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EXCEL - IDEA: XBRL DOCUMENT - GREENLIGHT CAPITAL RE, LTD.Financial_Report.xls
EX-31.1 - EXHIBIT 31.1 - GREENLIGHT CAPITAL RE, LTD.glre-20150331exhibit311.htm
EX-12.1 - EXHIBIT 12.1 - GREENLIGHT CAPITAL RE, LTD.glre-20150331exhibit121.htm
EX-31.2 - EXHIBIT 31.2 - GREENLIGHT CAPITAL RE, LTD.glre-20150331exhibit312.htm
EX-32.1 - EXHIBIT 32.1 - GREENLIGHT CAPITAL RE, LTD.glre-20150331exhibit321.htm
EX-32.2 - EXHIBIT 32.2 - GREENLIGHT CAPITAL RE, LTD.glre-20150331exhibit322.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
__________________________
FORM 10-Q 
__________________________
(Mark One)
 x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended March 31, 2015

or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from         to
Commission file number 001-33493
____________________________________________________________________________________
GREENLIGHT CAPITAL RE, LTD.
(Exact name of registrant as specified in its charter)
____________________________________________________________________________________
CAYMAN ISLANDS
N/A
(State or other jurisdiction of incorporation or organization)
(I.R.S. employer identification no.)
 
65 MARKET STREET
SUITE 1207, CAMANA BAY
P.O. BOX 31110
GRAND CAYMAN
CAYMAN ISLANDS
 
 
 
 
KY1-1205
(Address of principal executive offices)
(Zip code)

(345) 943-4573
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report) 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer x Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)            Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes ¨ No x

Class A Ordinary Shares, $0.10 par value
31,287,253
Class B Ordinary Shares, $0.10 par value
6,254,895
(Class)                      
Outstanding as of May 1, 2015





GREENLIGHT CAPITAL RE, LTD.
 
TABLE OF CONTENTS
 
 
 
Page
 
Condensed Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014
 
Condensed Consolidated Statements of Income for the three months ended March 31, 2015 and 2014 (unaudited)
 
Condensed Consolidated Statements of Shareholders' Equity for the three months ended March 31, 2015 and 2014 (unaudited)
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 (unaudited)
 
Notes to the Condensed Consolidated Financial Statements (unaudited)
Quantitative and Qualitative Disclosures about Market Risk                                                                                                              
Controls and Procedures                                                                                                           
Legal Proceedings                                                                                                          
Risk Factors                                                                                                               
Unregistered Sales of Equity Securities and Use of Proceeds                                                      
Defaults Upon Senior Securities                                                                                                               
Other Information                                                                                                               
Exhibits                                                                                                               



 

2


PART I — FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS 
GREENLIGHT CAPITAL RE, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
March 31, 2015 and December 31, 2014
(expressed in thousands of U.S. dollars, except per share and share amounts)
 
March 31, 2015
 
December 31, 2014
 
(unaudited)
 
(audited)
Assets
 
 
 
Investments
 
 
 
Debt instruments, trading, at fair value
$
47,338

 
$
49,212

Equity securities, trading, at fair value
1,245,720

 
1,266,175

Other investments, at fair value
159,604

 
115,591

Total investments
1,452,662

 
1,430,978

Cash and cash equivalents
11,466

 
12,030

Restricted cash and cash equivalents
1,524,999

 
1,296,914

Financial contracts receivable, at fair value
41,482

 
47,171

Reinsurance balances receivable
137,597

 
151,185

Loss and loss adjustment expenses recoverable
2,655

 
11,523

Deferred acquisition costs, net
42,554

 
34,420

Unearned premiums ceded
3,670

 
4,027

Notes receivable
30,115

 
1,566

Other assets
6,028

 
5,478

Total assets
$
3,253,228

 
$
2,995,292

Liabilities and equity
 
 
 
Liabilities
 
 
 
Securities sold, not yet purchased, at fair value
$
1,327,605

 
$
1,090,731

Financial contracts payable, at fair value
40,312

 
44,592

Due to prime brokers
255,660

 
211,070

Loss and loss adjustment expense reserves
260,310

 
264,243

Unearned premium reserves
160,981

 
128,736

Reinsurance balances payable
11,940

 
40,372

Funds withheld
6,770

 
6,558

Other liabilities
19,002

 
14,949

Total liabilities
2,082,580

 
1,801,251

Equity
 
 
 
Preferred share capital (par value $0.10; authorized, 50,000,000; none issued)

 

Ordinary share capital (Class A: par value $0.10; authorized, 100,000,000; issued and outstanding, 31,266,732 (2014: 31,129,648): Class B: par value $0.10; authorized, 25,000,000; issued and outstanding, 6,254,895 (2014: 6,254,895))
3,752

 
3,738

Additional paid-in capital
501,587

 
500,553

Retained earnings
636,813

 
660,860

Shareholders’ equity attributable to shareholders
1,142,152

 
1,165,151

Non-controlling interest in joint venture
28,496

 
28,890

Total equity
1,170,648

 
1,194,041

Total liabilities and equity
$
3,253,228

 
$
2,995,292

 
  The accompanying Notes to the Condensed Consolidated Financial Statements are an
integral part of the Condensed Consolidated Financial Statements.

