SILP's long portfolio lost 10.0%, while the short portfolio and macro positions gained 15.3% and 0.7%, respectively, during the three months endedJune 30, 2022 . For the three months endedJune 30, 2022 , the significant contributors to SILP's investment return were short positions in the S&P 500 index and a consumer cyclical company and a macro position on a high-yield bond index. The largest detractors were long positions in Brighthouse Financial andThe ODP Corp , and a macro position in gold. For the six months endedJune 30, 2022 , the Investment Portfolio managed byDME Advisors reported a gain of 6.7%, compared to a gain of 0.5% for the six months endedJune 30, 2021 . The long portfolio lost 15.8%, while the short portfolio and macro positions gained 20.2% and 4.1%, respectively, during the six months endedJune 30, 2022 . For the six months endedJune 30, 2022 , the most significant contributors to SILP's investment return were short positions in the S&P 500 index and a basket of overvalued stocks and a macro position on a high-yield bond index For the six months endedJune 30, 2022 , the most significant detractors were long positions in Brighthouse Financial, Green Brick Partners, and Atlas Air Worldwide. During the three and six months endedJune 30, 2022 , some of our Innovations-related investees completed new financing rounds contributing to a net unrealized gain of$5.3 million and$9.2 million , respectively. The unrealized gains are net of a$2.2 million valuation allowance recorded during the three and six months endedJune 30, 2022 on certain Innovations-related investments. 44
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For the three months endedJune 30, 2022 , and 2021, the gross investment return (loss) on our investments managed byDME Advisors (excluding investment advisor performance allocation) was composed of the following: Three months ended June 30 Six months ended June 30 2022 2021 2022 2021 Long portfolio gains (losses) (10.0) % 4.2 % (15.8) % 16.0 % Short portfolio gains (losses) 15.3 (2.3) 20.2 (9.1) Macro gains (losses) 0.7 (2.4) 4.1 (5.3) Other income and expenses 1 (0.5) (0.5) (1.1) (1.0) Gross investment return 5.5 % (1.0) % 7.4 % 0.6 % Net investment return 1 4.9 % (0.9) % 6.7 % 0.5 %
1 "Other income and expenses" excludes performance compensation but includes
management fees. "Net investment return" incorporates both of these amounts.
EffectiveJanuary 1, 2021 , the Investment Portfolio is calculated based on 50% of GLRE Surplus, or the Company's shareholders' equity, as reported in the Company's then most recent quarterlyU.S. GAAP financial statements, adjusted monthly for our share of the net profits and net losses reported by SILP during any intervening period. Prior toJanuary 1, 2021 , the Investment Portfolio was calculated based on several factors, including our share of SILP's net asset value and our posted collateral and net reserves.
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
capital gains. The Governor-In-Cabinet has granted us an exemption from any
income taxes that may be imposed in the
GRIL is incorporated inIreland 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.
Verdant is incorporated in
federal rates and regulations prescribed by the Internal Revenue Service. We
expect Verdant's future taxable income to be taxed at 21%.
AtJune 30, 2022 , we have included a gross deferred tax asset of$3.5 million (December 31, 2021 :$3.2 million ) in the caption "Other assets" in the Company's condensed consolidated balance sheets. AtJune 30, 2022 , a valuation allowance of$3.0 million (December 31, 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 condensed consolidated balance sheets atJune 30, 2022 , was$255.1 million , compared to$231.0 million atDecember 31 , 2021,an increase of$24.1 million , or 10.4%. The increase was primarily related to gains on SILP and Innovations-related investments and purchase of certificates of deposit. The increase was partially offset by net redemptions from SILP. AtJune 30, 2022 , 91.4% of SILP's portfolio was valued based on quoted prices in actively traded markets (Level 1), 5.3% was composed of instruments valued based on observable inputs other than quoted prices (Level 2), and 0.4% was composed of instruments valued based on non-observable inputs (Level 3). AtJune 30, 2022 , 2.9% of SILP's portfolio consisted of private equity funds valued using the funds' net asset values as a practical expedient. AtJune 30, 2022 , 88% of our 45
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Innovations-related portfolio was carried at fair value on a nonrecurring basis, measured as of the investees' most recent completed financing round, and 12% was carried at original cost. Other than our investment in SILP (see Notes 3 of the accompanying condensed 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
The unrestricted cash and cash equivalents decreased by$48.3 million , or 63.3%, from$76.3 million atDecember 31, 2021 , to$28.0 million atJune 30, 2022 , primarily due to collateral posted to our ceding insurers, and partially due to purchase of certificates of deposit. 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$34.8 million , or 5.5%, from$634.8 million atDecember 31, 2021 , to$669.6 million atJune 30, 2022 , primarily due to collateral required by our ceding insurers. The increase in collateral was partially funded from withdrawals from SILP and partially from unrestricted cash and cash equivalents.
