GREENLIGHT CAPITAL RE, LTD. 10-Q

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 and nine months ended September 30, 2020 and 2019 and financial condition as of September 30, 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 Securities and Exchange Commission (the “SEC”) on April 29, 2020. Such risks and uncertainties include, but are not limited to: • The impact of disruptions to commerce, reduced economic activity and other consequences of a pandemic, including the novel coronavirus (“COVID-19”) is unknown; • A.M. Best may downgrade or withdraw either of our ratings; • Our results of operations will likely fluctuate from period to period and may not be indicative of our long-term prospects; • Under our investment management structure, we have limited control over Solasglas Investments, LP (“SILP”); • SILP may be concentrated in a few large positions, which could result in large losses; • Competitors with greater resources may make it difficult for us to effectively market our products or offer our products at a profit; • If our losses and loss adjustment expenses greatly exceed our loss reserves, our financial condition may be significantly and negatively affected; • We may face risks from future strategic transactions such as acquisitions, dispositions, mergers or joint ventures; • The effect of emerging claim and coverage issues on our business is uncertain; • The property and casualty reinsurance market may be affected by cyclical trends; • The loss of key executives could adversely impact our ability to implement our business strategy; and • Currency fluctuations could result in exchange rate losses and negatively impact our business. 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. 26 Return to table of contents 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. We aim to complement our underwriting results with a non-traditional investment approach in order to achieve higher rates of return over the long term than reinsurance companies that exclusively employ more traditional investment strategies. Our investment portfolio is managed according to a value-oriented philosophy, in which our investment advisor takes long positions in perceived undervalued securities and short positions in perceived overvalued securities. Because our strategy is designed to allow us to capitalize on favorable 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. The Company’s subsidiaries hold an A.M. Best Financial Strength Rating of A- (Excellent) with a negative outlook. 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 relates predominantly 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. 27 Return to table of contents Outlook and Trends Recent loss activity has created an unusually high level of uncertainty in the global reinsurance market. While this uncertainty has caused reserving challenges throughout the industry, it has also led to underwriting opportunities. COVID-19, which was declared a pandemic in March 2020, has increased loss activity in certain lines we write, including mortgage insurance/reinsurance and multi-line business. Further, while we do not have significant exposure to business interruption claims, the potential exists for elevated losses if the U.S. federal government 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. P laintiffs are continuing to test insurers’ positions on business interruption coverage in court with mixed success. While o ur estimated loss from the pandemic did not change during the third quarter, this estimate remains subject to significant uncertainty due to the unprecedented nature of this crisis. We believe that i n comparison to other industry participants, our aggregate exposure to the pandemic is small. As a result, the uncertainty that we face is challenging the reinsurance market as a whole on a significantly larger scale. As reinsurers’ reserves must accommodate a wide range of loss estimates, they have less capital to deploy to new underwriting opportunities. Adding to the reduction in capital was the unusually high frequency of small to medium sized natural catastrophes that occurred during the third quarter of 2020. While some new capital has been injected into the industry, our assessment is that this new capital represents a small portion of what has been lost or encumbered. The resulting imbalance between the demand for reinsurance capacity and the available supply is having a significant effect on market conditions. In recent months, we have seen risk placements in specialty classes with significantly improved terms and have noted that attempts to place risks with only modest pricing improvements are often met with shortfalls in capacity. We continue to diversify the lines of business we write and we have increased our participation in excess-of-loss contracts when the economics support it, thereby replacing some of our lower-performing quota-share contracts with what we anticipate to be higher-margin business. We believe that the benefits of improved market conditions will flow through our underwriting results in future periods. The technological, analytical, product and delivery mechanism innovations in the insurance and reinsurance industries have accelerated as a result of the COVID-19 pandemic. We expect this dynamic to have a significant impact on the markets in which we operate. We believe that Greenlight Re Innovations unit, our internal effort to develop and implement product and service innovations with insurance applications, is well positioned to facilitate and participate in areas in which the market is growing more efficient. Compared to most of our competitors, we are small and have low overhead expenses. We believe that our current expense efficiency, agility and existing relationships have provided support to our competitive position and enable us to participate in lines of business that fit within our strategy. However, the size of our current capital base, combined with our A.M. Best rating, may constrain our capacity and our ability to access underwriting business. Our ability to execute our business strategy 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). In addition to the COVID-19 pandemic impact, there are many global economic, investment and political uncertainties that may impact our business and our investment portfolio, including central bank actions, potential trade disputes and economic inequality. Commencing in 2019 we reduced our investment exposure to such uncertainties and, for the foreseeable future we intend to limit our gross long exposure to 50% of the Company’s total shareholders’ equity. 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. 28 Return to table of contents Key Financial Measures and Non-GAAP Measures Management uses certain key financial measures, some of which are not prescribed under U.S. GAAP rules and standards (“non-GAAP financial measures”) to evaluate our financial performance, financial position and the change in shareholder value. Generally, a non-GAAP financial measure, as defined in SEC Regulation G, is a numerical measure of a company’s historical or future financial performance, financial position, or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented 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 assist our investors, shareholders and other interested parties in forming a basis of comparison with other companies within the property and casualty reinsurance industry. Basic book value per share is calculated on the basis of ending shareholders' equity and aggregate of Class A and Class B Ordinary shares issued and outstanding, as well as all unvested restricted shares. Fully diluted book value per share 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, 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. 