Item 1. Business
Item 1. BUSINESS
Unless otherwise indicated or unless the context otherwise requires, all references in this annual report on Form 10-K to “the Company,” “we,” “us,” “our,” and similar expressions are references to Greenlight Capital Re, Ltd. and its consolidated subsidiaries. Unless otherwise indicated or unless the context otherwise requires, all references in this annual report to entity names are as set forth in the following table:
Reference Entity’s legal name
Greenlight Capital Re Greenlight Capital Re, Ltd.
Greenlight Re Greenlight Reinsurance, Ltd.
GRIL Greenlight Reinsurance Ireland, Designated Activity Company
Verdant Verdant Holding Company, Ltd.
Greenlight Re UK Greenlight Re Marketing (UK) Limited
Syndicate 3456 Greenlight Innovation Syndicate 3456
GCM Greenlight Re Corporate Member Ltd.
We have included a Glossary of Selected Reinsurance Terms at the end of “Part 1, Item 1. Business” of this Form 10-K.
Company Overview
Greenlight Capital Re is a holding company incorporated in July 2004 under the laws of the Cayman Islands. In August 2004, we raised gross proceeds of $212.2 million from private placements of Greenlight Capital Re’s Class A ordinary shares and Class B ordinary shares, or, collectively, the ordinary shares. On May 24, 2007, Greenlight Capital Re raised proceeds of $208.3 million, net of underwriting fees, in an initial public offering of Class A ordinary shares, and an additional $50.0 million from a private placement of Class B ordinary shares.
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. We conduct our operations through two licensed and regulated entities: Greenlight Re, based in the Cayman Islands, and GRIL, based in Dublin, Ireland. Greenlight Re provides multi-line property and casualty reinsurance globally, while GRIL focuses mainly on the European market. In 2022, Greenlight Innovation Syndicate 3456 (“Syndicate 3456”) commenced insurance operations under the Lloyd’s syndicate-in-a-box model, with Greenlight Re as the sole capital provider.
The London market specialty business is central to our underwriting portfolio. In 2020, we established a UK marketing Company, Greenlight Re UK, which has increased our London market presence and we expect it to facilitate continued growth in this market.
On January 1, 2023, we acquired a Lloyd’s corporate member, GCM, that provides underwriting capacity for various syndicates (including Syndicate 3456) that underwrite general insurance and reinsurance business at Lloyd’s. Prior to acquiring GCM, we sourced our Funds at Lloyd’s (“FAL”) business through the same corporate member. The ownership of GCM complements our Syndicate 3456 and provides us more control over the FAL business.
Our goal is to build long-term shareholder value by providing risk management products and services to the insurance, reinsurance, and other risk marketplaces. We focus on delivering risk solutions to clients and brokers who value our expertise, analytics, and customer service offerings.
We aim to complement our underwriting 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 by a value-oriented investment advisor that analyzes companies’ available financial data, business strategies, and prospects to identify undervalued and overvalued securities.
From time to time, we make long-term strategic investments in insurance companies and general agents to complement our strategy and strengthen our client relationships. 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. In certain instances, we utilize Verdant to facilitate strategic investments in property and casualty insurers, general agents, and other entities domiciled in the United States.
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Description of Business
Greenlight Re is licensed and regulated by the Cayman Islands Monetary Authority (“CIMA”) to write property and casualty reinsurance business as well as long-term business (e.g., life insurance, long-term disability, long-term care, etc.) To date, we have not written any long-term business. GRIL is licensed and regulated by the Central Bank of Ireland (“CBI”) to write property and casualty reinsurance business. Currently, we have one operating segment: property and casualty reinsurance. Within that segment, we employ a two-pillar strategy:
1. Traditional property and casualty reinsurance
We offer excess of loss and quota share products across a range of classes in the property and casualty market. Our underwriting approach varies by class and type of opportunity:
● Where our expertise is sufficient to evaluate the risk thoroughly, we will generally seek to participate in syndicated placements negotiated and priced by another party that we judge to have market-leading expertise in the class or as a quota share retrocessionaire of a market-leading reinsurer;
● Where we have domain-specific expertise and a high level of market access, we may seek to act as the lead underwriter to achieve greater influence in negotiating pricing, terms, and conditions.
2. Risk innovation and strategic partnerships
We seek to develop a range of risk products via strategic partnerships and other methods to access fee income, a stream of underwriting business, and investment upside potential. We refer to this pillar as Greenlight Re Innovations (“Innovations”).
In evaluating Innovations opportunities, we generally ensure that each investment meets at least one of the following criteria:
● The value we add to a partnership is derived primarily from the application of our risk expertise, not solely capital or reinsurance support;
● The partnership adds expertise to our company in specific risk areas, technology, product innovation, or other areas;
● The partnership approach provides access to a pool of capital, products, or distribution;
● Overall, the partnership approach creates a combined effort that generates a durable strategic or competitive position in one or more markets and increases our opportunities to achieve revenue growth and margin expansion.
Our investment strategy, like our reinsurance strategy, is designed to maximize returns over the long term while minimizing the risk of capital loss. Unlike the investment strategies of many of our competitors, which invest primarily in fixed-income securities either directly or through fixed-fee arrangements with one or more investment managers, our investment strategy is focused mainly on long and short positions, primarily in publicly-traded equity and corporate debt instruments.
We measure our success by long-term growth in book value per share, which we believe is the most comprehensive gauge of our performance. Accordingly, we have incorporated a metric based on growth in book value per share in our incentive compensation plan to align employee and shareholder interests.
The size and diversification of our underwriting portfolio will vary based on our perception of the opportunities available in each line of business at each point in time. As our focus on certain lines fluctuates based on market conditions, we may only offer or underwrite a limited number of lines in any given period. We seek to:
● target markets and lines of business where we believe an appropriate risk/reward profile exists;
● attract and retain clients with expertise in their respective lines of business;
● employ strict underwriting discipline; and
● select reinsurance opportunities with anticipated favorable returns on capital.
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The following table sets forth our gross premiums written by line of business, further broken down by class of business:
Year ended December 31
2022 2021 2020
($ in thousands)
Property
Commercial $ 14,750 2.6 % $ 10,853 1.9 % $ 11,190 2.3 %
Motor 2,346 0.4 29,953 5.3 33,054 6.9
Personal 68,227 12.2 12,141 2.1 14,219 3.0
Total Property 85,323 15.2 52,947 9.4 58,463 12.2
Casualty
General Liability 60,276 10.7 18,037 3.2 4,228 0.9
Motor Liability 8,601 1.6 118,251 20.9 127,379 26.5
Professional Liability 1,921 0.3 316 0.1 204 —
Workers' Compensation 28,381 5.0 62,188 11.0 82,189 17.1
Multi-line 225,924 40.1 180,321 31.9 88,237 18.4
Total Casualty 325,103 57.7 379,113 67.1 302,237 63.0
Other
Accident & Health 8,947 1.6 31,612 5.6 56,284 11.7
Financial 66,528 11.8 66,612 11.8 23,231 4.8
Marine 22,700 4.0 10,652 1.9 770 0.2
Other Specialty 54,570 9.7 24,457 4.3 38,806 8.1
Total Other 152,745 27.1 133,333 23.6 119,091 24.8
$ 563,171 100.0 % $ 565,393 100.0 % $ 479,791 100.0 %
The following table sets forth our gross premiums written by the geographic area of the risk insured:
Year ended December 31
2022 2021 2020
($ in thousands)
U.S. and Caribbean $ 295,428 52.4 % $ 316,015 55.9 % $ 390,000 81.3 %
Worldwide (1)
242,561 43.1 240,285 42.5 84,204 17.5
Asia
20,334 3.6 4,609 0.8 5,587 1.2
Europe
4,848 0.9 4,484 0.8 — —
$ 563,171 100.0 % $ 565,393 100.0 % $ 479,791 100.0 %
(1) “Worldwide” comprises contracts that reinsure risks in more than one geographic area and may include risks in the U.S.
