GREENLIGHT CAPITAL RE, LTD. 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS References to “we,” “us,” “our,” “our company,” or “the Company” refer to Greenlight Capital Re, Ltd. (“GLRE”) and its wholly-owned subsidiaries unless the context dictates otherwise. See Item 1, Note 1 of the unaudited condensed consolidated financial statements for list of our wholly-owned subsidiaries. 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, 2022. The following is a discussion and analysis of our results of operations for the three months ended March 31, 2023 and 2022 and financial condition at March 31, 2023 and December 31, 2022. 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, as amended , 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. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following: 20 Return to table of contents ● Our results of operations fluctuate from period to period and may not be indicative of our long-term prospects. ● The impact of general economic, capital and credit market conditions, including banking sector instability, financial market illiquidity and fluctuations in interest rates, equity securities’ prices and/or foreign currency exchange rates. ● A downgrade or withdrawal of our A.M. Best ratings would materially and adversely affect our ability to implement our business strategy. ● Any suspension or revocation of any of our licenses would materially and adversely affect our business, financial condition and results of operations . ● Our investment performance depends in part on the performance of SILP and may suffer as a result of adverse financial market developments or other factors that impact SILP’s liquidity, which could materially and adversely affect our investment results, financial condition and results of operations. ● The carry values of our Innovations investments may differ significantly from those that would be used if we carried these investments at fair value. ● Our level of debt may have an adverse impact on our liquidity, restrict our current and future operations, particularly our ability to respond to business opportunities, and increase our vulnerability to adverse economic and industry conditions. ● Greenlight Capital Re, Greenlight Re and/or GRIL may be subject to United States federal income taxation. ● The other matters set forth in the section entitled “Part I, Item 1A. Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the SEC on March 8, 2023. 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. General We are a global specialty property and casualty (re)insurer headquartered in the Cayman Islands, with an underwriting 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 (“Innovations”), we support technology innovators in the (re)insurance market by providing investment capital, 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 reinsurance subsidiaries hold an A.M. Best Financial Strength Rating of A- (Excellent) with a stable outlook. 21 Return to table of contents Critical Accounting Policies and Estimates Our unaudited 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 II. Item 1A. Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the SEC on March 8, 2023, cause actual events or results to differ materially from our underlying assumptions or estimates. In that case, there could be a material adverse effect on our results of operations, financial condition, or liquidity. 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. We believe that the critical accounting estimates discussion in “Part II. Item 7. — Management’s Discussion and Analysis of Financial Condition and Results on Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 continues to describe the significant estimates and judgments included in the preparation of these unaudited condensed consolidated financial statements. Recent Accounting Pronouncements At March 31, 2023, there were no recently issued accounting pronouncements that we have not yet adopted that we expect could have a material impact on our results of operations, financial condition, or liquidity. Segments We have one operating segment, Property & Casualty (Re)insurance, and we analyze our business based on the following categories: ● Property ● Casualty ● Other Property business covers personal lines, commercial lines exposures and automobile physical damage. Property business includes both catastrophe and non-catastrophe coverage. Casualty business covers general liability, motor liability, professional liability, and workers’ compensation exposures. The Company’s multi-line business includes the Funds at Lloyd’s business. As our Lloyd’s syndicate contracts incorporate property (including incidental catastrophe), casualty, and other exposures, we categorize them as multi-line (and therefore casualty) business. However, these contracts are composed of primarily short-tailed risks. Other business covers accident and health, financial (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 We operate in a business where we expect volatility in our underwriting results. During the three months ended March 31, 2023, we incurred losses from catastrophe and weather-related events (herein referred as “CAT” losses) of $10.3 million from Cyclone Gabrielle, the Turkey earthquake, the U.S. convective storms in 2023, and Winter