3


GREENLIGHT CAPITAL RE, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 
For the three months ended March 31, 2015 and 2014
(expressed in thousands of U.S. dollars, except per share and share amounts)
 
Three months ended March 31
 
2015
 
2014
Revenues
 
 
 
Gross premiums written
$
129,682

 
$
118,901

Gross premiums ceded
(1,626
)
 
(5,940
)
Net premiums written
128,056

 
112,961

Change in net unearned premium reserves
(33,263
)
 
(1,272
)
Net premiums earned
94,793

 
111,689

Net investment income (loss)
(24,829
)
 
(10,150
)
Other income (expense), net
1,588

 
182

Total revenues
71,552

 
101,721

Expenses
 
 
 
Loss and loss adjustment expenses incurred, net
63,207

 
67,363

Acquisition costs, net
26,841

 
37,796

General and administrative expenses
6,160

 
6,200

Total expenses
96,208

 
111,359

Loss before income tax expense
(24,656
)
 
(9,638
)
Income tax (expense) benefit
215

 
560

Net loss including non-controlling interest
(24,441
)
 
(9,078
)
Loss attributable to non-controlling interest in joint venture
394

 
197

Net loss
$
(24,047
)
 
$
(8,881
)
Earnings (loss) per share
 
 
 
Basic
$
(0.65
)
 
$
(0.24
)
Diluted
$
(0.65
)
 
$
(0.24
)
Weighted average number of ordinary shares used in the determination of earnings and loss per share
 
 
 
Basic
37,173,008

 
36,808,386

Diluted
37,173,008

 
36,808,386

 

 
The accompanying Notes to the Condensed Consolidated Financial Statements are an
integral part of the Condensed Consolidated Financial Statements. 


 
 

4


GREENLIGHT CAPITAL RE, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
 
For the three months ended March 31, 2015 and 2014
(expressed in thousands of U.S. dollars)

 
Ordinary share capital
 
Additional paid-in capital
 
Retained earnings
 
Shareholders' equity attributable to shareholders
 
Non-controlling
interest in joint venture
 
Total equity
Balance at December 31, 2013
$
3,705

 
$
496,622

 
$
551,268

 
$
1,051,595

 
$
34,709

 
$
1,086,304

Issue of Class A ordinary shares, net of forfeitures
16

 

 

 
16

 

 
16

Share-based compensation expense, net of forfeitures

 
952

 

 
952

 

 
952

Non-controlling interest withdrawal from joint venture, net

 

 

 

 
(5,000
)
 
(5,000
)
Loss attributable to non-controlling interest in joint venture

 

 

 

 
(197
)
 
(197
)
Net loss

 

 
(8,881
)
 
(8,881
)
 

 
(8,881
)
Balance at March 31, 2014
$
3,721

 
$
497,574

 
$
542,387

 
$
1,043,682

 
$
29,512

 
$
1,073,194

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
$
3,738

 
$
500,553

 
$
660,860

 
$
1,165,151

 
$
28,890

 
$
1,194,041

Issue of Class A ordinary shares, net of forfeitures
14

 

 

 
14

 

 
14

Share-based compensation expense, net of forfeitures

 
1,034

 

 
1,034

 

 
1,034

Non-controlling interest withdrawal from joint venture, net

 

 

 

 

 

Loss attributable to non-controlling interest in joint venture

 

 

 

 
(394
)
 
(394
)
Net loss

 

 
(24,047
)
 
(24,047
)
 

 
(24,047
)
Balance at March 31, 2015
$
3,752

 
$
501,587

 
$
636,813

 
$
1,142,152

 
$
28,496

 
$
1,170,648



The accompanying Notes to the Condensed Consolidated Financial Statements are an
integral part of the Condensed Consolidated Financial Statements. 


 

5


GREENLIGHT CAPITAL RE, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the three months ended March 31, 2015 and 2014
(expressed in thousands of U.S. dollars)
 
 
Three months ended March 31
 
2015
 
2014
Cash provided by (used in) operating activities
 
 
 
Net income (loss)
$
(24,047
)
 
$
(8,881
)
Adjustments to reconcile net income to net cash provided by (used in) operating activities
 
 
 
Net change in unrealized gains and losses on investments and financial contracts
29,850

 
91,353

Net realized gains on investments and financial contracts
(25,010
)
 
(86,463
)
Foreign exchange (gains) losses on investments
7,973

 
7,418

Income (loss) attributable to non-controlling interest in joint venture
(394
)
 
(197
)
Share-based compensation expense, net of forfeitures
1,048

 
968

Depreciation expense
101

 
114

Net change in
 
 
 
Reinsurance balances receivable
13,588

 
(18,493
)
Loss and loss adjustment expenses recoverable
8,868

 
637

Deferred acquisition costs, net
(8,134
)
 
(1,249
)
Unearned premiums ceded
357

 
(2,877
)
Other assets
(651
)
 
(1,024
)
Loss and loss adjustment expense reserves
(3,933
)
 
(882
)
Unearned premium reserves
32,245

 
4,275

Reinsurance balances payable
(28,432
)
 
4,593

Funds withheld
212

 
(322
)
Other liabilities
4,053

 
741

Net cash provided by (used in) operating activities
7,694

 
(10,289
)
Investing activities
 
 
 
Purchases of investments, trading
(251,068
)
 
(275,575
)
Sales of investments, trading
252,857

 
367,235

Purchases of financial contracts
(3,999
)
 
(7,201
)
Dispositions of financial contracts
8,294

 
18,006

Securities sold, not yet purchased
391,768

 
249,867

Dispositions of securities sold, not yet purchased
(182,793
)
 
(413,508
)
Change in due to prime brokers
44,590

 
(28,806
)
Change in restricted cash and cash equivalents, net
(239,358
)
 
105,700

Change in notes receivable, net
(28,549
)
 
132

Non-controlling interest withdrawal from joint venture, net

 
(5,000
)
Net cash (used in) provided by investing activities
(8,258
)
 
10,850

Net increase (decrease) in cash and cash equivalents
(564
)
 
561

Cash and cash equivalents at beginning of the period
12,030

 
3,722

Cash and cash equivalents at end of the period
$
11,466

 
$
4,283

Supplementary information
 
 
 
Interest paid in cash
$
3,741

 
$
3,600

Interest received in cash
782

 
165

Income tax paid in cash

 


The accompanying Notes to the Condensed Consolidated Financial Statements are an
integral part of the Condensed Consolidated Financial Statements. 

