UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
__________________________
FORM 10-Q 
__________________________
(Mark One)
 x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended March 31, 2020

or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from         to
Commission file number 001-33493
____________________________________________________________________________________
GREENLIGHT CAPITAL RE, LTD.
(Exact name of registrant as specified in its charter)
____________________________________________________________________________________
CAYMAN ISLANDS
N/A
(State or other jurisdiction of incorporation or organization)
(I.R.S. employer identification no.)
 
65 MARKET STREET
SUITE 1207, JASMINE COURT,
CAMANA BAY, P.O. BOX 31110
GRAND CAYMAN
CAYMAN ISLANDS
 
 
 
 
KY1-1205
(Address of principal executive offices)
(Zip code)

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

Not Applicable
(Former name, former address and former fiscal year, if changed since last report) 

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Ordinary Shares
GLRE
Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer ¨           Accelerated filer x           Non-accelerated filer ¨           Smaller reporting company ¨           Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) 
Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class A Ordinary Shares, $0.10 par value
30,886,544
Class B Ordinary Shares, $0.10 par value
6,254,715
(Class)                      
Outstanding as of May 1, 2020





GREENLIGHT CAPITAL RE, LTD.
 
TABLE OF CONTENTS
 
 
 
Page
 
Condensed Consolidated Balance Sheets as of March 31, 2020 (unaudited) and December 31, 2019
 
Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019 (unaudited)
 
Condensed Consolidated Statements of Shareholders' Equity for the three months ended March 31, 2020 and 2019 (unaudited)
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (unaudited)
 
Notes to the Condensed Consolidated Financial Statements (unaudited)
Quantitative and Qualitative Disclosures about Market Risk                                                                                                              
Controls and Procedures                                                                                                           
Legal Proceedings                                                                                                          
Risk Factors                                                                                                               
Unregistered Sales of Equity Securities and Use of Proceeds                                                      
Defaults Upon Senior Securities                                                                                                               
Other Information                                                                                                               
Exhibits                                                                                                               



 

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PART I — FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS 
GREENLIGHT CAPITAL RE, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS 
March 31, 2020 and December 31, 2019
(expressed in thousands of U.S. dollars, except per share and share amounts)
 
March 31, 2020
 
December 31, 2019
 
(unaudited)
 
(audited)
Assets
 
 
 
Investments
 
 
 
Investment in related party investment fund
$
189,898

 
$
240,056

Other investments
17,724

 
16,384

Total investments
207,622

 
256,440

Cash and cash equivalents
8,094

 
25,813

Restricted cash and cash equivalents
735,954

 
742,093

Reinsurance balances receivable (net of allowance for expected credit losses of $89)
243,754

 
230,384

Loss and loss adjustment expenses recoverable (net of allowance for expected credit losses of $47)
23,095

 
27,531

Deferred acquisition costs
48,034

 
49,665

Unearned premiums ceded
558

 
901

Notes receivable (net of allowance for expected credit losses of $1,000)
19,200

 
20,202

Other assets
1,738

 
2,164

Total assets
$
1,288,049

 
$
1,355,193

Liabilities and equity
 
 
 
Liabilities
 
 
 
Loss and loss adjustment expense reserves
$
455,669

 
$
470,588

Unearned premium reserves
177,469

 
179,460

Reinsurance balances payable
114,208

 
122,665

Funds withheld
5,664

 
4,958

Other liabilities
5,064

 
6,825

Convertible senior notes payable
93,076

 
93,514

Total liabilities
851,150

 
878,010

Shareholders' equity
 
 
 
Preferred share capital (par value $0.10; authorized, 50,000,000; none issued)

 

Ordinary share capital (Class A: par value $0.10; authorized, 100,000,000; issued and outstanding, 31,179,529 (2019: 30,739,395): Class B: par value $0.10; authorized, 25,000,000; issued and outstanding, 6,254,715 (2019: 6,254,715))
3,743

 
3,699

Additional paid-in capital
504,375

 
503,547

Retained earnings (deficit)
(71,219
)
 
(30,063
)
Total shareholders' equity
436,899

 
477,183

Total liabilities, redeemable non-controlling interest and equity
$
1,288,049

 
$
1,355,193

 
  The accompanying Notes to the Condensed Consolidated Financial Statements are an
integral part of the Condensed Consolidated Financial Statements.

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GREENLIGHT CAPITAL RE, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
For the three months ended March 31, 2020 and 2019
(expressed in thousands of U.S. dollars, except per share and share amounts)
 
Three months ended March 31
 
2020
 
2019
Revenues
 
 
 
Gross premiums written
$
109,787

 
$
162,560

Gross premiums ceded
(678
)
 
(21,401
)
Net premiums written
109,109

 
141,159

Change in net unearned premium reserves
1,912

 
(15,797
)
Net premiums earned
111,021

 
125,362

Income (loss) from investment in related party investment fund [net of related party expenses of $662 and $5,432, respectively]
(42,126
)
 
30,756

Net investment income
6,837

 
1,567

Other income (expense), net
213

 
1,069

Total revenues
75,945

 
158,754

Expenses
 
 
 
Net loss and loss adjustment expenses incurred
75,697

 
122,865

Acquisition costs
31,739

 
21,526

General and administrative expenses
6,794

 
6,840

Interest expense
1,561

 
1,544

Total expenses
115,791

 
152,775

Income (loss) before income tax
(39,846
)
 
5,979

Income tax (expense) benefit
(424
)
 
(73
)
Net income (loss)
$
(40,270
)
 
$
5,906

Earnings (loss) per share
 
 
 
Basic
$
(1.11
)
 
$
0.16

Diluted
$
(1.11
)
 
$
0.16

Weighted average number of ordinary shares used in the determination of earnings and loss per share
 
 
 
Basic
36,138,245

 
35,972,665

Diluted
36,138,245

 
36,364,358

 

 
The accompanying Notes to the Condensed Consolidated Financial Statements are an
integral part of the Condensed Consolidated Financial Statements. 


 
 

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GREENLIGHT CAPITAL RE, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
 
For the three months ended March 31, 2020 and 2019
(expressed in thousands of U.S. dollars)

 
Ordinary share capital
 
Additional paid-in capital
 
Retained earnings (deficit)
 
Shareholders’ equity attributable to Greenlight Capital Re, Ltd.
 
Non-controlling
interest in joint venture
 
Total equity
Balance at December 31, 2018
$
3,638

 
$
499,726

 
$
(26,077
)
 
$
477,287

 
$
485

 
$
477,772

Issue of Class A ordinary shares, net of forfeitures
34

 

 

 
34

 

 
34

Share-based compensation expense

 
1,088

 

 
1,088

 

 
1,088

Change in non-controlling interest in related party joint venture

 

 

 

 
(485
)
 
(485
)
Net income (loss)

 

 
5,906

 
5,906

 

 
5,906

Balance at March 31, 2019
$
3,672

 
$
500,814

 
$
(20,171
)
 
$
484,315

 
$

 
$
484,315

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2019
$
3,699

 
$
503,547

 
$
(30,063
)
 
$
477,183

 
$

 
$
477,183

Cumulative effect of adoption of accounting guidance for expected credit losses at January 1, 2020

 

 
(886
)
 
(886
)
 

 
(886
)
Issue of Class A ordinary shares, net of forfeitures
44

 

 

 
44

 

 
44

Share-based compensation expense

 
828

 

 
828

 

 
828

Net income (loss)

 

 
(40,270
)
 
(40,270
)
 

 
(40,270
)
Balance at March 31, 2020
$
3,743

 
$
504,375

 
$
(71,219
)
 
$
436,899

 
$

 
$
436,899



The accompanying Notes to the Condensed Consolidated Financial Statements are an
integral part of the Condensed Consolidated Financial Statements. 


 

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GREENLIGHT CAPITAL RE, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the three months ended March 31, 2020 and 2019
(expressed in thousands of U.S. dollars) 
 
Three months ended March 31
 
2020
 
2019
Cash provided by (used in) operating activities
 
 
 

Net income (loss)
$
(40,270
)
 
$
5,906

Adjustments to reconcile net income or loss to net cash provided by (used in) operating activities
 
 
 
Loss (income) from investments in related party investment fund
42,126

 
(30,756
)
Loss (income) from equity accounted investment
(888
)
 
(431
)
Net change in unrealized gains and losses on investments and notes receivable
(15,771
)
 
14,150

Net realized (gains) losses on investments
15,000

 
(14,150
)
Foreign exchange (gains) losses on investments
441

 
(408
)
Current expected credit losses recognized on notes receivable and reinsurance assets
250

 

Share-based compensation expense
872

 
1,122

Amortization and interest expense, net of accruals
(438
)
 
(389
)
Depreciation expense
7

 
7

Net change in
 
 
 
Reinsurance balances receivable
(13,459
)
 
(26,367
)
Loss and loss adjustment expenses recoverable
4,389

 
(2,491
)
Deferred acquisition costs
1,631

 
(2,728
)
Unearned premiums ceded
343

 
728

Other assets
419

 
(297
)
Loss and loss adjustment expense reserves
(14,919
)
 
25,269

Unearned premium reserves
(1,991
)
 
15,179

Reinsurance balances payable
(8,457
)
 
10,853

Funds withheld
706

 
(1,362
)
Other liabilities
(1,761
)
 
(948
)
Net cash provided by (used in) operating activities
(31,770
)
 
(7,113
)
Investing activities
 
 
 
Proceeds from redemptions from related party investment fund
19,220

 
57,169

Contributions to related party investment fund
(11,188
)
 
(520
)
Change in due to related party investment fund

 
(9,642
)
Net change in notes receivable
2

 
(2,603
)
Non-controlling interest contribution into (withdrawal from) related party joint venture, net

 
(1,278
)
Net cash provided by (used in) investing activities
8,034

 
43,126

Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash
(122
)
 
411

Net increase (decrease) in cash, cash equivalents and restricted cash
(23,858
)
 
36,424

Cash, cash equivalents and restricted cash at beginning of the period (see Note 2)
767,906

 
703,231

Cash, cash equivalents and restricted cash at end of the period (see Note 2)
$
744,048

 
$
739,655

Supplementary information
 

 
 
Interest paid in cash
$
2,000

 
$
1,933

Non-cash transfer of investments (Note 3)

 
36,673

Non-cash addition of right-of-use asset

 
323


The accompanying Notes to the Condensed Consolidated Financial Statements are an
integral part of the Condensed Consolidated Financial Statements. 

