Item 2. Management’s Discussion and Analysis
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 its 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 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, 2021.
The following is a discussion and analysis of our results of operations for the three months ended March 31, 2022 and 2021 and financial condition at March 31, 2022 and December 31, 2021.
Special Note About Forward-Looking Statements
Certain statements in Management’s Discussion and Analysis, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements generally are identified by the words “believe,” “project,” “predict,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially from the forward-looking statements. We have included a detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements in the section entitled “Part II. Item 1A. Risk Factors” included in this Form 10-Q for the three months ended March 31, 2022, and in the section entitled “Part I, Item 1A. Risk Factors” contained in our Form 10-K for the fiscal year ended December 31, 2021, as filed with the Securities and Exchange Commission (the “SEC”) on March 8, 2022. Such risks and uncertainties include, but are not limited to:
• A downgrade or withdrawal of either of our A.M. Best ratings would materially and adversely affect our ability to implement our business strategy successfully;
• Our results of operations will likely fluctuate from period to period and may not be indicative of our long-term prospects;
• Our results of operations and financial condition could be adversely affected by the ongoing conflict between Russia and Ukraine and related disruptions in the global economy;
• The impact of COVID-19 and related risks could materially and adversely affect our results of operations, financial position, and liquidity;
• SILP may be concentrated in a few large positions, which could result in investment volatility;
• The performance of our Innovations investments could result in financial losses and reduce our capital;
• If our losses and loss adjustment expenses greatly exceed our loss reserves, our financial condition may be materially and adversely affected;
• Inflation may adversely impact our results of operations or financial condition;
• The effect of emerging claim and coverage issues on our business is uncertain;
• The property and casualty reinsurance market may be affected by cyclical trends; and
• The loss of key executives could adversely impact our ability to implement our business strategy.
We undertake no obligation to publicly update or revise any forward-looking statements, whether due to new information, future events, or otherwise. Readers are cautioned not to place undue reliance on the forward-looking statements, which speak only to the dates they were made.
We intend to communicate certain events that we believe may have a material adverse impact on our operations or financial position, including property and casualty catastrophic events and material losses in our investment portfolio, in a timely manner through a public announcement. Other than as required by the Exchange Act, we do not intend to make public announcements regarding reinsurance or investment events that we do not believe, based on management’s estimates and current information, will have a material adverse impact on our operations or financial position.
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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.
Through Greenlight Re Innovations, we support technology innovators in the (re)insurance market by providing investment, risk capacity, and access to a broad insurance network.
Because we seek to capitalize on favorable market conditions and opportunities, period-to-period comparisons of our underwriting results may not be meaningful. Also, our historical investment results are not necessarily indicative of future performance. Due to the nature of our reinsurance and investment strategies, our operating results will likely fluctuate from period to period.
The Company’s subsidiaries hold an A.M. Best Financial Strength Rating of A- (Excellent) with a stable outlook.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements contain certain amounts that are inherently subjective and have required management to make assumptions and best estimates to determine reported values. If certain factors, including those described in “Part I. Item IA. — Risk Factors” included in our Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on March 8, 2022, 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, 2021, describes our critical accounting policies and estimates. The most significant estimates relate to premium revenues and risk transfer, loss and loss adjustment expense reserves, investment impairments, allowances for credit losses, and share-based compensation.
Recently issued and adopted accounting standards and their impact on the Company, if any, are presented under “Recent Accounting Pronouncements” in Note 2 to the condensed consolidated financial statements.
Segments
We have one operating segment, Property & Casualty reinsurance, and we analyze our business based on the following categories:
● Property
● Casualty
● Other
Property business covers automobile physical damage, personal lines, and commercial lines exposures. Property business includes both catastrophe and non-catastrophe coverage. We expect catastrophe business to make up a small proportion of our property business.
Casualty business covers general liability, motor liability, professional liability, and workers’ compensation exposures. The Company’s multi-line business relates predominantly to casualty reinsurance, and as such, the Company includes all multi-line business within the casualty category. Casualty business generally has losses reported and paid over a longer period than property business. We categorize Lloyd’s syndicate contracts, which incorporate incidental catastrophe exposure, as multi-line (and therefore casualty) business.
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Other business covers accident and health, financial lines (including transactional liability, mortgage insurance, surety, and trade credit), marine, energy, as well as other specialty business such as aviation, crop, cyber, political, and terrorism exposures.
Outlook and Trends
In February 2022, the Russian army commenced military actions against Ukraine. The ongoing Russian-Ukrainian conflict has resulted in the U.S., United Kingdom, European Union, and other countries imposing financial and economic sanctions, which have caused disruption in the global economy and have increased economic and geopolitical uncertainty. Our underwriting results for the quarter included $13.6 million of losses attributed to the Russian-Ukrainian conflict. If this conflict is prolonged, we may incur additional losses in future periods.
During the January 1, 2022 renewal period, we saw improved rates in most of the classes of business we write, which enabled us to selectively expand our specialty book while taking advantage of improved rates. Our in-force portfolio reflects increased diversification across the classes of business we write and a lower concentration of risk to individual counterparties than at any other time in our history.
