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”), Greenlight Re Marketing (UK) Limited (“Greenlight Re UK”) and Verdant Holding Company, Ltd. (“Verdant”), unless the context dictates otherwise. References to our “Ordinary Shares” refer collectively to our Class A Ordinary Shares and Class B Ordinary Shares. The following is a discussion and analysis of our results of operations for the three months ended March 31, 2021 and 2020 and financial condition at March 31, 2021 and December 31, 2020. 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, 2020. 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 Form 10-K for the fiscal year ended December 31, 2020, as filed with the Securities and Exchange Commission (the “SEC”) on March 10, 2021. 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. 25 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 solutions to the insurance, reinsurance, and other risk marketplaces. We focus on delivering risk solutions to clients and brokers who value our expertise, analytics, and customer service offerings. We aim to complement our underwriting activities with a non-traditional investment approach designed to achieve higher rates of return over the long term than reinsurance companies that exclusively employ more traditional investment strategies. Our investment portfolio is managed according to a value-oriented philosophy, in which our investment advisor takes long positions in perceived undervalued securities and short positions in perceived overvalued securities. In 2018, we launched our Greenlight Re Innovations unit, which supports technology innovators in the (re)insurance market by providing investment, risk capacity, and access to a broad insurance network. Because we seek to capitalize on favorable market conditions and opportunities, period-to-period comparisons of our underwriting results may not be meaningful. Also, our historical investment results are not necessarily indicative of future performance. Due to the nature of our reinsurance and investment strategies, our operating results will likely fluctuate from period to period. The Company’s subsidiaries hold an A.M. Best Financial Strength Rating of A- (Excellent) with a negative outlook. Critical Accounting Policies and Estimates Our condensed consolidated financial statements contain certain amounts that are inherently subjective and have required management to make assumptions and best estimates to determine reported values. If certain factors, including those described in “Part I. Item IA. — Risk Factors” included in our Form 10-K for the fiscal year ended December 31, 2020, as filed with the SEC on March 10, 2021, 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, 2020 describes our critical accounting policies and estimates. The most significant estimates relate to premium revenues and risk transfer, investments, loss and loss adjustment expense reserves, bonus accruals, and share-based payments. Recently issued and adopted accounting standards and their impact on the Company, if any, are presented under “Recent Accounting Pronouncements” in Note 2 to the condensed consolidated financial statements. Segments We have one operating segment, Property & Casualty reinsurance, and we analyze our business based on the following categories: ● Property ● Casualty ● Other Property business covers automobile physical damage, personal lines (including homeowners’ insurance), and commercial lines exposures. Property business includes both catastrophe and non-catastrophe coverage. We expect catastrophe business to make up a small proportion of our property business. Casualty business covers general liability, motor liability, professional liability, and workers’ compensation exposures. The Company’s multi-line business relates predominantly to casualty reinsurance, and as such, the Company includes all multi-line business within the casualty category. Casualty business generally has losses reported and paid over a longer period than property business. Other business covers accident and health, financial lines (including transactional liability, mortgage insurance, surety, and trade credit), marine, energy, and to a lesser extent, other specialty business such as aviation, crop, cyber, political, and terrorism exposures. 26 Return to table of contents Outlook and Trends January 1st is a key renewal date for the global reinsurance industry, and in the first quarter of 2021 we saw improved rates in most of the classes of business we wrote. A hardening market enabled us to selectively expand our specialty book while taking advantage of improved rates. Our in-force portfolio reflects increased diversification across the classes of business we write and a lower concentration risk to individual counterparties. We wrote significantly more premium in the first quarter of 2021 than we did in the comparable 2020 period. The largest area of growth was in support of various Lloyd’s syndicates, an institution that we believe is ideally situated to respond to the insurance market dislocation. Improved market conditions also drove our expanded participation in marine and other specialty classes. The increases in our motor and workers’ compensation classes of business resulted mainly from the growth of several partners who cede business to us via quota share arrangements. However, we expect to see a decrease in these classes of business as the contracts come up for renewal over the coming year. During the first quarter of 2021, we reduced the amount of property catastrophe business we wrote. Although catastrophe premium rates did increase as compared to the January 1, 2020, renewals, in our view these increases were not sufficient to compensate reinsurers for the risks associated with this business as compared to other classes. As a result, we reduced our exposure from “pure catastrophe” contracts. However, as this reduction has been offset by our increased incidental exposure from specialty classes of business, our overall exposure to