Storm Elliott in December 2022. As noted below, these loss trends have led to improved pricing at the January 1st and April 1st renewal seasons. The ongoing Russian-Ukrainian conflict has resulted in continued financial and economic sanctions imposed by the U.S., United Kingdom, European Union, and other countries, which have caused significant disruption in the global economy and have increased economic and geopolitical uncertainty. If this conflict is prolonged, we and other reinsurers may incur additional losses in future periods. While there are signs that global inflationary pressures may be abating, this continues to be a significant concern to the (re)insurance industry, as it can add uncertainty to the cost of claims, particularly for classes of business with long payout tails. As a result, it creates pricing challenges for new business and valuation challenges in claims reserves. We continue to manage these concerns and risks in multiple ways: • Our underwriting strategy focuses on relatively short-tailed business, which is inherently less exposed to inflation than long-tailed lines. We estimate the payout duration of our existing reserves at less than three years. 22 Return to table of contents • We incorporate inflation assumptions in all our pricing and reassess these assumptions frequently. • We are minimizing our exposure to classes that are experiencing severe supply-chain-driven inflation. The rising interest rate environment has had a mixed impact on our financial results. While in 2022 we experienced losses driven by fixed-income securities held by the Lloyd’s syndicates in which we participate, the higher interest rates have improved the yield on our restricted cash and cash equivalents. To the extent interest rates continue to increase, we expect to see these trends continue. The SILP portfolio is positioned to also benefit from rising interest rates and an inflationary environment. The combination of the recent loss events, continued inflation, and rising interest rates led to a significant reduction in the amount of reinsurance capital available for deployment, which in turn has led to market conditions that we consider more favorable than any we have experienced in more than a decade. The January 1 renewal season saw widespread pricing improvements in the aviation, war and terror, and marine classes and even higher increases in property catastrophe rates. These short-tailed specialty and property catastrophe classes represent a significant portion of our 2023 business plan. For the three months ended March 31, 2023, we grew our property line by 63.9% over the same quarter in 2022 to $30.4 million (representing 16.3% of total gross premiums written). Elsewhere in our portfolio, average percentage rate improvements were in the single digits. Additionally, 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, including premiums written by Syndicate 3456, grew by 57.2% for three months ended March 31, 2023 over the same quarter in 2022, and accounted for approximately 14.9% of our net premiums written for the three months ended March 31, 2023. We see the potential for continued growth from Innovations-derived underwriting opportunities in 2023. Key Financial Measures and Non-GAAP Measures Management uses certain key financial measures, some of which are not prescribed under U.S. GAAP rules and standards (“non-GAAP financial measures”), to evaluate our financial performance, financial position, and the change in shareholder value. Generally, a non-GAAP financial measure, as defined in SEC Regulation G, is a numerical measure of a company’s historical or future financial performance, financial position, or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented 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 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 financial measures are described below. Basic Book Value Per Share and Fully Diluted Book Value Per Share We believe that long-term growth in fully diluted book value per share is the most relevant measure of our financial performance because it provides management and investors a yardstick 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. We exclude shares potentially issuable in connection with convertible notes if the conversion price exceeds the share price. 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. 23 Return to table of contents Our primary financial goal is to increase 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, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 ($ 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) $ 510,041 $ 503,120 $ 466,952 $ 484,293 $ 468,407 Denominator for basic and fully diluted book value per share: (1) Ordinary shares issued and outstanding as presented in the Company’s consolidated balance sheets 35,262,678 34,824,061 34,824,061 34,721,231 34,721,231 Less: Unearned performance-based restricted shares granted after December 31, 2021 (851,828) (516,489) (539,161) (560,927) (581,593) Denominator for basic book value per share 34,410,850 34,307,572 34,284,900 34,160,304 34,139,638 Add: In-the-money stock options, service-based RSUs granted, and earned performance-based RSUs granted 157,431 187,750 183,790 179,988 176,379 Denominator for fully diluted book value per share 34,568,281 