After another year of significant property catastrophe losses in 2021 and several years of generally weak performance of reinsurers, premium rates continue to increase overall. We believe that structural problems within the “pure catastrophe” class will limit premium rate increases in the class. However, we believe that the recent property catastrophe losses, along with the Russian-Ukrainian conflict will help support and extend the generally favorable market conditions in most other classes. We expect that the impact of inflation on our claims costs may partially reduce the extent of the overall premium adequacy, mainly with respect to longer-tailed classes.
Over the past four years, our underwriting portfolio has become considerably more diversified as we have shifted our underwriting away from being dominated by a small number of large accounts. This diversification has also exposed us to a wider array of global insurance events. However, we believe that taking on risk that is well priced, diversified and risk-managed, is key to achieving optimal underwriting results.
We continue to be encouraged by our Innovations unit, whose central objective is to enhance our underwriting return and risk profile by establishing a range of strategic partnerships. Our Innovations-related premiums accounted for approximately 10% of our net premiums written in the first quarter of 2022. We see the potential for significant growth from Innovations-derived underwriting opportunities going forward.
In April 2022, we launched a Lloyd’s approved insurtech-focused syndicate (“Syndicate 3456”). We expect Syndicate 3456 to enable us to provide capacity to our growing portfolio of Innovations partners.
Key Financial 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 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 facilitate a more thorough understanding of the Company’s business. Non-GAAP financial measures should not be viewed as substitutes for those determined under U.S. GAAP.
The key non-GAAP financial measures used in this report are:
• Basic book value per share and fully diluted book value per share; and
• Net underwriting income (loss)
These non-GAAP measures are described below.
Basic Book Value Per Share and Fully Diluted Book Value Per Share
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We believe that long-term growth in fully diluted book value per share is the most relevant measure of our financial performance because it provides management and investors a yardstick to monitor the shareholder value generated. Fully diluted book value per share may also help our investors, shareholders, and other interested parties form a basis of comparison with other companies within the property and casualty reinsurance industry. Basic book value per share and fully diluted book value per share should not be viewed as substitutes for the comparable U.S. GAAP measures.
We calculate basic book value per share as (a) ending shareholders' equity, divided by (b) aggregate of Class A and Class B Ordinary shares issued and outstanding, including all unvested service-based restricted shares, and the earned portion of performance-based restricted shares granted after December 31, 2021.
Fully diluted book value per share represents basic book value per share combined with any dilutive impact of in-the-money stock options, unvested service-based RSUs, and the earned portion of unvested performance-based RSUs granted. Fully diluted book value per share also includes the dilutive effect, if any, of ordinary shares expected to be issued upon settlement of the convertible notes.
Our primary financial goal is to increase adjusted fully diluted book value per share over the long term. We use fully diluted book value per share as a financial measure in our annual incentive compensation.
The following table presents a reconciliation of the non-GAAP financial measures basic and fully diluted book value per share to the most comparable U.S. GAAP measure:
March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021
($ in thousands, except per share and share amounts)
Numerator for basic and fully diluted book value per share:
Total equity (U.S. GAAP) (numerator for basic and fully diluted book value per share) $ 468,407 $ 475,663 $ 450,514 $ 466,826 $ 472,119
Denominator for basic and fully diluted book value per share: (1)
Ordinary shares issued and outstanding as presented in the Company’s condensed consolidated balance sheets 34,721,231 33,844,446 33,844,446 34,171,068 34,850,528
Less: Unearned performance-based restricted shares granted after December 31, 2021 (581,593) — — — —
Denominator for basic book value per share 34,139,638 33,844,446 33,844,446 34,171,068 34,850,528
Add: In-the-money stock options, service-based RSUs granted, and earned performance-based RSUs granted 176,379 154,134 154,134 154,134 154,134
Denominator for fully diluted book value per share 34,316,017 33,998,580 33,998,580 34,325,202 35,004,662
Basic book value per share $ 13.72 $ 14.05 $ 13.31 $ 13.66 $ 13.55
Increase (decrease) in basic book value per share ($) $ (0.33) $ 0.58 $ (0.35) $ 0.11 $ 0.08
Increase (decrease) in basic book value per share (%) (2.3) % 4.3 % (2.6) % 0.8 % 0.6 %
Fully diluted book value per share $ 13.65 $ 13.99 $ 13.25 $ 13.60 $ 13.49
Increase (decrease) in fully diluted book value per share ($) $ (0.34) $ 0.57 $ (0.35) $ 0.11 $ 0.07
Increase (decrease) in fully diluted book value per share (%) (2.4) % 4.2 % (2.6) % 0.8 % 0.5 %
(1) For periods prior to March 31, 2022, all unvested restricted shares are included in the “basic” and “fully diluted” denominators. Restricted shares with performance-based vesting conditions granted after December 31, 2021, are included in
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the “basic” and “fully diluted” denominators to the extent that the Company has recognized the corresponding share-based compensation expense. At March 31, 2022, the aggregate number of unearned restricted shares with performance conditions was 774,742 (December 31, 2021: 193,149, September 30, 2021: 193,149, June 30, 2021: 193,149, March 31, 2021: 193,149).
Net Underwriting Income (Loss)
One way that we evaluate the Company’s underwriting performance is by measuring net underwriting income (loss). We do not use premiums written as a measure of performance. Net underwriting income (loss) is a performance measure used by management to evaluate the fundamentals underlying the Company’s underwriting operations. We believe that the use of net underwriting income (loss) enables investors and other users of the Company’s financial information to analyze our performance in a manner similar to how management analyzes performance. Management also believes that this measure follows industry practice and allows the users of financial information to compare the Company’s performance with that of our industry peer group.