catastrophe events has remained largely consistent with last year. Key Financial Measures and Non-GAAP Measures Basic Book Value Per Share and Fully Diluted Book Value Per Share We believe that long-term growth in fully diluted book value per share is the most relevant measure of our financial performance because it provides management and investors a yardstick to monitor the shareholder value generated. Fully diluted book value per share may also help our investors, shareholders, and other interested parties form a basis of comparison with other companies within the property and casualty reinsurance industry. We calculate basic book value per share based on 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. Fully diluted book value per share also includes the dilutive effect, if any, of ordinary shares to be issued upon conversion of the convertible notes. Our primary financial goal is to increase fully diluted book value per share over the long term. The following table presents the basis and fully diluted book value per share for the recent periods: 27 Return to table of contents March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 ($ in thousands, except per share and share amounts) Numerator for basic and fully diluted book value per share: Total equity (U.S. GAAP) (numerator for basic and fully diluted book value per share) $ 472,119 $ 464,857 $ 426,867 $ 429,904 $ 436,899 Denominator for basic and fully diluted book value per share: (1) Ordinary shares issued and outstanding (denominator for basic book value per share) 34,850,528 34,514,790 35,368,417 36,272,585 37,434,244 Add: In-the-money stock options and RSUs issued and outstanding 154,134 116,722 116,722 116,722 116,722 Denominator for fully diluted book value per share 35,004,662 34,631,512 35,485,139 36,389,307 37,550,966 Basic book value per share $ 13.55 $ 13.47 $ 12.07 $ 11.85 $ 11.67 Increase (decrease) in basic book value per share ($) $ 0.08 $ 1.40 $ 0.22 $ 0.18 $ (1.23) Increase (decrease) in basic book value per share (%) 0.6 % 11.6 % 1.9 % 1.5 % (9.5) % Fully diluted book value per share $ 13.49 $ 13.42 $ 12.03 $ 11.81 $ 11.63 Increase (decrease) in fully diluted book value per share ($) $ 0.07 $ 1.39 $ 0.22 $ 0.18 $ (1.25) Increase (decrease) in fully diluted book value per share (%) 0.5 % 11.6 % 1.9 % 1.5 % (9.7) % (1) All unvested restricted shares, including those with performance conditions, are included in the “basic” and “fully diluted” denominators. At March 31, 2021, the number of unvested restricted shares with performance conditions was 193,149 (at December 31, 2020: 193,149, September 30, 2020: 429,444, June 30, 2020: 501,989, March 31, 2020: 501,989). Management also uses certain key financial measures, some of which are not prescribed under U.S. GAAP rules and standards (“non-GAAP financial measures”), to evaluate our financial performance, financial position, and the change in shareholder value. Generally, a non-GAAP financial measure, as defined in SEC Regulation G, is a numerical measure of a company’s historical or future financial performance, financial position, or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented under U.S. GAAP. We believe that these measures, which may be calculated or defined differently by other companies, provide consistent and comparable metrics of our business performance to help shareholders understand performance trends and allow for a more thorough understanding of the Company’s business. Non-GAAP financial measures should not be viewed as a substitute for those determined under U.S. GAAP. The key non-GAAP financial measures used in this report are: • Adjusted combined ratio; and • Net underwriting income (loss). These non-GAAP measures are described below. Adjusted combined ratio “Combined ratio” is a commonly used measure in the property and casualty insurance industry and is calculated using U.S. GAAP components. We use the combined ratio, as well as an adjusted combined ratio that excludes the impacts of certain items, to evaluate our underwriting performance. We believe this adjusted non-GAAP measure provides management and financial statement users with a better understanding of the factors influencing our underwriting results. In calculating the adjusted combined ratio, we exclude underwriting losses attributable to (i) prior accident-year reserve development, (ii) catastrophe losses, and (iii) certain significant, infrequent loss events. 28 Return to table of contents Prior accident-year reserve development, which can be favorable or unfavorable, represents changes in our estimates of losses and loss adjustment expenses associated with loss events that occurred in prior years. We believe a discussion of current accident-year performance, which excludes prior accident-year reserve development, is helpful since it provides more insight into current underwriting performance. By their nature, catastrophe losses and other significant, infrequent loss events are not representative of the type of loss activity that we would expect to occur in every period. We believe an adjusted combined ratio that excludes the effects of these items aids in understanding the underlying trends and variability in our underwriting results that these items may obscure. The following table reconciles the combined ratio to the adjusted combined ratio: Three months ended March 31 2021 2020 Combined ratio 101.5 % 98.9 % Impact on combined ratio of selected items: Prior-year development (0.2) % 3.5 % Catastrophes 3.4 % — % Other adjustments 1 2.2 % — % Adjusted combined ratio 96.1 % 95.4 % 1 In the periods presented, “Other adjustments” represents interest income and expense on deposit-accounted contracts due to changes in the associated estimated ultimate cash flows. 