Additional information about our business is set forth in “Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Marketing and Distribution
Business transacted using intermediaries
We source a majority of our business through reinsurance brokers. Brokerage distribution channels provide us with access to an efficient, variable cost and global distribution system. In some cases, intermediaries also provide other services, including risk analytics, processing, and clearing.
We aim to build and strengthen long-term relationships with global reinsurance brokers. Our management team has relationships with most primary and specialty broker intermediaries in the reinsurance marketplace. By maintaining close
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relationships with brokers, we believe that we will continue to obtain access to a broad range of reinsurance clients and opportunities.
We seek to strengthen our broker relationships and become the preferred choice of brokers and clients by providing, where applicable:
● demonstrated expertise in the underlying reinsured exposures and the operation of the contracts;
● rapid responses to risk submissions;
● timely claims payments;
● customized solutions that address the specific business needs of our clients;
● financial security; and
● a clear indication of risks we will and will not underwrite.
We focus on the quality and financial strength of any brokerage firm we conduct business with. Brokers do not have the authority to bind us to any reinsurance contract. Their commissions are generally determined based on a percentage of gross premiums written.
We rely on a small number of broker relationships, which has continued to decrease in recent years as a result of consolidation in the broker sector. In 2022, five brokerage firms accounted for 69.4% of our gross premiums written. The following table sets forth the premiums generated through our largest brokers and their subsidiaries and affiliates:
Year ended December 31
2022
($ in thousands)
Aon Benfield $ 159,421 28.3 %
Gallagher Re 91,239 16.2
BMS Group 51,435 9.1
Guy Carpenter (Marsh) 50,626 9.0
Howden 38,376 6.8
Total of largest brokers 391,097 69.4
All other brokers and direct placements 172,074 30.6
Total $ 563,171 100.0 %
We frequently meet in the Cayman Islands, Ireland, U.K. and elsewhere with brokers and senior representatives of clients and prospective clients. We review and (when we deem appropriate) approve all contract submissions in the Cayman Islands or Ireland. Due to our dependence on brokers, the inability to obtain business from them could adversely affect our business strategy. See “Item 1A. Risk Factors — Risks Related to Our Business — The inability to obtain business provided from brokers could materially and adversely affect our business, financial condition and results of operations. ” We may assume a degree of the credit risk of our reinsurance brokers. See “Item 1A. Risk Factors — Risks Related to Our Business — We are subject to the credit risk of our brokers, cedents, agents and other counterparties. ”
While most of our business is sourced through reinsurance brokers, we also write some insurance and reinsurance business on a direct basis. Our Innovations partnerships are a growing source of directly placed business.
Our FAL business, which represented approximately one third of our gross written premiums in the 2022 fiscal year, was generated through a Lloyd’s corporate member, which we subsequently acquired effective January 1, 2023.
We may also selectively delegate underwriting authority to managing general agents to transact business within the constraints of prescribed underwriting guidelines. We expect to delegate underwriting authority primarily relating to Syndicate 3456, and sporadically through carefully selected managing agents.
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Underwriting and Risk Management
We have established an underwriting platform composed of experienced underwriters and actuaries. We have underwriting operations in three locations: the Cayman Islands, Dublin, Ireland, and London, U.K. These platforms provide access to key markets in the U.S. and Europe. Our experienced team allows us to deploy our capital in various lines of business and capitalize on opportunities that we believe offer favorable returns on equity over the long term. Our underwriters and actuaries have expertise in multiple lines of business. We generally apply the following underwriting and risk management principles:
Economics of Results
Our primary underwriting goal is to build a (re)insurance portfolio that maximizes profitability, subject to risk and volatility constraints.
Underwriting Analysis
Our approach to underwriting analysis begins at the class-of-business level. This analysis includes identifying and assessing the structural drivers of risk and emerging loss trends and understanding the market participants and results, capacity conditions for supply and demand, and other factors. Our underwriting professionals specialize in business lines, and our quantitative professionals assist in evaluating all risks we underwrite. Combined with cross-line management, we believe this approach enables us to build and deploy expertise and insight into the business line’s risk dynamics and external factors that will affect each transaction.
We assign a deal team composed of underwriting and quantitative professionals to evaluate each potential transaction’s pricing and structure. Before committing capital to any transaction, the deal team and the regional Chief Underwriting Officer must obtain approval from the Chief Executive Officer. In seeking this approval, the deal team presents the key components of the proposed transaction, including assumptions and threats, market and individual deal risk factors, market capacity dynamics, transaction structure and pricing, maximum downside, and other factors.
We collaborate with our current and prospective clients and brokers to understand the risks associated with each potential transaction. For most of our business, we follow terms set by recognized market leads. We consider the remainder of our underwriting portfolio, including contracts linked to our Innovations partners or in areas where we have significant market expertise, to be “lead business.” When underwriting lead business, we generally structure the reinsurance agreements to ensure that our cedents’ interests and ours are aligned. Where appropriate, we conduct or contract for on-site audits or reviews of the clients’ underwriting files, systems, and operations. We usually obtain substantial data from our clients to conduct a thorough actuarial modeling analysis. As part of our pricing and underwriting process, we assess, among other factors:
● the client’s and industry’s historical loss data;
● the expected duration for claims to fully develop;
● the client’s pricing and underwriting strategies;
● the geographic areas in which the client is doing business and its market share;
● the reputation and financial strength of the client and its management and underwriting teams;
● the reputation and expertise of the broker; and
● reports provided by independent industry specialists.
We develop proprietary quantitative models and use several commercially available tools to price our business. Our models consider conventional underwriting and risk metrics and incorporate various class-specific and market-specific aspects from our line-of-business analyses. We use models to evaluate the quantitative work’s quality and predictive power and undertake a detailed assessment of the data quality.
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Underwriting Authorities
The Underwriting Committee of our Board of Directors (the “Underwriting Committee”) sets parameters for aggregate property catastrophic caps and limits for maximum loss potential under any individual contract. The Underwriting Committee must approve any exceptions to the established limits. The Underwriting Committee may amend the maximum underwriting authorities periodically to align with our capital base. The Underwriting Committee designs our underwriting authorities to ensure the underwriting portfolio is appropriate on a risk-adjusted basis.
Retrocessional Coverage
We opportunistically purchase retrocessional coverage for one or more of the following reasons: to manage our overall catastrophe events or aggregate exposure, reduce our net liability on individual risks, obtain additional underwriting capacity, and balance our underwriting portfolio.
The retrocessional coverage we purchase varies based on numerous factors, including the inherent volatility and risk accumulation of our underwriting portfolio and capital base. Our portfolio, and by extension our gross risk position, will change in size from year to year depending on market opportunities, so it is difficult to predict the level of retrocessional coverage that we will purchase in any future year.