29 Return to table of contents 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. September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 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 and fully diluted book value per share) $ 426,867 $ 429,904 $ 436,899 $ 477,183 $ 506,543 Denominator for basic and fully diluted book value per share: (1) Ordinary shares issued and outstanding (denominator for basic book value per share) 35,368,417 36,272,585 37,434,244 36,994,110 36,994,110 Add: In-the-money stock options and RSUs issued and outstanding 116,722 116,722 116,722 63,582 63,582 Denominator for fully diluted book value per share 35,485,139 36,389,307 37,550,966 37,057,692 37,057,692 Basic book value per share $ 12.07 $ 11.85 $ 11.67 $ 12.90 $ 13.69 Increase (decrease) in basic book value per share ($) $ 0.22 $ 0.18 $ (1.23) $ (0.79) $ 0.08 Increase (decrease) in basic book value per share (%) 1.9 % 1.5 % (9.5) % (5.8) % 0.6 % Fully diluted book value per share $ 12.03 $ 11.81 $ 11.63 $ 12.88 $ 13.67 Increase (decrease) in fully diluted book value per share ($) $ 0.22 $ 0.18 $ (1.25) $ (0.79) $ 0.09 Increase (decrease) in fully diluted book value per share (%) 1.9 % 1.5 % (9.7) % (5.9) % 0.7 % (1) All unvested restricted shares, including those with performance conditions, are included in the “basic” and “fully diluted” denominators. As of September 30, 2020, the number of unvested restricted shares with performance conditions was 429,444 (as of June 30, 2020: 501,989, March 31, 2020: 501,989, December, 31, 2019: 356,900, September 30, 2019: 356,900). 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 reinsurance and 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 income or loss and foreign exchange gains or losses as we believe these items are influenced by market conditions and other 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. 30 Return to table of contents 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 September 30 Nine months ended September 30 2020 2019 2020 2019 ($ in thousands) Income (loss) before income tax $ 2,183 $ 4,961 $ (37,726) $ 26,160 Add (subtract): Total investment (income) loss (6,897) (9,921) 22,849 (61,035) Other non-underwriting (income) expense (257) 1,254 (6) 1,059 Corporate expenses 2,972 4,727 9,711 11,418 Interest expense 1,579 1,578 4,702 4,684 Net underwriting income (loss) $ (420) $ 2,599 $ (470) $ (17,714) 31 Return to table of contents Results of Operations The table below summarizes our operating results for the three and nine months ended September 30, 2020 and 2019: Three months ended September 30 Nine months ended September 30 2020 2019 2020 2019 (in thousands, except percentages) Underwriting revenue Gross premiums written $ 135,596 $ 110,607 $ 362,072 $ 425,507 Gross premiums ceded (1,464) (4,035) (2,274) (48,577) Net premiums written 134,132 106,572 359,798 376,930 Change in net unearned premium reserves (18,613) 22,582 (24,844) (1,973) Net premiums earned $ 115,519 $ 129,154 $ 334,954 $ 374,957 Underwriting related expenses Loss and LAE incurred, net Current year $ 88,334 $ 92,692 $ 247,559 $ 264,129 Prior year * (281) 270 5,385 30,174 Loss and LAE incurred, net 88,053 92,962 252,944 294,303 Acquisition costs, net 27,018 30,962 76,660 89,660 Underwriting expenses 2,180 2,998 8,384 11,066 Deposit accounting and other reinsurance expense (income) (1,312) (367) (2,564) (2,358) Underwriting income (loss) $ (420) $ 2,599 $ (470) $ (17,714) Income (loss) from investment in related party investment fund $ 6,431 $ 6,609 $ (34,086) $ 51,770 Net investment income (loss) 466 3,312 11,237 9,265 Total investment income (loss) $ 6,897 $ 9,921 $ (22,849) $ 61,035 Net income (loss) $ 2,183 $ 5,140 $ (38,150) $ 26,360 Loss ratio - current year 76.5 % 71.8 % 73.9 % 70.5 % Loss ratio - prior year (0.3) % 0.2 % 1.6 % 8.0 % Loss ratio 76.2 % 72.0 % 75.5 % 78.5 % Acquisition cost ratio 23.4 % 24.0 % 22.9 % 23.9 % Composite ratio 99.6 % 96.0 % 98.4 % 102.4 % Underwriting expense ratio 0.8 % 2.0 % 1.7 % 2.3 % Combined ratio 100.4 % 98.0 % 100.1 % 104.7 % * 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 an income of $0.2 million and $0.0 million for the three months ended September 30, 2020 and 2019, respectively, and a loss of $4.8 million and a loss of $27.7 million, for the nine months ended September 30, 2020 and 2019, respectively. 32 Return to table of contents Three months ended September 30, 2020 and 2019 For the three months ended September 30, 2020, the fully diluted book value per share increased by $0.22 per share, or 1.9%, to $12.03 per share from $11.81 per share at June 30, 2020. For the three months ended September 30, 2020, the basic book value per share increased by $0.22 per share, or 1.9%, to $12.07 per share from $11.85 per share at June 30, 2020. The increase in basic and fully diluted book value per share for the three months ended September 30, 2020 was due primarily to (i) share repurchases executed, (ii) net income earned and (iii) restricted shares forfeited during the quarter. For the three months ended September 30, 2020, net income was $2.2 million, compared to a net income of $5.1 million reported for the equivalent 2019 period. The developments that most significantly affected our financial performance during the three months ended September 30, 2020, compared to the equivalent 2019 period, are summarized below: • Underwriting: The underwriting loss for the three months ended September 30, 2020 was $0.4 million. By comparison, the equivalent period in 2019 reported an underwriting income of $2.6 million. The decrease in underwriting income was due primarily to natural catastrophe losses from hurricanes Laura, Isaias and Sally, the Midwest derecho storm, and the North American wildfires, which in aggregate contributed $8.1 million to the underwriting loss. Our overall composite ratio was 99.6% for the three months ended September 30, 2020, compared to 96.0% during the equivalent 2019 period. The composite ratio for three months ended September 30, 2020 included 7.0 points related to natural catastrophe losses compared to 2.4 loss ratio points during the same period in 2019. • Investments: Our total investment income for the three months ended September 30, 2020 was $6.9 million compared to total investment income of $9.9 million reported for the same period in 2019. Nine months ended September 30, 2020 and 2019 For the nine months ended September 30, 2020, the fully diluted book value per share decreased by $0.85 per share, or 6.6%, to $12.03 per share from $12.88 per share at December 31, 2019. For the nine months ended September 30, 2020, the basic book value per share decreased by $0.83 per share, or 6.4%, to $12.07 per share from $12.90 per share at December 31, 2019. For the nine months ended September 30, 2020, net loss was $38.2 million, compared to net income of $26.4 million reported for the equivalent 2019 period. The developments that most significantly affected our financial performance during the nine months ended September 30, 2020, compared to the equivalent 2019 period, are summarized below: • Underwriting: The underwriting loss for the nine months ended September 30, 2020 was $0.5 million. By comparison, the underwriting loss for the same period in 2019 was $17.7 million primarily resulting from adverse loss development on our private passenger automobile business. Our overall composite ratio was 98.4% for the nine months ended September 30, 2020, compared to 102.4% during the same period in 2019. • Investments: Our total investment loss for the nine months ended September 30, 2020 was $22.8 million compared to total investment income of $61.0 million incurred during the equivalent 2019 period. The investment loss for the nine months ended September 30, 2020 was primarily related to our investment in SILP, which reported an investment loss of $34.1 million, driven primarily by the impact of changes in fair value mainly attributable to the disruptions in global financial markets associated with the COVID–19 pandemic. 