Reinsurance balances receivable
During the six months endedJune 30, 2022 , reinsurance balances receivable increased by$40.9 million , or 10.1%, to$446.3 million from$405.4 million atDecember 31, 2021 . This increase was related primarily to increases in (i) premiums receivable on new contracts bound during the first half of 2022 and (ii) premium withheld by Lloyd's syndicates on contracts in which we participate.
Loss and Loss Adjustment Expense Reserves; Loss and Loss Adjustment Expenses
Recoverable
Reserves for loss and loss adjustment expenses were composed of the following:
June 30, 2022 December 31, 2021
Case Case
Reserves IBNR Total Reserves IBNR Total
($ in thousands)
Property $ 21,286 $ 42,533 $ 63,819 $ 21,357 $ 49,486 $ 70,843
Casualty 146,786 211,195 357,981 151,734 219,949 371,683
Other 14,552 90,093 104,645 17,129 64,355 81,484
Total $ 182,624 $ 343,821 $ 526,445 $ 190,220 $ 333,790 $ 524,010
During the six months ended June 30, 2022 , the total gross loss and loss
adjustment expense reserves increased by $2.4 million , or 0.5%, to $526.4
million from $524.0 million at December 31, 2021 . See Note 5 of the accompanying
condensed 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 six months ended June 30, 2022 , the total loss and loss adjustment
expenses recoverable decreased by $1.7 million , or 15.1%, to $9.4 million from
$11.1 million at December 31, 2021 . See Note 6 of the accompanying condensed
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,
may 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 (probable
maximum loss).
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.
AtJuly 1, 2022 , 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$87.6 million and$95.9 million , respectively, both relating to the peril of North Atlantic Hurricane.
The below table contains the expected modeled loss for each of our peak peril
regions and sub-regions, for both a single event loss and aggregate loss
measures at the 1-in-250 year return period.
July 1, 2022
Net 1-in-250 Year Return Period
Peril Single Event Loss Aggregate Loss
($ in thousands)
North Atlantic Hurricane $ 87,558 $ 95,876
Southeast Hurricane 66,237 71,541
Gulf of Mexico Hurricane 59,936 64,145
Northeast Hurricane 60,540 61,924
North America Earthquake 60,733 65,126
California Earthquake 54,407 57,088
Other N.A. Earthquake 34,533 36,329
Japan Earthquake 38,158 41,048
Japan Windstorm 38,014 41,429
Europe Windstorm 30,041 36,550
Total shareholders' equity
Total equity reported on the condensed consolidated balance sheet increased by
$8.6 million to $484.3 million at June 30, 2022 , compared to $475.7 million at
December 31, 2021 . The increase in shareholders' equity during the six months
ended June 30, 2022 , was primarily due to the net income of $9.1 million
reported for the period, partially offset by the adoption of ASU 2020-06 (see
Note 2 of the accompanying condensed consolidated financial statements). For
details of other movements in shareholders' equity, please see the "Condensed
Consolidated Statements of Shareholders' Equity."
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. It is our current policy to retain earnings to support the growth of our business. We currently do not expect to pay dividends on our ordinary shares. 47
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AtJune 30, 2022 , Greenlight Re and GRIL were each rated "A- (Excellent)" with a stable outlook byA.M. Best . The ratings reflectA.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.
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. AtJune 30, 2022 , all of our investable assets, excluding strategic and Innovations investments and funds required for business operations and capital risk management, are invested byDME 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. AtJune 30, 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 condensed consolidated statements of operations for each reporting period. For the six months endedJune 30, 2022 and 2021, the net cash used in operating activities was$14.0 million and$19.8 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 for the six months endedJune 30, 2022 and 2021. 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 six months endedJune 30, 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, contributing 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 volume of claims submitted to us by our cedents. For the six months endedJune 30, 2022 , our investing activities provided$10.3 million of cash from redemptions from SILP (net of contributions) and used$9.7 million for new Innovations and other investments. By comparison, for the same period in 2021 our investing activities provided cash of$17.2 million .