34,495,322 34,468,690 34,340,292 34,316,017 Basic book value per share $ 14.82 $ 14.66 $ 13.62 $ 14.18 $ 13.72 Increase (decrease) in basic book value per share ($) $ 0.16 $ 1.04 $ (0.56) $ 0.46 $ (0.33) Increase (decrease) in basic book value per share (%) 1.1 % 7.6 % (3.9) % 3.4 % (2.3) % Fully diluted book value per share $ 14.75 $ 14.59 $ 13.55 $ 14.10 $ 13.65 Increase (decrease) in fully diluted book value per share ($) $ 0.16 $ 1.04 $ (0.55) $ 0.45 $ (0.34) Increase (decrease) in fully diluted book value per share (%) 1.1 % 7.7 % (3.9) % 3.3 % (2.4) % (1) For periods prior to January 1, 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 the “basic” and “fully diluted” denominators to the extent that the Company has recognized the corresponding share-based compensation expense. At March 31, 2023, the aggregate number of unearned restricted shares with performance conditions not included in the “basic” and “fully diluted” denominators was 1,014,317 (December 31, 2022: 709,638, September 30, 2022: 732,310, June 30, 2022: 754,076, March 31, 2022: 774,742). 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 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. 24 Return to table of contents 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, Lloyd’s interest income and expense, 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, Lloyd’s interest income or expense and expected credit losses as we believe these items are influenced by market conditions and other factors unrelated to underwriting decisions. Additionally, 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 2023 2022 ($ in thousands) Income (loss) before income tax $ 5,941 $ (5,743) Add (subtract): Total investment (income) loss (5,240) (7,737) Other non-underwriting (income) expense (7,097) 633 Corporate expenses 5,997 4,011 Interest expense 776 1,154 Net underwriting income (loss) $ 377 $ (7,682) 25 Return to table of contents Results of Operations The table below summarizes our operating results for the three months ended March 31, 2023 and 2022: Three months ended March 31 2023 2022 (in thousands, except percentages) Underwriting revenue Gross premiums written $ 186,455 $ 145,886 Gross premiums ceded (11,212) (6,009) Net premiums written 175,243 139,877 Change in net unearned premium reserves (32,594) (13,952) Net premiums earned $ 142,649 $ 125,925 Underwriting related expenses Net loss and loss adjustment expenses incurred Current year $ 84,687 $ 95,082 Prior year * 12,038 2,325 Net loss and loss adjustment expenses incurred 96,725 97,407 Acquisition costs 41,476 32,945 Underwriting expenses 3,939 3,221 Deposit accounting and other reinsurance expense (income) 132 34 Net underwriting income (loss) 1 $ 377 $ (7,682) Income (loss) from investment in related party investment fund $ (3,138) $ 4,077 Net investment income (loss) 8,378 3,660 Total investment income (loss) $ 5,240 $ 7,737 Net underwriting and investment income (loss) $ 5,617 $ 55 Corporate expenses $ 5,997 $ 4,011 Other (income) expense, net (7,097) 633 Interest expense 776 1,154 Income tax expense (benefit) 54 (16) Net income (loss) $ 5,887 $ (5,727) Earnings (loss) per share (Class A and Class B) (Note 2) Basic $ 0.17 $ (0.17) Diluted $ 0.17 $ (0.17) Underwriting ratios Loss ratio - current year 59.4 % 75.6 % Loss ratio - prior year 8.4 % 1.8 % Loss ratio 67.8 % 77.4 % Acquisition cost ratio 29.1 % 26.2 % Composite ratio 96.9 % 103.6 % Underwriting expense ratio 2.9 % 2.6 % Combined ratio 99.8 % 106.2 % * 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 $12.0 million and a loss of $2.6 million for the three months ended March 31, 2023 and 2022, respectively. 1 Net underwriting income (loss) is a non-GAAP financial measure. See “ Key Financial Measures and Non-GAAP Measures” above for discussion and reconciliation of non-GAAP financial measures. 26 Return to table of contents Three months ended March 31, 2023 and 2022 For the three months ended March 31, 2023, the fully diluted book value per share increased by $0.16 per share, or 1.1%, to $14.75 per share from $14.59 per share at December 31, 2022. For the three months ended March 31, 2023, basic book value per share increased by $0.16 per share, or 1.1%, to $14.82 per share from $14.66 per share at December 31, 2022. For the three months ended March 31, 2023, our net income was $5.9 million, compared to a net loss of $5.7 million reported for the equivalent 2022 period. The developments that most significantly affected our financial performance during the three months ended March 31, 2023, compared to the equivalent 2022 period, are summarized below: • Underwriting : The underwriting income for the three months ended March 31, 2023 was $0.4 million. This underwriting income included $7.9 million of net prior year attritional loss development, coupled with $10.3 million of total catastrophe losses from the Turkey earthquake, New Zealand Cyclone Gabrielle, and the U.S. convective storms that occurred during the current quarter, as well as $4.1 million of losses resulting from Winter Storm Elliott that occurred in late December 2022. By comparison, the equivalent period in 2022 reported an underwriting loss of $7.7 million, which included $1.5 million of net prior year attritional loss development, coupled with CAT losses of $13.6 million