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 to measure 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 those of our industry peer group. Net underwriting income (loss) is considered a non-GAAP financial measure because it excludes items used to calculate net income before taxes under U.S. GAAP. We calculate net underwriting income (loss) as net premiums earned, plus other income (expense) relating to reinsurance and deposit-accounted contracts, less net loss and loss adjustment expenses, acquisition costs, and underwriting expenses. The measure excludes, on a recurring basis: (1) investment income (loss); (2) other income (expense) not related to underwriting, including foreign exchange gains or losses 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. 29 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 are shown below: Three months ended March 31 2021 2020 ($ in thousands) Income (loss) before income tax $ 10,233 $ (39,846) Add (subtract): Total investment (income) loss (18,674) 35,289 Other non-underwriting (income) expense 703 394 Corporate expenses 4,204 3,858 Interest expense 1,544 1,561 Net underwriting income (loss) $ (1,990) $ 1,256 30 Return to table of contents Results of Operations The table below summarizes our operating results for the three months ended March 31, 2021 and 2020: Three months ended March 31 2021 2020 (in thousands, except percentages) Underwriting revenue Gross premiums written $ 169,935 $ 109,787 Gross premiums ceded 55 (678) Net premiums written 169,990 109,109 Change in net unearned premium reserves (34,594) 1,912 Net premiums earned $ 135,396 $ 111,021 Underwriting related expenses Net loss and loss adjustment expenses incurred Current year $ 97,861 $ 71,525 Prior year * (140) 4,172 Net loss and loss adjustment expenses incurred 97,721 75,697 Acquisition costs 33,381 31,739 Underwriting expenses 3,337 2,936 Deposit accounting and other reinsurance expense (income) 2,947 (607) Underwriting income (loss) $ (1,990) $ 1,256 Income (loss) from investment in related party investment fund $ 4,024 $ (42,126) Net investment income (loss) 14,650 6,837 Total investment income (loss) $ 18,674 $ (35,289) Net income (loss) 6,499 (40,270) Loss ratio - current year 72.3 % 64.4 % Loss ratio - prior year (0.1) % 3.8 % Loss ratio 72.2 % 68.2 % Acquisition cost ratio 24.7 % 28.6 % Composite ratio 96.9 % 96.8 % Underwriting expense ratio 4.6 % 2.1 % Combined ratio 101.5 % 98.9 % * The net favorable (adverse) financial impact associated with changes in the estimate of losses incurred in prior years was $0.2 million and $(3.9) million for the three months ended March 31, 2021 and 2020, respectively, and incorporates earned reinstatement premiums assumed and ceded, and adjustments to assumed and ceded acquisition costs. Three months ended March 31, 2021 and 2020 For the three months ended March 31, 2021, fully diluted book value per share increased by $0.07 per share, or 0.5%, to $13.49 per share from $13.42 per share at December 31, 2020. For the three months ended March 31, 2021, basic book value per share increased by $0.08 per share, or 0.6%, to $13.55 per share from $13.47 per share at December 31, 2020. For the three months ended March 31, 2021, net income was $6.5 million, compared to a net loss of $40.3 million reported for the equivalent 2020 period. 31 Return to table of contents The developments that most significantly affected our financial performance during the three months ended March 31, 2021, compared to the equivalent 2020 period, are summarized below: • Underwriting: The underwriting loss for the three months ended March 31, 2021 was $2.0 million. By comparison, the underwriting income for the same period in 2020 was $1.3 million. The underwriting loss was primarily due to the Texas winter storms during the first quarter of 2021, and losses associated with deposit-accounted contracts. Our overall composite ratio was 96.9% for the three months ended March 31, 2021, compared to 96.8% for the same period in 2020. The Texas winter storms contributed 3.4% to the composite ratio for the three months ended March 31, 2021. • Investments: Our total investment income for the three months ended March 31, 2021, was $18.7 million compared to our total investment loss of $35.3 million incurred during the equivalent 2020 period. The investment income for the three months ended March 31, 2021 was due primarily to a gain realized on the sale of our investment in AccuRisk. Additionally, our investment in SILP reported a gain of $4.0 million for the three months ended March 31, 2021, compared to a loss of $42.1 million during the equivalent 2020 period. Underwriting results We analyze our business based on three categories: “property,” “casualty,” and “other.” Gross Premiums Written Details of gross premiums written are provided in the following table: Three months ended March 31 2021 2020 ($ in thousands) Property $ 14,915 8.8 % $ 14,159 12.9 % Casualty 113,674 66.9 61,563 56.1 Other 41,346 24.3 34,065 31.0 Total $ 169,935 100.0 % $ 109,787 100.0 % 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. 32 Return to table of contents For the three months ended March 31, 2021, our gross premiums written increased by $60.1 million, or 54.8%, compared to the equivalent 2020 period. The primary drivers of this change are as follows: Gross Premiums Written Three months ended March 31, 2021 Increase (decrease) ($ in millions) % change Explanation Property $0.8 5.3% The increase in property gross premiums written during the first three months of 2021 over the comparable 2020 period was primarily related to motor contracts where underlying business written was higher in the first quarter of 2021 compared to the same period in 2020. Casualty $52.1 84.6% The increase in casualty gross premiums written during the first three months of 2021 over the comparable 2020 period was due primarily to an increase in Lloyd’s syndicate multi-line quota share contracts written during 2021, and an increase in motor and workers’ compensation business. Other $7.3 21.4% The increase in “other” gross premiums written during the first three months of 2021 over the comparable 2020 period was primarily attributable to new contracts relating to marine, energy, and other specialty