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GREENLIGHT CAPITAL RE, LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
March 31, 2020
 
 
1. ORGANIZATION AND BASIS OF PRESENTATION
 
Greenlight Capital Re, Ltd. (“GLRE”) was incorporated as an exempted company under the Companies Law of the Cayman Islands on July 13, 2004. GLRE’s principal wholly-owned subsidiary, Greenlight Reinsurance, Ltd. (“Greenlight Re”), provides global specialty property and casualty reinsurance. Greenlight Re has a Class D insurer license issued in accordance with the terms of The Insurance Law, 2010 and underlying regulations thereto (the “Law”) and is subject to regulation by the Cayman Islands Monetary Authority, in terms of the Law. Greenlight Re commenced underwriting in April 2006. Verdant Holding Company, Ltd. (“Verdant”), a wholly-owned subsidiary of GLRE, was incorporated in 2008 in the state of Delaware. During 2010, GLRE established Greenlight Reinsurance Ireland, Designated Activity Company (“GRIL”), a wholly-owned reinsurance subsidiary based in Dublin, Ireland. GRIL is authorized as a non-life reinsurance undertaking in accordance with the provisions of the European Union (Insurance and Reinsurance) Regulations 2015. GRIL provides multi-line property and casualty reinsurance capacity to the European broker market and provides GLRE with an additional platform to serve clients located in Europe and North America.  As used herein, the “Company” refers collectively to GLRE and its consolidated subsidiaries.

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

These unaudited condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2019. In the opinion of management, these unaudited condensed consolidated financial statements reflect all of the normal recurring adjustments considered necessary for a fair presentation of the Company’s financial position and results of operations as of the dates and for the periods presented.

The global pandemic related to the novel coronavirus (“COVID-19”) is expected to have a significant adverse impact on the property and casualty insurance and reinsurance industry. The Company expects that the economic consequences related to COVID-19 will negatively impact the amount of premiums written by the Company’s cedents and, in turn, by the Company. The Company expects the premium reduction will be more significant in the second quarter of 2020 and persist for the remainder of 2020 and beyond. However, the Company cannot yet quantify the impact, which will depend on the extent and duration of economic contraction, particularly in the United States. Accordingly, significant estimates used in the preparation of the Company’s consolidated financial statements including those associated with premiums, expected credit losses on amounts owed to us and the estimations of loss and loss adjustment expense reserves may be subject to significant adjustments in future periods.

The results for the three months ended March 31, 2020 are not necessarily indicative of the results expected for the full calendar year.


2. SIGNIFICANT ACCOUNTING POLICIES
 
The Company’s significant accounting policies have been updated to reflect the adoption of ASU No. 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”). The ASU requires an entity to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. ASU 2016-13 was effective for public business entities for annual and interim periods beginning after December 15, 2019. The financial assets included in the captions “Reinsurance balances receivable”, “Loss and loss adjustment expenses recoverable” (collectively “Reinsurance Assets”) and “Notes receivable”, in the Company’s condensed consolidated balance sheets are carried at amortized cost and therefore affected by ASU 2016-13. Other than the changes relating to the adoption of ASU 2016-13, there have been no other changes to the Company’s significant accounting policies as described in its Annual Report on Form 10-K for the year ended December 31, 2019.

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

Restricted Cash and Cash Equivalents
 
The Company maintains cash and cash equivalent balances to collateralize regulatory trusts and letters of credit issued to cedents (see Note 10). The following table reconciles the cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets to the total presented in the condensed consolidated statements of cash flows:

 
March 31, 2020
 
December 31, 2019
 
($ in thousands)
Cash and cash equivalents
$
8,094

 
$
25,813

Restricted cash and cash equivalents
735,954

 
742,093

Total cash, cash equivalents and restricted cash presented in the condensed consolidated statements of cash flows
$
744,048

 
$
767,906


Reinsurance Assets

Upon adoption of ASU 2016-13, the Company calculated an allowance for expected credit losses for its reinsurance balances receivable and loss and loss adjustment expenses recoverable by applying a Probability of Default (“PD”) / Loss Given Default (“LGD”) model that considers both the Company’s collectibility history on its reinsurance assets as well as representative external loss history. The external loss history that the Company used included a long-term probability of liquidation study specific to insurance companies. Additionally, the life of each of the Company’s reinsurance treaties was also considered as the probability of default was calculated over the contractual length of the reinsurance contracts.

The credit worthiness of a counterparty is evaluated by considering the credit ratings assigned by independent agencies and individually evaluating all the counterparties. The Company manages its credit risk in its reinsurance assets by transacting with insurers and reinsurers that it considers financially sound.

For its retrocessionaire counterparties that are unrated, the Company may hold collateral in the form of funds withheld, trust accounts and/or irrevocable letters of credit. For credit risk associated with reinsurance balances receivable, the Company considers the fact that in certain instances credit risk may be reduced by the Company's right to offset loss obligations or unearned premiums against premiums receivable. The Company regularly evaluates its net credit exposure to assess the ability of the retrocessionaires to honor their respective obligations.

Upon adoption, the Company recorded an allowance for expected credit loss on its Reinsurance Assets of $0.1 million with an offset to retained earnings. At March 31, 2020, the allowance for expected credit losses was $0.1 million.

Notes Receivable
 
Notes receivable represent promissory notes receivable from third parties. These notes are recorded at cost plus accrued interest, if any, net of valuation allowance for expected credit losses. The Company calculates the allowance for expected credit losses to provide for the risk of credit losses inherent in the lending process. Interest income, change in the allowance for expected credit losses (excluding changes due to charge-offs) and unrealized and realized gains or losses on the notes receivable are included in the caption “Net investment income (loss)” in the Company’s condensed consolidated statements of operations.

The allowance for expected credit losses is calculated using a PD / LGD model that leverages the Company’s collectibility history on its notes receivable as well as representative external loss history. The expected loss, as a percentage, is calculated as the product of the PD and LGD and is calculated for each period over the life of a note. The Company evaluates the financial condition of the notes receivable counterparties and monitors its exposure on a regular basis. At March 31, 2020,

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the Company considers the notes receivable balance to be collectible and has not experienced any default on payments since inception of these notes. The notes receivable originated between 2015 and 2018.

At March 31, 2020 and December 31, 2019, $0.9 million and $0.1 million, respectively, of accrued interest was included in the caption “Notes receivable” in the Company’s condensed consolidated balance sheets. When there is uncertainty as to the collection of interest contractually due, the Company places the note on non-accrual status. For notes receivable placed on non-accrual status, the notes are presented excluding any accrued interest amount. The Company resumes the accrual of interest on a note when none of the principal or interest remains past due, and the Company expects to collect the remaining contractual principal and interest. Interest collected on notes that are placed on non-accrual status is recorded as interest income when collected, provided that the recorded value of the note is deemed to be fully collectible. Where doubt exists as to the collectibility of the remaining recorded value of the notes placed on non-accrual status, the Company immediately reverses any previous accrued interest through interest income and any payments received are applied to reduce the recorded value of the notes. The allowance for expected credit losses for notes receivable is calculated on the amortized cost excluding accrued interest and interest written off due to non-accrual status.

Charge offs of notes receivable are recorded when all or a portion of the financial asset is deemed uncollectible. Full or partial charge offs are recorded as reductions to the amortized cost and deducted from the allowance in the period in which the note receivable is deemed uncollectible. In instances where the Company collects cash that it has previously charged off, the recovery will be recognized through earnings or as a reduction of the amortized cost for interest and principal, respectively.

The following table provides a roll-forward of the Company’s allowance for credit losses on notes receivable:
 
Three months ended March 31
 
2020
 
2019
 
($ in thousands)
Balance at beginning of period
$
15,000

 
$
9,012

Cumulative effect of adoption of ASU 2016-13 at January 1, 2020
750

 

Charge offs
(15,000
)
 

Net increase (decrease) in allowance
250

 

Balance at end of period
$
1,000

 
$
9,012


Deposit Assets and Liabilities
 
The Company applies deposit accounting to reinsurance contracts that do not transfer sufficient insurance risk to merit reinsurance accounting. Under deposit accounting, an asset or liability is recognized based on the consideration paid or received. The deposit asset or liability balance is subsequently adjusted using the interest method with a corresponding income or expense recorded in the Company’s condensed consolidated statements of operations under the caption “Other income (expense)”. The Company’s deposit assets and liabilities are recorded in the Company’s condensed consolidated balance sheets in the caption “Reinsurance balances receivable” and “Reinsurance balances payable,” respectively. At March 31, 2020, deposit assets and deposit liabilities were $5.6 million and $56.6 million, respectively (December 31, 2019: $5.2 million and $56.9 million, respectively). For the three months ended March 31, 2020 and 2019, the interest income/(expense) on deposit accounted contracts was as follows:
 
Three months ended March 31
 
2020
 
2019
 
($ in thousands)
Deposit interest income
$
607

 
$
1,048

Deposit interest expense
$

 
$
(48
)
Deposit interest income/(expense), net
$
607

 
$
1,000


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Other Assets

Other assets consist primarily of prepaid expenses, fixed assets, right-of-use lease assets, other receivables and deferred tax assets.