We generally purchase uncollateralized retrocessional coverage from reinsurers with a minimum financial strength rating of “A- (Excellent)” from A.M. Best Company, Inc. (“A.M. Best”) or an equivalent rating from a recognized rating service. For lower-rated or non-rated reinsurers, we endeavor to obtain and monitor collateral in the form of cash, funds withheld, letters of credit, regulatory trusts, or other collateral in the form of guarantees. At December 31, 2022, the aggregate amount due from reinsurers from retrocessional coverages represented 2.4% (2021: 2.1%) of our gross loss reserves. For further details, please see Note 8 to the consolidated financial statements. We regularly evaluate the financial condition of our reinsurers to assess their ability to honor their obligations. At December 31, 2022, the Company had recorded an allowance for expected credit losses from retrocessionaires of $0.4 million (2021: $0.1 million).
Claims Management
Our claims management process begins upon receiving claims notifications from our clients or third-party administrators. We review reserving and settlement authority under the individual contract requirements and, as necessary, discuss with the contract’s underwriter. Our in-house claims officer oversees claims reviews and approves complex or large claim settlements. Claims above the claims officer’s authority are referred to the General Counsel or Chief Financial Officer, together with the claims officer’s recommendations, for secondary approval. Our Chief Executive Officer must approve claim payments above a certain threshold. We believe that this process ensures that we pay claims in accordance with each contract's terms and conditions.
Where appropriate, we conduct or contract for on-site claims audits at cedents and third-party administrators, particularly for large accounts, Innovations partners, and those whose performance differs from our expectations. Through these audits, we evaluate and monitor the third-party administrators’ and the ceding companies’ organization and claims-handling practices. These practices include:
• fact-finding and investigation techniques;
• loss notifications;
• reserving;
• claims negotiation and settlement;
• adherence to claims-handling guidelines.
We recognize that the fair interpretation of our reinsurance agreements and timely payment of covered claims are essential components of the service we provide to our clients.
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Reserves
Our reserving philosophy is to set reserves at the level representing our best estimate of the amount we will ultimately be required to pay in connection with risks we have underwritten. Our actuarial staff performs quarterly reviews of our portfolio and provides reserving estimates according to our stated reserving philosophy. In doing so, our actuarial staff groups our portfolio into reserving analysis segments based primarily on homogeneity considerations. Currently, this process involves analysis at the individual client or transaction level.
We engage independent external actuaries who review and provide opinions on these reserve estimates at least once a year. Due to the use of different assumptions and loss experience, the amount we establish as reserves with respect to individual risks, clients, transactions, or business lines may be greater or less than those set by our clients or ceding companies. Reserves include claims reported but not yet paid, claims incurred but not reported, and claims in the process of settlement. Additional underwriting liabilities include unearned premiums, premium deposits, and profit commissions earned but not yet paid.
Reserves represent an estimate rather than an exact quantification. Although the methods for establishing reserves are well established, many assumptions about anticipated loss emergence patterns are subject to unanticipated fluctuation. We base our estimates on our assessment of facts and circumstances, future trends in claim severity and frequency, judicial theories of liability, and other factors, including inflation, interest rate changes, political risks and the actions of third parties, which are beyond our control. See Note 7 of the accompanying consolidated financial statements for a reconciliation of claims reserves, loss development tables by accident year, and explanations of significant prior period loss development movements. See “Item 1A. Risk Factors — Risks Relating to Our Business — If our losses and loss adjustment expenses greatly exceed our loss reserves, our financial condition may be materially and adversely affected. ”
Collateral Arrangements and Letter of Credit Facilities
We are licensed and admitted as a reinsurer only in the Cayman Islands and the European Economic Area (the “EEA”). Many jurisdictions, including the United States, do not permit clients to take credit for reinsurance on their statutory financial statements if they obtain such reinsurance from unlicensed or non-admitted insurers without appropriate collateral. As a result, our U.S. clients and some non-U.S. clients require us to provide collateral for the contracts we bind with them. We provide collateral as funds withheld, trust arrangements, or letters of credit. At December 31, 2022, we had one letter of credit facility with a limit of $275.0 million (2021: $275.0 million). At December 31, 2022, we had issued letters of credit totaling $203.9 million (2021: $136.8 million) to clients. Additionally, at December 31, 2022, we had pledged $463.7 million (2021: $497.1 million) as collateral through trust arrangements.
Competition
The reinsurance industry is highly competitive. We compete with major reinsurers, most of which are well-established and have significant operating histories, strong financial strength ratings, and long-standing client relationships.
Our competitors vary according to the individual market and situation. Generally, they include Arch Capital, Axis, Everest Re, Hamilton Re, Hannover Re, RenaissanceRe, SiriusPoint, and smaller companies, other niche reinsurers, and Lloyd’s syndicates and their related entities. Although we seek to provide coverage where capacity and alternatives are limited, we directly compete with these and other larger companies due to the breadth of their coverage across the property and casualty market in substantially all lines of business. See “Item 1A — Risk Factors — Risks Relating to Our Business – Competitors with greater resources may make it difficult for us to effectively market our products or offer our products at a profit. ”
Ratings
Our current “A- (Excellent)” rating with a stable outlook from A.M. Best is the fourth highest of 13 ratings. We believe a strong rating is important in marketing reinsurance products to clients and brokers. These ratings reflect the rating agency’s opinion of our reinsurance subsidiaries’ financial strength, operating performance, and ability to meet obligations. It is not an evaluation directed toward the investors’ protection or a recommendation to buy, sell or hold our Class A ordinary shares.
The failure to maintain a strong rating may significantly and negatively affect our ability to implement our business strategy. See “Item 1A. Risk Factors — Risks Relating to Our Business — A downgrade or withdrawal of our A.M. Best ratings would materially and adversely affect our ability to implement our business strategy. ”
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Regulations
Cayman Islands Insurance Regulation
The legislative framework for conducting insurance and reinsurance business in and from within the Cayman Islands is composed of The Insurance Act, 2010 (as amended) and underlying regulations thereto (the “Act”), which became effective in the Cayman Islands on November 1, 2012.
Greenlight Re holds a Class D insurer license issued in accordance with the terms of the Act and is subject to regulation and supervision by CIMA.
As the holder of a Class D insurer license, Greenlight Re is permitted to carry on reinsurance business from the Cayman Islands but, except with the prior written approval of CIMA, may not carry on any insurance or reinsurance business where the underlying risk originates and resides in the Cayman Islands.
Greenlight Re is required to comply with the following principal requirements under the Act:
● to maintain capital and a margin of solvency in accordance with the capital and solvency requirements prescribed by the Act;
● to carry on its business in accordance with its business plan and the laws of the Cayman Islands, including the regulatory laws, regulations, rules, and statements of guidance, where applicable;
● to maintain adequate arrangements, including internal controls, for the management of risks and a system of governance as approved by CIMA;
● to maintain a minimum of at least two directors and to seek the prior approval of CIMA in respect of the appointment of directors and officers and to provide CIMA with information in connection therewith and notification of any changes thereto;
● to have a place of business in the Cayman Islands and to maintain such resources, including staff and facilities, books and records as CIMA considers appropriate, having regard for the nature and scale of the business of Greenlight Re;
● to submit to CIMA an annual return in the prescribed form together with:
- financial statements prepared in accordance with internationally recognized accounting standards, audited by an independent auditor approved by CIMA;
- an actuarial valuation of Greenlight Re’s assets and liabilities, certified by an actuary approved by CIMA;
- certification of solvency prepared by a person approved by CIMA in accordance with the prescribed requirements;
- confirmation that the information contained in Greenlight Re’s license application, as modified by any subsequent changes, remains correct and up to date;
- such other information as may be prescribed by CIMA; and
● to pay an annual license fee.