from the Russian-Ukrainian war and $2.8 million from Tennessee wildfires. Our combined ratio was 99.8% for the three months ended March 31, 2023 compared to 106.2% during the equivalent 2022 period. The lower CAT losses quarter over quarter contributed favorably to the combined ratio for the three months ended March 31, 2023. The improved underwriting performance was partially offset by higher adverse attritional loss development from prior years, which added 5.6 percentage points to our combined ratio for the three months ended March 31, 2023, compared to 0.6 percentage points for same period in 2022. • Investments : Our total investment income for the three months ended March 31, 2023 was $5.2 million, compared to total investment income of $7.7 million reported for the same period in 2022. Our investment in SILP reported a loss of $3.1 million during the three months ended March 31, 2023, compared to a gain of $4.1 million during the equivalent period in 2022. Other investment income from our Innovations investments and restricted cash and cash equivalents totaled $8.4 million and $3.7 million during the three months ended March 31, 2023 and 2022, respectively. The increase in other investment income was driven primarily by increase in short-term yields in the last twelve months. • Other (income) expense : For the three months ended March 31, 2023, we earned other income of $7.1 million, compared to incurring other expense of $0.6 million for the same quarter in 2022. The favorable change was driven primarily by: ◦ $4.9 million of foreign exchange gains during the current quarter, compared to $1.1 million of foreign exchange loss in the same quarter in 2022, due mainly to the strengthening of the pound sterling against the U.S. dollar; and ◦ our share of Lloyd’s syndicates’ investment income on Funds at Lloyd’s business, which is generally conducted on a funds withheld basis. The Lloyd’s syndicates invest a portion of these funds in fixed-maturity securities and investment funds. We record our share of the investment income and mark-to-market adjustments of these fixed maturity securities when the syndicates report them to us, generally one quarter in arrears. 27 Return to table of contents Underwriting results We analyze our business based on three categories: “property,” “casualty,” and “other.” Gross Premiums Written Details of gross premiums written are provided in the following table: Three months ended March 31 2023 2022 ($ in thousands) Property $ 30,372 16.3 % $ 18,535 12.7 % Casualty 95,204 51.1 78,269 53.7 Other 60,879 32.7 49,082 33.6 Total $ 186,455 100.0 % $ 145,886 100.0 % 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. For the three months ended March 31, 2023, our gross premiums written increased by $40.6 million, or 27.8%, compared to the equivalent 2022 period. The following table provides a further analysis of this overall increase: Gross Premiums Written Three months ended March 31, 2023 Increase (decrease) ($ in millions) % change Explanation Property $11.8 63.9% The increase was driven mainly from growth in our commercial lines and to a lesser extent personal lines of business, mainly due to favorable pricing and new contracts. This was partially offset by our continued exit strategy from motor business with only a negligible amount written during the current quarter. Casualty $16.9 21.6% The increase was due primarily to favorable pricing and new contracts bound during 2023 relating to general liability and multi-line business. This was partially offset by our continued tactical strategy to lower our exposure to workers’ compensation business. Other $11.8 24.0% The increase was driven mainly by new contracts within our “other specialty” lines of business, primarily in aviation and cyber risk lines. Our Innovations-related contracts contributed $9.5 million to the overall net increase in gross premiums written for the three months ended March 31, 2023. Premiums Ceded For the three months ended March 31, 2023, premiums ceded were $11.2 million, or 6.0% of gross premiums written, compared to $6.0 million, or 4.1% of gross premiums written for the three months ended March 31, 2022. The increase was driven mainly by rate increase and purchase of an additional $10.0 million excess of loss coverage to reduce our exposure to marine and energy, coupled with an increase in quota share retrocessions for property lines due to growth from inward premiums. 28 Return to table of contents Net Premiums Written Details of net premiums written are provided in the following table: Three months ended March 31 2023 2022 ($ in thousands) Property $ 26,005 14.8 % $ 16,435 11.7 % Casualty 95,276 54.4 78,269 56.0 Other 53,962 30.8 45,173 32.3 Total $ 175,243 100.0 % $ 139,877 100.0 % For the three months ended March 31, 2023 net premiums written increased by $35.4 million, or 25.3%, compared to the three months ended March 31, 2022. The movement in net premiums written resulted from the changes in gross premiums written and ceded during the periods. Net Premiums Earned Details of net premiums earned are provided in the following table: Three months ended March 31 2023 2022 ($ in thousands) Property $ 18,743 13.1 % $ 14,490 11.5 % Casualty 84,115 59.0 81,228 64.5 Other 39,791 27.9 30,207 24.0 Total $ 142,649 100.0 % $ 125,925 