33 Return to table of contents Underwriting results Gross Premiums Written Details of gross premiums written are provided in the following table: Three months ended September 30 Nine months ended September 30 2020 2019 2020 2019 ($ in thousands) ($ in thousands) Property $ 17,178 12.7 % $ 20,087 18.2 % $ 44,888 12.4 % $ 72,347 17.0 % Casualty 92,778 68.4 77,104 69.7 229,135 63.3 296,114 69.6 Other 25,640 18.9 13,416 12.1 88,049 24.3 57,046 13.4 Total $ 135,596 100.0 % $ 110,607 100.0 % $ 362,072 100.0 % $ 425,507 100.0 % 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. For the three months ended September 30, 2020, our gross premiums written increased by $25.0 million, or 22.6%, compared to the equivalent 2019 period. The primary drivers for this change are the following: Gross Premiums Written Three months ended September 30, 2020 Increase (decrease) ($ in millions) % change Explanation Property $(2.9) (14.5)% The decrease in property gross premiums written during the three months ended September 30, 2020 over the comparable 2019 period was primarily related to motor contracts that we had elected not to renew in the third quarter of 2019. Casualty $15.7 20.3% The increase in casualty gross premiums written during the three months ended September 30, 2020 over the comparable 2019 period related primarily to an increase in workers’ compensation premiums. This increase in workers’ compensation premiums written was due primarily to an expanded relationship with an existing cedent as well as a restructured and renewed contract that was recorded on a deposit accounting basis during the comparative period in 2019. The increase in casualty premiums written also reflects an increase Lloyds’ syndicate multi-line quota share business. The increase was partially offset by motor contracts that we elected not to renew, and lower premium volumes on in-force contracts. Other $12.2 91.1% The increase in “other” gross premiums written during the three months ended September 30, 2020 over the comparable 2019 period was primarily due to new crop, energy and other specialty business written during 2020 and the latter half of 2019. The increase was also attributed to health premiums resulting from strategic partnerships and our innovation initiatives. 34 Return to table of contents For the nine months ended September 30, 2020, our gross premiums written decreased by $63.4 million, or 14.9%, compared to the equivalent 2019 period. The primary drivers of this change are as follows: Gross Premiums Written Nine months ended September 30, 2020 Increase (decrease) ($ in millions) % change Explanation Property $(27.5) (38.0)% The decrease in property gross premiums written during the nine months of 2020 over the comparable 2019 period was primarily related to motor contracts that we elected not to renew in the third quarter of 2019. Casualty $(67.0) (22.6)% The decrease in casualty gross premiums written during the nine months of 2020 over the comparable 2019 period was related primarily to motor contracts that we elected not to renew, and also due to lower premium volumes on in-force contracts. The decrease was partially offset by an increase in workers’ compensation premiums compared to the same period in 2019. This increase in workers’ compensation premiums written was primarily due to an expanded relationship with an existing cedent as well as a restructured and renewed contract that was recorded on a deposit accounting basis during the comparative period in 2019. In addition, the increase in casualty premiums written also related to Lloyds’ syndicate multi-line quota share contracts. Other $31.0 54.3% The increase in “other” gross premiums written during the nine months of 2020 over the comparable 2019 period was primarily attributable to new contracts relating to crop, energy, cyber and other specialty lines. The increase was also attributed to health premiums resulting from strategic partnerships and the innovation initiatives. The increase was partially offset by decrease in transactional liabilities premiums due to a slow down in M&A activity during 2020 due to the COVID-19 pandemic. Premiums Ceded For the three and nine months ended September 30, 2020, premiums ceded were $1.5 million and $2.3 million, respectively, compared to $4.0 million and $48.6 million for the three and nine months ended September 30, 2019, respectively. During the comparative period in 2019 we had retroceded a portion of our overall exposure to an inward motor contract. The decrease in premiums ceded for the three and nine months ended September 30, 2020 was primarily related to our decision not to renew the associated inward motor contract. In general, we use retrocessional coverage to manage our net portfolio exposure, to leverage areas of expertise and to improve our strategic position in meeting the needs of clients and brokers. Net Premiums Written Details of net premiums written are provided in the following table: Three months ended September 30 Nine months ended September 30 2020 2019 2020 2019 ($ in thousands) ($ in thousands) Property $ 16,845 12.6 % $ 18,700 17.5 % $ 44,465 12.4 % $ 61,183 16.2 % Casualty 91,646 68.3 74,824 70.3 227,453 63.2 259,199 68.8 Other 25,641 19.1 13,048 12.2 87,880 24.4 56,548 15.0 Total $ 134,132 100.0 % $ 106,572 100.0 % $ 359,798 100.0 % $ 376,930 100.0 % For the three and nine months ended September 30, 2020, net premiums written increased by $27.6 million, or 25.9%, and decreased by $17.1 million, or 4.5%, respectively, compared to the three and nine months ended September 30, 2019. The movement in net premiums written resulted from the changes in gross premiums written and ceded during the periods. 35 Return to table of contents Net Premiums Earned Details of net premiums earned are provided in the following table: Three months ended September 30 Nine months ended September 30 2020 2019 2020 2019 ($ in thousands) ($ in thousands) Property $ 16,045 13.9 % $ 22,151 17.2 % $ 45,111 13.5 % $ 60,182 16.1 % Casualty 77,731 67.3 85,872 66.4 212,203 63.3 251,766 67.1 Other 21,743 18.8 21,131 16.4 77,640 23.2 63,009 16.8 Total $ 115,519 100.0 % $ 129,154 100.0 % $ 334,954 100.0 % $ 374,957 100.0 % 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 September 30 Nine months ended September 30 2020 2019 2020 2019 ($ in thousands) ($ in thousands) Property $ 14,909 16.9 % $ 14,079 15.1 % $ 34,704 13.7 % $ 39,583 13.4 % Casualty 55,028 62.5 64,172 69.1 151,257 59.8 211,912 72.1 Other 18,116 20.6 14,711 15.8 66,983 26.5 42,808 14.5 Total $ 88,053 100.0 % $ 92,962 100.0 % $ 252,944 100.0 % $ 294,303 100.0 % The below table summarizes the loss ratios for the nine months ended September 30, 2020 and 2019: Three months ended September 30 Nine months ended September 30 2020 2019 Increase / (decrease) in loss ratio points 2020 2019 Increase / (decrease) in loss ratio points Property 92.9 % 63.6 % 29.3 76.9 % 65.8 % 11.1 Casualty 70.8 % 74.7 % (3.9) 71.3 % 84.2 % (12.9) Other 83.3 % 69.6 % 13.7 86.3 % 67.9 % 18.4 Total 76.2 % 72.0 % 4.2 75.5 % 78.5 % (3.0) 36 Return to table of contents The changes in net losses incurred for the three months ended September 30, 2020 as compared to the equivalent 2019 period were attributable to the following: Net Losses Incurred Three months ended September 30, 2020 Increase (decrease) ($ in millions) Increase / (decrease) in loss ratio points Explanation Property $0.8 29.3 The increase in property losses incurred during the three months ended September 30, 2020, compared to the equivalent 2019 period, was due to the estimated losses from hurricanes Isaias, Laura and Sally, the Midwest derecho storm, and the North American wildfires. The increase in property losses incurred was partially offset by lower motor losses resulting from the non-renewal of certain motor contracts in Q3 2019. Despite the small increase in losses incurred during the three months ended September 30, 2020, the property loss ratio increased during that period over the equivalent 2019 period as a result of lower earned premiums on property contracts during the third quarter of 2020. Casualty $(9.1) (3.9) The decrease in losses incurred reflects lower motor casualty losses during the three months ended September 30, 2020, compared to the equivalent 2019 period. This reduction was due primarily to the non-renewal of certain motor contracts in Q3 2019. These decreases in casualty losses were partially offset by increases in losses associated with the growth in our workers’ compensation and catastrophe losses impacting certain multi-line contracts. The decrease in motor casualty losses offset the impact of the catastrophe losses resulting in a 3.9 percentage point decrease in the casualty loss ratio during the third quarter of 2020 over the equivalent 2019 period. Other $3.4 13.7 The increase in “Other” losses incurred during the three months ended September 30, 2020 over the equivalent 2019 period was primarily related to certain health and crop contracts reporting higher than expected losses. The crop and health contracts contributed to the 13.7 percentage points increase in Other loss ratio during the third quarter of 2020 as compared to the equivalent 2019 period. 