Net underwriting income (loss) is considered a non-GAAP financial measure because it excludes items used to calculate net income before taxes under U.S. GAAP. We calculate net underwriting income (loss) as net premiums earned, plus other income relating to reinsurance and deposit-accounted contracts, less deposit interest expense, less net loss and loss adjustment expenses, acquisition costs, and underwriting expenses. The measure excludes, on a recurring basis: (1) investment income (loss); (2) other income (expense) not related to underwriting, including foreign exchange gains or losses and adjustments to the allowance for expected credit losses; (3) corporate general and administrative expenses; and (4) interest expense. We exclude total investment income or loss, foreign exchange gains or losses, and expected credit losses as we believe these items are influenced by market conditions and other factors not related to underwriting decisions. We exclude corporate and interest expenses because these costs are generally fixed and not incremental to or directly related to our underwriting operations. We believe all of these amounts are largely independent of our underwriting process, and including them could hinder the analysis of trends in our underwriting operations. Net underwriting income (loss) should not be viewed as a substitute for U.S. GAAP net income before income taxes.
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
2022 2021
($ in thousands)
Income (loss) before income tax $ (5,743) $ 10,233
Add (subtract):
Total investment (income) loss (7,737) (18,674)
Other non-underwriting (income) expense 633 703
Corporate expenses 4,011 4,204
Interest expense 1,154 1,544
Net underwriting income (loss) $ (7,682) $ (1,990)
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Results of Operations
The table below summarizes our operating results for the three months ended March 31, 2022, and 2021:
Three months ended March 31
2022 2021
(in thousands, except percentages)
Underwriting revenue
Gross premiums written $ 145,886 $ 169,935
Gross premiums ceded (6,009) 55
Net premiums written 139,877 169,990
Change in net unearned premium reserves (13,952) (34,594)
Net premiums earned $ 125,925 $ 135,396
Underwriting related expenses
Net loss and loss adjustment expenses incurred
Current year $ 95,082 $ 97,861
Prior year * 2,325 (140)
Net loss and loss adjustment expenses incurred 97,407 97,721
Acquisition costs 32,945 33,381
Underwriting expenses 3,221 3,337
Deposit accounting and other reinsurance expense (income) 34 2,947
Net underwriting income (loss) $ (7,682) $ (1,990)
Income (loss) from investment in related party investment fund $ 4,077 $ 4,024
Net investment income (loss) 3,660 14,650
Total investment income (loss) $ 7,737 $ 18,674
Net underwriting and investment income (loss) $ 55 $ 16,684
Corporate expenses $ 4,011 $ 4,204
Other (income) expense, net 633 703
Interest expense 1,154 1,544
Income tax expense (benefit) (16) 3,734
Net income (loss) $ (5,727) $ 6,499
Earnings (loss) per share
Basic $ (0.17) $ 0.19
Diluted $ (0.17) $ 0.19
Underwriting ratios
Loss ratio - current year 75.6 % 72.3 %
Loss ratio - prior year 1.8 % (0.1) %
Loss ratio 77.4 % 72.2 %
Acquisition cost ratio 26.2 % 24.7 %
Composite ratio 103.6 % 96.9 %
Underwriting expense ratio 2.6 % 4.6 %
Combined ratio 106.2 % 101.5 %
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* The net financial impacts associated with changes in the estimate of losses incurred in prior years, which incorporate earned reinstatement premiums assumed and ceded, and adjustments to assumed and ceded acquisition costs, were a loss of $2.6 million and a gain of $0.2 million for the three months ended March 31, 2022, and 2021, respectively.
Three months ended March 31, 2022, and 2021
For the three months ended March 31, 2022, fully diluted book value per share decreased by $0.34, or 2.4%, to $13.65 per share from $13.99 per share at December 31, 2021. For the three months ended March 31, 2022, basic book value per share decreased by $0.33, or 2.3%, to $13.72 per share from $14.05 per share at December 31, 2021. The decrease in fully diluted book value per share included $0.07, or 0.50%, adverse impact relating to the adoption of ASU 2020-06 during the three months ended March 31, 2022 (see Note 2 of the accompanying condensed consolidated financial statements for recently issued accounting standards adopted).
For the three months ended March 31, 2022, our net loss was $5.7 million, compared to a net income of $6.5 million reported for the equivalent 2021 period.
The developments that most significantly affected our financial performance during the three months ended March 31, 2022, compared to the equivalent 2021 period, are summarized below:
• Underwriting: The underwriting loss for the three months ended March 31, 2022, was $7.7 million, driven primarily by $13.6 million of losses related to the Russian-Ukrainian conflict and $2.8 million of losses related to Tennessee wildfires. By comparison, the underwriting loss for the same period in 2021 was $2.0 million, driven by $2.9 million of deposit accounting interest expense.
Our overall combined ratio was 106.2% for the three months ended March 31, 2022, compared to 101.5% for the same period in 2021. The Russian-Ukrainian conflict contributed 10.8 percentage points to the combined ratio for the three months ended March 31, 2022.
• Investments: Our total investment income for the three months ended March 31, 2022, was $7.7 million compared to a total investment income of $18.7 million incurred during the equivalent 2021 period. For the three months ended March 31, 2022, our investment in SILP reported a gain of $4.1 million, while our Innovations-related investments reported an unrealized gain of $3.9 million. The investment income during the equivalent 2021 period was driven by a $14.7 million gain realized on the sale of our investment in AccuRisk.