lines. The hardening market enabled us to selectively expand our specialty book while taking advantage of improved rates. A decrease in health premiums partially offset the increase as we lowered our participation in a quota share contract upon renewal in 2021. Premiums Ceded For the three months ended March 31, 2021, premiums ceded were negative $0.1 million, compared to $0.7 million for the three months ended March 31, 2020. The negative premiums ceded for the three months ended March 31, 2021, resulted primarily from premium adjustments on contracts retroceded in prior periods. We have not entered into any retrocession contracts during 2021. In general, we use retrocessional coverage to manage our net portfolio exposure, leverage areas of expertise, and improve our strategic position in meeting the needs of clients and brokers. Net Premiums Written Details of net premiums written are provided in the following table: Three months ended March 31 2021 2020 ($ in thousands) Property $ 14,956 8.8 % $ 13,979 12.8 % Casualty 113,705 66.9 61,236 56.1 Other 41,329 24.3 33,894 31.1 Total $ 169,990 100.0 % $ 109,109 100.0 % For the three months ended March 31, 2021, net premiums written increased by $60.9 million, or 55.8%, compared to the three months ended March 31, 2020. The movement in net premiums written resulted from the changes in gross premiums written and ceded during the periods. 33 Return to table of contents Net Premiums Earned Details of net premiums earned are provided in the following table: Three months ended March 31 2021 2020 ($ in thousands) Property $ 14,155 10.5 % $ 14,809 13.3 % Casualty 87,091 64.3 65,273 58.8 Other 34,150 25.2 30,939 27.9 Total $ 135,396 100.0 % $ 111,021 100.0 % 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 2021 2020 ($ in thousands) Property $ 11,385 11.6 % $ 9,472 12.4 % Casualty 64,152 65.7 47,434 62.8 Other 22,184 22.7 18,791 24.8 Total $ 97,721 100.0 % $ 75,697 100.0 % The below table summarizes the loss ratios for the three months ended March 31, 2021 and 2020: Three months ended March 31 2021 2020 Increase / (decrease) in loss ratio points Property 80.4 % 64.0 % 16.4 Casualty 73.7 % 72.7 % 1.0 Other 65.0 % 60.7 % 4.3 Total 72.2 % 68.2 % 4.0 34 Return to table of contents The changes in net losses incurred and loss ratios during the three months ended March 31, 2021 were attributable to the following: Net Losses Incurred Three months ended March 31, 2021 Increase (decrease) ($ in millions) Increase / (decrease) in loss ratio points Explanation Property $1.9 16.4 The increase in property losses incurred during the three months ended March 31, 2021, compared to the equivalent 2020 period, related primarily to catastrophe losses from the Texas winter storm Uri. Losses relating to the winter storm Uri contributed to the 16.4 percentage point increase in the property loss ratio during the three months ended March 31, 2021, compared to the equivalent 2020 period. Casualty $16.7 1.0 The increase in casualty losses incurred during the three months ended March 31, 2021, as compared to the equivalent 2020 period related primarily to: • an increase in new business; and • losses from the winter storm Uri on certain multi-line contracts. The winter storm Uri was the primary driver of the 1.0 percentage point increase in the casualty loss ratio during the three months ended March 31, 2021, compared to the equivalent 2020 period. Other $3.4 4.3 The increase in “Other” losses incurred during the three months ended March 31, 2021, as compared to the equivalent 2020 period related primarily to: • a satellite loss occurring during the first quarter of 2021; and • increase in premiums earned on specialty health, marine, energy, and other specialty contracts. The primary drivers of the 4.3 percentage points increase in loss ratio during the three months ended March 31, 2021, as compared to the equivalent 2020 period, were the satellite loss noted above and a shift in the mix of business from financial lines towards specialty lines, which generally incorporates a higher loss ratio. See Note 5 of the accompanying condensed consolidated financial statements for additional discussion of our reserving techniques and prior period development of net claims and claim expenses. Acquisition Costs, Net Details of acquisition costs are provided in the following table: Three months ended March 31 2021 2020 ($ in thousands) Property $ 2,800 8.4 % $ 2,885 9.1 % Casualty 21,791 65.3 17,667 55.7 Other 8,790 26.3 11,187 35.2 Total $ 33,381 100.0 % $ 31,739 100.0 % The acquisition cost ratios for the three months ended March 31, 2021 and 2020, were as follows: 35 Return to table of contents Three months ended March 31 2021 2020 Increase / (decrease) Property 19.8 % 19.5 % 0.3 % Casualty 25.0 % 27.1 % (2.1) % Other 25.7 % 36.2 % (10.5) % Total 24.7 % 28.6 % (3.9) % The changes in the acquisition cost ratios during the three months ended March 31, 2021, compared to the same period in 2020, were attributable to the following: Change in Acquisition Cost Ratios Three months ended March 31, 2021 Increase / (decrease) in acquisition cost ratio points Explanation Property 0.3 There was no significant change in the property acquisition cost ratio during the three months ended March 31, 2021 over the comparable 2020 period. Casualty (2.1) The casualty acquisition cost ratio decreased during the three months ended March 31, 2021 over the comparable 2020 period. The decrease related to favorable ceding commission adjustments on workers’ compensation contracts that experienced adverse loss development during the first quarter of 2021. Other (10.5) The decrease in the “other” acquisition cost ratio during the three months ended March 31, 2021, over the comparable 2020 period was due to a shift in the mix of business towards non-proportional specialty business during the first three months of 2021. This business incorporates relatively lower commission rates as compared to proportional health and financial lines business. 