37 Return to table of contents The changes in net losses incurred for the nine months ended September 30, 2020 were attributable to the following: Net Losses Incurred Nine months ended September 30, 2020 Increase (decrease) ($ in millions) Increase / (decrease) in loss ratio points Explanation Property $(4.9) 11.1 The decrease in property losses incurred during the nine months of 2020 as compared to the equivalent 2019 period related primarily to: • significant adverse loss development recognized during 2019, • the non-renewal of certain motor contracts, and • a lower level of losses reported on in-force motor contracts as a result of fewer motorists on the roads at peak traffic times due to the COVID-19 pandemic during 2020. The decrease in property losses were partially offset by: • COVID-19 pandemic related business interruption claims incurred on non-motor contracts, and • catastrophe losses from hurricanes Laura, Isaias, and Sally, the Midwest derecho storm, and the North American wildfires during the nine months ended September 30, 2020. Despite the reduction in losses incurred during the nine months ended September 30, 2020, the loss ratio increased 11.1 percentage point during that period over the equivalent 2019 period as a result of the COVID-19 pandemic losses and catastrophe losses on a lower level of earned premiums. Casualty $(60.7) (12.9) The decrease in casualty losses incurred during the first nine months of 2020 as compared to the equivalent 2019 period related primarily to: • significant adverse loss development recognized during the first half of 2019, • favorable loss development on professional liability and motor contracts, • the non-renewal of certain motor contracts, • a lower level of losses reported on in-force motor contracts as a result of fewer motorists on the roads at peak traffic times due to the COVID-19 pandemic during 2020. While the casualty losses incurred and loss ratio decreased for the motor business, the losses incurred and loss ratio for multi-line business increased compared to the same period in 2019. This increase in multi-line losses was due primarily to (i) adverse loss development recognized during the first nine months of 2020 and (ii) and the COVID-19 pandemic related claims incurred on non-motor contracts during the first nine months of 2020. Overall, the reduced level of adverse prior year loss development recognized during the first nine months of 2020 was the primary driver of the 12.9 percentage point decrease in the casualty loss ratio as compared to the equivalent 2019 period. Other $24.2 18.4 The increase in “Other” losses incurred during the nine months ended September 30, 2020 over the comparable 2019 period was primarily related to losses incurred on mortgage contracts resulting from the COVID-19 pandemic. The increases in losses incurred on mortgage business were mostly offset by reductions in the profit commissions we pay to our cedents. To a lesser extent the increase in “Other” losses incurred was due to certain health and crop contracts reporting higher than expected losses. The mortgage, crop and health contracts contributed to the 18.4 percentage points increase in Other loss ratio during the first nine months of 2020 as compared to the equivalent 2019 period. 38 Return to table of contents See Note 5 of the accompanying condensed consolidated financial statements for additional discussion of prior period development of net claims and claim expenses. Acquisition Costs, Net Details of acquisition costs are provided in the following table: Three months ended September 30 Nine months ended September 30 2020 2019 2020 2019 ($ in thousands) ($ in thousands) Property $ 3,329 12.3 % $ 4,254 13.7 % $ 9,191 12.0 % $ 11,165 12.5 % Casualty 20,418 75.6 20,119 65.0 58,106 75.8 56,825 63.3 Other 3,271 12.1 6,589 21.3 9,363 12.2 21,670 24.2 Total $ 27,018 100.0 % $ 30,962 100.0 % $ 76,660 100.0 % $ 89,660 100.0 % The acquisition cost ratios for the three and nine months ended September 30, 2020 and 2019, were as follows: Three months ended September 30 Nine months ended September 30 2020 2019 Increase / (decrease) 2020 2019 Increase / (decrease) Property 20.7 % 19.2 % 1.5 % 20.4 % 18.6 % 1.8 % Casualty 26.3 % 23.4 % 2.9 % 27.4 % 22.6 % 4.8 % Other 15.0 % 31.2 % (16.2) % 12.1 % 34.4 % (22.3) % Total 23.4 % 24.0 % (0.6) % 22.9 % 23.9 % (1.0) % The changes in the acquisition cost ratios for the three months ended September 30, 2020, compared to the same period in 2019, were attributable to the following: Change in Acquisition Cost Ratios Three months ended September 30, 2020 Increase / (decrease) in acquisition cost ratio points Explanation Property 1.5 The increase in the property acquisition cost ratio during the three months ended September 30, 2020 over the comparable 2019 period was due primarily to higher commissions on certain motor contracts. Casualty 2.9 The increase in the casualty acquisition cost ratio during the three months ended September 30, 2020 as compared to the equivalent 2019 period was due primarily to the relative increase in the amount of workers’ compensation and multi-line business written during the third quarter of 2020. These lines incorporate relatively high commission rates as compared to other casualty business. Other (16.2) The decrease in the “other” acquisition cost ratio during the three months ended September 30, 2020 over the comparable 2019 period was due to reversal of profit commissions upon final settlement of a commuted mortgage contract. 39 Return to table of contents The changes in the acquisition cost ratios for the nine months ended September 30, 2020, compared to the same period in 2019, were attributable to the following: Change in Acquisition Cost Ratios Nine months ended September 30, 2020 Increase / (decrease) in acquisition cost ratio points Explanation Property 1.8 The property acquisition cost ratio increased during the nine months ended September 30, 2020 over the comparable 2019 period. The 2019 comparable period benefited from the reversal of sliding scale ceding commissions on private passenger automobile contracts. This reversal was the primary driver of the increase during the first nine months of 2020. Casualty 4.8 The casualty acquisition cost ratio increased during the nine months ended September 30, 2020 over the comparable 2019 period. The 2019 comparable period benefited from the reversal of sliding scale ceding commissions on private passenger automobile contracts. This reversal was the primary driver of the increase during the first nine months of 2020. An additional cause of the increase related to a relative increase in the amount of workers’ compensation and multi-line business written during the first nine months of 2020. These lines incorporate