It is the duty of CIMA:
● to maintain a general review of insurance practices in the Cayman Islands;
● to examine the affairs or business of any licensee or other person carrying on, or who has carried on, insurance business to ensure that the Act has been complied with and that the licensee is in a sound financial position and is carrying on its business in a fit and proper manner;
● to examine and report on the annual returns delivered to CIMA in terms of the Act; and
● to examine and make recommendations with respect to, among other things, proposals for the revocation of licenses and cases of suspected insolvency of licensed entities.
Greenlight Re is also required to comply with, amongst other standards, the Rule on Corporate Governance for Insurers, the Rule on Risk Management for Insurers, and the Rule on Investment Activities for Insurers and the associated Statement of Guidance. Respectively, these rules require regulated insurers to establish and maintain (a) a corporate governance framework that provides for the sound and prudent management and oversight of the insurer's business, including outsourcing and internal controls, and which adequately recognizes and protects the interests of its policyholders, and (b) a risk management framework that is capable of promptly identifying, measuring, assessing, reporting, monitoring and controlling all sources of risks that could have a material impact on its operations, and (c) implement investment activities that consider all of Greenlight Re’s risks and solvency requirements.
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The Act provides that where CIMA believes a licensee is committing, or is about to commit or pursue, an act that is an unsafe or unsound business practice, CIMA may direct the licensee to cease or refrain from committing the act or pursuing the offending course of conduct. Failure to comply with such a CIMA direction may be punishable on summary conviction by a fine of up to 100,000 Cayman Islands dollars (approximately US$120,000) or to imprisonment for a term of five years or to both, and on conviction on indictment to a fine of 500,000 Cayman Islands dollars (approximately US$600,000) or to imprisonment for a term of ten years or to both and to an additional 10,000 Cayman Islands dollars (approximately US$12,000) for every day after conviction that the breach continues.
The Monetary Authority Act (“MAA”) also provides CIMA with the authority to impose administrative fines on licensees. The recent Monetary Authority (Administrative Fines) (Amendment) Regulations, 2020 (the “Amendment Regulations”) came into force on 26 June 2020. They extended the scope of the fines CIMA may impose for breaches of a range of regulatory laws, including the Act. Breaches are categorized as minor, serious, or very serious, and, depending on the category of the breach, fines range from US$6,100 to US$1,220,000 per breach for very serious breaches. Where a breach is committed by a corporate entity and is shown to have been committed with the consent, connivance, knowledge, or neglect of an individual, that individual may also be subject to an administrative fine.
Whenever CIMA believes that a licensee is or may become unable to meet its obligations as they fall due, is carrying on business in a manner likely to be detrimental to the public interest or the interests of its creditors or policyholders, has contravened the terms of the Act or has otherwise behaved in such a manner to cause CIMA to call into question the licensee’s fitness, CIMA may take one of several steps. The steps include requiring the licensee to rectify the matter, suspending the license of the licensee, revoking the license, imposing conditions upon the license and amending or revoking any such condition, requiring the substitution of any director, manager, or officer of the licensee, at the expense of the licensee, appointing a person to advise the licensee on the proper conduct of its affairs and to report to CIMA thereon, at the expense of the licensee, appointing a person to assume control of the licensee’s affairs or otherwise requiring such action to be taken by the licensee as CIMA considers necessary. We have not been subject to any such actions from CIMA to date.
Other Regulations in the Cayman Islands
As Cayman Islands exempted companies, Greenlight Capital Re and Greenlight Re may not carry on business or trade locally in the Cayman Islands except in furtherance of their business outside the Cayman Islands and are prohibited from soliciting the public of the Cayman Islands to subscribe for any of their securities or debt. Both these companies are further required to file a return with the Registrar of Companies in January of each year (“Annual Return”) and to pay an annual registration fee at that time.
Economic substance law requiring a “relevant entity” conducting “relevant activity” to file notifications and, unless exempt, to report to the Tax Information Authority (“TIA”) and maintain economic substance has been introduced in the Cayman Islands.
The International Tax Co-operation (Economic Substance) Act (2020 Revision) and International Tax Co-operation (Economic Substance) Regulations, 2020, were published on January 14, 2020, and August 11, 2020, respectively, and subsequently amended (together, the “ES Act”). The latest version of the Guidance on Economic Substance for Geographically Mobile Activities (“ES Guidance”) was published in July 2022.
Commencing January 2020, Greenlight Capital Re and Greenlight Re are required to confirm their economic substance classification and submit this classification to the TIA as a prerequisite to the Annual Return filing.
The Cayman Islands has no exchange controls restricting dealings in currencies or securities.
Ireland Insurance Regulations
Our Irish subsidiary, GRIL, is authorized as a non-life reinsurance undertaking by the CBI in accordance with the European Union (Insurance and Reinsurance) Regulations 2015 (the "Irish Regulations"). The Irish Regulations give effect in Ireland to EU Directive 2009/138/EC (known as "Solvency II"), which introduced a new European regulatory regime for insurers and reinsurers with effect from January 1, 2016. Solvency II is supplemented by the European Commission Delegated Regulation (EU) 2015/35, other European Commission “delegated acts” and binding technical standards, and guidelines issued by the European Insurance and Occupational Pensions Authority (“Delegated Acts and Guidelines”). GRIL is required to comply at all times with the Irish Regulations, the Irish Insurance Acts 1909 to 2018, regulations relating to insurance business or reinsurance business promulgated under the European Communities Act 1972, the Irish Central Bank Acts 1942 to 2018 as amended, regulations promulgated thereunder and directions, guidelines and codes of conduct issued by CBI (collectively the
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“Irish Insurance Acts and Regulations”). In addition, GRIL is required to comply with the Delegated Acts and Guidelines and must meet risk-based solvency requirements imposed under Solvency II on insurers and reinsurers across all member states, including Ireland. Solvency II and the Delegated Acts and Guidelines set out classification and eligibility requirements, including the characteristics that capital, including any capital contribution, must display to qualify as regulatory capital.
GRIL is also required to comply with the European Union (Insurance Distribution) Regulations 2018 (the "2018 Regulations"), which apply to distributors of insurance and reinsurance products (including insurers and reinsurers). The 2018 Regulations give effect in Ireland to Directive (EU) 2016/97 (known as the "IDD") and strengthen the regulatory regime applicable to distribution activities through increased transparency, information, and conduct requirements. On May 25, 2018, the General Data Protection Regulation (the "GDPR") came into force across the EU. The GDPR significantly increases organizations’ obligations and responsibilities in collecting, using, storing, and protecting personal data. Organizations in breach of the GDPR may incur sizable financial penalties up to, the higher of €10 million or 4% of annual global turnover.
UK Regulations
Lloyd’s Oversight
Syndicate 3456 is subject to oversight by Lloyd’s, substantially effected through the Lloyd’s Council. Our business plan for Syndicate 3456, including maximum underwriting capacity, requires annual approval by Lloyd’s. Lloyd’s may require changes to any business plan presented to it or additional capital to be provided to support the underwriting plan. We have deposited certain assets with Lloyd’s to support GCM’s underwriting business at Lloyd’s.
By entering into a membership agreement with Lloyd’s, GCM has undertaken to comply with all Lloyd’s by-laws and regulations as well as the provisions of the Lloyd’s Acts and the Financial Services and Markets Act 2000, as amended by the Financial Services Act 2012. This arrangement subjects us to the following:
● Capital Requirements. The underwriting capacity of a member of Lloyd’s must be supported by providing a deposit, referred to as “Funds at Lloyd’s” or “FAL,” in an amount determined on the basis of such entity’s solvency and capital requirements. The amount of such deposit is calculated for each member through the completion of an annual capital adequacy exercise. In addition, if the FAL are not sufficient to cover all losses, the Lloyd’s Central Fund provides an additional level of security for policyholders. Dividends from a Lloyd’s managing agent and a Lloyd’s corporate member can be declared and paid provided the relevant company has sufficient profits available for distribution.