Other Liabilities

Other liabilities consist primarily of accruals for legal and other professional fees, employee bonuses and lease liabilities.

Earnings (Loss) Per Share
 
The Company’s unvested restricted stock awards, which contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are considered “participating securities” for the purposes of calculating earnings (loss) per share. Basic earnings per share is calculated on the basis of the weighted average number of common shares and participating securities outstanding during the period. Diluted earnings (or loss) per share includes the dilutive effect of the following:

Restricted Stock Units (“RSUs”) issued that would convert to common shares upon vesting;
additional potential common shares issuable when stock options are exercised, determined using the treasury stock method; and
those common shares with the potential to be issued by virtue of convertible debt and other such convertible instruments, determined using the treasury stock method.

Diluted earnings (or loss) per share contemplates a conversion to common shares of all convertible instruments only if they are dilutive in nature with regards to earnings per share. In the event of a net loss, all RSUs, stock options outstanding, convertible debt and participating securities are excluded from the calculation of both basic and diluted loss per share as their inclusion would be anti-dilutive.

The table below presents the shares outstanding for the purposes of the calculation of earnings (loss) per share for the three months ended March 31, 2020 and 2019:
 
Three months ended March 31
 
2020
 
2019
Weighted average shares outstanding - basic
36,138,245

 
35,972,665

Effect of dilutive employee and director share-based awards

 
391,693

Weighted average shares outstanding - diluted
36,138,245

 
36,364,358

Anti-dilutive stock options outstanding
875,627

 
935,627

Participating securities excluded from calculation of loss per share 
1,326,613

 


Taxation
 
Under current Cayman Islands law, no corporate entity, including GLRE and Greenlight Re, is obligated to pay taxes in the Cayman Islands on either income or capital gains. The Company has an undertaking from the Governor-in-Cabinet of the Cayman Islands, pursuant to the provisions of the Tax Concessions Law, as amended, that, in the event that the Cayman Islands enacts any legislation that imposes tax on profits, income, gains or appreciations, or any tax in the nature of estate duty or inheritance tax, such tax will not be applicable to GLRE, Greenlight Re nor their respective operations, or to the Class A or Class B ordinary shares or related obligations, before February 1, 2025.
 
Verdant is incorporated in Delaware and therefore is subject to taxes in accordance with the U.S. federal rates and regulations prescribed by the U.S. Internal Revenue Service (“IRS”). Verdant’s taxable income is generally expected to be taxed at a marginal rate of 21% (2019: 21%). Verdant’s tax years 2014 and beyond remain open and subject to examination by the IRS.


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GRIL is incorporated in Ireland and therefore is subject to the Irish corporation tax rate of 12.5% on its trading income, and 25% on its non-trading income.

The Company records a valuation allowance to the extent that the Company considers it more likely than not that all or a portion of the deferred tax asset will not be realized in the future. Other than this valuation allowance, the Company has not taken any income tax positions that are subject to significant uncertainty that is reasonably likely to have a material impact on the Company. 

Recent Accounting Pronouncements

Recently Issued Accounting Standards Adopted

As discussed above, the Company adopted ASU 2016-13 during the first quarter of 2020 using a modified retrospective transition method. The adoption resulted in a cumulative-effect adjustment to retained earnings of $0.9 million as of January 1, 2020.

Recently Issued Accounting Standards Not Yet Adopted

In January 2020, the FASB issued ASU No. 2020-01, Investments-Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging Issues Task Force) (“ASU 2020-01”). The amendments in ASU 2020-01 clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. These amendments improve current GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions. ASU 2020-01 is effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The adoption of ASU 2020-01 is not expected to have a material impact on the Company’s consolidated financial statements.


3. INVESTMENT IN RELATED PARTY INVESTMENT FUND

Prior to January 2, 2019, the Company and its reinsurance subsidiaries were party to a joint venture agreement (the “venture agreement”) with DME Advisors, LP (“DME Advisors”) and DME Advisors LLC (“DME”) under which the Company, its reinsurance subsidiaries and DME were participants in a joint venture (the “Joint Venture”) for the purpose of managing certain jointly held assets. DME and DME Advisors are related to the Company and each is an affiliate of David Einhorn, Chairman of the Company’s Board of Directors.

On September 1, 2018, the Company 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”). The SILP LPA, in conjunction with a participation agreement, replaced the venture agreement and assigned and/or transferred Greenlight Re’s and GRIL’s invested assets in the Joint Venture to SILP. The Joint Venture was terminated on January 2, 2019 by which date all assets were transferred to SILP. On September 1, 2018, SILP also entered into a SILP investment advisory agreement (“IAA”) with DME Advisors pursuant to which DME Advisors is the investment manager for SILP.

The Company has concluded that SILP qualifies as a variable interest entity (“VIE”) under U.S. GAAP. In assessing its interest in SILP, the Company noted the following:

DME II serves as SILP’s general partner and has the power of appointing the investment manager. The Company does not have the power to appoint, change or replace the investment manager or the general partner except “for cause.” Neither of the GLRE Limited Partners can participate in the investment decisions of SILP as long as SILP adheres to the investment guidelines provided within the SILP LPA. For these reasons, the GLRE Limited Partners are not considered to have substantive participating rights or kick-out rights.

DME II holds an interest in excess of 10% of SILP’s net assets which the Company considers to represent an obligation to absorb losses and a right to receive benefits of SILP that are significant to SILP.

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Consequently, the Company has concluded that DME II’s interests, and not the Company’s, meet both the “power” and “benefits” criteria associated with VIE accounting guidance, and therefore DME II is SILP’s primary beneficiary. The Company’s investment in SILP is presented in the Company’s condensed consolidated balance sheets in the caption “Investment in related party investment fund.”

During 2019, SILP’s investment portfolio was de-risked in order to reduce the Company’s investment volatility in the near-term. As a result, a significant proportion of the Company’s investment assets in SILP was held in cash and short-term treasuries as of March 31, 2020 and December 31, 2019.

The Company’s maximum exposure to loss relating to SILP is limited to the net asset value of the GLRE Limited Partners’ investment in SILP. As of March 31, 2020, the net asset value of the GLRE Limited Partners’ investment in SILP was $189.9 million (December 31, 2019: $240.1 million), representing 80.3% (December 31, 2019: 81.0%) of SILP’s total net assets. The remaining 19.7% (December 31, 2019: 19.0%) of SILP’s total net assets was held by DME II. The investment in SILP is recorded at the GLRE Limited Partners’ share of the net asset value of SILP as reported by SILP’s third-party administrator. The GLRE Limited Partners can redeem their assets from SILP for operational purposes by providing three business days’ notice to DME II. As of March 31, 2020, the majority of SILP’s long investments are composed of cash, short-term U.S. treasuries and publicly-traded equity securities, which can be readily liquidated to meet any GLRE Limited Partner’s redemption requests. The Company’s share of the change in the net asset value of SILP for the three months ended March 31, 2020 and 2019 was $(42.1) million and $30.8 million, respectively, and shown in the caption “Income (loss) from investment in related party investment fund” in the Company’s condensed consolidated statements of operations. The change in the net asset value of SILP for the three months ended March 31, 2020 was primarily driven by the impact of changes in fair value primarily attributable to the recent disruptions in global financial markets associated with COVID–19.

The summarized financial statements of SILP are presented below.

Summarized Statement of Assets and Liabilities of Solasglas Investments, LP
 
 
March 31, 2020
 
December 31, 2019
 
 
($ in thousands)
Assets
 
 
 
 
Investments, at fair value
 
$
108,514

 
$
162,928

Derivative contracts, at fair value
 
5,346

 
6,324

Due from brokers
 
84,981

 
68,060

Cash and cash equivalents
 
107,906

 
111,046

Interest and dividends receivable
 
3

 
47

Total assets
 
306,750

 
348,405

 
 
 
 
 
Liabilities and partners’ capital
 
 
 
 
Liabilities
 
 
 
 
Investments sold short, at fair value
 
(44,736
)
 
(47,834
)
Derivative contracts, at fair value
 
(16,969
)
 
(2,054
)
Due to brokers
 
(8,306
)
 
(1,180
)
Interest and dividends payable
 
(129
)
 
(828
)
Other liabilities
 
(57
)
 
(101
)
Total liabilities
 
(70,197
)
 
(51,997
)
 
 
 
 
 
Net Assets
 
$
236,553

 
$
296,408

 
 
 
 
 
GLRE Limited Partners’ share of Net Assets
 
$
189,898

 
$
240,056



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Summarized Statement of Operations of Solasglas Investments, LP
 
 
Three months ended March 31, 2020
 
Three months ended March 31, 2019
 
 
($ in thousands)
Investment income
 
 
 
 
Dividend income (net of withholding taxes)
 
$
747

 
$
1,240

Interest income
 
209

 
686

Total Investment income
 
956

 
1,926

 
 
 
 
 
Expenses
 
 
 
 
Management fee
 
(662
)
 
(2,014
)
Interest
 
(17
)
 
(1,374
)
Dividends
 
(145
)
 
(1,070
)
Professional fees and other
 
(208
)
 
(380
)
Total expenses
 
(1,032
)
 
(4,838
)
Net investment income (loss)
 
(76
)
 
(2,912
)
 
 
 
 
 
Realized and change in unrealized gains (losses)
 
 
 
 
Net realized gain (loss)
 
(11,953
)
 
(7,175
)
Net change in unrealized appreciation (depreciation)
 
(39,793
)
 
49,753

Net gain (loss) on investment transactions
 
(51,746
)
 
42,578

 
 
 
 
 
Net income (loss)
 
$
(51,822
)
 
$
39,666

 
 
 
 
 
GLRE Limited Partners’ share of net income (loss) (1)
 
$
(42,126
)
 
$
30,756


1 Net of management fees of $0.7 million and $2.0 million for the three months ended March 31, 2020 and 2019, respectively, and net of accrued performance allocation of nil and $3.4 million for the three months ended March 31, 2020 and 2019, respectively. See Note 9 for further details.