For the six months ended
compared to the same period in 2021 where we used
Class A ordinary shares.
AtJune 30, 2022 , we believe we have sufficient liquidity to meet our foreseeable financial requirements. We do not expect that the recent global events, including the Russian-Ukrainian conflict and the COVID-19 pandemic, will materially impact our operational liquidity needs, which will be met by cash, funds generated from underwriting activities, and investment income, including withdrawals from SILP if necessary. AtJune 30, 2022 , we expect to fund our operations for the next twelve months from operating and investing cash flow. However, 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. 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. AtJune 30, 2022 , Greenlight Re and GRIL exceeded their regulatory minimum capital requirements.
Letters of Credit and Trust Arrangements
AtJune 30, 2022 , neither Greenlight Re nor GRIL was licensed or admitted as a reinsurer in any jurisdiction other than theCayman 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 ourU.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. 48
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AtJune 30, 2022 , we had one letter of credit facility available with an aggregate capacity of$275.0 million (December 31, 2021 :$275.0 million ). See Note 12 of the accompanying condensed 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. AtJune 30, 2022 , the aggregate amount of collateral provided to cedents under such arrangements was$668.8 million (December 31, 2021 :$633.9 million ). AtJune 30, 2022 , the letters of credit and trust accounts were secured by restricted cash and cash equivalents with a total fair value of$669.6 million (December 31, 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 atJune 30, 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 inJuly 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 six months endedJune 30, 2022 . The Board of Directors had previously approved a share repurchase plan authorizing the Company to repurchase up to$25.0 million of Class A ordinary shares or securities convertible into Class A ordinary shares in the open market, through privately negotiated transactions or Rule 10b5-1 stock trading plans. OnApril 26, 2022 , the Board of Directors renewed and extended the share repurchase plan untilJune 30, 2023 . The Company is not required to repurchase any Class A ordinary shares, and the repurchase plan may be modified, suspended, or terminated at the election of our Board of Directors at any time without prior notice. During the six months endedJune 30, 2022 , the Company repurchased no Class A ordinary shares. Under the Company's stock incentive plan, the number of Class A ordinary shares authorized for issuance is 8.0 million shares. AtJune 30, 2022 , 2,119,189 Class A ordinary shares were available for future issuance under the Company's stock incentive plan. The Compensation Committee of the Board of Directors administers the stock incentive plan.
Contractual Obligations and Commitments
Due to the nature of our reinsurance operations, the amount and timing of the cash flows associated with our reinsurance contractual liabilities will fluctuate, perhaps materially, and, therefore, are highly uncertain. AtJune 30, 2022 , we estimate that we will pay the loss and loss adjustment expense reserves as follows: Less than More than 1 year 1-3 years 3-5 years 5 years Total ($ in thousands) Loss and loss adjustment expense reserves (1)$ 271,119 $ 153,195
(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 has entered into a lease agreement for office space in theCayman Islands commencing fromJuly 1, 2021 . The lease expires onJune 30, 2026 , unless Greenlight Re exercises its right to renew the lease for another five-year period. GRIL has entered into a lease agreement for office space inDublin, Ireland commencing fromOctober 1, 2021 . This lease expires onSeptember 30, 2031 , unless GRIL exercises the break clause by providing a notice of termination at least nine months prior toSeptember 30, 2026 . The aggregate annual lease obligation ranges from$0.5 million to$0.6 million . 49
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The Company has$100.0 million of senior convertible notes payable, which mature onAugust 1, 2023 . The Company is obligated to make semi-annual 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 betweenSILP 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 onAugust 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 byDME 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 allowsDME II to earn reduced performance allocation of 10% of net profits in years subsequent to the year in which the capital accounts of the limited partners incur a loss, until all losses are recouped and an additional amount equal to 150% of the loss is earned. AtJune 30, 2022 , we estimate the reduced performance allocation of 10% to continue to be applied until SILP achieves additional investment returns of 176%, at which point the performance allocation will revert to 20%. For detailed breakdowns of management fees and performance compensation for the three and six months endedJune 30, 2022 and 2021, please refer to Note 3 of the condensed consolidated financial statements. The Company has entered into a service agreement withDME Advisors pursuant to whichDME 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 orDME 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 11 to the accompanying
condensed 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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