● Ratings. The financial security of the Lloyd’s market as a whole is regularly assessed by three independent rating agencies (A.M. Best, S&P and Fitch). Syndicates at Lloyd’s take their financial security rating from the rating of the Lloyd’s market. A satisfactory credit rating issued by an accredited rating agency is necessary for Lloyd’s syndicates to be able to trade in certain classes of business at current levels.
● Intervention Powers. The Lloyd’s Council has wide discretionary powers to regulate members’ underwriting at Lloyd’s, including, the power to withdraw a member’s permission to underwrite business or to underwrite a particular class of business and to change the basis on which syndicate expenses are allocated.
● Assessments. If Lloyd’s determines that the Central Fund needs to be increased, it has the power to assess premium levies on current Lloyd’s members up to 5% of a member’s underwriting capacity in any one year.
PRA and FCA Regulation .
The Prudential Regulation Authority (“PRA”) and the Financial Conduct Authority (“FCA”) regulate all financial services firms in the U.K. including the Lloyd’s market, and Syndicate 3456, and have substantial powers of intervention in relation to regulated firms. Lloyd’s is required to implement certain rules prescribed by the PRA and the FCA. If it appears to either the PRA or the FCA that either Lloyd’s is not fulfilling its delegated regulatory responsibilities or that managing agents are not complying with the applicable regulatory rules and guidance, the PRA or the FCA may intervene at their discretion.
Lloyd’s is subject to an annual PRA solvency test which measures whether Lloyd’s has sufficient assets in the aggregate to meet all outstanding liabilities of its members, both current and run-off. If Lloyd’s fails this test, the PRA may require the entire Lloyd’s market to cease underwriting or individual Lloyd’s members may be required to cease or reduce their underwriting.
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Overview of Investments
Our investment portfolio is managed by DME Advisors, LP (“DME Advisors”), a value-oriented investment advisor that analyzes companies’ available financial data, business strategies, and prospects to identify undervalued and overvalued securities. DME Advisors is controlled by David Einhorn, the Chairman of our Board of Directors and the President of Greenlight Capital, Inc.
We have entered into an amended and restated exempted limited partnership agreement (the “SILP LPA”) of Solasglas Investments, LP (“SILP”), with DME Advisors II, LLC (“DME II”), as General Partner, Greenlight Re, GRIL and the initial limited partner (each, a “Partner”). We present our investment in SILP under the caption “Investment in related party investment fund” in our consolidated balance sheets.
On September 1, 2018, SILP entered into an investment advisory agreement (the “IAA”) with DME Advisors, with an initial term ending on August 31, 2023, subject to automatic extensions for successive three-year terms. DME Advisors has the contractual right to manage substantially all of our investable assets and is required to follow our investment guidelines and act in a fair and equitable manner in allocating investment opportunities to SILP. However, DME Advisors is not otherwise restricted with respect to the nature or timing of making investments for SILP.
On February 26, 2019, effective as of September 1, 2018, we entered into Amendment No. 1 to the SILP LPA. The
amendment revised the mechanics for calculating the Carryforward Account and Performance Allocation (as defined in the SILP LPA) to consider withdrawals from and subsequent recontributions of capital to SILP. On January 7, 2021, effective as of January 1, 2021, we entered into a second amended and restated SILP LPA, which amended (a) the definition of “Additional Investment Ratio” and (b) each of the defined terms “Greenlight Re Surplus” and “GRIL Surplus.” The amendment to the SILP LPA also incorporated the requirement that the Investment Portfolio, as defined in the SILP LPA, will not exceed 50% of GLRE Surplus. Effective January 1, 2023, we amended the SILP LPA to increase the maximum Investment Portfolio to 60% of GLRE Surplus.
DME Advisors receives a monthly management fee at an annual rate of 1.5% of each limited partner’s Investment Portfolio, as provided in the SILP LPA. DME II receives a performance allocation based on the positive performance change of each limited partner’s capital account equal to 20% of net profits calculated per annum, subject to a loss carryforward provision.
The loss carryforward provision allows DME II to earn a reduced performance allocation of 10% on net profits in any year after the year in which a limited partner’s capital account incurs a loss until the limited partner has recouped all losses and has earned an additional amount equal to 150% of the loss. DME II is not entitled to a performance allocation in a year in which a capital account incurs a loss.
DME Advisors is required to follow our investment guidelines and act in a manner that it considers fair and equitable in allocating investment opportunities to us and SILP. However, the IAA does not otherwise impose any specific obligations or requirements concerning the allocation of time, effort, or investment opportunities to us and SILP or any restrictions on the nature or timing of investments for our or SILP’s account or other accounts that DME Advisors or its affiliates may manage. DME Advisors can outsource to sub-advisors without our consent or approval. If DME Advisors and any of its affiliates attempt to invest in the same opportunity simultaneously, DME Advisors and its affiliates may allocate the opportunity as they determine reasonably. Affiliates of DME Advisors presently serve as the general partner or the investment advisor of Greenlight Capital, LP, Greenlight Capital Offshore Qualified, Ltd., GCOQ Intermediate, LP, Greenlight Capital Offshore Partners, Ltd., Greenlight Capital Investors, LP, Greenlight Capital Offshore Investors, Ltd., GCOI Intermediate, LP, Greenlight Capital Offshore Master, Ltd., Greenlight Masters, LP, Greenlight Masters Qualified, LP, Greenlight Masters Offshore, Ltd., Greenlight Masters Offshore I, Ltd., Greenlight Masters Offshore Partners and Greenlight Masters Partners (collectively, the “Greenlight Funds”).
We have agreed to use commercially reasonable efforts to cause all our current and future subsidiaries to enter into the SILP LPA. Under the SILP LPA, we are contractually obligated to use commercially reasonable efforts to cause substantially all investable assets of Greenlight Re and GRIL, with limited exceptions, to be contributed to SILP.
We have agreed to release DME II and DME Advisors and their affiliates from any liability arising out of the IAA or the SILP LPA, subject to certain exceptions. Furthermore, DME II has agreed to indemnify us against any liability incurred in connection with certain actions.
Under the SILP LPA, either GLRE Limited Partner may voluntarily withdraw all or part of its capital account for its operating needs by giving DME II at least three business days’ notice. Either of the GLRE Limited Partners may withdraw as a
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partner and fully withdraw all of its capital account from SILP on three business days’ notice if the limited partner’s board declares that a cause for withdrawal exists as per the SILP LPA.
Investment Strategy
DME Advisors implements a value-oriented investment strategy by taking long positions in perceived undervalued securities and short positions in perceived overvalued securities. DME Advisors aims to achieve high absolute returns while minimizing the risk of capital loss. DME Advisors attempts to determine the risk/return characteristics of potential investments by analyzing factors such as the risk that expected cash flows would not be achieved, the volatility of the cash flows, the leverage of the underlying business, and the security’s liquidity, among others.
Our Board of Directors reviews our investment portfolio activities and oversees our investment guidelines to meet our investment objectives. We believe our investment approach, while generating returns less predictable than those of traditional fixed-income portfolios, complements our reinsurance business and will achieve higher rates of return over the long term than reinsurance companies that invest predominantly in fixed-income securities. We have designed our investment guidelines to maintain adequate liquidity to fund our reinsurance operations.