4. FINANCIAL INSTRUMENTS 
 
Investments
  
Other Investments
 
“Other investments” include unlisted securities and investments accounted for under the equity method.

At March 31, 2020, the following securities were included in the caption “Other investments”:
March 31, 2020
 
Cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair value / carrying value
 
 
($ in thousands)
Private investments and unlisted equities
 
$
10,420

 
$
990

 
$
(276
)
 
$
11,134

Investment accounted for under the equity method
 

 

 

 
6,590

Total other investments
 
 
 
 
 
 
 
$
17,724



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At December 31, 2019, the following securities were included in the caption “Other investments”: 
December 31, 2019
 
Cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair value / carrying value
 
 
($ in thousands)
Private investments and unlisted equities
 
$
10,420

 
$
265

 
$
(4
)
 
$
10,681

Investment accounted for under the equity method
 

 

 

 
5,703

Total other investments
 
 
 
 
 
 
 
$
16,384


Private investments and unlisted equities include securities that do not have readily determinable fair values. The carrying values of these holdings are determined based on their original cost minus impairment, if any, plus or minus changes resulting from observable price changes. At March 31, 2020, the carrying value of private investments and unlisted equities was $11.1 million (December 31, 2019: $10.7 million), and incorporated an upward adjustment of $0.8 million during the three months ended March 31, 2020 (2019: $0.2 million), excluding any unrealized gains or losses related to changes in foreign currency exchange rates. There were no individually significant adjustments to the carrying values of private equity securities for the three months ended March 31, 2020.

 The Company’s investment accounted for under the equity method represents its investment in AccuRisk Holdings LLC (“AccuRisk”), a Chicago, Illinois-based managing general underwriter focused on employee and health insurance benefits. At March 31, 2020, the Company held a 58% (December 31, 2019: 58%), interest in AccuRisk and had provided a $6.0 million credit facility. In addition to providing capital and funding in support of AccuRisk’s expansion plans, the Company also provides reinsurance capacity for business produced by AccuRisk. The Company has determined that AccuRisk is a VIE, of which the Company is not the primary beneficiary. The Company’s carrying value represents its ownership share of AccuRisk’s net assets. The Company’s maximum exposure to loss relating to AccuRisk is limited to the carrying amount of its investment, plus the credit facility extended. For the three months ended March 31, 2020, the Company’s share of AccuRisk’s net income was $0.9 million (2019: $0.4 million), which was included in the caption “Net investment income” in the Company’s condensed consolidated statements of operations.

Fair Value Hierarchy

The fair value of a financial instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants. Assets and liabilities measured at fair value are categorized based on whether the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
Level 2: Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.

As of March 31, 2020 and December 31, 2019, the Company did not carry any investments at fair value that were assigned a Level within the fair value hierarchy. The Company’s investment in the related party investment fund is measured at fair value using the net asset value practical expedient, and is therefore not classified within the fair value hierarchy. (See Note 3 for further details.)

Financial Instruments Disclosed, But Not Carried, at Fair Value

The captions “Notes receivable (net of allowance for expected credit loss)” and “Convertible senior notes payable” represent financial instruments that are carried at amortized cost. The carry values of the notes receivable (net of allowance for expected credit loss) approximate their fair values, which the Company has determined on the basis of Level 3 inputs. The fair value of the convertible senior notes payable is estimated based on the bid price observed in an inactive market for the identical instrument (Level 2 input).


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5. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

There were no significant changes in the actuarial methodology or assumptions relating to the Company’s loss and loss adjustment expense reserves for the three months ended March 31, 2020.

At March 31, 2020 and December 31, 2019, loss and loss adjustment expense reserves were composed of the following:
 
 
March 31, 2020
 
December 31, 2019
 
 
($ in thousands)
Case reserves
 
$
198,616

 
$
217,834

IBNR
 
257,053

 
252,754

Total
 
$
455,669

 
$
470,588


A summary of changes in outstanding loss and loss adjustment expense reserves for all lines of business consolidated
for the three months ended March 31, 2020 and 2019 is as follows: 
Consolidated
 
2020
 
2019
 
 
($ in thousands)
Gross balance at January 1
 
$
470,588

 
$
482,662

Less: Losses recoverable
 
(27,531
)
 
(43,705
)
Net balance at January 1
 
443,057

 
438,957

Incurred losses related to:
 
 
 
 
Current year
 
71,525

 
87,812

Prior years
 
4,172

 
35,053

Total incurred
 
75,697

 
122,865

Paid losses related to:
 
 
 
 
Current year
 
(10,649
)
 
(13,277
)
Prior years
 
(73,296
)
 
(87,375
)
Total paid
 
(83,945
)
 
(100,652
)
Foreign currency revaluation
 
(2,235
)
 
565

Net balance at March 31
 
432,574

 
461,735

Add: Losses recoverable
 
23,095

 
46,196

Gross balance at March 31
 
$
455,669

 
$
507,931

    


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The changes in the outstanding loss and loss adjustment expense reserves for health claims for the three months ended March 31, 2020 and 2019 are as follows:
Health
 
2020
 
2019
 
 
($ in thousands)
Gross balance at January 1
 
$
18,063

 
$
24,502

Less: Losses recoverable
 

 

Net balance at January 1
 
18,063

 
24,502

Incurred losses related to:
 
 
 
 
Current year
 
8,033

 
11,142

Prior years
 
851

 
2,159

Total incurred
 
8,884

 
13,301

Paid losses related to:
 
 
 
 
Current year
 
(1,719
)
 
(1,502
)
Prior years
 
(8,964
)
 
(9,972
)
Total paid
 
(10,683
)
 
(11,474
)
Foreign currency revaluation
 

 

Net balance at March 31
 
16,264

 
26,329

Add: Losses recoverable
 

 

Gross balance at March 31
 
$
16,264

 
$
26,329


For the three months ended March 31, 2020, the estimate of net losses incurred relating to prior accident years increased by $4.2 million, primarily in relation to certain general liability, health and multi-line contracts. The net financial impact of the prior year unfavorable loss development for the three months ended March 31, 2020, taking into account earned reinstatement premiums assumed and ceded, adjustments to assumed and ceded acquisition costs and adjustments to deposit accounted contracts, was a loss of $3.9 million.

For the three months ended March 31, 2019, the estimate of net losses incurred relating to prior accident years increased by $35.1 million that originated primarily from private passenger automobile contracts. These unanticipated automobile losses were the result of adverse rulings that affected a significant number of loss events that occurred in Florida between 2015 and early 2018, including many claims that had previously been considered closed. The net financial impact of the prior year adverse loss development for the three months ended March 31, 2019, taking into account earned reinstatement premiums assumed and ceded, adjustments to assumed and ceded acquisition costs and adjustments to deposit accounted contracts, was a loss of $25.7 million.


6. RETROCESSION
 
The Company, from time to time, purchases retrocessional coverage for one or more of the following reasons: to manage its overall exposure, to reduce its net liability on individual risks, to obtain additional underwriting capacity and to balance its underwriting portfolio. Loss and loss adjustment expenses recoverable from retrocessionaires are recorded as assets.

For the three months ended March 31, 2020, the Company’s earned ceded premiums were $1.0 million (2019: $22.2 million). For the three months ended March 31, 2020, loss and loss adjustment expenses incurred of $75.7 million (2019: $122.9 million), reported on the condensed consolidated statements of operations are net of loss and loss expenses recovered and recoverable of $3.5 million (2019: $26.3 million).

Retrocession contracts do not relieve the Company from its obligations to the insureds. Failure of retrocessionaires to honor their obligations could result in losses to the Company. At March 31, 2020, the Company’s loss reserves recoverable consisted of (i) $17.9 million (December 31, 2019: $21.2 million) from unrated retrocessionaires, of which $17.4 million (December 31, 2019: $20.0 million) were secured by cash, letters of credit and collateral held in trust accounts for the benefit of the Company and (ii) $5.2 million (December 31, 2019: $6.4 million) from retrocessionaires rated A- or above by A.M. Best.


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The Company regularly evaluates its net credit exposure to assess the ability of the retrocessionaires to honor their respective obligations. At March 31, 2020, the Company had recorded an allowance for expected credit losses of $0.1 million (December 31, 2019: nil).

7. SENIOR CONVERTIBLE NOTES

On August 7, 2018, the Company issued $100.0 million of senior unsecured convertible notes (the “Notes”), which mature on August 1, 2023. The Notes bear interest at 4.0% payable semi-annually on February 1 and August 1 of each year beginning on February 1, 2019.

Note holders have the option, under certain conditions, to redeem the Notes prior to maturity.
If the Notes are converted by the holder, the Company shall have the option to settle the conversion obligation in cash, ordinary shares of the Company, or a combination thereof pursuant to the terms of the indenture governing the Notes. The Company has therefore bifurcated the Notes into liability and equity components.
If converted at March 31, 2020, the face value of the Notes would be cash settled as the Company has assumed that the conversion option will not be exercised due to the share price at March 31, 2020 being lower than the conversion price of $17.19 per share.
The Company’s effective borrowing rate for non-convertible debt at the time of issuance of the Notes was estimated to be 6.0%, which equated to an $8.2 million discount. As of March 31, 2020 and December 31, 2019, the unamortized debt discount was $5.5 million and $5.9 million, respectively, and is expected to be amortized through the maturity date. The debt discount also represents the portion of the Note’s principal amount allocated to the equity component.