Underwriting results
We analyze our business based on three categories: “property,” “casualty,” and “other.”
Gross Premiums Written
Details of gross premiums written are provided in the following table:
Three months ended March 31
2022 2021
($ in thousands)
Property $ 18,535 12.7 % $ 14,915 8.8 %
Casualty 78,269 53.7 113,674 66.9
Other 49,082 33.6 41,346 24.3
Total $ 145,886 100.0 % $ 169,935 100.0 %
As a result of our underwriting philosophy, the total premiums we write and the mix of premiums between property, casualty, and other business, may vary significantly from period to period depending on the market opportunities we identify.
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For the three months ended March 31, 2022, our gross premiums written decreased by $24.0 million, or 14.2%, compared to the equivalent 2021 period. The primary drivers of this change are the following:
Gross Premiums Written
Three months ended March 31, 2022
Increase (decrease)
($ in millions) % change Explanation
Property $3.6 24.3% The increase in property premiums written during the three months ended March 31, 2022, over the comparable 2021 period was primarily attributable to growth in underlying business relating to one of our Innovations-related contracts. To a lesser extent, the increase in property premiums was driven by new personal and commercial property contracts during 2022. A decrease in motor premiums partially offset the increase in property premiums as we elected to reduce or not renew our participation on certain motor contracts.
Casualty $(35.4) (31.1)% The decrease in casualty premiums written during the three months ended March 31, 2022, over the comparable 2021 period was due primarily to motor and workers’ compensation contracts on which we elected to reduce or not renew our participation. The decrease in casualty premiums was partially offset by growth in general liability and multi-line premiums resulting from new and renewed contracts, including Innovations-related business.
Other $7.7 18.7% The increase in “other” premiums written during the three months ended March 31, 2022, over the comparable 2021 period was due primarily to:
• financial lines, including transactional liability business;
• new marine and energy contracts bound during 2022; and
• new contracts bound during 2022 relating to other specialty classes.
These increases were partially offset by decreases in health premiums due primarily to a contract in which we shifted our participation from proportional basis to excess of loss basis.
Premiums Ceded
For the three months ended March 31, 2022, premiums ceded were $6.0 million compared to $(0.1) million for the three months ended March 31, 2021. We use retrocessional coverage to manage our net portfolio exposure, leverage areas of expertise, and improve our strategic position in meeting the needs of clients and brokers.. In 2022, we entered into new retrocession agreements, primarily to reduce our exposure to large marine and energy loss events and certain property losses.
Net Premiums Written
Details of net premiums written are provided in the following table:
Three months ended March 31
2022 2021
($ in thousands)
Property $ 16,435 11.7 % $ 14,956 8.8 %
Casualty 78,269 56.0 113,705 66.9
Other 45,173 32.3 41,329 24.3
Total $ 139,877 100.0 % $ 169,990 100.0 %
For the three months ended March 31, 2022, net premiums written decreased by $30.1 million, or 17.7%, compared to the three months ended March 31, 2021. The movement in net premiums written resulted from the changes in gross premiums written and ceded during the periods.
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Net Premiums Earned
Details of net premiums earned are provided in the following table:
Three months ended March 31
2022 2021
($ in thousands)
Property $ 14,490 11.5 % $ 14,155 10.5 %
Casualty 81,228 64.5 87,091 64.3
Other 30,207 24.0 34,150 25.2
Total $ 125,925 100.0 % $ 135,396 100.0 %
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
2022 2021
($ in thousands)
Property $ 9,713 9.9 % $ 11,385 11.6 %
Casualty 55,373 56.9 64,152 65.7
Other 32,321 33.2 22,184 22.7
Total $ 97,407 100.0 % $ 97,721 100.0 %
The below table summarizes the loss ratios for the three months ended March 31, 2022 and 2021:
Three months ended March 31
2022 2021 Increase / (decrease) in loss ratio points
Property 67.0 % 80.4 % (13.4)
Casualty 68.2 % 73.7 % (5.5)
Other 107.0 % 65.0 % 42.0
Total 77.4 % 72.2 % 5.2
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The changes in net losses incurred and loss ratios during the three months ended March 31, 2022, were attributable to the following:
Net Losses Incurred
Three months ended March 31, 2022
Increase (decrease)
($ in millions) Increase / (decrease) in loss ratio points Explanation
Property $(1.7) (13.4) The decrease in property losses incurred during the three months ended March 31, 2022, compared to the same period in 2021, was due primarily to a reduction in motor business related to contracts on which we elected to reduce or non-renew our participation. The decrease was partially offset by higher personal lines losses from Tennessee wildfires.
The property loss ratio decreased 13.4 percentage points during the three months ended March 31, 2022, over the equivalent 2021 period, due primarily to the reasons described above.
Casualty $(8.8) (5.5) The decrease in casualty losses incurred during the three months ended March 31, 2022, compared to the same period in 2021, was due primarily to a reduction in motor business related to contracts on which we elected to reduce or non-renew our participation. The decrease was partially offset by higher incurred losses relating to the multi-line business driven by growth in Lloyd’s syndicate contracts.