6


GREENLIGHT CAPITAL RE, LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
March 31, 2015
 
 
1.   ORGANIZATION AND BASIS OF PRESENTATION
 
Greenlight Capital Re, Ltd. ("GLRE") was incorporated as an exempted company under the Companies Law of the Cayman Islands on July 13, 2004. GLRE’s principal wholly-owned subsidiary, Greenlight Reinsurance, Ltd. ("Greenlight Re"), provides global specialty property and casualty reinsurance. Greenlight Re has a Class D insurer license issued in accordance with the terms of The Insurance Law, 2010 and underlying regulations thereto (the "Law") and is subject to regulation by the Cayman Islands Monetary Authority ("CIMA"), in terms of the Law. Greenlight Re commenced underwriting in April 2006. Effective May 30, 2007, GLRE completed an initial public offering of 11,787,500 Class A ordinary shares at $19.00 per share. Concurrently, 2,631,579 Class B ordinary shares of GLRE were sold at $19.00 per share in a private placement offering. During 2008, Verdant Holding Company, Ltd. ("Verdant"), a wholly owned subsidiary of GLRE, was incorporated in the state of Delaware. During 2010, GLRE established Greenlight Reinsurance Ireland, Ltd. ("GRIL"), a wholly-owned reinsurance subsidiary based in Dublin, Ireland. GRIL is authorized as a non-life reinsurance undertaking in accordance with the provisions of the European Communities (Reinsurance) Regulations 2006 ("Irish Regulations"). GRIL provides multi-line property and casualty reinsurance capacity to the European broker market and provides GLRE with an additional platform to serve clients located in Europe and North America.  As used herein, the "Company" refers collectively to GLRE and its consolidated subsidiaries.

The Class A ordinary shares of GLRE are listed on Nasdaq Global Select Market under the symbol "GLRE".

These unaudited condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2014. In the opinion of management, these unaudited condensed consolidated financial statements reflect all of the normal recurring adjustments considered necessary for a fair presentation of the Company’s financial position and results of operations as of the dates and for the periods presented.

The results for the three months ended March 31, 2015 are not necessarily indicative of the results expected for the full calendar year.

Reclassifications
Certain prior period balances have been reclassified to conform to the current period presentation. Prior to January 1, 2015, non-investment related foreign exchange gains and losses were recorded under general and administrative expenses in the condensed consolidated statements of income. Effective from January 1, 2015, the presentation has been modified and any non-investment related foreign exchange gains or losses are now recorded under “Other income (expense) net” in the condensed consolidated statements of income. As a result, foreign exchange loss of $0.3 million that was previously reported in general and administrative expenses for the three months ended March 31, 2014 was reclassified as “Other income (expense) net” to conform to the current year presentation. The reclassifications resulted in no changes to net income or retained earnings for any of the periods presented.


2.   SIGNIFICANT ACCOUNTING POLICIES
 
Use of Estimates
 
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of income and expenses during the period. Actual results could differ from these estimates. 
 

7


Restricted Cash and Cash Equivalents
 
The Company is required to maintain certain cash in segregated accounts with prime brokers and derivative counterparties. The amount of restricted cash held by prime brokers is primarily used to support the liability created from securities sold, not yet purchased, and to collateralize the letters of credit issued under certain letter of credit facilities (see Notes 4 and 8). The amount of cash encumbered varies depending on the market value of the securities sold, not yet purchased, and letters of credit issued. In addition, derivative counterparties require cash collateral to support the current value of any amounts that may be due to the counterparty based on the value of the underlying financial instrument.

Deferred Acquisition Costs
 
Policy acquisition costs, such as commission and brokerage costs, relate directly to, and vary with, the writing of reinsurance contracts. Acquisition costs relating solely to bound contracts are deferred subject to ultimate recoverability and are amortized over the related contract term. The Company evaluates the recoverability of deferred acquisition costs by determining if the sum of future earned premiums and anticipated investment income is greater than the expected future claims and expenses. If a loss is probable on the unexpired portion of policies in force, a premium deficiency loss is recognized. At March 31, 2015 and December 31, 2014, the deferred acquisition costs were considered fully recoverable and no premium deficiency loss was recorded. 

Acquisition costs also include profit commissions which are expensed when incurred. Profit commissions are calculated and accrued based on the expected loss experience for contracts and recorded when the current loss estimate indicates that a profit commission is probable under the contract terms. As of March 31, 2015, $11.0 million (December 31, 2014: $11.0 million) of profit commission reserves were included in reinsurance balances payable on the condensed consolidated balance sheets. For the three months ended March 31, 2015, $0.5 million (2014: $0.9 million) of net profit commission expense was included in acquisition costs on the condensed consolidated statements of income.
  
Loss and Loss Adjustment Expense Reserves and Recoverable
 
The Company establishes reserves for contracts based on estimates of the ultimate cost of all losses including losses incurred but not reported ("IBNR"). These estimated ultimate reserves are based on the Company’s own actuarial estimates derived from reports received from ceding companies, industry data and historical experience. These estimates are reviewed by the Company periodically on a contract by contract basis and adjusted as necessary. Since reserves are estimates, the final settlement of losses may vary from the reserves established and any adjustments to the estimates, which may be material, are recorded in the period they are determined.
 
Loss and loss adjustment expenses recoverable include the amounts due from retrocessionaires for unpaid loss and loss adjustment expenses on retrocession agreements. Ceded losses incurred but not reported are estimated based on the Company’s actuarial estimates. These estimates are reviewed periodically and adjusted when deemed necessary. The Company may not be able to ultimately recover the loss and loss adjustment expense recoverable amounts due to the retrocessionaires’ inability to pay. The Company regularly evaluates the financial condition of its retrocessionaires and records provisions for uncollectible reinsurance expenses recoverable when recovery is no longer probable.
 