The Company incurred issuance costs in connection with the issuance of the Notes. As of March 31, 2020, the unamortized portion of these costs attributed to the debt component was $2.1 million (December 31, 2019: $2.3 million), which are expected to be amortized through the maturity date. The portion of these issuance costs attributed to the equity component was netted against the gross proceeds allocated to equity, resulting in $7.9 million being included in the caption “Additional paid-in capital” in the Company’s condensed consolidated balance sheets.
The carrying value of the Notes as of March 31, 2020, including accrued interest of $0.7 million was $93.1 million (December 31, 2019: $93.5 million). As of March 31, 2020, the fair value of the Notes was estimated to be $78.6 million (December 31, 2019: $94.9 million (see Note 4 Financial Instruments).
For the three months ended March 31, 2020, the Company recognized interest expense of $1.6 million (2019: $1.5 million) in connection with the interest coupon, amortization of issuance costs and amortization of the discount.

The Company was in compliance with all covenants relating to the Notes as of March 31, 2020 and December 31, 2019.


8. SHARE-BASED COMPENSATION
 
The Company has a stock incentive plan for directors, employees and consultants that is administered by the Compensation Committee of the Board of Directors.
 
Employee and Director Restricted Shares
 
For the three months ended March 31, 2020, 306,264 (2019: 235,701) Class A ordinary shares were issued to employees pursuant to the Company’s stock incentive plan. These shares contain certain restrictions relating to, among other things, vesting, forfeiture in the event of termination of employment and transferability. The restricted shares cliff vest three years after the date of issuance, subject to the grantee’s continued service with the Company. During the vesting period, the holder of the restricted shares retains voting rights and is entitled to any dividends declared by the Company.

For the three months ended March 31, 2020, 145,089 (2019: 89,945) Class A ordinary shares were issued to the Company’s Chief Executive Officer (“CEO”) pursuant to the Company’s stock incentive plan. These shares contain performance and service conditions and certain restrictions relating to, among other things, vesting, forfeiture in the event of termination of employment and transferability. These restricted shares cliff vest 5 years after the date of issuance, subject to the performance condition being met and the grantee’s continued service with the Company. During the vesting period, the holder of the restricted shares retains voting rights and is entitled to any dividends declared by the Company. The weighted average

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grant date fair value of these restricted shares subject to performance conditions was $6.72 (2019: $10.84) per share. As the performance conditions associated with these restricted shares have not been met, no compensation cost was recognized relating to these shares for the three months ended March 31, 2020 and 2019 .

For the three months ended March 31, 2020, 18,701 (2019: nil) restricted shares were forfeited by employees who left the Company prior to the expiration of the applicable vesting periods. For the three months ended March 31, 2020, $0.1 million stock compensation expense (2019: nil) relating to the forfeited restricted shares was reversed.

The Company recorded $0.6 million of share-based compensation expense, net of forfeiture reversals, relating to restricted shares for the three months ended March 31, 2020 (2019: $0.8 million). As of March 31, 2020, there was $3.6 million (December 31, 2019: $2.7 million) of unrecognized compensation cost relating to non-vested restricted shares (excluding CEO’s restricted shares with performance conditions) which are expected to be recognized over a weighted average period of 2.2 years (December 31, 2019: 1.6 years). For the three months ended March 31, 2020, the total fair value of restricted shares vested was $2.1 million (2019: $2.3 million).

The following table summarizes the activity for unvested outstanding restricted share awards during the three months ended March 31, 2020:

 
 
Number of
non-vested
restricted
 shares
 
Weighted
 average
grant date
fair value
Balance at December 31, 2019
 
873,087

 
$
12.83

Granted
 
451,353

 
6.72

Vested
 
(95,848
)
 
21.65

Forfeited
 
(18,701
)
 
12.78

Balance at March 31, 2020
 
1,209,891

 
$
9.85

 
Employee and Director Stock Options

For the three months ended March 31, 2020, no Class A ordinary share purchase options were granted, no stock options were exercised by directors or employees, and no stock options vested. When stock options are granted, the Company reduces the corresponding number from the shares authorized for issuance as part of the Company’s stock incentive plan.

The total compensation cost expensed relating to stock options for the three months ended March 31, 2020 was $0.2 million (2019$0.3 million). At March 31, 2020, the total compensation cost related to non-vested options not yet recognized was $1.1 million (December 31, 2019$1.9 million) to be recognized over a weighted average period of 2.3 years (December 31, 20192.8 years) assuming the grantee completes the service period for vesting of the options.

There was no activity in employee and director stock options during the three months ended March 31, 2020. At March 31, 2020 and December 31, 2019, there were 0.9 million and 0.9 million stock options outstanding, respectively, with a weighted average exercise price of $22.68 and $22.68 per share, respectively and weighted average grant date fair value of $10.25 and $10.25 per share, respectively. The weighted average remaining contractual term of the stock options was 5.6 years and 5.8 years, at March 31, 2020 and December 31, 2019, respectively.

 Employee Restricted Stock Units

The Company issues restricted stock units (“RSUs”) to certain employees as part of the stock incentive plan.

These RSUs contain restrictions relating to vesting, forfeiture in the event of termination of employment, transferability and other matters. Each RSU grant cliff vests three years after the date of issuance, subject to the grantee’s continued service with the Company. On the vesting date, the Company converts each RSU into one Class A ordinary share and issues new Class A ordinary shares from the shares authorized for issuance as part of the Company’s stock incentive plan. For the three months ended March 31, 2020, 60,622 (2019: 48,535) RSUs were issued to employees pursuant to the Company’s stock incentive plan. For the three months ended March 31, 2020, no (2019: 24,165) RSUs were forfeited by employees who left the Company prior to the expiration of the applicable vesting periods.


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The Company recorded $0.1 million of share-based compensation expense, net of forfeitures, relating to RSUs for the three months ended March 31, 2020 (2019: $0.1 million).
 
Employee RSU activity during the three months ended March 31, 2020 was as follows:
 
 
Number of
non-vested
RSUs
 
Weighted
 average
grant date
fair value
Balance at December 31, 2019
 
63,582

 
$
13.76

Granted
 
60,622

 
6.72

Vested
 
(7,482
)
 
21.65

Forfeited
 

 

Balance at March 31, 2020
 
116,722

 
$
9.60


For the three months ended March 31, 2020 and 2019, the combined stock compensation expense (net of forfeitures), which was included in the caption “General and administrative expenses” in the Company’s statements of operations, was $0.9 million and $1.1 million, respectively.


9. RELATED PARTY TRANSACTIONS 
 
Investment Advisory Agreement
 
DME, DME II and DME Advisors are related to the Company and each is an affiliate of David Einhorn, Chairman of the Company’s Board of Directors.

The Company has entered into the SILP LPA with DME II. DME II receives a performance allocation equal to (with capitalized terms having the meaning provided under the SILP LPA) (a) 10% of the portion of the Positive Performance Change for each limited partner’s capital account that is less than or equal to the positive balance in such limited partner’s Carryforward Account, plus (b) 20% of the portion of the Positive Performance Change for each limited partner’s capital account that exceeds the positive balance in such limited partner’s Carryforward Account. The Carryforward Account for Greenlight Re and GRIL include the amount of losses that were to be recouped under the Joint Venture as well as any loss generated on the assets invested in SILP, subject to adjustments for redemptions. The loss carry forward provision contained in the SILP LPA allows DME II to earn a reduced performance allocation of 10% of profits in years subsequent to any 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. On February 26, 2019, effective as of September 1, 2018, the Company entered into Amendment No. 1 to the SILP LPA. The amendment was intended to revise the mechanics for calculating the Carryforward Account and Performance Allocation (as defined in the LPA) to take into account withdrawals from and subsequent recontributions of capital to SILP, consistent with the treatment under the Joint Venture. For the three months ended March 31, 2020, no accrued performance allocation (2019: $3.4 million), was deducted from the Company’s investment in SILP and allocated to DME II.

In accordance with the SILP LPA, DME Advisors constructs a levered investment portfolio as agreed by the Company (the “Investment Portfolio” as defined in the SILP LPA). On September 1, 2018, SILP entered into the IAA with DME Advisors which entitles DME Advisors to a monthly management fee equal to 0.125% (1.5% on an annual basis) of each limited partner’s Investment Portfolio. The IAA has an initial term ending on August 31, 2023 subject to an automatic extension for successive three-year terms. For the three months ended March 31, 2020, management fees paid by SILP to DME Advisors of $0.7 million, (2019: $2.0 million), were included in the caption “Income (loss) from investment in related party investment fund” in the Company’s condensed consolidated statement of operations.

The Company has entered into a letter agreement with DME Advisors and DME II whereby during the period from June 1, 2019 to June 30, 2020, the portion of the Investment Portfolio held in cash or cash equivalents will not be subject to any management fee or performance allocation.
 
Pursuant to the SILP LPA and the IAA, the Company has agreed to indemnify DME, DME II and DME Advisors for any expense, loss, liability, or damage arising out of any claim asserted or threatened in connection with DME Advisors serving as the Company’s or SILP’s investment advisor. The Company will reimburse DME, DME II and DME Advisors for reasonable costs and expenses of investigating and/or defending such claims, provided such claims were not caused due to gross

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negligence, breach of contract or misrepresentation by DME, DME II or DME Advisors. There were no indemnification amounts incurred by the Company during any of the periods presented.

Green Brick Partners, Inc.