DME Advisors is contractually obligated to adhere to our investment guidelines and make investment decisions on our behalf. These decisions may include buying publicly listed equity securities and corporate debt, selling securities short, and investing in private placements, futures, currencies, commodities, credit default swaps, interest rate swaps, sovereign debt, derivatives, and other instruments.
Investment Guidelines
The investment guidelines adopted by the respective Boards of Directors of Greenlight Re and GRIL, which may be amended, modified, or waived from time to time, take into account restrictions imposed on us by regulators, our liability mix, requirements to maintain an appropriate claims-paying rating by ratings agencies and requirements of lenders.
At the date hereof, Greenlight Re’s investment guidelines, which Greenlight Re’s board of directors may amend at any time, are as follows:
● Composition of Investments: At least 80% of the assets in its Investment Portfolio (as defined in the SILP LPA) will be held in debt or equity securities (including swaps) of publicly-traded companies (or their subsidiaries), governments of the Organization of Economic Co-operation and Development high-income countries, cash, cash equivalents, and gold. No more than 10% of Greenlight Re Surplus (as defined in the SILP LPA) will be held in private equity securities.
● Concentration of Investments: Other than cash, cash equivalents, United States government obligations, and gold, no single investment in its Investment Portfolio will constitute more than 10% of Greenlight Re Surplus.
● Liquidity: Assets will be invested in such fashion that Greenlight Re has a reasonable expectation that it can meet any of its liabilities as they become due. Greenlight Re will review with the Investment Advisor the liquidity of the portfolio on periodic basis.
● Monitoring: Greenlight Re will require the Investment Advisor to re-evaluate each position in its Investment Portfolio and to monitor changes in intrinsic value and trading value and provide monthly reports on its Investment Portfolio to Greenlight Re as Greenlight Re may reasonably determine.
● Leverage: No new investments to increase net long exposure shall be made when Greenlight Re’s pro-rata share of Assets (excluding cash equivalents) exceeds its Investment Portfolio. In any event, Greenlight Re’s pro-rata share of Assets (excluding cash equivalents) may not exceed 110% of its Investment Portfolio.
● Currency hedging activities are excluded from leverage calculations. In addition to currency hedging, where the Investment Advisor enters into a secondary investment with the primary purpose of reducing the risk of another existing investment, then the investment advisor may exclude the secondary investment from the calculation of leverage provided that the Investment Advisor receives approval from Greenlight Re’s Chief Financial Officer. Such authority is limited such that no more than 10% of gross exposure may be excluded from leverage calculations and may be netted from the primary investment for concentration limits.
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The investment guidelines for GRIL are identical to Greenlight Re’s except for (a) currency hedging guidelines, which do not apply to GRIL, and (b) Concentration of Investments and Credit default swaps, which for GRIL are as follows:
● Concentration of Investments: Other than cash, cash equivalents, and United States government obligations, (1) no single investment in its Investment Portfolio will constitute more than 7.5% of GRIL Surplus (as defined in the SILP LPA), (2) the ten largest investments shall not constitute greater than 40% of GRIL Surplus, and (3) its Investment Portfolio shall at all times be composed of a minimum of 50 debt or equity securities of publicly traded companies (or their subsidiaries).
● Credit default swaps: The sale of credit default swaps is prohibited.
At December 31, 2022, taking into account a waiver provided by the Board of Directors of Greenlight Re, relating to SILP’s concentration in a single investment, DME Advisors was in compliance with each of Greenlight Re’s and GRIL’s investment guidelines. See “Part I, Item 1A. Risk Factors – Risks Relating to Our Investment Strategy — SILP may be concentrated in a few large positions, which could result in investment volatility and large losses.”
Investment Results
Composition
The following table summarizes the investments as reported in the consolidated financial statements:
December 31
2022 2021
($ in thousands)
Investment in related party investment fund $ 178,197 71.7 % $ 183,591 79.5 %
Private investments and unlisted equities 62,433 25.1 47,049 20.4
Derivative financial instruments (not designated as hedging instruments) — — 335 0.1
Debt and convertible debt securities 1,846 0.8 — —
Certificates of deposit 6,000 2.4 — —
Total investments $ 248,476 100.0 % $ 230,975 100.0 %
DME Advisors reports the composition of SILP’s portfolio on a delta-adjusted basis, which it believes is the appropriate manner to assess the exposure and profile of investments and reflects how it manages the portfolio. An option’s delta is the option price’s sensitivity to the underlying stock (or commodity) price. The delta-adjusted basis is the number of shares or contracts underlying the option multiplied by the delta and the underlying stock (or commodity) price.
The following table represents the composition of SILP’s investments at December 31, 2022 and 2021:
December 31
2022 2021
Long % Short % Long % Short %
Debt instruments 0.6 % — % 1.1 % — %
Equities and related derivatives 84.4 49.7 79.1 45.0
Private and unlisted equity securities 3.2 — 4.0 —
Total 88.2 % 49.7 % 84.2 % 45.0 %
The above exposure analysis does not include cash (U.S. dollar and foreign currencies), gold and other commodities, credit default swaps, sovereign debt, foreign currency derivatives, interest rate options, and other macro positions. Under this methodology, a total return swap’s exposure is reported at its full notional amount. Options are reported at their delta-adjusted basis. At December 31, 2022, SILP’s exposure to gold on a delta-adjusted basis was 15.2% (2021: 8.1% ).
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The following table represents the composition of SILP by industry sector at December 31, 2022:
Sector Long % Short % Net %
Communication Services 0.9 % (3.9) % (3.0) %
Consumer Discretionary 29.8 (18.5) 11.3
Consumer Staples 0.8 (0.6) 0.2
Energy 13.0 (0.2) 12.8
Financial 13.8 (3.4) 10.4
Healthcare 6.8 (6.6) 0.2
Industrials 3.3 (4.2) (0.9)
Materials 7.6 — 7.6
Real Estate 0.3 (2.3) (2.0)
Technology 10.3 (9.7) 0.6
Utilities 0.3 (0.3) —
Other 1.3 — 1.3
Total 88.2 % (49.7) % 38.5 %
The following table represents the composition of our investments in SILP, by the market capitalization of the underlying security, at December 31, 2022:
Capitalization Long % Short % Net %
Mega Cap Equity (≥$25 billion) 12.6 % (14.8) % (2.2) %
Large Cap Equity (≥$10 billion and <$25 billion) 5.8 (9.3) (3.5)
Mid Cap Equity (≥$2 billion and <$10 billion) 43.5 (20.0) 23.5
Small Cap Equity (<$2 billion) 22.5 (5.6) 16.9
Debt Instruments 0.6 — 0.6
Other Investments 3.2 — 3.2
Total 88.2 % (49.7) % 38.5 %
Investment Returns
In accordance with the SILP LPA, DME Advisors constructs a levered investment portfolio as agreed with the Company (the “Investment Portfolio” as defined in the SILP LPA). Investment returns, net of all fees and expenses, by quarter for the last five years are as follows: (1)
Quarter 2022 2021 2020 2019 2018
1st 1.7 % 1.5 % (8.1) % 6.2 % (11.8)%
2nd 4.9 (0.9) 0.3 2.7 (3.8)
3rd 3.6 (2.7) 1.4 1.2 (8.4)
4th 13.4 9.9 8.4 (1.0) (10.2)
Full Year 25.3 % 7.5 % 1.4 % 9.3 % (30.3) %
(1) Investment returns are calculated monthly and compounded to calculate the quarterly and annual returns generated by our Investment Portfolio. Past performance is not necessarily indicative of future results. The monthly investment return is calculated by dividing the investment income/loss (net of fees and expenses) by the Investment Portfolio. Effective January 1, 2021, the Investment Portfolio is calculated on the basis of 50% of GLRE Surplus, or the shareholders’ equity of Greenlight Capital Re, Ltd., as reported in Greenlight Capital Re, Ltd.’s then most recent quarterly financial statements prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). It is adjusted monthly for the Company’s net profits and net losses as reported by SILP during any intervening period. This basis was increased to 60% effective January 1, 2023. Prior to January 1, 2021, the Investment Portfolio was calculated on the basis of several factors, including the Companies’ shares of SILP’s net asset value, collateral posted by the Companies, and the Companies’ net reserves.
