GREENLIGHT CAPITAL RE, LTD. 10-Q

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We believe we are exposed to the following types of market risk: • equity price risk; • commodity price risk; • foreign currency risk; • interest rate risk; • credit risk; and • political risk. 47 Return to table of contents Equity Price Risk At June 30, 2021, our investments consisted primarily of an investment in SILP. Among SILP’s holdings are equity securities, the carrying values of which are based primarily on quoted market prices. Generally, market prices of common equity securities are subject to fluctuation, which could cause the amount to be realized upon the closing of a position to differ significantly from its current reported value. This risk is partly mitigated by the presence of both long and short equity securities as part of our investment strategy. At June 30, 2021, a 10% decline in the price of each of the underlying listed equity securities and equity-based derivative instruments would result in a $7.5 million loss to our Investment Portfolio. Computations of the prospective effects of hypothetical equity price changes are based on numerous assumptions, including the maintenance of the current composition of SILP’s portfolio. They should not be relied on as indicative of future results. Commodity Price Risk Generally, market prices of commodities are subject to fluctuation. SILP’s investments periodically include long or short investments in commodities or derivatives directly impacted by fluctuations in the prices of commodities. At June 30, 2021, SILP’s investments incorporate unhedged exposure to changes in gold, silver, and crude oil prices. The following table summarizes the net impact that a 10% increase and decrease in commodity prices would have on the value of our Investment Portfolio at June 30, 2021. The below table excludes the indirect effect that changes in commodity prices might have on equity securities in our Investment Portfolio. 10% increase in commodity prices 10% decrease in commodity prices Commodity Change in fair value Change in fair value ($ in millions) Gold $ 2.0 $ (2.0) Silver 0.4 (0.4) Crude oil 0.1 (0.1) Total $ 2.5 $ (2.5) Foreign Currency Risk Certain of our reinsurance contracts are denominated in foreign currencies whereby premiums are receivable and losses are payable in foreign currencies. Foreign currency exchange rate risk exists to the extent that our foreign currency reinsurance balances are more than (or less than) the corresponding foreign currency cash balances and there is an increase (or decrease) in the exchange rate of that foreign currency. While we do not seek to precisely match our liabilities under reinsurance policies that are payable in foreign currencies with investments denominated in such currencies, we continually monitor our exposure to potential foreign currency losses and may use foreign currency cash and cash equivalents or forward foreign currency exchange contracts to mitigate against adverse foreign currency movements. At June 30, 2021, our exposure to GBP denominated net asset balance was £25.7 million. At June 30, 2021, a 10% decrease in the U.S. dollar against the GBP (all else constant) would result in an estimated $3.6 million foreign exchange gain. Alternatively, a 10% increase in the U.S dollar against the GBP would result in an estimated $3.6 million foreign exchange loss. Similarly, at June 30, 2021, our net exposure to Euro-denominated liability balances was €1.5 million. At June 30, 2021, a 10% decrease in the U.S. dollar against the Euro (all else constant) would result in an estimated $0.2 million foreign exchange loss. Alternatively, a 10% increase in the U.S dollar against the Euro would result in an estimated $0.2 million foreign exchange gain. We may also be exposed to foreign currency risk through SILP’s underlying cash, forwards, options, and investments in securities denominated in foreign currencies. At June 30, 2021, a majority of our currency exposure resulting from foreign denominated securities (longs and shorts) was reduced by offsetting cash balances denominated in the corresponding foreign currencies. At June 30, 2021, a 10% increase or decrease in the value of the U.S. dollar against foreign currencies would have no meaningful impact on the value of our Investment Portfolio. 48 Return to table of contents Interest Rate Risk Our investment in SILP includes interest-rate sensitive securities, such as corporate and sovereign debt instruments and interest rate options. The primary market risk exposure for any debt instrument is interest rate risk. As interest rates rise, the fair value of a long fixed-income portfolio generally falls. Similarly, falling interest rates generally lead to increases in the fair value of fixed-income securities. Additionally, some of the derivative investments may also be sensitive to interest rates, and their value may indirectly fluctuate with changes in interest rates. At June 30, 2021, SILP’s investments included interest rate options expiring in September 2021 which were exposed to movements in the 3-month LIBOR interest rates (“LIBOR”). If the LIBOR interest rates decreased by 15 basis points to 0%, the value of our Investment Portfolio would decrease by $2.9 million. If the LIBOR interest rates increased by 100 basis points, it would have no meaningful impact on the value of our Investment Portfolio. We, along with DME Advisors, monitor the net exposure to interest rate risk and generally do not expect changes in interest rates to have a materially adverse impact on our operations. Credit Risk Credit risk relates to the uncertainty of a counterparty’s ability to make timely payments in accordance with terms of the instrument or contract. Our maximum exposure to credit risk is the carrying value of our financial assets. We evaluate the financial condition of our business partners and clients relating to balances receivable under our reinsurance contracts, including premiums receivable, losses recoverable, and commission adjustments recoverable. We obtain collateral in the form of funds withheld, trusts and letters of credit from our counterparties to mitigate this credit risk. We monitor our net exposure to each counterparty relative to the financial strength of our counterparties and assess the collectibility of these balances on a regular basis. See Note 2 of the accompanying condensed consolidated financial statements for further details on allowance for credit loss on reinsurance assets. In addition, the securities, commodities, and cash in SILP’s investment portfolio are held with several prime brokers and derivative counterparties, subjecting SILP, and indirectly us, to a significant concentration of credit risk. While we have no direct control over SILP, DME Advisors regularly monitors the concentration of credit risk with each counterparty and, if appropriate, transfers cash or securities between counterparties or requests collateral to diversify and mitigate this credit risk. Political Risk Through our assumed reinsurance contracts, we currently provide a limited amount of political risk insurance coverage. We do not expect this exposure to have a materially adverse impact on our underwriting results. We are exposed to political risk to the extent that we underwrite business from entities located in foreign markets and to the extent that DME Advisors, on behalf of SILP and subject to our investment guidelines, trades securities listed on various U.S. and foreign exchanges and markets. The governments in any of these jurisdictions could impose restrictions, regulations, or other measures, which may have a material adverse impact on our underwriting operations and investment strategy. See “Item 1A. Risk Factors - We could face unanticipated losses from political instability which could have a material adverse effect on our financial condition and results of operations” included in our Form 10-K for the fiscal year ended December 31, 2020. 49 Return to table of contents