Notes Receivable
 
Notes receivable include promissory notes receivable from third party entities. These notes are recorded at cost along with accrued interest, if any, which approximates the fair value. Interest income and realized gains or losses on sale of notes receivable are included under net investment income (loss) in the condensed consolidated statements of income.

The Company regularly reviews all notes receivable individually for impairment and records valuation allowance provisions for uncollectible and non-performing notes. The Company places notes on non-accrual status when the recorded value of the note is not considered impaired but there is uncertainty as to the collection of interest based on the terms of the note. The Company resumes accrual of interest on a note when none of the principal or interest remains past due, and the Company expects to collect the remaining contractual principal and interest. Interest collected on notes that are placed on non-accrual status is treated on a cash-basis and recorded as interest income when collected, provided that the recorded value of the note is deemed to be fully collectible. Where doubt exists as to the collectability of the remaining recorded value of the notes placed on non-accrual status, any payments received are applied to reduce the recorded value of the notes.

At March 31, 2015, $25.7 million of notes receivable (net of any valuation allowance) were on non-accrual status (December 31, 2014: $0.0 million) and any payments received are applied to reduce the recorded value of the notes. The

8


increase in notes receivable during the three months ended March 31, 2015, related to a settlement agreement entered into with a ceding insurer during the first quarter of 2015 whereby certain amounts, previously classified under reinsurance balances receivable, were converted into a ten-year note receivable.
 
At March 31, 2015 and December 31, 2014 there was no accrued interest included in the notes receivable balance. Based on management’s assessment, the recorded values of the notes receivable, net of any valuation allowance, at March 31, 2015 and December 31, 2014, were expected to be fully collectible.

Deposit Assets and Liabilities
 
In accordance with U.S. GAAP, deposit accounting is used in the event that a reinsurance contract does not transfer sufficient insurance risk, or a contract provides retroactive reinsurance. Any losses on such contracts are charged to earnings immediately. Any gains relating to such contracts are deferred and amortized over the estimated remaining settlement period. All such deferred gains are included in reinsurance balances payable in the condensed consolidated balance sheets. Amortized gains are recorded in the condensed consolidated statements of income as other income. At March 31, 2015 and December 31, 2014, there were no material deposit assets or deposit liabilities and no material gains or losses on deposit accounted contracts.

Financial Instruments
 
Investments in Securities and Investments in Securities Sold, Not Yet Purchased
 
The Company’s investments in debt instruments and equity securities that are classified as "trading securities" are carried at fair value. The fair values of the listed equity investments are derived based on quoted prices (unadjusted) in active markets for identical assets (Level 1 inputs). The fair values of listed equities that have restrictions on sale or transfer which expire within one year, are determined by adjusting the observed market price of the equity using a liquidity discount based on observable market inputs. The fair values of debt instruments are derived based on inputs that are observable, either directly or indirectly, such as market maker or broker quotes reflecting recent transactions (Level 2 inputs), and are generally derived based on the average of multiple market maker or broker quotes which are considered to be binding. Where quotes are not available, debt instruments are valued using cash flow models using assumptions and estimates that may be subjective and non-observable (Level 3 inputs).

The Company’s "other investments" may include investments in private and unlisted equity securities, limited partnerships and commodities, which are all carried at fair value. The fair values of commodities are determined based on quoted prices in active markets for identical assets (Level 1). The Company maximizes the use of observable direct or indirect inputs (Level 2 inputs) when deriving the fair values for "other investments". For limited partnerships and private and unlisted equity securities, where observable inputs are not available, the fair values are derived based on unobservable inputs (Level 3 inputs) such as management’s assumptions developed from available information using the services of the investment advisor, including the most recent net asset values obtained from the managers of those underlying investments.

For securities classified as "trading securities" and "other investments", any realized and unrealized gains or losses are determined on the basis of the specific identification method (by reference to cost or amortized cost, as appropriate) and included in net investment income (loss) in the condensed consolidated statements of income.

Dividend income and expense are recorded on the ex-dividend date. The ex-dividend date is the date as of when the underlying security must have been traded to be eligible for the dividend declared. Interest income and interest expense are recorded on an accrual basis.
 

9


Derivative Financial Instruments
 
U.S. GAAP requires that an entity recognize all derivatives in the balance sheet at fair value. It also requires that unrealized gains and losses resulting from changes in fair value be included in income or comprehensive income, depending on whether the instrument qualifies as a hedge transaction, and if so, the type of hedge transaction. The Company’s derivative financial instrument assets are included in financial contracts receivable. Derivative financial instrument liabilities are generally included in financial contracts payable. The Company's derivatives do not qualify as hedges for financial reporting purposes and are recorded in the condensed consolidated balance sheets on a gross basis and not offset against any collateral pledged or received. Pursuant to the International Swaps and Derivatives Association ("ISDA") master agreements, securities lending agreements and other agreements, the Company and its counterparties typically have the ability to net certain payments owed to each other in specified circumstances. In addition, in the event a party to one of the ISDA master agreements, securities lending agreements or other agreements defaults, or a transaction is otherwise subject to termination, the non-defaulting party generally has the right to set off against payments owed to the defaulting party or collateral held by the non-defaulting party.
 
Financial Contracts

The Company enters into financial contracts with counterparties as part of its investment strategy. Financial contracts which include total return swaps, credit default swaps ("CDS"), futures, options, currency forwards and other derivative instruments are recorded at their fair value with any unrealized gains and losses included in net investment income (loss) in the condensed consolidated statements of income. Financial contracts receivable represents derivative contracts whereby, based upon the contract's current fair value, the Company will be entitled to receive payments upon settlement of the contract. Financial contracts payable represents derivative contracts whereby, based upon each contract's current fair value, the Company will be obligated to make payments upon settlement of the contract.
 