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Internal Risk Management
Our Chief Risk Officer is responsible for constructing and reviewing our internal risk management function. A primary objective of our risk management function is to ensure that our underwriting efforts comply with explicitly stated underwriting appetites. We design these appetites to balance our risk position size with our expertise and the available margins while containing the cost of incorrectly assessing risks and rewards. In doing so, our risk management function designs, implements, and oversees a range of operational and underwriting controls to support the organization. We frequently review our investment and underwriting portfolios to assess the impact on capital under stressed scenarios. With the assistance of DME Advisors, we analyze our investment assets and liabilities, including the numerous risk components in our portfolio, such as concentration and liquidity risks.
Information Technology
We have most of our information technology infrastructure primarily at an off-site, secure data center hosted by Microsoft. We have increased our use of cloud-based services as the security and reliability have proven cost-effective and provide the high levels of service and redundancy required.
We have implemented backup procedures to ensure we save key data daily and that we can restore it promptly as needed.
We have a disaster recovery plan for our information technology infrastructure that includes data and system snapshots with restore points. We believe we can access our core systems with minor outages and restore our primary systems within our mean time to restore.
We protect our information systems with physical, electronic, and software safeguards considered appropriate by our management. We employ a specialist vendor to monitor our systems for security events and risks within our network. We regularly provide security risk awareness education and training to our staff. Despite these efforts, computer viruses, hackers, employee misuse or misconduct, and other internal or external hazards could expose our data systems to security breaches, cyber-attacks, or other disruptions. See “Item 1A. Risk Factors — Risks Related to Our Business — Operational risks, including human or systems failures, are inherent in our business. ” and “— Technology breaches or failures, including those resulting from a malicious ransomware or cyber-attack on us or our business partners and service providers, could disrupt or otherwise negatively impact our business . ”
Human Capital
At March 3, 2023, we had 48 full-time employees, 31 of whom were based in Grand Cayman, Cayman Islands, 12 in Dublin, Ireland, and 5 in London, United Kingdom. We believe that our employee relations are good. None of our employees are subject to collective bargaining agreements, and we are not aware of any current efforts to implement such agreements. We also engage consultants and contract with third parties, as needed, to provide additional resources to support our business activities.
We are committed to advancement and innovation through investing in our employees’ professional development. We have implemented an employee training and development policy to encourage our employees to take advantage of training and development opportunities.
We have designed our performance-driven compensation policy to attract and retain talent. We use short-term compensation composed of base salary and annual cash bonuses and long-term compensation composed of stock options, restricted share units, and restricted shares, as applicable, to align our employees’ and executive officers’ interests with those of our shareholders. In addition, from time to time and under certain circumstances, we award sign-on bonuses, retention bonuses, and other bonus opportunities. We also offer welfare benefits and other perquisites, including a defined contribution pension plan and medical insurance coverage for our employees. As part of our commitment to supporting our employees, we match any contributions made by our employees to charities and not-for-profit organizations.
We believe our employees are fairly compensated without regard to gender, race, and ethnicity. We believe in creating and maintaining a workplace free from discrimination and harassment. Each of our employees annually acknowledges complying with our Code of Business Conduct and Ethics, which provides employees with access to an anonymous whistleblower hotline to report any violations. Our Code of Business Conduct and Ethics is available on our website.
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Additional Information
Our website address is www.greenlightre.com, and we make available, free of charge, on or through our website, links to our annual reports on Form 10-K and quarterly reports on Form 10-Q, current reports on Form 8-K, and other documents we file with or furnish to the SEC, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Information contained on our website is not incorporated by reference into this annual report.
Glossary of Selected Reinsurance Terms
Accident & Health insurance Insurance against loss by illness or bodily injury. Health insurance provides
coverage for medicine, visits to the doctor or emergency room, hospital stays, and
other medical expenses.
Acquisition costs Ceding commissions, profit commissions, brokerage fees, premium taxes, and other direct expenses relating directly to premium production.
Acquisition cost ratio The acquisition cost ratio is calculated by dividing net acquisition costs by net premiums earned.
Actuary A person professionally trained in the mathematical and technical aspects of insurance and related fields, particularly in calculating premiums, loss reserves, and other values.
Broker An intermediary who negotiates contracts of insurance or reinsurance, receiving a commission for placement and other services rendered, between (1) a policyholder and a primary insurer, on behalf of the policyholder, (2) a primary insurer and a reinsurer, on behalf of the primary insurer, or (3) a reinsurer and a retrocessionaire, on behalf of the reinsurer.
Capacity Capacity is the percentage of surplus that an insurer or reinsurer is willing or able to place at risk or the dollar amount of exposure it is willing to assume. Capacity may apply to a single risk, a program, a business line, or an entire book of business. Capacity may be constrained by legal restrictions, corporate restrictions, or indirect financial restrictions such as capital adequacy requirements.
Casualty reinsurance Casualty reinsurance is primarily concerned with the losses caused by injuries to third persons (persons other than the policyholder) and the legal liability imposed on the policyholder resulting therefrom. Casualty reinsurance includes but is not limited to workers’ compensation, automobile liability, and general liability. A greater degree of unpredictability is generally associated with casualty risks known as ‘‘long-tail risks,’’ where losses take time to become known, and a claim may be separated from the circumstances that caused it by several years. An example of a long-tail casualty risk includes the use of certain drugs that may cause cancer or birth defects. There tends to be a greater delay in the reporting and settlement of casualty reinsurance claims due to the long-tail nature of the underlying casualty risks and their greater potential for litigation.
Catastrophe A severe loss, typically involving multiple claimants. Common perils include earthquakes, hurricanes, tsunamis, hailstorms, tornados, derechos, severe winter weather, floods, fires, explosions, volcanic eruptions, and other natural or human-made disasters. Catastrophe losses may also arise from acts of war, acts of terrorism, and geopolitical instability.
Cede; cedent When a party reinsures its liability to another party, it ‘‘cedes’’ business to the reinsurer and is referred to as the ‘‘client.’’
Claim Request by an insured or reinsured for indemnification by an insurance or reinsurance company for loss incurred from an insured peril or event.
Client A party whose liability is reinsured by a reinsurer, also known as a cedent.
Combined ratio The combined ratio is the sum of the loss ratio, acquisition cost ratio, and underwriting expense ratio.
Composite ratio The composite ratio is the ratio of underwriting losses incurred, loss adjustment expenses, and acquisition costs, excluding underwriting-related general and administrative expenses, to net premiums earned, or equivalently, the sum of the loss ratio and acquisition cost ratio.
Corporate expenses Corporate expenses include those costs associated with operating as a publicly listed entity and an allocation of other general and administrative expenses.