David Einhorn also serves as the Chairman of the Board of Directors of Green Brick Partners, Inc. (“GRBK”), a publicly traded company. As of March 31, 2020, SILP, along with certain affiliates of DME Advisors, collectively owned 47.8% of the issued and outstanding common shares of GRBK. Under applicable securities laws, DME Advisors may be limited at times in its ability to trade GRBK shares on behalf of SILP.

Service Agreement
 
The Company has entered into a service agreement with DME Advisors, pursuant to which DME Advisors provides certain investor relations services to the Company for compensation of five thousand dollars per month (plus expenses). The agreement is automatically renewed annually until terminated by either the Company or DME Advisors for any reason with 30 days prior written notice to the other party. 

Collateral Assets Investment Management Agreement

Effective January 1, 2019, the Company (and its subsidiaries) entered into a collateral assets investment management agreement (the “CMA”) with DME Advisors, pursuant to which DME Advisors manages certain assets of the Company that are not subject to the SILP LPA and are held by the Company to provide collateral required by the cedents in the form of trust accounts and letters of credit. In accordance with the CMA, DME Advisors receives no fees and is required to comply with the collateral investment guidelines. The CMA can be terminated by any of the parties upon 30 days’ prior written notice to the other parties.



10. COMMITMENTS AND CONTINGENCIES 
 
Letters of Credit and Trusts
 
At March 31, 2020, the Company had one letter of credit facility, which automatically renews each year unless terminated by either party in accordance with the applicable required notice period:
 
 
Facility
 
Termination Date
 
Notice period required for termination
 
 
($ in thousands)
 
 
 
 
Citibank Europe plc
 
$
400,000

 
October 11, 2020
 
120 days prior to termination date

As of March 31, 2020, an aggregate amount of $138.4 million (December 31, 2019: $204.5 million) in letters of credit were issued under the above facility. As of March 31, 2020, total cash and cash equivalents with a fair value in the aggregate of $138.8 million (December 31, 2019: $213.4 million) were pledged as collateral against the letters of credit issued and included in the caption “Restricted cash and cash equivalents” in the Company’s condensed consolidated balance sheets. The 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 will be prohibited from paying dividends to its parent company. The Company was in compliance with all the covenants of the facility as of March 31, 2020 and December 31, 2019.

The Company has also established regulatory trust arrangements for certain cedents. As of March 31, 2020, collateral of $597.2 million (December 31, 2019: $528.7 million) was provided to cedents in the form of regulatory trust accounts and included in the caption “Restricted cash and cash equivalents” in the Company’s condensed consolidated balance sheets.


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Lease Obligations
 
Greenlight Re has entered into lease agreements for office space in the Cayman Islands that expires on December 31, 2020. The Company has determined that the current arrangement qualifies as a short term lease. The short-term lease expense for the three months ended March 31, 2020 was $0.1 million (2019: $0.1 million).

GRIL has entered into a lease agreement for office space in Dublin, Ireland. Under the terms of this lease agreement, GRIL is committed to minimum annual rent payments denominated in Euros approximating €0.1 million until May 2021, and adjusted to the prevailing market rates for the subsequent five-year term. GRIL has the option to terminate the lease agreement in 2021. The Company has determined that this lease was an operating lease and of March 31, 2020 has recorded a right-of-use asset and a corresponding lease liability of $0.2 million (December 31, 2019: $0.2 million). The operating lease expense for the three months ended March 31, 2020 and 2019 was insignificant. Included in the ”Schedule of Commitments and Contingencies,” below, are the net minimum lease payment obligations relating to this lease as of March 31, 2020.

Schedule of Commitments and Contingencies
The following is a schedule of future minimum payments required under the above commitments:  
 
2020
 
2021
 
2022
 
2023
 
2024
 
Thereafter
 
Total
 
($ in thousands)
Operating lease obligations
$
507

 
$
61

 
$

 
$

 
$

 
$

 
$
568

Interest and convertible note payable
2,000

 
4,000

 
4,000

 
104,000

 

 

 
114,000

 
$
2,507

 
$
4,061

 
$
4,000

 
$
104,000

 
$

 
$

 
$
114,568


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



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11. SEGMENT REPORTING
 
The Company manages its business on the basis of one operating segment, Property & Casualty Reinsurance. The following tables provide a breakdown of the Company’s gross premiums written by line of business and by geographic area of risks insured for the periods indicated: 

Gross Premiums Written by Line of Business
 
 
Three months ended March 31
 
 
2020
 
2019
 
 
($ in thousands)
Property
 
 
 
 
 
 
 
 
Commercial
 
$
2,965

 
2.7
%
 
$
3,730

 
2.3
%
Motor
 
8,233

 
7.5

 
20,183

 
12.4

Personal
 
2,961

 
2.7

 
2,893

 
1.8

Total Property
 
14,159

 
12.9

 
26,806

 
16.5

 
 
 
 
 
 
 
 
 
Casualty
 
 
 
 
 
 
 
 
General Liability
 
168

 
0.1

 
982

 
0.6

Motor Liability
 
29,395

 
26.8

 
79,243

 
48.7

Professional Liability
 
90

 
0.1

 
82

 
0.1

Workers' Compensation
 
10,324

 
9.4

 
9,429

 
5.8

Multi-line
 
21,586

 
19.6

 
20,749

 
12.8

Total Casualty
 
61,563

 
56.0

 
110,485

 
68.0

 
 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
 
Accident & Health
 
17,876

 
16.3

 
14,871

 
9.1

Financial
 
10,162

 
9.3

 
7,904

 
4.9

Marine
 
356

 
0.3

 
110

 
0.1

Other Specialty
 
5,671

 
5.2

 
2,384

 
1.5

Total Other
 
34,065

 
31.1

 
25,269

 
15.5

 
 
$
109,787

 
100.0
%
 
$
162,560

 
100.0
%

Gross Premiums Written by Geographic Area of Risks Insured
 
 
Three months ended March 31
 
 
2020
 
2019
 
 
($ in thousands)
U.S. and Caribbean
 
$
86,050

 
78.4
%
 
$
137,651

 
84.7
%
Worldwide (1)
 
22,796

 
20.7

 
24,909

 
15.3

Asia
 
941

 
0.9

 

 

 
 
$
109,787

 
100.0
%
 
$
162,560

 
100.0
%
(1) “Worldwide” is composed of contracts that reinsure risks in more than one geographic area and may include risks in the U.S. 




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Item 2.    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 our wholly-owned subsidiaries, Greenlight Reinsurance, Ltd, (“Greenlight Re”), Greenlight Reinsurance Ireland, Designated Activity Company (“GRIL”) and Verdant Holding Company, Ltd. (“Verdant”), unless the context dictates otherwise. References to our “Ordinary Shares” refers collectively to our Class A Ordinary Shares and Class B Ordinary Shares.
 
The following is a discussion and analysis of our results of operations for the three months ended March 31, 2020 and 2019 and financial condition as of March 31, 2020 and December 31, 2019. 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 December 31, 2019.
  
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. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” (refer to Part I, Item 1A) contained in our Amendment No. 1 to Form 10-K for the fiscal year ended December 31, 2019, as filed with the SEC on April 29, 2020. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of 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 on which 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.

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 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.
 
Historically, we have aimed to complement our underwriting results with a non-traditional investment approach in order to achieve higher rates of return over the long term than reinsurance companies that employ more traditional 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.

The Company’s subsidiaries hold an A.M. Best Financial Strength Rating of A- (Excellent) with a negative outlook. During 2019, the Company’s Board initiated a strategic review to address the risk of a downgrade. On April 2, 2020, the Company announced the completion of its review of strategic transaction alternatives. The Board, following a recommendation made by a special committee composed of independent directors, determined that stockholder value is likely to be better enhanced on a standalone basis than by pursuing a transaction with a third party.
 
Because our portfolio will evolve in response to market conditions and underwriting opportunities, period-to-period comparisons of our underwriting results may not be meaningful. In addition, our historical investment results may not necessarily be indicative of future performance. Due to the nature of our reinsurance and investment strategies, our operating results will likely fluctuate from period to period.

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Segments
 
We manage our business on the basis of 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 (including homeowners’ insurance) and commercial lines exposures. Property business includes both catastrophe as well as non-catastrophe coverage. We expect catastrophe business to make up a small proportion of our property business.

Casualty business covers general liability, motor liability, professional liability and workers’ compensation exposures. The Company’s multi-line business predominantly relates to casualty reinsurance and as such all multi-line business is included within the casualty category. Casualty business generally has losses reported and paid over a longer period of time than property business.

Other business covers accident and health, financial lines (including transactional liability, mortgage insurance, surety and trade credit), marine, and to a lesser extent, other specialty business such as aviation, crop, cyber, energy, political and terrorism exposures.