Total return swap agreements, included on the condensed consolidated balance sheets as financial contracts receivable and financial contracts payable, are derivative financial instruments whereby the Company is either entitled to receive or obligated to pay the product of a notional amount multiplied by the movement in an underlying security, which the Company may not own, over a specified time frame. In addition, the Company may also be obligated to pay or receive other payments based on interest rates, dividend payments and receipts, or foreign exchange movements during a specified period. The Company measures its rights or obligations to the counterparty based on the fair value movements of the underlying security together with any other payments due. These contracts are carried at fair value, based on observable inputs (Level 2 inputs) with the resultant unrealized gains and losses reflected in net investment income (loss) in the condensed consolidated statements of income. Additionally, any changes in the value of amounts received or paid on swap contracts are reported as a gain or loss in net investment income (loss) in the condensed consolidated statements of income.
 
Financial contracts may also include exchange traded futures or options contracts that are based on the movement of a particular index, equity security, commodity, currency or interest rate. Where such contracts are traded in an active market, the Company’s obligations or rights on these contracts are recorded at fair value based on the observable quoted prices of the same or similar financial contracts in an active market (Level 1) or on broker quotes which reflect market information based on actual transactions (Level 2). Amounts invested in exchange traded options and over the counter ("OTC") options are recorded either as an asset or liability at inception. Subsequent to initial recognition, unexpired exchange traded option contracts are recorded at fair value based on quoted prices in active markets (Level 1). For OTC options or exchange traded options where a quoted price in an active market is not available, fair values are derived based upon observable inputs (Level 2) such as multiple quotes from brokers and market makers, which are considered to be binding.
 
The Company may purchase and sell CDS for strategic investment purposes. A CDS is a derivative instrument that provides protection against an investment loss due to specified credit or default events of a reference entity. The seller of a CDS guarantees to pay the buyer a specified amount if the reference entity defaults on its obligations or fails to perform. The buyer of a CDS pays a premium over time to the seller in exchange for obtaining this protection. A CDS trading in an active market is valued at fair value based on broker or market maker quotes for identical instruments in an active market (Level 2) or based on the current credit spreads on identical contracts (Level 2).

The Company, from time time, purchases industry loss warranty contracts ("ILW") to manage its exposure to weather related events. An ILW is designated as a weather derivative swap and included in financial contracts receivable. The carrying amount of an ILW is the unamortized portion of the premium paid for an ILW. An estimate of fair value is not practicable since ILW contracts are generally not exchange traded, and the time and cost involved in creating a valuation model to estimate the fair value would be excessive relative to the size and duration of the ILW contract.


10


Comprehensive Income (Loss)

The Company has no other comprehensive income or loss, other than the net income or loss disclosed in the condensed consolidated statements of income.

Earnings (Loss) Per Share
 
Basic earnings per share are based on the weighted average number of common shares and participating securities outstanding during the period. Diluted earnings per share includes the dilutive effect of restricted stock units ("RSU") and additional potential common shares issuable when stock options are exercised and are determined using the treasury stock method. The Company treats its unvested restricted stock as participating securities in accordance with U.S. GAAP, which requires that unvested stock awards which contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid (referred to as "participating securities"), be included in the number of shares outstanding for both basic and diluted earnings per share calculations. In the event of a net loss, all RSUs, stock options outstanding and all participating securities are excluded from the calculation of both basic and diluted loss per share since their inclusion would be anti-dilutive.

 
 
Three months ended March 31
 
 
2015
 
2014
Weighted average shares outstanding - basic
 
37,173,008

 
36,808,386

Effect of dilutive service provider share-based awards
 

 

Effect of dilutive employee and director share-based awards
 

 

Weighted average shares outstanding - diluted
 
37,173,008

 
36,808,386

Anti-dilutive stock options outstanding
 
71,821

 
40,000

Participating securities excluded from calculation of loss per share 
 
322,971

 
384,323


Taxation
 
Under current Cayman Islands law, no corporate entity, including GLRE and Greenlight Re, is obligated to pay taxes in the Cayman Islands on either income or capital gains. The Company has an undertaking from the Governor-in-Cabinet of the Cayman Islands, pursuant to the provisions of the Tax Concessions Law, as amended, that, in the event that the Cayman Islands enacts any legislation that imposes tax on profits, income, gains or appreciations, or any tax in the nature of estate duty or inheritance tax, such tax will not be applicable to GLRE, Greenlight Re nor their respective operations, or to the Class A or Class B ordinary shares or related obligations, until February 1, 2025.
 
Verdant is incorporated in Delaware and therefore is subject to taxes in accordance with the U.S. federal rates and regulations prescribed by the U.S. Internal Revenue Service ("IRS"). Verdant’s taxable income is generally expected to be taxed at a rate of 35%.

GRIL is incorporated in Ireland and therefore is subject to the Irish corporation tax rate of 12.5% on its trading income, and 25% on its non-trading income, if any.

Any deferred tax asset is evaluated for recovery and a valuation allowance is recorded when it is more likely than not that the deferred tax asset will not be realized in the future. The Company has not taken any income tax positions that are subject to significant uncertainty or that are reasonably likely to have a material impact on the Company.
 
Recently Adopted Accounting Pronouncements
        
None.


3.         FINANCIAL INSTRUMENTS 
 
In the normal course of its business, the Company purchases and sells various financial instruments, which include listed and unlisted equities, corporate and sovereign debt, commodities, futures, put and call options, currency forwards, other derivatives and similar instruments sold, not yet purchased.

11



   Fair Value Hierarchy

The Company’s financial instruments are carried at fair value, and the net unrealized gains or losses are included in net investment income (loss) in the condensed consolidated statements of income.
 