The casualty loss ratio decreased 5.5 percentage points during the three months ended March 31, 2022, over the equivalent 2021 period, due primarily to the reasons described above.
Other $10.1 42.0 The increase in “other” losses incurred during the three months ended March 31, 2022, compared to the same period in 2021, was due primarily to losses relating to the Russian-Ukrainian conflict. The increase was partially offset by lower losses incurred on health contracts on which we elected to reduce or not renew our participation.
The “other” loss ratio increased 42.0 percentage points during the three months ended March 31, 2022, over the equivalent 2021 period, due primarily to the reasons described above.
Russian-Ukrainian Conflict
Our loss and loss adjustment expenses from the Russian-Ukrainian conflict relate primarily to marine, energy, political violence, and terrorism (“MEPVT”) policies and whole account contracts, all of which are included in our Specialty book of business. We have purchased excess of loss reinsurance to reduce our net exposure relating to MEPVT exposures. As of March 31, 2022, we have not recorded any reinsurance recoveries, as the estimated losses had not impacted the excess layers. However, we may generate recoveries under the retroceded contracts if we recognize significant further MEPVT losses from the Russian-Ukrainian conflict.
See Note 5 of the accompanying condensed consolidated financial statements for additional discussion of our reserving techniques and prior period development of net claims and claim expenses.
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Acquisition Costs, Net
Details of acquisition costs are provided in the following table:
Three months ended March 31
2022 2021
($ in thousands)
Property $ 3,348 10.2 % $ 2,800 8.4 %
Casualty 21,246 64.5 21,791 65.3
Other 8,351 25.3 8,790 26.3
Total $ 32,945 100.0 % $ 33,381 100.0 %
The acquisition cost ratios for the three months ended March 31, 2022 and 2021, were as follows:
Three months ended March 31
2022 2021 Increase / (decrease)
Property 23.1 % 19.8 % 3.3 %
Casualty 26.2 % 25.0 % 1.2 %
Other 27.6 % 25.7 % 1.9 %
Total 26.2 % 24.7 % 1.5 %
The changes in the acquisition cost ratios during the three months ended March 31, 2022, compared to the equivalent period in 2021, were attributable to the following:
Change in Acquisition Cost Ratios
Three months ended March 31, 2022
Increase / (decrease) in acquisition cost ratio points Explanation
Property 3.3 The increase in property acquisition cost ratio during the three months ended March 31, 2022, compared to the equivalent period in 2021, was due primarily to an increase in quota share commercial and personal property business. This business had a higher acquisition cost ratio relative to motor business that decreased during the three months ended March 31, 2022, compared to the same period in 2021.
Casualty 1.2 The increase in the casualty acquisition cost ratio during the three months ended March 31, 2022, compared to the equivalent period in 2021, related primarily to growth in multi-line and Lloyd’s syndicate business.
Other 1.9 The increase in the “other” acquisition cost ratio was due primarily to the change in the mix of business during the three months ended March 31, 2022, compared to the equivalent period in 2021. The “other” acquisition cost expense and earned premiums were lower due to decreased health business. However, the growth in transactional liability business, which has a higher acquisition cost ratio relative to other specialty business, increased the overall “other” acquisition cost ratio.
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Ratio Analysis
The following table provides our underwriting ratios by line of business:
Three months ended March 31 Three months ended March 31
2022 2021
Property Casualty Other Total Property Casualty Other Total
Loss ratio 67.0 % 68.2 % 107.0 % 77.4 % 80.4 % 73.7 % 65.0 % 72.2 %
Acquisition cost ratio 23.1 26.2 27.6 26.2 19.8 25.0 25.7 24.7
Composite ratio 90.1 % 94.4 % 134.6 % 103.6 % 100.2 % 98.7 % 90.7 % 96.9 %
Underwriting expense ratio 2.6 4.6
Combined ratio 106.2 % 101.5 %
The underwriting expense ratio for the three months ended March 31, 2021, included 2.2% percentage points relating to interest expense on deposit-accounted contracts based on revised expectations of ultimate cash flows. There was no similar impact on the underwriting expense ratio for the three months ended March 31, 2022.
General and Administrative Expenses
Details of general and administrative expenses are provided in the following table:
Three months ended March 31
2022 2021
($ in thousands)
Underwriting expenses $ 3,221 $ 3,337
Corporate expenses 4,011 4,204
General and administrative expenses $ 7,232 $ 7,541
For the three months ended March 31, 2022, and 2021, general and administrative expenses included $1.0 million and $0.8 million, respectively, of costs related to stock compensation granted to employees and directors.
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Total Investment Income (Loss)
Total investment income (loss) incorporates (i) changes in the net asset value of our investment in SILP managed by DME Advisors, (ii) interest income earned on the restricted cash and cash equivalents pledged as collateral to our clients, and (iii) gains (or losses) and interest on our portfolio of strategic and Innovations investments, notes receivable and investments accounted for under the equity method. We expect our total investment income, including any change in the net asset value of our investment in SILP, to fluctuate from period to period.
A summary of our total investment income (loss) is as follows:
Three months ended March 31
2022 2021
($ in thousands)
Realized gains (losses) $ — $ 14,210
Change in unrealized gains and losses 3,899 1,228
Investment-related foreign exchange gains (losses) (38) (19)
Interest and dividend income, net of withholding taxes 22 113
Interest, dividend, and other expenses (223) (882)
Net investment-related income (loss) $ 3,660 $ 14,650
Income (loss) from investments in related party investment fund $ 4,077 $ 4,024
Total investment income (loss) $ 7,737 $ 18,674
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, 2022 and 2021, please refer to Note 3 of the condensed consolidated financial statements.