Outlook and Trends

The global pandemic related to the novel coronavirus (“COVID-19”) is expected to have a significant adverse impact on the property and casualty insurance and reinsurance industry. We expect that the economic consequences related to COVID-19 will negatively impact the amount of premiums written by our cedents and, in turn, by us. While we have incorporated an estimate of refunds of premium we wrote during the first quarter of 2020, we expect the premium reduction will be more significant in the second quarter of 2020 and persist for the remainder of 2020 and beyond. We cannot predict with certainty the degree of the impact, which will depend on the extent and duration of economic contraction, particularly in the United States. However, given the anticipated impact of the pandemic on our earned premiums, we expect an increase in our underwriting expense ratio in the near term.
We also expect that COVID-19 will negatively impact the frequency and severity of claims in certain lines, including mortgage insurance/reinsurance, workers’ compensation, health and multi-line business. Further, while we do not have significant exposure to business interruption claims, the potential exists for elevated losses in the event that U.S. or other government legislative action is taken to retroactively mandate coverage irrespective of terms, exclusions or other conditions included in our underlying policies that would otherwise preclude coverage.
In other lines that we write, particularly motor, we believe that the frequency of claims is likely to be reduced. We believe that fewer claims will be reported, at least in the short term, as a result of fewer private passenger automobiles being driven during shelter-in-place orders. This decrease in claims may offset the decrease in premiums, which could result in a net favorable impact to our cedents and, in turn, us.
We expect that technological, analytical, product and delivery mechanism innovations in the insurance and reinsurance industries will have an increasingly significant impact on the markets in which we operate. The Greenlight Re Innovations unit, our internal effort to develop and implement product and service innovations with insurance applications, is positioned to facilitate some of these market shifts, while we also anticipate benefiting from new underwriting opportunities that are created.
Compared to most of our competitors, we are small and have low overhead expenses. We believe that our current expense efficiency, agility and existing relationships has provided support to our competitive position and should allows us to profitably participate in lines of business that fit within our strategy. However, the size of our current capital base, combined with A.M Best’s negative outlook on our subsidiaries’ A- (Excellent) rating, may constrain our capacity and our ability to access underwriting business. Our ability to execute our business plan during the remainder of 2020 may be adversely impacted by a prolonged negative outlook from A.M. Best or if A.M. Best revises our subsidiaries’ ratings below A- (Excellent).

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We continue to monitor market conditions to best position ourselves to participate where an appropriate risk-reward profile exists. Our underlying results and product line concentrations may vary, perhaps significantly, from one period to the next, and therefore our results to date are not necessarily indicative of future portfolio composition and performance.
There are many global economic, investment and political uncertainties that may impact our business and our investment portfolio, including the impact of COVID-19, central bank actions and potential trade disputes. Our decision to de-risk our investments has reduced, although not eliminated, our exposure to such uncertainties. We expect to hold most of our investable assets in cash and short-term treasuries in the current environment.

Critical Accounting Policies and Estimates
 
Our condensed consolidated financial statements contain certain amounts that are inherently subjective in nature and have required management to make assumptions and best estimates to determine reported values. If certain factors, including those described in “Part I. Item IA. — Risk Factors” included in our Amendment No. 1 to Form 10-K for the fiscal year ended December 31, 2019, as filed with the SEC on April 29, 2020, 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. “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 ended December 31, 2019 describes our critical accounting policies and estimates. The most significant estimates relate to premium revenues and risk transfer, loss and loss adjustment expense reserves, acquisition costs, bonus accruals and share-based payments.

Recently issued and adopted accounting standards and their impact to the Company, if any, are presented under “Recent Accounting Pronouncements” in Note 2 to the condensed consolidated financial statements.

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 and the change in shareholder value. Generally, a non-GAAP financial measure, as defined in Securities and Exchange Commission (“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 in accordance with U.S. GAAP. We believe that these measures, which may be calculated or defined differently by other companies, provide a consistent and comparable measure of performance of our business to help shareholders understand performance trends and allow for a more complete understanding of the Company’s business. Non-GAAP financial measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. The key non-GAAP financial measures used in this report are:
Basic book value per share;
Fully diluted book value per share; and
Net underwriting income (loss).

These non-GAAP 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 by which to monitor the shareholder value generated. In addition, fully diluted book value per share may be useful to our investors, shareholders and other interested parties to form a basis of comparison with other companies within the property and casualty reinsurance industry.

Fully diluted book value per share is considered a non-GAAP financial measure and represents basic book value per share combined with any dilutive impact of in-the-money stock options and RSUs issued and outstanding as of any period end. In addition, the fully diluted book value per share includes the dilutive effect, if any, of ordinary shares to be issued upon conversion of the convertible notes. 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.

Our primary financial goal is to increase fully diluted book value per share over the long term.


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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 comparable U.S. GAAP measure.
 
March 31, 2020
 
December 31, 2019
 
September 30, 2019
 
June 30, 2019
 
March 31, 2019
 
  ($ 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 book value per share)
$
436,899

 
$
477,183

 
$
506,543

 
$
500,738

 
$
484,315

Add: Proceeds from in-the-money stock options issued and outstanding

 

 

 

 

Numerator for fully diluted book value per share
$
436,899

 
$
477,183

 
$
506,543

 
$
500,738

 
$
484,315

Denominator for basic and fully diluted book value per share: (1)
 
 
 
 
 
 
 
 
 
Ordinary shares issued and outstanding (denominator for basic book value per share)
37,434,244

 
36,994,110

 
36,994,110

 
36,793,162

 
36,717,761

Add: In-the-money stock options and RSUs issued and outstanding
116,722

 
63,582

 
63,582

 
87,747

 
87,747

Denominator for fully diluted book value per share
37,550,966

 
37,057,692

 
37,057,692

 
36,880,909

 
36,805,508

Basic book value per share
$
11.67

 
$
12.90

 
$
13.69

 
$
13.61

 
$
13.19

Increase (decrease) in basic book value per share ($)
$
(1.23
)
 
$
(0.79
)
 
$
0.08

 
$
0.42

 
$
0.07

Increase (decrease) in basic book value per share (%)
(9.5
)%
 
(5.8
)%
 
0.6
%
 
3.2
%
 
0.5
 %
 
 
 
 
 
 
 
 
 
 
Fully diluted book value per share
$
11.63

 
$
12.88

 
$
13.67

 
$
13.58

 
$
13.16

Increase (decrease) in fully diluted book value per share ($)
$
(1.25
)
 
$
(0.79
)
 
$
0.09

 
$
0.42

 
$
(0.32
)
Increase (decrease) in fully diluted book value per share (%)
(9.7
)%
 
(5.9
)%
 
0.7
%
 
3.2
%
 
(2.4
)%

(1) All unvested restricted shares, including those with performance conditions, are included in the “basic” and “fully diluted” denominators. As of March 31, 2020, the number of unvested restricted shares with performance conditions was 501,989 (356,900, 356,900, 120,605, 120,605 as of December, 31, 2019, September 30, 2019, June 30, 2019 and March 31, 2019, respectively).

Net Underwriting Income (Loss)

One way that we evaluate the Company’s underwriting performance is through the measurement of 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 as it measures 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 its those of our industry peer group.

Net underwriting income (loss) is considered a non-GAAP financial measure because it excludes items used in the calculation of net income before taxes under U.S. GAAP. Net underwriting income (loss) is calculated as net premiums earned, plus other income (expense) relating to deposit-accounted contracts, less net loss and loss adjustment expenses, less acquisition costs, and less 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 and adjustments to the allowance for expected credit losses; (3) corporate general and administrative expenses; (4) interest expense and (5) income taxes. We exclude total investment related income or loss and foreign exchange gains or losses as we believe these items are influenced by market conditions and other

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factors not related to underwriting decisions. We exclude corporate expenses because these expenses 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.

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 is shown below:
 
 
Three months ended March 31
 
 
2020
 
2019
 
($ in thousands)
Income (loss) before income tax
 
$
(39,846
)
 
$
5,979

Add (subtract):
 
 
 
 
Investment related (income) loss
 
35,289

 
(32,323
)
Other non-underwriting (income) expense
 
394

 
(69
)
Corporate expenses
 
3,858

 
3,034

Interest expense
 
1,561

 
1,544

Net underwriting income (loss)
 
$
1,256

 
$
(21,835
)



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Results of Operations

The table below summarizes our operating results for the three months ended March 31, 2020 and 2019:
 
 
Three months ended March 31
 
 
2020
 
2019
 
 
(in thousands, except percentages)
Underwriting revenue
 
 
 
 
Gross premiums written
 
$
109,787

 
$
162,560

Gross premiums ceded
 
(678
)
 
(21,401
)
Net premiums written
 
109,109

 
141,159

Change in net unearned premium reserves
 
1,912

 
(15,797
)
Net premiums earned
 
$
111,021

 
$
125,362

Underwriting expenses
 
 
 
 
Loss and LAE incurred, net
 
 
 
 
Current year
 
$
71,525

 
$
87,812

Prior year *
 
4,172

 
35,053

Loss and LAE incurred, net
 
75,697

 
122,865

Acquisition costs, net
 
31,739

 
21,526

Underwriting expenses
 
2,936

 
3,806

Deposit accounting expense (income)
 
(607
)
 
(1,000
)
Underwriting income (loss)
 
$
1,256

 
$
(21,835
)
 
 
 
 
 
Income (loss) from investment in related party investment fund
 
$
(42,126
)
 
$
30,756

Net investment income (loss)
 
6,837

 
1,567

Net investment result
 
$
(35,289
)
 
$
32,323

 
 
 
 
 
Net income (loss)
 
$
(40,270
)
 
$
5,906

 
 
 
 
 
Loss ratio - current year
 
64.4
%
 
70.0
%
Loss ratio - prior year
 
3.8
%
 
28.0
%
Loss ratio
 
68.2
%
 
98.0
%
Acquisition cost ratio
 
28.6
%
 
17.2
%
Composite ratio
 
96.8
%
 
115.2
%
Underwriting expense ratio
 
2.1
%
 
2.2
%
Combined ratio
 
98.9
%
 
117.4
%

* The net financial impact associated with changes in the estimate of losses incurred in prior years, which incorporates earned reinstatement premiums assumed and ceded, adjustments to assumed and ceded acquisition costs and adjustments to deposit accounted contracts, was a loss of $3.9 million and $25.7 million, for the three months ended March 31, 2020 and 2019, respectively.


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Results of operations for three months ended March 31, 2020 and 2019

For the three months ended March 31, 2020, the fully diluted book value per share decreased by $1.25 per share, or 9.7%, to $11.63 per share from $12.88 per share at December 31, 2019. For the three months ended March 31, 2020, the basic book value per share decreased by $1.23 per share, or 9.5%, to $11.67 per share from $12.90 per share at December 31, 2019.