The following table presents the Company’s investments, categorized by the level of the fair value hierarchy as of March 31, 2015:
 
 
Fair value measurements as of March 31, 2015
 
 
Description
 
Quoted prices in
active markets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
Assets: 
 
($ in thousands)
Debt instruments
 
$

 
$
25,078

 
$
22,260

 
$
47,338

Listed equity securities
 
1,237,978

 
7,742

 

 
1,245,720

Commodities
 
139,838

 

 

 
139,838

Private and unlisted equity securities
 

 

 
19,766

 
19,766

Financial contracts receivable
 
1,065

 
38,654

 
1,763

 
41,482

 
 
$
1,378,881

 
$
71,474

 
$
43,789

 
$
1,494,144

Liabilities:
 
 
 
 
 
 
 
 
Listed equity securities, sold not yet purchased
 
$
(1,052,141
)
 
$

 
$

 
$
(1,052,141
)
Debt instruments, sold not yet purchased
 

 
(275,464
)
 

 
(275,464
)
Financial contracts payable
 
(1,634
)
 
(38,678
)
 

 
(40,312
)
 
 
$
(1,053,775
)
 
$
(314,142
)
 
$

 
$
(1,367,917
)
 
The following table presents the Company’s investments, categorized by the level of the fair value hierarchy as of December 31, 2014:
 
 
Fair value measurements as of December 31, 2014
 
 
Description
 
Quoted prices in
active markets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
Assets: 
 
($ in thousands)
Debt instruments
 
$

 
$
26,953

 
$
22,259

 
$
49,212

Listed equity securities
 
1,259,298

 
6,877

 

 
1,266,175

Commodities
 
96,872

 

 

 
96,872

Private and unlisted equity securities
 

 

 
18,719

 
18,719

Financial contracts receivable
 
2,463

 
44,708

 

 
47,171

 
 
$
1,358,633

 
$
78,538

 
$
40,978

 
$
1,478,149

Liabilities:
 
 
 
 
 
 
 
 
Listed equity securities, sold not yet purchased
 
$
(834,228
)
 
$

 
$

 
$
(834,228
)
Debt instruments, sold not yet purchased
 

 
(256,503
)
 

 
(256,503
)
Financial contracts payable
 

 
(44,592
)
 

 
(44,592
)
 
 
$
(834,228
)
 
$
(301,095
)
 
$

 
$
(1,135,323
)
 The following table presents the reconciliation of the balances for all investments measured at fair value using significant unobservable inputs (Level 3) for the three months ended March 31, 2015

12


 
 
  Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Debt instruments
 
 Private and unlisted equity securities
 
Financial contracts receivable
 
 Total
 
 
 ($ in thousands)
Beginning balance
 
$
22,259

 
$
18,719

 
$

 
$
40,978

Purchases
 

 
866

 
2,340

 
3,206

Sales
 

 

 

 

Issuances
 

 

 

 

Settlements

 

 

 

Total realized and unrealized gains (losses) and amortization included in earnings, net
 
1

 
181

 
(577
)
 
(395
)
Transfers into Level 3
 

 

 

 

Transfers out of Level 3
 

 

 

 

Ending balance
 
$
22,260

 
$
19,766

 
$
1,763

 
$
43,789


There were no transfers between Level 1, Level 2 or Level 3 during the three months ended March 31, 2015.

The following table presents the reconciliation of the balances for all investments measured at fair value using significant unobservable inputs (Level 3) for the three months ended March 31, 2014:
 
 
  Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Debt instruments
 
 Private and unlisted equity securities
 
Total
 
 
 ($ in thousands)
Beginning balance
 
$
527

 
$
46,323

 
$
46,850

Purchases
 

 
937

 
937

Sales
 

 
(1,956
)
 
(1,956
)
Issuances
 

 

 

Settlements
 

 

 

Total realized and unrealized gains included in earnings, net
 
77

 
511

 
588

Transfers into Level 3
 

 

 

Transfers out of Level 3
 

 

 

Ending balance
 
$
604

 
$
45,815

 
$
46,419


During the three months ended March 31, 2014, $10.0 million of securities at fair value based on the date of transfer, were transferred from Level 2 to Level 1 as the lock-up period restrictions on those securities expired. There were no other transfers between Level 1, Level 2 or Level 3 during the three months ended March 31, 2014.

For the three months ended March 31, 2015, included in net investment income (loss) in the condensed consolidated statements of income were net realized gains relating to Level 3 securities of nil (three months ended March 31, 2014: net realized gains of $0.3 million). In addition, for the three months ended March 31, 2015, amortization expense of $0.6 million (three months ended March 31, 2014: nil) relating to financial contracts receivable valued using unobservable inputs, was included in the condensed consolidated statements of income as other income (expense), net.

For Level 3 classified securities still held as of the reporting date, the change in net unrealized gains for the three months ended March 31, 2015 of $0.2 million (three months ended March 31, 2014: net unrealized gains of $0.3 million), were included in net investment income (loss) in the condensed consolidated statements of income.

13


  
Investments
 
Debt instruments, trading
 
At March 31, 2015, the following investments were included in debt instruments:
 
 
Cost/
 amortized
 cost
 
Unrealized
 gains
 
Unrealized
 losses
 
Fair
 value
 
 
($ in thousands)
Corporate debt – U.S.
 
$
23,677

 
$

 
$
(1,417
)
 
$
22,260

Corporate debt – Non U.S.
 
2,109

 

 
(1,008
)
 
1,101

Municipal debt – U.S.
 
2,653

 
287

 

 
2,940

Sovereign debt – Non U.S.
 
21,769

 
763

 
(1,495
)
 
21,037

Total debt instruments
 
$
50,208

 
$
1,050

 
$
(3,920
)
 
$
47,338

 
At December 31, 2014, the following investments were included in debt instruments:
 
 
Cost/
 amortized
 cost
 
Unrealized
 gains
 
Unrealized
 losses
 
Fair
 value
 
 
($ in thousands)
Corporate debt – U.S.
 
$
23,677

 
$
5

 
$
(1,423
)
 
$
22,259

Corporate debt – Non U.S.
 
5,870

 
49

 
(1,405
)
 
4,514

Municipal debt – U.S.
 