36 Return to table of contents Ratio Analysis The following table provides our underwriting ratios by line of business: Three months ended March 31 Three months ended March 31 2021 2020 Property Casualty Other Total Property Casualty Other Total Loss ratio 80.4 % 73.7 % 65.0 % 72.2 % 64.0 % 72.7 % 60.7 % 68.2 % Acquisition cost ratio 19.8 25.0 25.7 24.7 19.5 27.1 36.2 28.6 Composite ratio 100.2 % 98.7 % 90.7 % 96.9 % 83.5 % 99.8 % 96.9 % 96.8 % Underwriting expense ratio 4.6 2.1 Combined ratio 101.5 % 98.9 % The increase in underwriting expense ratio for three months ended March 31, 2021, compared to the equivalent 2020 period, was primarily due to interest expense on deposit-accounted contracts based on revised expectations of ultimate cash flows. General and Administrative Expenses Details of general and administrative expenses are provided in the following table: Three months ended March 31 2021 2020 ($ in thousands) Underwriting expenses $ 3,337 $ 2,936 Corporate expenses 4,204 3,858 General and administrative expenses $ 7,541 $ 6,794 For the three months ended March 31, 2021, general and administrative expenses increased by $0.7 million, or 11.0%, compared to the equivalent 2020 period. The increase was due primarily to higher personnel costs and increased directors’ and officers’ insurance premiums. The increase was partially offset by lower legal and other professional fees. For the three months ended March 31, 2021, and 2020, general and administrative expenses included $0.8 million and $0.9 million, respectively, of expenses related to stock compensation granted to employees and directors. 37 Return to table of contents Total Investment Income (Loss) Total investment income (loss) incorporates (i) changes in the net asset value of our investment in SILP managed by DME Advisors, (ii) interest income earned on the restricted cash and cash equivalents pledged as collateral to our clients, and (iii) gains (or losses) and interest on our portfolio of strategic and Innovations investments, notes receivable and investments accounted for under the equity method. We expect our total investment income, including any change in the net asset value of our investment in SILP, to fluctuate from period to period. A summary of our total investment income (loss) is as follows: Three months ended March 31 2021 2020 ($ in thousands) Realized gains (losses) $ 14,210 $ (15,000) Change in unrealized gains and losses 1,228 15,515 Investment related foreign exchange gains (losses) (19) (319) Interest and dividend income, net of withholding taxes 113 5,762 Interest, dividend and other expenses (882) (8) Income (loss) from equity method investment — 887 Net investment related income (loss) $ 14,650 $ 6,837 Income (loss) from investments in related party investment fund $ 4,024 $ (42,126) Total investment income (loss) $ 18,674 $ (35,289) The caption “Income (loss) from investment in related party investment fund” in the above table is net of management fees paid by SILP to DME Advisors and performance compensation, if any, allocated from the Company’s investment in SILP to DME II. No performance compensation is allocated in periods of loss reported by SILP. For detailed breakdowns of management fees and performance compensation for the three months ended March 31, 2021 and 2020, please refer to Note 3 of the condensed consolidated financial statements. For the three months ended March 31, 2021, investment income, net of fees and expenses, resulted in a gain of 1.5% on the Investment Portfolio managed by DME Advisors, compared to a loss of 8.1% for the three months ended March 31, 2020. The long portfolio gained 11.7%, while the short portfolio and macro positions lost 6.8% and 2.8%, respectively, during the three months ended March 31, 2021. For the three months ended March 31, 2021, the largest contributors to SILP’s investment income were long positions in AerCap Holdings (AER), Brighthouse Financial (BHF), and Danimer Scientific (DNMR). Various short positions were the largest detractors during the three months ended March 31, 2021 For the three months ended March 31, 2021, the decrease in interest income compared to the equivalent period in 2020 resulted primarily from lower interest rates offered by financial institutions on the restricted cash and cash equivalents we have pledged as collateral to our clients. During the three months ended March 31, 2021, we recorded a realized gain of $14.2 million (pre-tax) relating to the sale of our investment in AccuRisk. Additionally, during the three months ended March 31, 2021, we recorded a net unrealized gain of $1.2 million on our portfolio of Innovations related investments. During the equivalent period in 2020, we wrote off a valuation allowance previously recorded on certain other notes receivable. The write-off represented a realized loss, which was fully offset by a reduction in unrealized loss. 38 Return to table of contents For the three months ended March 31, 2021 and 2020, the gross investment return (loss) on our Investment Portfolio managed by DME Advisors (excluding investment advisor performance allocation) was composed of the following: Three months ended March 31 2021 2020 Long portfolio gains (losses) 11.7 % (8.6) % Short portfolio gains (losses) (6.8) 0.4 Macro gains (losses) (2.8) 0.3 Other income and expenses 1 (0.5) (0.2) Gross investment return 1.6 % (8.1) % Net investment return 1 1.5 % (8.1) % 1 “Other income and expenses” excludes performance compensation but includes management fees. “Net investment return” incorporates both of these amounts. Effective January 1, 2021, the Investment Portfolio is calculated based on 50% of GLRE Surplus, or the shareholders’ equity of the Company, as reported in the then most recent quarterly U.S. GAAP financial statements, and is adjusted monthly for our share of the net profits and net losses as reported by Solasglas during any intervening period. Prior to January 1, 2021, the Investment Portfolio was calculated based on several factors, including our share