Deposit assets and liabilities Assets (or liabilities) representing the consideration paid (or received) in connection with contracts that do not incorporate sufficient risk transfer to merit reinsurance accounting.
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Development The difference between the amount of reserves for losses and loss adjustment expenses initially estimated by an insurer or reinsurer and the amount re-estimated in an evaluation at a later date.
Excess of loss reinsurance Reinsurance that indemnifies the reinsured against all or a specified portion of losses above a specified dollar or percentage loss ratio amount.
Financial strength rating The opinion of rating agencies regarding an insurance or reinsurance company’s financial ability to meet its financial obligations under its policies.
Funds at Lloyd’s (FAL) Funds of an approved form that are lodged and held in trust at Lloyd's as security for a member’s underwriting activities. They comprise the member’s deposit, personal reserve fund, and special reserve fund. They may be drawn down if the member’s syndicate-level premium trust funds are insufficient to cover its liabilities. The amount of the deposit is related to the member's premium income limit and also the nature of the underwriting account.
Gross premiums written Total premiums for assumed reinsurance during a given period.
Health insurance Insurance against loss by illness or bodily injury. Health insurance covers medicine, visits to the doctor or emergency room, hospital stays, and other medical expenses.
Incurred but not reported (IBNR) Reserves for estimated loss and loss adjustment expenses incurred by insureds and reinsureds but not yet reported to the insurer or reinsurer, including unknown future developments on loss and loss adjustment expenses known to the insurer or reinsurer.
Lloyd’s Depending on the context, this term may refer to - (a) the society of individual and corporate underwriting members that insure and reinsure risks as members of one or more syndicates. Lloyd’s is not an insurance company; (b) the underwriting room in the Lloyd’s Building in which managing agents underwrite insurance and reinsurance on behalf of their syndicate members. In this sense, Lloyd’s should be understood as a marketplace; or (c) the Corporation of Lloyd’s, which regulates and provides support services to the Lloyd’s market.
Loss adjustment expenses (LAE) The expenses of settling claims, including legal and other fees, and the portion of general expenses allocated to claim settlement costs. Also known as claim adjustment expenses.
Loss ratio The loss ratio is calculated by dividing net loss and loss adjustment expenses incurred by net premiums earned.
Loss reserves and loss adjustment expense reserves Liabilities established by insurers and reinsurers to reflect the estimated cost of claims payments and the related expenses that the insurer or reinsurer will ultimately be required to pay in respect of insurance or reinsurance contracts it has written. Reserves are established for losses and loss adjustment expenses and consist of reserves established for individual reported claims and incurred but not reported losses.
Multi-line Contracts that cover more than one line of business.
Net financial impact The net impact of prior period loss development after taking into account net losses and loss expenses incurred, earned reinstatement premiums assumed and ceded, and adjustments to assumed and ceded acquisition costs and profit commissions.
Net premiums written An insurer’s gross premiums written, less premiums ceded to reinsurers.
Non-admitted insurers An insurer not licensed to do business in the jurisdiction in question. Also known as an unauthorized insurer and unlicensed insurer.
Premiums; written, earned, and unearned Premiums represent the cost of insurance paid by the cedent or insured to the insurer or reinsurer. Written represents the total amount of premiums received, and earned represents the amount recognized as income over a period of time. Unearned is the difference between written and earned premiums.
Probable maximum loss (PML) PML is the anticipated loss, taking into account contract terms and limits, caused by a natural catastrophe affecting a broad geographic area, such as that caused by an earthquake or hurricane.
Professional liability insurance Professional liability insurance protects a company and its representatives against legal claims arising from error or misconduct in providing or failing to provide professional services. This coverage includes errors and omissions policies, directors and officers coverage, and specialty coverage like employment practices liability insurance.
Profit commission A commission paid by a reinsurer to a ceding insurer based on a predetermined percentage of the profit realized by the reinsurer on the ceded business.
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Property insurance Property insurance covers a business’s building and its contents—money and securities, records, inventory, furniture, machinery, supplies, and even intangible assets such as trademarks—when damage, theft, or loss occurs.
Property catastrophe reinsurance Property catastrophe reinsurance contracts are typically ‘‘all risk’’ in nature, protecting against losses from natural and human-made catastrophes. Losses on these contracts typically stem from direct property damage and business interruption.
Proportional reinsurance All forms of reinsurance in which the reinsurer shares a proportional part of the original premiums and losses of the reinsured. In proportional reinsurance, the reinsurer generally pays the client a ceding commission. The ceding commission is generally based on the client’s cost of acquiring the business being reinsured (including commissions, premium taxes, assessments, and miscellaneous administrative expenses) and may include a profit component. Frequently referred to as quota-share reinsurance.
Quota-share reinsurance A form of proportional reinsurance in which the reinsurer assumes an agreed percentage of each underlying insurance contract being reinsured.
Reinstatement premium Premium charged for the reinstatement of the amount of reinsurance coverage to its full amount otherwise reduced as a result of a reinsurance loss payment.
Reinsurance An arrangement in which a reinsurer agrees to indemnify an insurance company, the client, against all or a portion of the insurance risks underwritten by the client under one or more policies. Reinsurance can provide a client with several benefits, including reducing net liability on individual risks and catastrophe protection from large or multiple losses. Reinsurance also provides a client with additional underwriting capacity by permitting it to accept larger risks and write more business than would be possible without a related increase in capital and surplus, and facilitates the maintenance of acceptable financial ratios by the client. Reinsurance does not legally discharge the client from its liability with respect to its obligations to the insured.
Reinsurer An insurance company that assumes part of the risk in exchange for part of the premium to a primary insurer.
Retrocession; retrocessional coverage A transaction whereby a reinsurer cedes to another reinsurer, commonly referred to as the retrocessionaire, all or part of the reinsurance that the first reinsurer has assumed. Retrocessional reinsurance does not legally discharge the ceding reinsurer from its liability with respect to its obligations to the reinsured.
Risk-free rate The interest rate on a riskless or safe asset, usually taken to be a short-term U.S. government security.
Risk transfer The shifting of all or a part of a risk to another party.
Severity business Insurance/reinsurance characterized by contracts containing the potential for significant losses emanating from one event.
Surety and fidelity insurance Surety and fidelity insurance includes (1) insurance guaranteeing the fidelity of persons holding positions of public or private trust; (2) insurance guaranteeing the performance of contracts other than insurance policies and guaranteeing and executing bonds, undertakings, and contracts of suretyship; and (3) insurance indemnifying banks, bankers, brokers, financial or moneyed corporations or associations against loss.
Underwriter An insurance or reinsurance company employee who examines, accepts, or rejects risks and classifies risks to charge an appropriate premium for each accepted risk.
Underwriting The process of evaluating, defining, and pricing reinsurance risks including, where appropriate, the rejection of such risks, and the acceptance of the obligation to pay the reinsured under the terms of the contract.
Underwriting expense Underwriting expenses include those expenses directly related to underwriting activities that are not eligible to be capitalized and an allocation of other general and administrative expenses.
Underwriting expense ratio The underwriting expense ratio includes those expenses directly related to underwriting activities and an allocation of other general and administrative expenses. Therefore, the underwriting expense ratio is the ratio of underwriting expenses to net premiums earned. The underwriting expense ratio also incorporates interest income and expenses from deposit-accounted contracts.
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Workers’ compensation insurance Workers’ compensation insurance provides medical, disability, and lost-wage benefits to employees for injuries and illness sustained in the course of their employment.
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