100.0 % Net premiums earned for the three months ended March 31, 2023, increased by $16.7 million or 13.3%, compared to the three months ended March 31, 2022. The change in net premiums earned is primarily a function of the amount and timing of net premiums written during the current and prior periods, coupled by the mix of business written in the form of excess of loss versus quota share reinsurance contracts. Loss and Loss Adjustment Expenses Incurred, Net For the three months ended March 31, 2023 and 2022, the components of the loss ratio were as follows: Three months ended March 31 2023 2022 Increase / (decrease) in loss ratio points Current accident year loss ratio 59.4 % 75.5 % (16.1) Prior year reserve development ratio 8.4 % 1.8 % 6.6 Loss ratio 67.8 % 77.4 % (9.5) Current accident year loss ratio decreased to 59.4% for the three months ended March 31, 2023, from 75.5% for the three months ended March 31, 2022. Adjusting for the impact of CAT losses (including Ukrainian-Russian conflict), the current accident year loss ratio decreased to 55.1% for the three months ended March 31, 2023, from 62.5% for the three months ended March 31, 2022. This positive change was principally due to the impact of favorable pricing over loss trends in our lines of business. Prior year reserve development ratio deteriorated by 6.6 points in the current quarter compared to the first quarter in 2022. Refer to Note 5 to the condensed consolidated financial statements for further details on prior year developments. 29 Return to table of contents Details of net losses incurred by line of business are provided in the following table: Three months ended March 31 2023 2022 ($ in thousands) Property $ 17,530 $ 9,713 Casualty 61,038 55,373 Other 18,157 32,321 Total $ 96,725 $ 97,407 The below table summarizes the loss ratios by line of business: Three months ended March 31 2023 2022 Increase / (decrease) in loss ratio points Property 93.5 % 67.0 % 26.5 Casualty 72.6 68.2 4.4 Other 45.6 107.0 (61.4) Total 67.8 % 77.4 % (9.6) The changes in net losses incurred for the three months ended March 31, 2023, as compared to the equivalent 2022 period, were attributable to the following: Net Losses Incurred Three months ended March 31, 2023 Increase (decrease) ($ in millions) Increase / (decrease) in loss ratio points Property $7.8 26.5 The increase in incurred losses from property is primarily driven by the 29.4% increase in net premiums earned, coupled with CAT losses. During the three months ended March 31, 2023, we incurred $7.9 million of CAT losses relating to the Turkey earthquake, New Zealand Cyclone Gabrielle, and the U.S. convective storms in 2023, including $4.1 million relating to Winter Storm Elliott in December 2022. For the same quarter in 2022, we incurred $2.8 million of CAT losses related to the Tennessee wildfires. Casualty $5.7 4.4 The increase in losses incurred and loss ratio points was primarily due to adverse loss development on our professional liability, motor and workers’ compensation exposures. Other $(14.2) (61.4) Despite the 31.7% increase in net premiums earned from other specialty lines of business, the decrease in incurred losses and loss ratio points was mainly driven by favorable pricing and lower CAT events, coupled by higher volume of adverse attritional loss development in the comparative period. During the three months ended March 31, 2023, we incurred $1.4 million of adverse loss development mainly relating to the Ukraine-Russia conflict. During the same quarter in 2022, we incurred $9.5 million losses related to the Ukraine-Russia conflict. 30 Return to table of contents 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, which are included mostly in the “Other” line of business. As of March 31, 2023, we had recorded $14.3 million incurred losses related to this CAT event (December 31, 2022: $13.6 million). We purchased excess of loss reinsurance to reduce our net exposure relating to MEPVT exposures. As of March 31, 2023, 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. Acquisition Costs, Net For the three months ended March 31, 2023, our total acquisition cost increased by 25.9% to $41.5 million, compared to the same quarter in 2022, mainly due to growth in net premiums earned. The acquisition cost ratios by line of business were as follows: Three months ended March 31 2023 2022 Increase / (decrease) in acquisition cost ratio points Property 19.0 % 23.1 % (4.1) Casualty 30.4 26.2 4.2 Other 31.0 27.6 3.4 Total 29.1 % 26.2 % 2.9 The changes in the acquisition cost ratios for the three months ended March 31, 2023, compared to the equivalent period in 2022, were attributable to the following: Change in Acquisition Cost Ratios Three months ended March 31, 2023 Increase / (decrease) in acquisition cost ratio points Explanation Property (4.1) The decrease was due primarily to a change in our business mix, coupled with a higher proportion of excess of loss contracts written during the current quarter, which incorporate lower commissions than quota share contracts. Casualty 4.2 The increase was due primarily to changes in our business mix, particularly with the 29% increase in earned premium from FAL business, which has a higher ceding commission than other lines within this business. Other 3.4 The increase was driven by business mix and higher profit commission within our financial business due to favorable underwriting performance, coupled with growth in quota share contracts within our other specialty business, which has higher acquisition cost ratio than excess of loss reinsurance treaties. 