of Solasglas’s net asset value, our posted collateral, and our net reserves. Each month, we post on our website ( www.greenlightre.com ) the returns from our investment in SILP. Income Taxes We are not obligated to pay taxes in the Cayman Islands on either income or capital gains. The Governor-In-Cabinet has granted us an exemption from any income taxes that may be imposed in the Cayman Islands for a period of 20 years, expiring on February 1, 2025. GRIL is incorporated in Ireland and is subject to the Irish corporation tax. We expect GRIL to be taxed at 12.5% on its taxable trading income and 25% on its non-trading income, if any. Verdant is incorporated in Delaware and is subject to taxes under the U.S. federal rates and regulations prescribed by the Internal Revenue Service. We expect Verdant’s future taxable income to be taxed at 21%. For the three months ended March 31, 2021, the income tax expense of $3.7 million was due primarily to the gain on the sale of our investment in AccuRisk. At March 31, 2021, we have included a gross deferred tax asset of $3.7 million (December 31, 2020: $3.5 million) in the caption “Other assets” in the Company’s condensed consolidated balance sheets. At March 31, 2021, a valuation allowance of $3.2 million (December 31, 2020: $3.0 million) partially offset this gross deferred tax asset. We have determined that it is more likely than not that the Company will fully realize the recorded deferred tax asset (net of the valuation allowance) in the future. We have based this determination on the expected timing of the reversal of the temporary differences, and the likelihood of generating sufficient taxable income to realize the future tax benefit. We have not taken any other tax positions that we believe are subject to uncertainty or reasonably likely to have a material impact on the Company. Financial Condition Total investments The total investments reported in the condensed consolidated balance sheets at March 31, 2021, was $226.0 million, compared to $196.2 million at December 31, 2020, an increase of $29.8 million, or 15.2%. The increase was primarily related to net contributions into SILP from the collateral released by our ceding insurers. The income from our investment in SILP also contributed to the increase. The sale of our investment in AccuRisk partially offset these increases. At March 31, 2021, 93.1% of SILP’s investments were valued based on quoted prices in actively traded markets (Level 1), 3.1% was composed of instruments valued based on observable inputs other than quoted prices (Level 2), and 1.1% was 39 Return to table of contents composed of instruments valued based on non-observable inputs (Level 3). At March 31, 2021, 2.7% of SILP’s investments were private equity funds valued using the funds’ net asset values as a practical expedient. Restricted cash and cash equivalents We use our restricted cash and cash equivalents for funding trusts and letters of credits issued to our ceding insurers. Our restricted cash decreased by $47.7 million, or 6.4%, from $745.4 million at December 31, 2020 to $697.7 million, at March 31, 2021, primarily due to a reduction in collateral held by our ceding insurers. Reinsurance balances receivable During the three months ended March 31, 2021, reinsurance balances receivable increased by $56.6 million, or 17.1%, to $386.9 million from $330.2 million at December 31, 2020. This increase was related primarily to premiums written on new and renewed contracts during the three months ended March 31, 2021, including increases in funds withheld on reinsurance contracts with Lloyd’s syndicates. Loss and Loss Adjustment Expense Reserves; Loss and Loss Adjustment Expenses Recoverable The COVID-19 pandemic is unprecedented and we do not have previous loss experience on which to base our estimates for the associated loss and loss adjustment expense reserves. See Note 5 of the accompanying condensed consolidated financial statements for assumptions used in our loss estimates relating to the COVID-19 pandemic. Losses in respect of the COVID-19 pandemic recognized after March 31, 2021, will be reflected in the periods in which those losses are incurred. Reserves for loss and loss adjustment expenses were composed of the following: March 31, 2021 December 31, 2020 Case Reserves IBNR Total Case Reserves IBNR Total ($ in thousands) Property $ 23,617 $ 48,927 $ 72,544 $ 25,833 $ 45,680 $ 71,513 Casualty 134,934 219,054 353,988 138,432 206,152 344,584 Other 13,229 73,082 86,311 12,540 65,542 78,082 Total $ 171,780 $ 341,063 $ 512,843 $ 176,805 $ 317,374 $ 494,179 During the three months ended March 31, 2021, the total gross loss and loss adjustment expense reserves increased by $18.7 million, or 3.8%, to $512.8 million from $494.2 million at December 31, 2020. See Note 5 of the accompanying condensed consolidated financial statements for a summary of changes in outstanding loss and loss adjustment expense reserves and a description of prior period loss developments. During the three months ended March 31, 2021, total loss and loss adjustment expenses recoverable decreased by $1.8 million, or 10.9%, to $15.0 million from $16.9 million at December 31, 2020. 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 each contract’s limit of liability has been reached, we have no further exposure to additional losses from that contract. However, certain contracts, particularly quota share contracts covering first-dollar exposure, may not contain aggregate limits. Our property 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 our PML. We anticipate that our PML will vary from period to period depending upon the modeled simulated losses and the composition of our in-force book of business. We describe projected severity levels 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. 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. 