1,759

 

 
(6
)
 
1,753

Sovereign debt – Non U.S.
 
21,769

 

 
(1,083
)
 
20,686

Total debt instruments
 
$
53,075

 
$
54

 
$
(3,917
)
 
$
49,212


The maturity distribution for debt instruments held at March 31, 2015 and December 31, 2014 was as follows:
 
 
March 31, 2015
 
December 31, 2014
 
 
Cost/
 amortized
 cost
 
Fair
 value
 
Cost/
 amortized
 cost
 
Fair
 value
 
 
($ in thousands)
Within one year
 
$

 
$

 
$

 
$

From one to five years
 
21,959

 
22,017

 
21,922

 
21,923

From five to ten years
 
2,480

 
1,520

 
2,401

 
1,282

More than ten years
 
25,769

 
23,801

 
28,752

 
26,007

 
 
$
50,208

 
$
47,338

 
$
53,075

 
$
49,212

 
Equity securities, trading

At March 31, 2015, the following long positions were included in equity securities, trading: 
 
 
Cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair
value
 
 
($ in thousands)
Equities – listed
 
$
1,091,172

 
$
224,350

 
$
(89,400
)
 
$
1,226,122

Exchange traded funds
 
42,126

 

 
(22,528
)
 
19,598

Total equity securities
 
$
1,133,298

 
$
224,350

 
$
(111,928
)
 
$
1,245,720



14


At December 31, 2014, the following long positions were included in equity securities, trading:
 
 
Cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair
value
 
 
($ in thousands)
Equities – listed
 
$
1,079,955

 
$
247,109

 
$
(80,637
)
 
$
1,246,427

Exchange traded funds
 
42,126

 

 
(22,378
)
 
19,748

Total equity securities
 
$
1,122,081

 
$
247,109

 
$
(103,015
)
 
$
1,266,175


Other Investments
 
"Other investments" include commodities and private and unlisted equity securities. As of March 31, 2015 and December 31, 2014, commodities were comprised of gold bullion. 

At March 31, 2015, the following securities were included in other investments:
 
 
Cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair
value
 
 
($ in thousands)
Commodities
 
$
139,130

 
$
708

 
$

 
$
139,838

Private and unlisted equity securities
 
18,103

 
3,631

 
(1,968
)
 
19,766

 
 
$
157,233

 
$
4,339

 
$
(1,968
)
 
$
159,604


At December 31, 2014, the following securities were included in other investments: 
 
 
Cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair
value
 
 
($ in thousands)
Commodities
 
$
95,815

 
$
1,057

 
$

 
$
96,872

Private and unlisted equity securities
 
17,238

 
3,451

 
(1,970
)
 
18,719

 
 
$
113,053

 
$
4,508

 
$
(1,970
)
 
$
115,591


As of March 31, 2015, included in private and unlisted equity securities are investments in private equity funds with a fair value of $13.3 million (December 31, 2014: $12.3 million) determined based on unadjusted net asset values reported by the managers of these securities. Some of these values were reported from periods prior to March 31, 2015. The private equity funds have varying lock-up periods and as of March 31, 2015, all of the funds had redemption restrictions, and therefore have been categorized within Level 3 of the fair value hierarchy. The redemption restrictions have been in place since inception of the investments and are not expected to lapse in the near future. As of March 31, 2015, the Company had $8.0 million (December 31, 2014: $8.9 million) of unfunded commitments relating to private equity funds whose fair values are determined based on unadjusted net asset values reported by the managers of these securities. These commitments are included in the amounts presented in the schedule of commitments and contingencies in Note 8 of these condensed consolidated financial statements.    

Investments in Securities Sold, Not Yet Purchased 

Securities sold, not yet purchased are securities that the Company has sold, but does not own, in anticipation of a decline in the market value of the security. The Company’s risk is that the value of the security will increase rather than decline. Consequently, the settlement amount of the liability for securities sold, not yet purchased may exceed the amount recorded in the consolidated balance sheet as the Company is obligated to purchase the securities sold, not yet purchased in the market at prevailing prices to settle its obligations. To establish a position in security sold, not yet purchased, the Company needs to borrow the security for delivery to the buyer. On each day the transaction is open, the liability for the obligation to replace the borrowed security is marked-to-market and an unrealized gain or loss is recorded. At the time the transaction is closed, the Company realizes a gain or loss equal to the difference between the price at which the security was sold and the cost of replacing the borrowed security. While the transaction is open, the Company will also incur an expense for any dividends or interest which will be paid to the lender of the securities.

15



At March 31, 2015, the following securities were included in investments in securities sold, not yet purchased:
 
 
Proceeds
 
Unrealized gains
 
Unrealized losses
 
 Fair value
 
 
($ in thousands)
Equities – listed
 
$
(1,006,286
)
 
$
86,374

 
$
(116,284
)
 
$
(1,036,196
)
Exchange traded funds
 
(12,815
)
 

 
(3,130
)
 
(15,945
)
Corporate debt – U.S.
 
(7,066
)
 
1,245

 
(5
)
 
(5,826
)
Sovereign debt – Non U.S.
 
(293,186
)
 
23,548

 

 
(269,638
)
 
 
$
(1,319,353
)
 
$
111,167

 
$
(119,419
)
 
$
(1,327,605
)

At December 31, 2014, the following securities were included in investments in securities sold, not yet purchased: 
 
 
Proceeds
 
Unrealized gains
 
Unrealized losses
 
 Fair value
 
 
($ in thousands)
Equities – listed
 
$
(813,365
)
 
$
91,690

 
$
(101,715
)
 
$
(823,390
)
Exchange traded funds
 
(9,180
)
 

 
(1,658
)
 
(10,838
)
Corporate debt – U.S.
 
(7,066
)
 
1,007

 
(5
)
 
(6,064
)
Sovereign debt – Non U.S.
 