For the three months ended March 31, 2022, the Investment Portfolio managed by DME Advisors reported a gain of 1.7%, compared to a gain of 1.5% for the three months ended March 31, 2021. The long portfolio lost 6.0%, while the short portfolio and macro positions gained 4.9% and 3.5%, respectively, during the three months ended March 31, 2022. For the three months ended March 31, 2022, the most significant contributors to SILP’s investment return were long positions in Rheinmetall AG (RHM GY), Teck Resources (TECK), and The Chemours Company (CC). During the three months ended March 31, 2022, the most significant detractors were Green Brick Partners (GRBK), Capri Holdings (CPRI), and various short positions.
During the three months ended March 31, 2022, we recorded a net unrealized gain of $3.9 million on our portfolio of Innovations-related investments.
For the three months ended March 31, 2022, and 2021, the gross investment return (loss) on our investments managed by DME Advisors (excluding investment advisor performance allocation) was composed of the following:
Three months ended March 31
2022 2021
Long portfolio gains (losses) (6.0) % 11.7 %
Short portfolio gains (losses) 4.9 (6.8)
Macro gains (losses) 3.5 (2.8)
Other income and expenses 1
(0.5) (0.5)
Gross investment return 1.9 % 1.6 %
Net investment return 1
1.7 % 1.5 %
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 Company’s shareholders’ equity, as reported in the Company’s then most recent quarterly U.S. GAAP financial statements. It is adjusted
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monthly for our share of the net profits and net losses reported by SILP during any intervening period. Prior to January 1, 2021, the Investment Portfolio was calculated based on several factors, including our share of SILP’s net asset value and our posted collateral and net reserves.
Each month, we post on our website ( www.greenlightre.com ) the returns from our investment in SILP.
Income Taxes
We are not obligated to pay taxes in the 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 the 20 years expiring 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%.
At March 31, 2022, we have included a gross deferred tax asset of $3.8 million (December 31, 2021: $3.2 million) in the caption “Other assets” in the Company’s condensed consolidated balance sheets. At March 31, 2022, a valuation allowance of $3.3 million (December 31, 2021: $2.7 million) partially offset this gross deferred tax asset. We have concluded that it is more likely than not that the Company will fully realize the recorded deferred tax asset (net of the valuation allowance) in the future. We have based this conclusion on the expected timing of the reversal of the temporary differences and the likelihood of generating sufficient taxable income to realize the future tax benefit. We have not taken any other tax positions that we believe are subject to uncertainty or reasonably likely to have a material impact on the Company.
Financial Condition
Total investments
The total investments reported in the condensed consolidated balance sheets at March 31, 2022, was $205.7 million, compared to $231.0 million at December 31, 2021,a decrease of $25.3 million, or 11.0%. The decrease was primarily related to net redemptions from SILP which were used primarily to fund collateral required by our ceding insurers. New Innovations-related investments, and the gains from SILP and the Innovations-related investments partially offset the decrease.
At March 31, 2022, 92.5% of SILP’s portfolio was valued based on quoted prices in actively traded markets (Level 1), 4.9% was composed of instruments valued based on observable inputs other than quoted prices (Level 2), and 0.2% was composed of instruments valued based on non-observable inputs (Level 3). At March 31, 2022, 2.4% of SILP’s portfolio consisted of private equity funds valued using the funds’ net asset values as a practical expedient. At March 31, 2022, our Innovations-related investments did not have readily determinable fair values and were carried at their original cost minus impairment plus changes resulting from observable price changes.
Other than our investment in SILP (see Notes 3 of the accompanying condensed consolidated financial statements), we have not participated in transactions that created relationships with unconsolidated entities or financial partnerships, including VIEs, established to facilitate off-balance sheet arrangements.
Cash and cash equivalents; Restricted cash and cash equivalents
The unrestricted cash and cash equivalents decreased by $45.0 million, or 58.9%, from $76.3 million at December 31, 2021, to $31.3 million at March 31, 2022, primarily due to collateral posted to our ceding insurers.
We use our restricted cash and cash equivalents for funding trusts and letters of credit issued to our ceding insurers. Our restricted cash increased by $66.6 million, or 10.5%, from $634.8 million at December 31, 2021, to $701.4 million, at March 31, 2022, primarily due to collateral required by our ceding insurers. The increase in collateral was partially funded from withdrawals from SILP and partially from unrestricted cash and cash equivalents.
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Reinsurance balances receivable
During the three months ended March 31, 2022, reinsurance balances receivable increased by $36.3 million, or 8.9%, to $441.6 million from $405.4 million at December 31, 2021. This increase was related primarily to increases in (i) premiums receivable on new contracts bound during the first quarter of 2022 and (ii) funds withheld on reinsurance contracts with Lloyd’s syndicates.