40 Return to table of contents Our PML estimate incorporates all significant exposure from our reinsurance operations, including coverage for property, marine and energy, motor, and catastrophe workers’ compensation. At April 1, 2021, 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 $87.7 million and $112.9 million, respectively. The following table provides the PML for single event loss exposure and aggregate loss exposure to natural peril losses for each of the peak zones at April 1, 2021: April 1, 2021 1-in-250 year return period Zone Single Event Loss Aggregate Loss ($ in thousands) United States, Canada and the Caribbean $ 87,692 $ 102,617 Europe 44,379 51,054 Japan 44,909 48,198 Rest of the world 47,241 51,060 Maximum 87,692 112,879 Total shareholders’ equity Total equity reported on the condensed consolidated balance sheet increased by $7.3 million to $472.1 million at March 31, 2021, compared to $464.9 million at December 31, 2020, due primarily to a net income of $6.5 million reported for the three months ended March 31, 2021. For details of other movements in shareholders’ equity, see the “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 corporate and general administrative expenses and interest expense. We conduct all our underwriting operations through our wholly-owned reinsurance subsidiaries, Greenlight Re and GRIL, which underwrite property and casualty reinsurance. There are restrictions on each of Greenlight Re’s and GRIL’s ability to pay dividends, described in more detail below. It is our current policy to retain earnings to support the growth of our business. We currently do not expect to pay dividends on our ordinary shares. At March 31, 2021, 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. They are not evaluations directed toward the protection of investors or a recommendation to buy, sell or hold our Class A ordinary shares. If A.M. Best downgrades our ratings below “A- (Excellent)” or withdraws our rating, we could be severely limited or prevented from writing any new reinsurance contracts, which would significantly and negatively affect our business. Our A.M. Best ratings may be revised or revoked at the sole discretion of the rating agency. Sources and Uses of Funds Our sources of funds consist primarily of premium receipts (net of brokerage and ceding commissions), investment income, and other income. We use cash from our operations to pay losses and loss adjustment expenses, profit commissions, interest, and general and administrative expenses. At March 31, 2021, all of our investable assets, excluding strategic investments and funds required for business operations and 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. At March 31, 2021, 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. 41 Return to table of contents For the three months ended March 31, 2021 and 2020, the net cash used in operating activities was $18.7 million and $31.8 million, respectively. The net cash used in our underwriting activities and for payment of corporate and general administrative expenses was $18.0 million and $37.5 million for the three months ended March 31, 2021 and 2020, 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 three months ended March 31, 2021 and 2020, 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 three months ended March 31, 2021, our investing activities used $29.1 million of cash for contribution into SILP (net of redemptions). They provided $26.9 million of cash from the sale of our AccuRisk investment and the collection of a note receivable from AccuRisk. By comparison, for the same period in 2020 our investing activities provided cash of $8.0 million. At March 31, 2021, we believe we have sufficient cash flow from operating and investing activities to meet our foreseeable liquidity requirements. We do not expect that the COVID-19 pandemic will materially impact our operational liquidity needs, which will be met by cash, funds generated from underwriting activities, and investment income, including withdrawals from SILP if necessary. At March 31, 2021, we expect to fund our operations for the next twelve months from operating and investing cash flow. However, we may explore various financing options, including capital raising alternatives, to fund our business strategy, improve our capital structure, increase surplus, pay claims or make acquisitions. We can provide no assurances regarding the terms of such transactions, or that any such transactions will occur. Although GLRE is not subject to any significant legal prohibitions on the payment of dividends, Greenlight Re and GRIL are each subject to regulatory minimum capital requirements and regulatory constraints that affect their ability to pay dividends to us. In addition, any dividend payment would have to be approved by the relevant regulatory authorities prior to payment. At March 31, 2021, Greenlight Re and GRIL both exceeded the regulatory minimum capital requirements. Letters of Credit and Trust Arrangements At March 31, 2021, 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. At March 31, 2021, we had one letter of credit facility available with an aggregate capacity of $275.0 million (December 31, 2020: $275.0 million). See Note 12 of the accompanying condensed consolidated financial statements for details on the letter of credit facility. We provide collateral to cedents in the form of letters of credit and trust arrangements. At March 31, 2021, the aggregate amount of collateral provided to cedents under such arrangements was $696.6 million (December 31, 2020: $743.0 million). At March 31, 2021, the letters of credit and trust accounts were secured by restricted cash and cash equivalents with a total fair value of $697.7 million (December 31, 2020: $745.4 million). The letter of credit facility contains customary events of default and restrictive covenants, including but not limited to limitations on liens on collateral, transactions with affiliates, mergers and sales of assets, as well as solvency and maintenance of certain minimum pledged equity requirements, and restricts issuance of any debt without the consent of the letter of credit provider. Additionally, if an event of default exists, as defined in the letter of credit facility, Greenlight Re would be prohibited from paying dividends to its parent company. The Company was in compliance with all the covenants of this facility at March 31, 2021. 