31 Return to table of contents Ratio Analysis The following table provides our underwriting ratios by line of business: Three months ended March 31 Three months ended March 31 2023 2022 Property Casualty Other Total Property Casualty Other Total Loss ratio 93.5 % 72.6 % 45.6 % 67.8 % 67.0 % 68.2 % 107.0 % 77.4 % Acquisition cost ratio 19.0 30.4 31.0 29.1 23.1 26.2 27.6 26.2 Composite ratio 112.5 % 103.0 % 76.6 % 96.9 % 90.1 % 94.4 % 134.6 % 103.6 % Underwriting expense ratio 2.9 2.6 Combined ratio 99.8 % 106.2 % The higher underwriting expense ratio for the three months ended March 31, 2023, compared to the same period in 2022, was due mainly to the additional personnel costs and outsourcing services. General and Administrative Expenses Details of general and administrative expenses are provided in the following table: Three months ended March 31 2023 2022 ($ in thousands) Underwriting expenses $ 3,939 $ 3,221 Corporate expenses 5,997 4,011 General and administrative expenses $ 9,936 $ 7,232 For the three months ended March 31, 2023, general and administrative expenses increased by $2.7 million, or 37.4%, compared to the equivalent 2022 period. In addition to the increase in underwriting expenses as previously noted above, our corporate expenses increased mainly due to severance relating to the former CFO and higher legal professional fees as a result of outsourced legal services while we sought a replacement General Counsel. For the three months ended March 31, 2023 and 2022, general and administrative expenses included $1.0 million (net of $0.3 million forfeiture credit) and $1.0 million (net of insignificant forfeiture credit), respectively, of costs related to share-based compensation granted to employees and directors. 32 Return to table of contents Total Investment Income (Loss) Total investment income (loss) incorporates (i) changes in the net asset value of our investment in SILP managed by DME Advisors, (ii) interest income earned on the restricted cash and cash equivalents pledged as collateral to our clients, and (iii) gains (or losses) and interest on our portfolio of strategic and Innovations investments. We expect our total investment income, including any change in the net asset value of our investment in SILP, to fluctuate from period to period. A summary of our total investment income (loss) is as follows: Three months ended March 31 2023 2022 ($ in thousands) Interest and dividend income, net of withholding taxes $ 8,646 $ 22 Change in unrealized gains and losses 550 3,899 Investment-related foreign exchange gains (losses) — (38) Interest, dividend, and other expenses (18) (223) Realized gains (losses) (800) — Net investment-related income (loss) $ 8,378 $ 3,660 Income (loss) from investments in related party investment fund (3,138) 4,077 Total investment income (loss) $ 5,240 $ 7,737 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 further information about management fees and performance compensation for the three months ended March 31, 2023 and 2022, please refer to Note 3 of the condensed consolidated financial statements. For the three months ended March 31, 2023, the Investment Portfolio managed by DME Advisors reported a loss of 1.1%, compared to a gain of 1.7% for the three months ended March 31, 2022. SILP’s long portfolio gained 8.9%, the short portfolio lost 9.0%, and macro positions lost 0.3%, during the three months ended March 31, 2023. For the three months ended March 31, 2023, the significant contributors to SILP’s investment return were long positions in Green Brick Partners (GRBK), Kyndryl Holdings Inc., and gold. The largest detractors were Brighthouse Financial, one short position, and a hedge position for GRBK. For the three months ended March 31, 2023, we had an unrealized loss of $0.3 million in our Innovations-related investments, compared to $3.9 million net unrealized gains recorded for the three months ended March 31, 2022. The increase in interest income for the three months ended March 31, 2023 was primarily related to our restricted cash and cash equivalents, which benefited from rising U.S. interest rates. For the three months ended March 31, 2023 and 2022, the gross investment return (loss) on our investments managed by DME Advisors (excluding the investment advisor performance allocation) was composed of the following: Three months ended March 31 2023 2022 Long portfolio gains (losses) 8.9 % (6.0) % Short portfolio gains (losses) (9.0) 4.9 Macro gains (losses) (0.3) 3.5 Other income and expenses 1 (0.7) (0.5) Gross investment return (1.1) % 1.9 % Net investment return 1 (1.1) % 1.7 % 1 “Other income and expenses” excludes performance compensation but includes management fees. “Net investment return” incorporates both of these amounts. 