relatively high commission rates as compared to other casualty business. Other (22.3) The decrease in the “other” acquisition cost ratio during the nine months ended September 30, 2020 over the comparable 2019 period was due to profit commission reversals recognized on mortgage contracts, offsetting most of the increase in loss reserves associated with the COVID-19 pandemic. General and Administrative Expenses Details of general and administrative expenses are provided in the following table: Three months ended September 30 Nine months ended September 30 2020 2019 2020 2019 ($ in thousands) ($ in thousands) Underwriting expenses $ 2,180 $ 2,998 $ 8,384 $ 11,066 Corporate expenses 2,972 4,727 9,711 11,418 General and administrative expenses $ 5,152 $ 7,725 $ 18,095 $ 22,484 General and administrative expenses decreased by $2.6 million, or 33.3%, for the three months ended September 30, 2020, compared to the equivalent 2019 period. The decrease was due primarily to lower corporate expenses including legal and other professional fees compared to the same period in 2019 relating to the strategic review. Additional causes of the decrease in general and administrative expenses were lower stock compensation expense due to share forfeitures and to a lesser extent, lower travel, accommodation and office related expenses due to the COVID-19 pandemic. For the nine months ended September 30, 2020, general and administrative expenses decreased by $4.4 million, or 19.5%, compared to the equivalent 2019 period. The decrease was due primarily to lower personnel costs including bonus and stock compensation expenses, and to a lesser extent due to lower corporate expenses including legal and other professional fees associated with the strategic review. For the nine months ended September 30, 2020 and 2019, general and administrative expenses included $1.4 million and $2.9 million, respectively, of expenses related to stock compensation granted to employees and directors. 40 Return to table of contents Total Investment Income (Loss) Total investment income (loss) incorporates (i) changes in the net asset value of our investment in SILP managed by DME Advisors, (ii) interest income earned on the restricted cash and cash equivalents pledged as collateral to our clients, and (iii) gains (or losses) and interest on our portfolio of strategic and innovation investments, notes receivable and investments accounted for under the equity method. We expect our total investment income, including any change in the net asset value of our investment in SILP, to fluctuate from period to period. A summary of our total investment income (loss) is as follows: Three months ended September 30 Nine months ended September 30 2020 2019 2020 2019 ($ in thousands) Realized gains (losses) $ — $ — $ (15,000) $ (14,150) Change in unrealized gains and losses 40 — 18,884 14,350 Investment related foreign exchange gains (losses) 44 (98) (110) (78) Interest and dividend income, net of withholding taxes 1,021 4,415 7,351 13,709 Interest, dividend and other expenses (719) (822) (757) (4,833) Income (loss) from equity method investment 80 (183) 869 267 Net investment related income (loss) $ 466 $ 3,312 $ 11,237 $ 9,265 Income (loss) from investments in related party investment fund $ 6,431 $ 6,609 $ (34,086) $ 51,770 Total investment income (loss) $ 6,897 $ 9,921 $ (22,849) $ 61,035 The investment income from related party investment fund in the above table is net of management fees paid by SILP to DME Advisors as well as performance compensation, if any, allocated from the Company’s investment in SILP to DME II. No performance compensation is allocated in periods of loss reported by SILP. For detailed breakdowns of management fees and performance compensation for the three and nine months ended September 30, 2020 and 2019, please refer to Note 3 of the condensed consolidated financial statements. For the three months ended September 30, 2020, investment income, net of fees and expenses, resulted in a gain of 1.4%, on the Investment Portfolio managed by DME Advisors, compared to a gain of 1.2% for the three months ended September 30, 2019. SILP’s long portfolio and macro positions gained 3.2% and 0.3%, respectively, while the short portfolio lost 1.9% during the three months ended September 30, 2020. For the three months ended September 30, 2020, the significant contributors to SILP’s investment income were long positions in The Chemours Company (CC), Green Brick Partners (GRBK) and Atlas Air Worldwide Holdings (AAWW) . The largest detractors were short positions in Tesla (TSLA), Zillow Group (Z) and a long position in AerCap Holdings (AER). For the nine months ended September 30, 2020, investment income, net of fees and expenses, resulted in a loss of 6.5% on the Investment Portfolio managed by DME Advisors, compared to a gain of 10.4% for the nine months ended September 30, 2019. The short portfolio lost 7.7%, while the long portfolio and macro positions gained 0.9% and 0.7%, respectively, during the nine months ended September 30, 2020. For the nine months ended September 30, 2020, the largest contributors to SILP’s investment income were a long position in GRBK and short positions in the S&P 500 Index and a group of companies in the life insurance industry that was intended to reduce the exposure to a long position in Brighthouse Financial (BHF). The largest detractors were a long position in BHF and a short position in TSLA and a basket of short positions in companies whose finances are significantly affected by the COVID-19 pandemic. For the three and nine months ended September 30, 2020, the decrease in interest income compared to the equivalent period in 2019, related to lower interest rates offered by financial institutions on the restricted cash and cash equivalents pledged as collateral to our clients. During the nine months ended September 30, 2020, we recorded net unrealized gains of $3.3 million relating to our portfolio of innovation investments. During the nine months ended September 30, 2020, we wrote-off a valuation allowance 41 Return to table of contents previously recorded on certain other notes receivable. The write-off has been presented in the above table as a realized loss with an offsetting reduction in unrealized loss. For the three months ended September 30, 2020 and 2019, and for the nine months ended September 30, 2020 and 2019, the gross investment return (loss) on our investments managed by DME Advisors (excluding investment advisor performance allocation) were composed of the following: Three months ended September 30 Nine months ended September 30 2020 2019 2020 2019 Long portfolio gains (losses) 3.2 % 2.2 % 0.9 % 15.6 % Short portfolio gains (losses) (1.9) (0.8) (7.7) (3.3) Macro gains (losses) 0.3 0.1 0.7 0.6 Other income and expenses 1 (0.2) (0.1) (0.4) (1.3) Gross investment return 1.4 % 1.4 % (6.5) % 11.6 % Net investment return 1 1.4 % 1.2 % (6.5) % 10.4 % 1 “Other income and expenses” excludes performance compensation but includes management fees. “Net investment return” incorporates both of these amounts. Our investment returns on investments managed by DME Advisors are posted on our website ( www.greenlightre.com ) on a monthly basis. Income Taxes We are not obligated to pay taxes in the Cayman Islands on either income or capital gains. We have been granted an exemption by the Governor-In-Cabinet from any income taxes that may be imposed in the Cayman Islands for a period of 20 years, expiring on February 1, 2025. GRIL is incorporated in Ireland and is subject to the Irish corporation tax. GRIL is expected to be taxed at a rate of 12.5% on its taxable trading income, and 25% on its non-trading income, if any. Verdant is incorporated in Delaware and, therefore, is subject to taxes in accordance with the U.S. federal rates and regulations prescribed by the Internal Revenue Service. Verdant’s future taxable income is expected to be taxed at a rate of 21%. As of September 30, 2020, a gross deferred tax asset of $3.8 million (December 31, 2019: $3.6 million) was included in other assets on the condensed consolidated balance sheets. As of September 30, 2020, this gross deferred tax asset was partially offset by a valuation allowance of $3.3 million (December 31, 2019: $2.6 million). Based on the timing of the reversal of the temporary differences and likelihood of generating sufficient taxable income to realize the future tax benefit, management believes it is more likely than not that the recorded deferred tax asset (net of the valuation allowance) will be fully realized in the future. The Company has not taken any other tax positions that management believes are subject to uncertainty or that are reasonably likely to have a material impact to the Company, GRIL or Verdant. 