42 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, 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 three months ended March 31, 2021. 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 or more tender offers. On May 4, 2021, the Board of Directors approved a share repurchase plan effective from July 1, 2021 until June 30, 2022 authorizing the Company to purchase up to $25 million of Class A ordinary shares or securities convertible into Class A ordinary shares in the open market, through privately negotiated transactions or Rule 10b5-1 stock trading plans. The Company is not required to repurchase any 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 three months ended March 31, 2021, the Company did not repurchase any Class A ordinary shares. At March 31, 2021, 2.5 million Class A ordinary shares and $25.0 million of the Notes, remained available for repurchase under the repurchase plans. Under the Company’s stock incentive plan, the number of Class A ordinary shares available for issuance is 8.0 million shares. At March 31, 2021, there were 3,101,738 Class A ordinary shares available for future issuance under the Company’s stock incentive plan. The Compensation Committee of the Board of Directors administers the stock incentive plan. Contractual Obligations and Commitments Due to the nature of our reinsurance operations, the amount and timing of the cash flows associated with our reinsurance contractual liabilities will fluctuate, perhaps materially, and, therefore, are highly uncertain. As of March 31, 2021, we expect to pay the loss and loss adjustment expense reserves as follows: Less than 1 year 1-3 years 3-5 years More than 5 years Total ($ in thousands) Operating lease obligations (1) $ 386 $ — $ — $ — $ 386 Interest and convertible note payable (2) 4,000 106,000 — — 110,000 Loss and loss adjustment expense reserves (3) 251,293 150,263 55,387 55,900 512,843 $ 255,679 $ 256,263 $ 55,387 $ 55,900 $ 623,229 (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 a lease agreement for office space in the Cayman Islands. The lease expired on December 31, 2020, and the parties have agreed to extend the lease until December 31, 2021 while a new lease agreement is negotiated. GRIL had entered into a lease agreement for office space in Dublin, Ireland. Under the terms of this lease agreement, GRIL was committed to minimum annual rent payments denominated in Euros approximating €0.1 million until May 2021. 43 Return to table of contents GRIL has exercised its option to terminate the lease agreement in May 2021. The minimum lease payment obligations are included in the above table under operating lease obligations and in Note 12 to the accompanying condensed consolidated financial statements. The Company has $100.0 million of senior convertible notes payable, which mature on August 1, 2023. The Company is obligated to make semi-annual interest payments of $2.0 million at an interest rate of 4.0% per annum. The Company has received regulatory approval to declare dividends from Greenlight Re to meet the interest payments obligation. Pursuant to the IAA between SILP and DME Advisors, DME Advisors is entitled to a monthly management fee equal to 0.125% (1.5% on an annual basis) of each limited partner’s Investment Portfolio, as provided in the SILP LPA. The IAA has an initial term ending on August 31, 2023, subject to automatic extension for successive three-year terms. Pursuant to the SILP LPA, DME II is entitled to a performance allocation equal to 20% of the net profit, calculated per annum, of each limited partner’s share of the capital account managed by DME Advisors, subject to a loss carry-forward provision. DME II is not entitled to earn a performance allocation in a year in which SILP incurs a loss. The loss carry-forward provision contained in the SILP LPA allows DME II to earn reduced performance allocation of 10% of net profits in years subsequent to the year in which the capital accounts of the limited partners incur a loss, until all losses are recouped and an additional amount equal to 150% of the loss is earned. At March 31, 2021, we expect the reduced performance allocation of 10% to be applied to 178% of future net investment returns before reverting to 20%. For detailed breakdowns of management fees and performance compensation for the three months ended March 31, 2021 and 2020, please refer to Note 3 of the condensed consolidated financial statements. The Company has entered into a service agreement with DME Advisors pursuant to which DME Advisors will provide investor relations services to us for compensation of $5,000 per month plus expenses. The service agreement had an initial term of one year, and continues for sequential one-year periods until terminated by us or DME Advisors. Either party may terminate the service agreement for any reason with 30 days prior written notice to the other party. Our related party transactions are presented in Note 11 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 investment in SILP (see Note 3 of the accompanying condensed consolidated financial statements), we have not participated in transactions that created relationships with unconsolidated entities or financial partnerships, including VIEs, established to facilitate off-balance sheet arrangements. Effects of Inflation Inflation generally affects the cost of claims and claim expenses, as well as asset values in our investment portfolio. Our pricing and reserving models incorporate considerations of the anticipated effects of inflation on our claim costs. However, we cannot predict or estimate the onset, duration, and severity of an inflationary period with precision. This actual effect of inflation may differ significantly from our estimate.