33 Return to table of contents The investment performance for the three months ended March 31, 2022 reflects the Investment Portfolio 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 adjusted monthly for our share of the net profits and net losses reported by SILP during any intervening period (the “adjusted GLRE Surplus”). Effective January 1, 2023, the Investment Portfolio is calculated based on 60% of adjusted GLRE Surplus. Each month, we post on our website ( www.greenlightre.com ) the returns from our investment in SILP. Financial Condition Total investments The total investments reported in the unaudited condensed consolidated balance sheets at March 31, 2023 was $267.2 million, compared to $248.5 million at December 31, 2022, an increase of $18.7 million, or 7.5%. The increase was primarily related to net contribution into SILP resulting from release of restricted cash. The increase was partially offset by an investment loss reported by SILP. At March 31, 2023, 91.8% of SILP’s portfolio was valued based on quoted prices in actively traded markets (Level 1), 6.1% was composed of instruments valued based on observable inputs other than quoted prices (Level 2), and 0.0% was composed of instruments valued based on non-observable inputs (Level 3). At March 31, 2023, 2.1% of SILP’s portfolio consisted of private equity funds valued using the funds’ net asset values as a practical expedient. At March 31, 2023, 85.4% of our Innovations-related portfolio was carried at fair value on a nonrecurring basis, measured as of the investees’ most recently completed financing round, and 14.6% was carried at the original cost. Other than our investment in SILP (see Note 3 of the accompanying unaudited 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. Restricted cash and cash equivalents We use our restricted cash and cash equivalents for funding trusts and letters of credit issued to our ceding insurers. Our restricted cash decreased by $42.1 million, or 6.3%, from $668.3 million at December 31, 2022, to $626.2 million at March 31, 2023, primarily due to release of collateral from our ceding insurers relating to legacy contracts in run-off. Reinsurance balances receivable During the three months ended March 31, 2023, reinsurance balances receivable increased by $76.1 million, or 15.0%, to $581.6 million from $505.6 million at December 31, 2022. This increase was related partially to funds withheld by cedents. At March 31, 2023, funds held by cedents were $367.8 million, compared to $337.4 million at December 31, 2022. Funds withheld predominantly relate to premiums withheld by Lloyd’s syndicates and funds contributed by the Company to Lloyd's as security for members’ underwriting activities. The remaining increase related to premiums receivable on new contracts bound during the three months ended March 31, 2023. Loss and Loss Adjustment Expense Reserves; Loss and Loss Adjustment Expenses Recoverable Reserves for loss and loss adjustment expenses were composed of the following: March 31, 2023 December 31, 2022 Case Reserves IBNR Total Case Reserves IBNR Total ($ in thousands) Property $ 30,593 $ 40,848 $ 71,441 $ 20,354 $ 41,361 $ 61,715 Casualty 145,409 251,139 396,548 146,702 227,979 374,681 Other 19,955 107,855 127,810 17,700 101,372 119,072 Total $ 195,957 $ 399,842 $ 595,799 $ 184,756 $ 370,712 $ 555,468 34 Return to table of contents During the three months ended March 31, 2023, the total gross loss and loss adjustment expense reserves increased by $40.3 million, or 7.3%, to $595.8 million from $555.5 million at December 31, 2022. 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. At April 1, 2023, our estimated largest probable maximum loss (net of retrocession and reinstatement premiums) at a 1-in-250 year return period for a single event and in aggregate was $78.0 million and $84.7 million, respectively, both relating to the peril of North Atlantic Hurricane, compared to $77.5 million and $83.5 million, respectively, at January 1, 2023. The below table contains the expected modeled loss for each of our peak peril regions and sub-regions, for both a single event loss and aggregate loss measures at the 1-in-250 year return period. April 1, 2023 Net 1-in-250 Year Return Period Peril Single Event Loss Aggregate Loss ($ in thousands) North Atlantic Hurricane $ 77,993 $ 84,704 Southeast Hurricane 65,609 67,079 Gulf of Mexico Hurricane 52,068 56,792 Northeast Hurricane 50,728 50,728 North America Earthquake 67,641 71,009 California Earthquake 61,683 65,194 Other N.A. Earthquake 22,914 24,505 Japan Earthquake 37,348 49,128 Japan Windstorm 31,126 32,749 Europe Windstorm 31,941 36,236 The Japanese peril exposures include new contracts bound effective April 1, 2023. Total shareholders’ equity Total equity reported on the unaudited condensed consolidated balance sheet increased by $6.9 million to $510.0 million at March 31, 2023, compared to $503.1 million at December 31, 2022. The increase in shareholders’ equity during the three months ended March 31, 2023, was primarily due to the net income of $5.9 million reported for the period. For details of other movements in shareholders’ equity, please see the accompanying unaudited Condensed Consolidated Statements of Shareholders’ Equity.” Liquidity and Capital Resources We anticipate positive cash flows from operations (underwriting activities and investment income) to be sufficient to cover cash outflows under most loss scenarios in the near term. Based on expected cash flows from operations, financing arrangements and redemptions from related party