For the three months ended March 31, 2020, the net loss was $40.3 million, compared to net income of $5.9 million reported for the equivalent 2019 period.

The developments that most significantly affected our financial performance during the three months ended March 31, 2020, compared to the equivalent 2019 period, are summarized below:

Underwriting income - The underwriting income for the three months ended March 31, 2020 was $1.3 million. By comparison, the underwriting loss for the same period in 2019 was $21.8 million primarily resulting from adverse loss development on our private passenger automobile business.

Our overall composite ratio was 96.8% for the three months ended March 31, 2020, compared to 115.2% during the same period in 2019.

Investment income - Our net investment related loss for the three months ended March 31, 2020 was $35.3 million compared to investment related income of $32.3 million incurred during the equivalent 2019 period. The investment loss for the three months ended March 31, 2020 was primarily related to our investment in SILP which reported a return of (8.1)% compared to 6.2% during the same period in 2019. The investment loss for the three months ended March 31, 2020 was primarily driven by the impact of changes in fair value primarily attributable to the recent disruptions in global financial markets associated with COVID–19.

Underwriting results

Gross Premiums Written
 
Details of gross premiums written are provided in the following table: 
 
Three months ended March 31
 
2020
 
2019
 
($ in thousands)
Property
$
14,159

 
12.9
%
 
$
26,806

 
16.5
%
Casualty
61,563

 
56.1

 
110,485

 
68.0

Other
34,065

 
31.0

 
25,269

 
15.5

Total
$
109,787

 
100.0
%
 
$
162,560

 
100.0
%

As a result of our underwriting philosophy, the total premiums we write, as well as the mix of premiums between property, casualty and other business, may vary significantly from period to period depending on the market opportunities that we identify.


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For the three months ended March 31, 2020, our gross premiums written decreased by $52.8 million, or 32.5%, compared to the equivalent 2019 period. The primary drivers of this change are as follows:
Gross Premiums Written
Three months ended March 31, 2020
 
 
Increase (decrease)
($ in millions)
 
% change
 
Explanation
Property
 
$(12.6)
 
(47.2)%
 
The decrease in property gross premiums written during the first three months of 2020 over the comparable 2019 period was primarily related to motor contracts that we elected not to renew. The decrease was partially offset by new and renewed motor contracts during 2019 and 2020.
Casualty
 
$(48.9)
 
(44.3)%
 
The decrease in casualty gross premiums written during the first three months of 2020 over the comparable 2019 period was primarily related to motor contracts that we elected not to renew, and also due to lower premium volumes on in-force contracts. The lower premium volumes represent the cedents’ reporting of lower premiums. The decrease was partially offset by an increase in multi-line and workers’ compensation premiums compared to the same period in 2019.
Other
 
$8.8
 
34.8%
 
The increase in “other” gross premiums written during the first three months of 2020 over the comparable 2019 period was primarily attributable to new contracts relating to health, financial, marine, energy and other specialty lines. Several of the new contracts were on an excess of loss basis and the premiums on these contracts are written in full during the quarter in which the contracts incept.

Premiums Ceded
 
For the three months ended March 31, 2020, premiums ceded were $0.7 million, compared to $21.4 million for the three months ended March 31, 2019. During the comparative period in 2019 we purchased outward retrocession to reduce our overall exposure to an inward motor contract. The decrease in premiums ceded for the three months ended March 31, 2020 was primarily related to our decision not to renew the associated inward motor contract. In general, we use retrocessional coverage to manage our net portfolio exposure, to leverage areas of expertise and to improve our strategic position in meeting the needs of clients and brokers.
 
Net Premiums Written

Details of net premiums written are provided in the following table: 
 
Three months ended March 31
 
2020
 
2019
 
($ in thousands)
Property
$
13,979

 
12.8
%
 
$
22,194

 
15.7
%
Casualty
61,236

 
56.1

 
93,791

 
66.5

Other
33,894

 
31.1

 
25,174

 
17.8

Total
$
109,109

 
100.0
%
 
$
141,159

 
100.0
%

For the three months ended March 31, 2020, net premiums written decreased by $32.1 million, or 22.7%, compared to the three months ended March 31, 2019. 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 March 31
 
2020
 
2019
 
($ in thousands)
Property
$
14,809

 
13.3
%
 
$
19,745

 
15.7
%
Casualty
65,273

 
58.8

 
85,457

 
68.2

Other
30,939

 
27.9

 
20,160

 
16.1

Total
$
111,021

 
100.0
%
 
$
125,362

 
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 March 31
 
2020
 
2019
 
($ in thousands)
Property
$
9,472

 
12.4
%
 
$
13,970

 
11.3
%
Casualty
47,434

 
62.8

 
92,187

 
75.1

Other
18,791

 
24.8

 
16,708

 
13.6

Total
$
75,697

 
100.0
%
 
$
122,865

 
100.0
%

The below table summarizes the loss ratios for the three months ended March 31, 2020 and 2019:
 
Three months ended March 31
 
2020
 
2019
 
Increase / (decrease) in loss ratio points
Property
64.0
%
 
70.8
%
 
(6.8
)%
Casualty
72.7
%
 
107.9
%
 
(35.2
)%
Other
60.7
%
 
82.9
%
 
(22.2
)%
Total
68.2
%
 
98.0
%
 
(29.8
)%



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The changes in net losses incurred for the three months ended March 31, 2020 were attributable to the following:
Net Losses Incurred
Three months ended March 31, 2020
 
 
Increase (decrease)
($ in millions)
 
Increase / (decrease) in loss ratio points
 
Explanation
Property
 
$(4.5)
 
(6.8)
 
The decrease in property losses incurred during the first three months of 2020 over the comparable 2019 period related primarily to significant adverse loss development during the comparable 2019 period which was not present during the current period in 2020.

The lower level of adverse prior year loss development was the primary driver of the 6.8 percentage points decrease in the property loss ratio during the first three months of 2020 as compared to the equivalent 2019 period.
Casualty
 
$(44.8)
 
(35.2)
 
The decrease in casualty losses incurred during the first three months of 2020 over the comparable 2019 period related primarily to significant adverse loss development during the comparable 2019 period which was not present during the current period in 2020.

The lower level of adverse prior year loss development was the primary driver of the 35.2 percentage points decrease in the casualty loss ratio during the first three months of 2020 as compared to the equivalent 2019 period.
Other
 
$2.1
 
(22.2)
 
The increase in “other” losses incurred during the first three months of 2020 over the comparable 2019 period was primarily due to losses on crop contracts.

In spite of the increase in “other” incurred losses, the loss ratio decreased by 22.2 percentage points as a result of the ratio being calculated on a much larger earned premium denominator for the three months of 2020 compared to the same period in 2019.

See Note 5 of the accompanying condensed consolidated financial statements for additional discussion of 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 March 31
 
2020
 
2019
 
($ in thousands)
Property
$
2,885

 
9.1
%
 
$
2,095

 
9.7
%
Casualty
17,667

 
55.7

 
13,038

 
60.6

Other
11,187

 
35.2

 
6,393

 
29.7

Total
$
31,739

 
100.0
%
 
$
21,526

 
100.0
%

The acquisition cost ratios for the three months ended March 31, 2020 and 2019, were as follows:
 
Three months ended March 31
 
2020
 
2019
 
Increase / (decrease)
Property
19.5
%
 
10.6
%
 
8.9
%
Casualty
27.1
%
 
15.3
%
 
11.8
%
Other
36.2
%
 
31.7
%
 
4.5
%
Total
28.6
%
 
17.2
%
 
11.4
%


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The changes in the acquisition cost ratios for the three months ended March 31, 2020, compared to the same period in 2019, were attributable to the following:
Change in Acquisition Cost Ratios
Three months ended March 31, 2020
 
 
Increase / (decrease) in acquisition cost ratio points
Explanation
Property
 
8.9
The increase in the property acquisition cost ratio during the three months ended March 31, 2020 over the comparable 2019 period was due primarily to the lower comparable period acquisition cost which benefited from the reversal of sliding scale ceding commissions on private passenger automobile contracts.
Casualty
 
11.8
The increase in the casualty acquisition cost ratio during the three months ended March 31, 2020 over the comparable 2019 period was due primarily to the lower comparable period acquisition cost which benefited from the reversal of sliding scale ceding commissions on private passenger automobile contracts.

Other
 
4.5
The increase in the “other” acquisition cost ratio during the three months ended March 31, 2020 over the comparable 2019 period was due primarily to changes in the mix of business. Contracts with relatively high ceding commissions, including transactional liability contracts, made up a larger proportion of the “other” category during the first quarter of 2020 than during the comparable 2019 period. The first quarter of 2019 had a greater proportion of contracts with lower ceding commissions, including crop, marine and energy contracts.

General and Administrative Expenses

Details of general and administrative expenses are provided in the following table:
 
 
Three months ended March 31
 
2020
 
2019
 
($ in thousands)
Underwriting expenses
$
2,936

 
$
3,806

Corporate expenses
3,858

 
3,034

General and administrative expenses
$
6,794

 
$
6,840



For the three months ended March 31, 2020, general and administrative expenses decreased by $0.05 million, or 0.7%, compared to the equivalent 2019 period. The decrease was due primarily to lower personnel costs, partially offset by higher corporate expenses including legal and other professional fees relating to the strategic review.

For the three months ended March 31, 2020 and 2019, general and administrative expenses included $0.9 million and $1.1 million, respectively, of expenses related to stock compensation granted to employees and directors.


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Total Investment Related Income (Loss)
 
A summary of our investment related income (loss) is as follows:

 
 
Three months ended March 31
 
 
2020
 
2019