42 Return to table of contents Ratio Analysis The following table provides our underwriting ratios by line of business: Three months ended September 30 Three months ended September 30 2020 2019 Property Casualty Other Total Property Casualty Other Total Loss ratio 92.9 % 70.8 % 83.3 % 76.2 % 63.6 % 74.7 % 69.6 % 72.0 % Acquisition cost ratio 20.7 26.3 15.0 23.4 19.2 23.4 31.2 24.0 Composite ratio 113.6 % 97.1 % 98.3 % 99.6 % 82.8 % 98.1 % 100.8 % 96.0 % Underwriting expense ratio 0.8 2.0 Combined ratio 100.4 % 98.0 % Nine months ended September 30 Nine months ended September 30 2020 2019 Property Casualty Other Total Property Casualty Other Total Loss ratio 76.9 % 71.3 % 86.3 % 75.5 % 65.8 % 84.2 % 67.9 % 78.5 % Acquisition cost ratio 20.4 27.4 12.1 22.9 18.6 22.6 34.4 23.9 Composite ratio 97.3 % 98.7 % 98.4 % 98.4 % 84.4 % 106.8 % 102.3 % 102.4 % Underwriting expense ratio 1.7 2.3 Combined ratio 100.1 % 104.7 % Financial Condition Total investments The total investments reported in the condensed consolidated balance sheets as of September 30, 2020, was $207.2 million, compared to $256.4 million as of December 31, 2019, a decrease of $49.2 million, or 19.2%. The decrease was primarily related to investment losses from our investment in SILP driven by the significant volatility in the equity markets arising from economic uncertainty relating to the COVID-19 pandemic, and to a lesser extent due to withdrawals for claim payments. As of September 30, 2020, 91.1% of SILP’s investments were valued based on quoted prices in actively traded markets (Level 1), 4.7% was composed of instruments valued based on observable inputs other than quoted prices (Level 2) and 1.0% was composed of instruments valued based on non-observable inputs (Level 3). As of September 30, 2020, 3.2% of SILP’s investments were in private equity funds valued using the funds’ net asset values as a practical expedient. Restricted cash and cash equivalents The Company’s restricted cash and cash equivalents are used for funding trusts and letters of credits issued to our ceding insurers. Our restricted cash decreased by $19.0 million, or 2.6%, from $742.1 million at December 31, 2019 to $723.1 million, as of September 30, 2020, primarily due to reduction in collateral held by our ceding insurers. 43 Return to table of contents Loss and loss adjustment expense reserves; Loss and loss adjustment expenses recoverable The COVID-19 pandemic is unprecedented and we do not have previous loss experience on which to base estimates for loss and loss adjustment expense reserves related to this pandemic. See Note 5 of the accompanying condensed consolidated financial statements for assumptions used in our loss estimates relating to the COVID-19 pandemic. Losses in respect of the COVID-19 pandemic subsequent to September 30, 2020 will be reflected in the periods in which those losses are incurred. Reserves for loss and loss adjustment expenses were composed of the following: September 30, 2020 December 31, 2019 Case Reserves IBNR Total Case Reserves IBNR Total ($ in thousands) Property $ 56,353 $ 20,425 $ 76,778 $ 48,350 $ 27,126 $ 75,476 Casualty 143,443 195,726 339,169 152,049 204,574 356,623 Other 24,936 40,887 65,823 17,435 21,054 38,489 Total $ 224,732 $ 257,038 $ 481,770 $ 217,834 $ 252,754 $ 470,588 During the nine months ended September 30, 2020, the total gross loss and loss adjustment expense reserves increased by $11.2 million, or 2.4% to $481.8 million from $470.6 million as of December 31, 2019. See Note 5 of the accompanying condensed consolidated financial statements for a summary of changes in outstanding loss and loss adjustment expense reserves and for a description of prior period loss developments. During the nine months ended September 30, 2020, the total loss and loss adjustment expenses recoverable decreased by $7.6 million, or 27.5%, to $19.9 million from $27.5 million as of December 31, 2019. The decrease primarily related to losses recovered relating to retroceded private passenger automobile contracts that were not renewed during 2019. See Note 6 of the accompanying condensed consolidated financial statements for a description of the credit risk associated with our retrocessionaires. For most of the contracts we write, our risk exposure is limited by defined limits of liability. Once the loss limit has been reached, we have no further exposure to additional losses from that contract outside of contract failure. However, certain contracts, particularly quota share contracts that relate to first-dollar exposure, may not contain aggregate limits. Our property business, and to a lesser extent our casualty and other business, incorporate contracts that contain natural peril loss exposure. We estimate catastrophe loss exposure in terms of the probable maximum loss (“PML”). We define PML as the anticipated loss, taking into account contract terms and limits, caused by a catastrophe affecting a broad geographic area, such as that caused by an earthquake or hurricane. We anticipate that the PML will vary from period to period depending upon the modeled simulated losses and the composition of the in-force book of business. The projected severity levels are described in terms of a 1-in-250 year return period. The 1-in-250 year return period PML means that we believe there is a 0.4% chance in any given year that an occurrence of a natural catastrophe will lead to losses exceeding the stated estimate. In other words, it corresponds to a 99.6% probability that the loss from an event will fall below the indicated PML. PMLs are estimates and as a result, we cannot provide any assurance that any actual event will align with the modeled event or that actual losses from events similar to the modeled events will not vary materially from the modeled event PML. The PML estimate incorporates all significant exposure from our reinsurance operations, including coverage for property, marine and energy, motor and catastrophe workers’ compensation. 