Loss and Loss Adjustment Expense Reserves; Loss and Loss Adjustment Expenses Recoverable
Reserves for loss and loss adjustment expenses were composed of the following:
March 31, 2022 December 31, 2021
Case
Reserves IBNR Total Case
Reserves IBNR Total
($ in thousands)
Property $ 32,023 $ 79,027 $ 111,050 $ 21,357 $ 49,486 $ 70,843
Casualty 129,908 168,172 298,080 151,734 219,949 371,683
Other 27,381 112,630 140,011 17,129 64,355 81,484
Total $ 189,312 $ 359,829 $ 549,141 $ 190,220 $ 333,790 $ 524,010
During the three months ended March 31, 2022, the total gross loss and loss adjustment expense reserves increased by $25.1 million, or 4.8%, to $549.1 million from $524.0 million at December 31, 2021. See Note 5 of the accompanying condensed consolidated financial statements for a summary of changes in outstanding loss and loss adjustment expense reserves and a description of prior period loss developments.
During the three months ended March 31, 2022, the total loss and loss adjustment expenses recoverable decreased by $0.3 million, or 2.4%, to $11.4 million from $11.1 million at December 31, 2021. See Note 6 of the accompanying condensed consolidated financial statements for a description of the credit risk associated with our retrocessionaires.
For most of the contracts we write, defined limits of liability limit our risk exposure. Once each contract’s limit of liability has been reached, we have no further exposure to additional losses from that contract. However, certain contracts, particularly quota share contracts covering first-dollar exposure, may not contain aggregate limits.
Our property and Lloyd’s business, and to a lesser extent our casualty and other business, incorporate contracts that contain natural peril loss exposure. We currently monitor our catastrophe loss exposure in terms of our PML (probable maximum loss).
We anticipate that our PMLs will vary from period to period depending upon the modeled simulated losses and the composition of our in-force book of business.
We monitor our natural peril PMLs on a worldwide basis, with a particular focus on our peak peril regions. When these perils consist of a large geographic area, we split them into sub-regions, where the underlying geographic components can also be considered individual peril zones.
For our natural catastrophe PMLs, we utilize the output of catastrophe models at the 1-in-250 year return period. The 1-in-250 year return period PML means that we believe there is a 0.4% probability that in any given year, an occurrence of a natural catastrophe will lead to losses exceeding the stated estimate.
It is important to note that PMLs are best estimates based on the modeled data available for each underlying risk. As a result, we cannot provide assurance that any actual event will align with the modeled event or that actual losses from events similar to the modeled events will not vary materially from the modeled event PML.
Our PML estimates incorporate all significant exposure from our reinsurance operations, including coverage for property, marine and energy, motor, and catastrophe workers’ compensation.
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At April 1, 2022, our estimated largest PML (net of retrocession and reinstatement premiums) at a 1-in-250 year return period for a single event and in aggregate was $87.6 million and $95.9 million, respectively, both relating to the peril of North Atlantic Hurricane.
The below table contains the expected modeled loss for each of our peak peril regions and sub-regions, for both a single event loss and aggregate loss measures at the 1-in-250 year return period.
April 1, 2022
Net 1-in-250 Year Return Period
Peril Single Event Loss Aggregate Loss
($ in thousands)
North Atlantic Hurricane $ 87,558 $ 95,876
Southeast Hurricane 66,237 71,541
Gulf of Mexico Hurricane 58,736 64,145
Northeast Hurricane 60,540 61,924
North America Earthquake 60,733 65,126
California Earthquake 54,407 57,088
Other N.A. Earthquake 34,533 36,329
Japan Earthquake 39,227 42,101
Japan Windstorm 39,734 43,498
Europe Windstorm 30,041 36,550
Total shareholders’ equity
Total equity reported on the condensed consolidated balance sheet decreased by $7.3 million to $468.4 million at March 31, 2022, compared to $475.7 million at December 31, 2021. The decrease in shareholders’ equity during the three months ended March 31, 2022, was primarily due to (i) the adoption of ASU 2020-06 (see Note 2 of the accompanying condensed consolidated financial statements) and (ii) the net loss of $5.7 million reported for the period. 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 a holding company with no operations of its own. As a holding company, Greenlight Capital Re has minimal continuing cash needs, most of which are related to the payment of corporate and general administrative expenses and interest expenses. We conduct all our underwriting operations through our wholly-owned reinsurance subsidiaries, Greenlight Re and GRIL, which underwrite property and casualty reinsurance. There are restrictions on Greenlight Re’s and GRIL’s ability to pay dividends, described in more detail below. It is our current policy to retain earnings to support the growth of our business. We currently do not expect to pay dividends on our ordinary shares.
At March 31, 2022, Greenlight Re and GRIL were each rated “A- (Excellent)” with a stable outlook by A.M. Best. 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.
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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, 2022, all of our investable assets, excluding strategic and Innovations investments and funds required for business operations and capital risk management, are invested by DME Advisors in SILP, subject to our investment guidelines. We can redeem funds from SILP at any time for operational purposes by providing three days’ notice to the general partner. At March 31, 2022, the majority of SILP’s long investments were composed of cash and cash equivalents and publicly traded equity securities, which can be readily liquidated to meet our redemption requests. We record all investment income (loss), including any changes in the net asset value of SILP, and any unrealized gains and losses, in our condensed consolidated statements of operations for each reporting period.