investment fund as needed, we believe we have sufficient liquidity to cover our working capital requirements and other contractual obligations and commitments through the foreseeable future. Refer to the “ Liquidity and Capital Resources ” section included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 for a general discussion of liquidity and capital resources. The following provides an update on material changes to our liquidity and capital resources during the three months ended March 31, 2023. Sources and Uses of Funds The following table summarizes our sources and uses of funds for the respective periods: 35 Return to table of contents Three months ended March 31 2023 2022 Change ($ in thousands) Total cash provided by (used in): Operating activities $ (1,259) $ (11,618) $ 10,359 Investing activities (22,076) 33,256 (55,332) Financing activities (17,085) — (17,085) Effect of currency exchange on cash (1) 132 — 132 Net cash inflows (outflows) (40,288) 21,638 (61,926) Cash, beginning of period 706,548 711,101 (4,553) Cash, end of period $ 666,260 $ 732,739 $ (66,479) (1) Cash includes unrestricted and restricted cash and cash equivalents - see Note 2 of the unaudited condensed consolidated financial statements . Cash used in operating activities The decrease in cash used in our operating activities for the three months ended March 31, 2023 over the same quarter in 2022 was driven mainly by the ebb and flow from our underwriting activities, which may vary significantly from period to period depending on the mix of business, the nature of underwriting opportunities available and volume of claims submitted to us by our cedents. Cash provided by investing activities The increase in cash used for our investing activities for the three months ended March 31, 2023 over the same quarter in 2022 was mainly due to contributions (net of redemptions) of $21.0 million into SILP, compared to net redemptions from SILP of $36.7 million during the same period in 2022. Cash used in financing activities The increase in cash used in our financing activities for the three months ended March 31, 2023 over the same quarter in 2022 was due to the partial repurchase of our outstanding convertible senior notes at a discount. Cash at March 31, 2023 As a result of the above activities, coupled with the foreign exchange rate adjustment on foreign cash, our consolidated cash position declined to $666.3 million at March 31, 2023, from $706.5 million at December 31, 2022. Letters of Credit and Trust Arrangements See Note 11 of the accompanying condensed consolidated financial statements for details on the committed and uncommitted letter of credit facilities. We provide collateral to cedents in the form of letters of credit and trust arrangements. At March 31, 2023, the aggregate amount of collateral provided to cedents under such arrangements was $625.5 million (December 31, 2022: $667.6 million). At March 31, 2023, the letters of credit and trust accounts were secured by restricted cash and cash equivalents with a total fair value of $626.2 million (December 31, 2022: $668.3 million). Contractual Obligations and Commitments Since December 31, 2022, the material changes to our contractual obligations and commitments at March 31, 2023 were as follows: Payment due: Less than 1 year 1-3 years 3-5 years More than 5 years Total ($ in thousands) Loss and loss adjustment expense reserves (1) $ 295,516 $ 176,952 $ 67,325 $ 56,005 $ 595,799 36 Return to table of contents (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. Additionally, we have related party commitments as disclosed in Note 11 of the condensed consolidated financial statements. At March 31, 2023, we estimate the reduced performance allocation of 10% to continue to be applied until SILP achieves additional investment returns of 150%, 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, 2023 and 2022, refer to Note 3 of the condensed consolidated financial statements. 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. 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. We are in the process of arranging refinancing for the outstanding convertible senior notes that mature in August 2023. If we are unable to refinance the convertible senior notes, we may find alternative financing arrangements, or fund the settlement at maturity using cash on hand, or withdrawals from SILP. Effects of Inflation Inflation generally affects the cost of claims and claim expenses. Long-tailed lines of business generally have greater exposure to inflation than short-tailed lines, with this differential becoming more pronounced as the severity of inflation increases. Our underwriting portfolio is predominantly short-tailed, and we actively manage our exposures to lines that experience significant inflation. Our pricing and reserving models incorporate the anticipated effects of inflation on our claim costs, and we regularly review and update our assumptions. 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 assumptions. Inflation can also affect the asset values in SILP’s investment portfolio. DME Advisors regularly monitors and re-positions SILP’s investment portfolio to deal with the impact of inflation on its underlying investments, and holds macro positions to benefit from a rising inflationary environment.