44 Return to table of contents As of October 1, 2020, our estimated PML exposure (net of retrocession and reinstatement premiums) at a 1-in-250 year return period for a single event and in aggregate was $89.7 million and $108.1 million, respectively. The following table provides the PML for single event loss exposure and aggregate loss exposure to natural peril losses for each of the peak zones as of October 1, 2020: October 1, 2020 1-in-250 year return period Zone Single Event Loss Aggregate Loss ($ in thousands) United States, Canada and the Caribbean $ 89,686 $ 98,248 Europe 43,279 46,869 Japan 33,256 35,459 Rest of the world 32,067 35,629 Maximum 89,686 108,073 Total shareholders’ equity Total equity reported on the condensed consolidated balance sheet decreased by $50.3 million to $426.9 million as of September 30, 2020, compared to $477.2 million as of December 31, 2019. Retained earnings decreased primarily due to a net loss of $38.2 million reported for the nine months ended September 30, 2020. Additionally, the Company repurchased 1.9 million Class A ordinary shares during the nine months ended September 30, 2020 resulting in a $12.7 million decrease in shareholders’ equity. For details of other movements in shareholders’ equity see Part I, Item 1. “Condensed Consolidated Statements of Shareholders’ Equity.” Liquidity and Capital Resources General Greenlight Capital Re is organized as a holding company with no operations of its own. As a holding company, Greenlight Capital Re has minimal continuing cash needs, most of which are related to the payment of administrative expenses and interest expense. All of our underwriting operations are conducted through our wholly-owned reinsurance subsidiaries, Greenlight Re and GRIL, which underwrite property and casualty reinsurance. There are restrictions on each of Greenlight Re’s and GRIL’s ability to pay dividends, which are described in more detail below. It is our current policy to retain earnings to support the growth of our business. We currently do not expect to pay dividends on our ordinary shares. As of September 30, 2020, Greenlight Re and GRIL were each rated “A- (Excellent)” with a negative outlook, by A.M. Best. On July 22, 2020, A.M. Best affirmed the “A- (Excellent)” ratings. The ratings reflect A.M. Best’s opinion of our reinsurance subsidiaries’ financial strength, operating performance and ability to meet obligations and it is not an evaluation directed toward the protection of investors or a recommendation to buy, sell or hold our Class A ordinary shares. If A.M. Best downgrades our ratings below “A- (Excellent)” or withdraws our rating, we could be severely limited or prevented from writing any new reinsurance contracts, which would significantly and negatively affect our business. Our A.M. Best ratings may be revised or revoked at the sole discretion of the rating agency. Sources and Uses of Funds Our sources of funds consist primarily of premium receipts (net of brokerage and ceding commissions), investment income and other income. We use cash from our operations to pay losses and loss adjustment expenses, profit commissions, interest and general and administrative expenses. As of September 30, 2020, all of our investable assets, excluding strategic investments and funds required for business operations and for capital risk management, are invested by DME Advisors in SILP, subject to our investment guidelines. We have the ability to redeem funds from SILP at any time for operational purposes by providing three days’ notice to the general partner. As of September 30, 2020, the majority of SILP’s long investments were composed of cash and cash equivalents, and publicly-traded equity securities, which can be readily liquidated to meet our redemption requests. We record all investment income (loss), including any changes in the net asset value of SILP, and any unrealized gains and losses, in our condensed consolidated statements of operations for each reporting period. 45 Return to table of contents For the nine months ended September 30, 2020 and 2019, the net cash used in operating activities was $44.7 million and $8.7 million, respectively. The net cash used in our underwriting activities and for payment of corporate expenses was $51.3 million and $17.6 million for the nine months ended September 30, 2020 and 2019, respectively. Generally, if the premiums collected exceed claim payments within a given period, we generate cash from our underwriting activities. Our underwriting activities represented a net use of cash for the nine months ended September 30, 2020 and 2019, as the losses we paid exceeded the premiums we collected. The cash used in, and generated from, underwriting activities may vary significantly from period to period depending on the underwriting opportunities available and claims submitted to us by our cedents. For the nine months ended September 30, 2020, our net withdrawals from SILP provided cash of $21.0 million which was primarily used to pay losses and to fund collateral required by our ceding insurers. By comparison, for the same period in 2019 our investing activities provided cash of $79.2 million. As of September 30, 2020, we believe we have sufficient cash flow from operating and investing activities to meet our foreseeable liquidity requirements. We expect that our operational needs for liquidity will not be materially impacted by the COVID-19 pandemic and will be met by cash, funds generated from underwriting activities and investment income, including withdrawals from SILP, if necessary. As of September 30, 2020, we expect to fund our operations for the next twelve months from operating and investing cash flow. However, we may explore various financing alternatives, including capital raising alternatives, to fund our business strategy, improve our capital structure, increase surplus, pay claims or make acquisitions. We can provide no assurances that any such transactions will occur or, if so, as to the terms of such transactions. Although GLRE is not subject to any significant legal prohibitions on the payment of dividends, Greenlight Re and GRIL are each subject to regulatory minimum capital requirements and regulatory constraints that affect their ability to pay dividends to us. In addition, any dividend payment would have to be approved by the relevant regulatory authorities prior to payment. During the nine months ended September 30, 2020, we received regulatory approval for a return of up to $15.0 million of Greenlight Re’s share premium to GLRE to facilitate the share repurchases. In October 2020, we received regulatory approval for return of up to $25.0 million of Greenlight Re’s share premium to GLRE in order to provide additional capital to GRIL. For the nine months ended September 30, 2020, we used $12.7 million to repurchase 1.9 million Class A ordinary shares. As of September 30, 2020, Greenlight Re and GRIL both exceeded the regulatory minimum capital requirements. Letters of Credit and Trust Arrangements As of September 30, 2020, neither Greenlight Re nor GRIL was licensed or admitted as a reinsurer in any jurisdiction other than the Cayman Islands and the European Economic Area, respectively. Because many jurisdictions do not permit domestic insurance companies to take credit on their statutory financial statements for loss recoveries or ceded unearned premiums unless appropriate measures are in place for reinsurance obtained from unlicensed or non-admitted insurers, we anticipate that all of our U.S. clients and some of our non-U.S. clients will require us to provide collateral through funds withheld, trust arrangements, letters of credit or a combination thereof. As of September 30, 2020, we had one letter of credit facility available with an aggregate capacity of $275.0 million (December 31, 2019: $400.0 million). See Note 11 of the accompanying condensed consolidated financial statements for details on the letter of credit facility. We provide collateral to cedents in the form of letters of credit and trust arrangements. As of September 30, 2020, the aggregate amount of collateral provided to cedents under such arrangements was $720.6 million (December 31, 2019: $733.2 million). As of September 30, 2020, the letters of credit and trust accounts were secured by restricted cash and cash equivalents with a total fair value of $723.1 million (December 31, 2019: $742.1 million). The letter of credit facility contains customary events of default and restrictive covenants, including but not limited to, limitations on liens on collateral, transactions with affiliates, mergers and sales of assets, as well as solvency and maintenance of certain minimum pledged equity requirements, and restricts issuance of any debt without the consent of the letter of credit provider. Additionally, if an event of default exists, as defined in the letter of credit facility, Greenlight Re would be prohibited from paying dividends to its parent company. The Company was in compliance with all the covenants of this facility as of September 30, 2020. 