For the three months ended March 31, 2022 and 2021, the net cash used in operating activities was $11.6 million and $18.7 million, respectively. The net cash used in operating activities was used primarily for our underwriting activities and for payment of corporate and general administrative expenses for the three months ended March 31, 2022 and 2021. Generally, if the premiums collected exceed claim payments within a given period, we generate cash from our underwriting activities. Our underwriting activities represented a net use of cash for the three months ended March 31, 2022 and 2021, as the losses we paid exceeded the premiums we collected. On our Lloyd’s syndicate contracts we do not receive any premiums until the year of account is settled, net of losses, at the end of three years. 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, 2022, our investing activities provided $36.7 million of cash from redemptions from SILP (net of contributions) and used $3.4 million for new Innovations investments. By comparison, for the same period in 2021 our investing activities used cash of $4.3 million.
For the three months ended March 31, 2022 and 2021, there were no financing activities.
At March 31, 2022, we believe we have sufficient cash flow from operating and investing activities to meet our foreseeable liquidity requirements. We do not expect that the recent global events, including the Russian-Ukrainian conflict and the COVID-19 pandemic, will materially impact our operational liquidity needs, which will be met by cash, funds generated from underwriting activities, and investment income, including withdrawals from SILP if necessary. At March 31, 2022, we expect to fund our operations for the next twelve months from operating and investing cash flow. However, we may explore various financing options, including 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, 2022, Greenlight Re and GRIL exceeded their regulatory minimum capital requirements.
Letters of Credit and Trust Arrangements
At March 31, 2022, 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. Many jurisdictions do not permit domestic insurance companies to take credit on their statutory financial statements for loss recoveries or ceded unearned premiums unless appropriate measures are in place for reinsurance obtained from unlicensed or non-admitted insurers. As a result, we anticipate that all of our U.S. clients and some non-U.S. clients will require us to provide collateral through funds withheld, trust arrangements, letters of credit, or a combination thereof.
At March 31, 2022, we had one letter of credit facility available with an aggregate capacity of $275.0 million (December 31, 2021: $275.0 million). See Note 12 of the accompanying condensed consolidated financial statements for details on the letter of credit facility. We provide collateral to cedents in the form of letters of credit and trust arrangements. At March 31, 2022, the aggregate amount of collateral provided to cedents under such arrangements was $700.6 million (December 31, 2021: $633.9 million). At March 31, 2022, the letters of credit and trust accounts were secured by restricted cash and cash equivalents with a total fair value of $701.4 million (December 31, 2021: $634.8 million).
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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, 2022.
Capital
Our capital structure currently consists of senior convertible notes and equity issued in two classes of ordinary shares. We expect that the existing capital base and internally generated funds will be sufficient to implement our business strategy for the foreseeable future. Consequently, we do not presently anticipate that we will incur any additional material indebtedness in the ordinary course of our business. However, to provide us with flexibility and timely access to public capital markets should we require additional capital for working capital, capital expenditures, acquisitions, or other general corporate purposes, we have filed a Form S-3 registration statement, which expires in July 2024. In addition, as noted above, we may explore various financing alternatives, although there can be no assurance that additional financing will be available on acceptable terms when needed or desired. We did not make any significant commitments for capital expenditures during the three months ended March 31, 2022.
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 repurchase up to $25.0 million of Class A ordinary shares or securities convertible into Class A ordinary shares in the open market, through privately negotiated transactions or Rule 10b5-1 stock trading plans. On April 26, 2022, the Board of Directors renewed and extended the share repurchase plan until June 30, 2023.The Company is not required to repurchase any Class A ordinary shares, and the repurchase plan may be modified, suspended, or terminated at the election of our Board of Directors at any time without prior notice. During the three months ended March 31, 2022, the Company repurchased no Class A ordinary shares.
Under the Company’s stock incentive plan, the number of Class A ordinary shares authorized for issuance is 8.0 million shares. At March 31, 2022, 2,092,276 Class A ordinary shares were available for future issuance under the Company’s stock incentive plan. The Compensation Committee of the Board of Directors administers the stock incentive plan.
Contractual Obligations and Commitments
Due to the nature of our reinsurance operations, the amount and timing of the cash flows associated with our reinsurance contractual liabilities will fluctuate, perhaps materially, and, therefore, are highly uncertain. At March 31, 2022, we estimate that we will pay the loss and loss adjustment expense reserves as follows:
Less than
1 year 1-3 years 3-5 years More than
5 years Total
($ in thousands)
Loss and loss adjustment expense reserves (1)
$ 282,808 $ 159,800 $ 49,972 $ 56,562 $ 549,141
(1) Due to the nature of our reinsurance operations, the amount and timing of the cash flows associated with our reinsurance contractual liabilities will fluctuate, perhaps materially, and, therefore, are highly uncertain.
Greenlight Re has entered into a lease agreement for office space in the Cayman Islands commencing from July 1, 2021. The lease expires on June 30, 2026, unless Greenlight Re exercises its right to renew the lease for another five-year period. GRIL has entered into a lease agreement for office space in Dublin, Ireland commencing from October 1, 2021. This lease expires on September 30, 2031, unless GRIL exercises the break clause by providing a notice of termination at least nine months prior to September 30, 2026. The aggregate annual lease obligation ranges from $0.5 million to $0.6 million.
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
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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, 2022, we estimate the reduced performance allocation of 10% to continue to be applied until SILP achieves additional investment returns of 173%, at which point the performance allocation will revert to 20%. For detailed breakdowns of management fees and performance compensation for the three months ended March 31, 2022 and 2021, 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.
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 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. The actual effect of inflation may differ significantly from our estimate.