46 Return to table of contents Capital Our capital structure currently consists of senior convertible notes and equity issued in two classes of ordinary shares. We expect that the existing capital base and internally generated funds will be sufficient to implement our business strategy for the foreseeable future. Consequently, we do not presently anticipate that we will incur any additional material indebtedness in the ordinary course of our business. However, in order to provide us with flexibility and timely access to public capital markets should we require additional capital for working capital, capital expenditures, acquisitions or other general corporate purposes, we have filed a Form S-3 registration statement, which expires in July 2021. In addition, as noted above, we may explore various financing alternatives, although there can be no assurance that additional financing will be available on acceptable terms when needed or desired. We did not make any significant commitments for capital expenditures during the nine months ended September 30, 2020. On March 26, 2020, the Board of Directors extended the share repurchase plan to June 30, 2021 and increased the number of shares authorized to be repurchased to 5.0 million Class A ordinary shares or securities convertible into Class A ordinary shares in the open market, through privately negotiated transactions or Rule 10b5-1 stock trading plans. In addition, the Board of Directors also authorized the Company to repurchase up to $25.0 million aggregate face amount of the Company’s 4.00% Convertible Senior Notes due 2023 (the “Notes”) in privately negotiated transactions, in open market repurchases or pursuant to one more tender offers. The Company is not required to repurchase any of the Class A ordinary shares or the Notes and the repurchase plans may be modified, suspended or terminated at the election of our Board of Directors at any time without prior notice. During the nine months ended September 30, 2020, 1.9 million Class A ordinary shares were repurchased by the Company. As of September 30, 2020, 3.1 million Class A ordinary shares and $25.0 million of the Notes, remained available for repurchase under the repurchase plans. As of September 30, 2020, there were 293,939 Class A ordinary shares available for future issuance under the Company’s stock incentive plan. The stock incentive plan is administered by the Compensation Committee of the Board of Directors. On October 29, 2020, our shareholders approved an amendment to our stock incentive plan to increase the number of Class A ordinary shares available for issuance by 3.0 million shares from 5.0 million to 8.0 million shares. Contractual Obligations and Commitments The following table shows our aggregate contractual obligations as of September 30, 2020 by time period remaining: Less than 1 year 1-3 years 3-5 years More than 5 years Total ($ in thousands) Operating lease obligations (1) $ 236 $ — $ — $ — $ 236 Interest and convertible note payable (2) 4,000 106,000 — — 110,000 Loss and loss adjustment expense reserves (3) 248,593 128,151 49,141 55,885 481,770 $ 252,829 $ 234,151 $ 49,141 $ 55,885 $ 592,006 (1) Reflects our minimum contractual obligations pursuant to the lease agreements as described below. (2) Includes interest payments due on $100.0 million of senior convertible note payable at 4.0% per annum, as well as the payment of principal upon maturity on August 1, 2023. (3) Due to the nature of our reinsurance operations, the amount and timing of the cash flows associated with our reinsurance contractual liabilities will fluctuate, perhaps materially, and, therefore, are highly uncertain. Greenlight Re had entered into lease agreements for office space in the Cayman Islands. The leases expired on June 30, 2018 and the Company is currently in negotiations with the lessor for renewal of the leases and meanwhile both parties have agreed to extend the lease until December 31, 2020. The remaining obligations relating to the monthly lease are included in the above table in the caption “Operating lease obligation.” 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 ten-year term. GRIL has the option to terminate the lease agreement in 2021. The minimum lease payment obligations are included in the above table under operating lease obligations and in Note 11 to the accompanying condensed consolidated financial statements. 47 Return to table of contents Pursuant to the IAA between SILP and DME Advisors, DME Advisors is entitled to a monthly management fee equal to 0.125% (1.5% on an annual basis) of each limited partner’s Investment Portfolio, as provided in the SILP LPA. The IAA has an initial term ending on August 31, 2023 subject to automatic extension for successive three-year terms. For the three and nine months ended September 30, 2020, management fees paid by SILP to DME Advisors were $0.7 million and $2.0 million, respectively (2019: $0.7 million and $4.2 million, respectively). Pursuant to the SILP LPA, DME II is entitled to a performance allocation equal to 20% of the net profit, calculated per annum, of each limited partner’s share of the capital account managed by DME Advisors, subject to a loss carry forward provision. DME II is not entitled to earn a performance allocation in a year in which SILP incurs a loss. The loss carry forward provision contained in the SILP LPA allows DME II to earn reduced performance allocation of 10% of net profits in years subsequent to the year in which the capital accounts of the limited partners incur a loss, until all losses are recouped and an additional amount equal to 150% of the loss is earned. Due to the investment loss for the nine months ended September 30, 2020, no performance allocation was earned by DME II. For the three and nine months ended September 30, 2019, $0.7 million and $5.7 million, respectively, of performance allocation was netted against income in the caption “Investment in related party investment fund” in the Company’s condensed consolidated statement of operations. 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. The Company has also entered into a letter agreement with DME Advisors and DME II whereby during the period from June 1, 2019 to June 30, 2021, cash, cash equivalents and/or U.S. government issued securities will not be subject to any management fee or performance allocation. The Company has entered into a service agreement with DME Advisors pursuant to which DME Advisors will provide investor relations services to us for compensation of $5,000 per month plus expenses. The service agreement had an initial term of one year, and continues for sequential one-year periods until terminated by us or DME Advisors. Either party may terminate the service agreement for any reason with 30 days prior written notice to the other party. Our related party transactions are presented in Note 10 to the accompanying condensed consolidated financial statements. Off-Balance Sheet Financing Arrangements We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. Other than our investments in SILP and AccuRisk Holdings LLC (see Notes 3 and 4 of the accompanying condensed consolidated financial statements), we have not participated in transactions that created relationships with unconsolidated entities or financial partnerships, including VIEs, established for the purpose of facilitating off-balance sheet arrangements. Effects of Inflation Inflation generally affects the cost of claims and claim expenses, as well as asset values in our investment portfolio. The anticipated effects of inflation on our claim costs are considered in our pricing and reserving models. However, the actual effect of increases in claim costs due to inflation cannot be accurately known until claims are ultimately settled, and may differ significantly from our estimate. In addition, the onset, duration and severity of an inflationary period cannot be predicted or estimated with precision.