(246,589
)
 
6,635

 
(10,485
)
 
(250,439
)
 
 
$
(1,076,200
)
 
$
99,332

 
$
(113,863
)
 
$
(1,090,731
)
 
Financial Contracts
 
As of March 31, 2015 and December 31, 2014, the Company had entered into total return swaps, CDS, options, warrants, rights, futures, forwards and interest rate options contracts with various financial institutions to meet certain investment objectives. Under the terms of each of these financial contracts, the Company is either entitled to receive or is obligated to make payments which are based on the product of a formula contained within each contract that includes the change in the fair value of the underlying or reference security.

In addition, at March 31, 2015, the Company had entered into an ILW contract with certain third-parties in order to purchase protection against worldwide wind and earthquake exposures from January 2015 to December 2015. In return for a fixed payment, the Company is entitled to receive a floating payment in the event of losses incurred by the insurance industry, as a whole, exceeding a specified threshold. The maximum total recovery to the Company under the ILW is $12.0 million. Through March 31, 2015, the Company was not aware of any industry loss event occurring that would have triggered a recovery under the ILW.


16


At March 31, 2015, the fair values of financial contracts outstanding were as follows: 
Financial Contracts
 
Listing
currency
(1)
 
Notional amount of
underlying instruments
 
Fair value of net assets
(obligations)
on financial
contracts
 
 
 
 
($ in thousands)
Financial contracts receivable
 
 
 
 
 
 
Forwards
 
KRW
 
15,697

 
$
127

Put options (2)
 
USD
 
235,354

 
14,730

Total return swaps – equities
 
EUR/GBP/HKD/MXN/USD
 
56,949

 
23,797

Warrants and rights on listed equities
 
EUR
 
2,684

 
1,065

Weather derivative swap
 
USD
 
12,000

 
1,763

Total financial contracts receivable, at fair value
 
 
 
 
 
$
41,482

Financial contracts payable
 
 
 
 
 
 
Credit default swaps, purchased – corporate debt
 
USD
 
221,198

 
$
(806
)
Credit default swaps, purchased – sovereign debt
 
USD
 
251,467

 
(1,112
)
Futures
 
USD
 
77,524

 
(1,634
)
Total return swaps – equities
 
EUR/GBP/HKD/INR/RON/USD
 
109,343

 
(36,760
)
Total financial contracts payable, at fair value
 
 
 
 
 
$
(40,312
)
(1) USD = US Dollar; EUR = Euro; GBP = British Pound; HKD = Hong Kong Dollar; KRW = Korean Won; MXN = Mexican Peso; RON = Romanian New Leu; INR = Indian Rupee.
(2) Includes options on the Japanese Yen and the Chinese Yuan, denominated in U.S. dollars.
 

At December 31, 2014, the fair values of financial contracts outstanding were as follows: 
Financial Contracts
 
Listing
currency
(1)
 
Notional amount of
underlying instruments
 
Fair value of net assets
(obligations)
on financial
contracts
 
 
 
 
($ in thousands)
Financial contracts receivable
 
 
 
 
 
 
Futures
 
USD
 
13,204

 
3,461

Put options (2)
 
USD
 
299,907

 
22,349

Total return swaps – equities
 
EUR/GBP/HKD/USD
 
43,355

 
18,898

Warrants and rights on listed equities
 
EUR
 
8,054

 
2,463

Total financial contracts receivable, at fair value
 
 
 
 
 
$
47,171

Financial contracts payable
 
 
 
 
 
 
Credit default swaps, purchased – corporate debt
 
USD
 
221,198

 
$
(1,305
)
Credit default swaps, purchased – sovereign debt
 
USD
 
251,467

 
(1,714
)
Forwards
 
KRW
 
20,563

 
(512
)
Futures
 
USD
 
33,625

 
(867
)
Total return swaps – equities
 
EUR/GBP/HKD/INR/RON/USD
 
122,667

 
(40,194
)
Total financial contracts payable, at fair value
 
 
 
 
 
$
(44,592
)
(1) USD = US Dollar; EUR = Euro; GBP = British Pound; HKD = Hong Kong Dollar; KRW = Korean Won; RON = Romanian New Leu; INR = Indian Rupee.
(2) Includes options on the Japanese Yen and the Chinese Yuan, denominated in U.S. dollars.
  

17



Options are derivative financial instruments that give the buyer, in exchange for a premium payment, the right, but not the obligation, to either purchase from (call option) or sell to (put option) the writer, a specified underlying security at a specified price on or before a specified date. The Company enters into option contracts to meet certain investment objectives. For exchange traded option contracts, the exchange acts as the counterparty to specific transactions and therefore bears the risk of delivery to and from counterparties of specific positions.

During the three months ended March 31, 2015 and 2014, the Company reported gains and losses on derivatives as follows:
Derivatives not designated as hedging instruments
 
Location of gains and losses on derivatives recognized in income
 
Gain (loss) on derivatives recognized in income
 
 
 
 
Three months ended March 31
 
 
 
 
2015
 
2014
 
 
 
 
($ in thousands)
Credit default swaps, purchased – corporate debt
 
Net investment income (loss)
 
$
(55
)
 
$
11

Credit default swaps, purchased – sovereign debt
 
Net investment income (loss)
 
(31
)
 
(206
)
Forwards
 
Net investment income (loss)
 
136

 
(503
)
Futures
 
Net investment income (loss)
 
(2,077
)
 
(4,879
)
Interest rate options
 
Net investment income (loss)
 

 
(26
)
Options, warrants, and rights
 
Net investment income (loss)
 
(2,474
)
 
(9,619
)
Total return swaps – equities
 
Net investment income (loss)
 
4,223

 
6,419

Weather derivative swap
 
Other income (expense), net
 
(577
)
 

Total
 
 
 
$
(855
)
 
$
(8,803
)

The Company generally does not enter into derivatives for risk management or hedging purposes. The volume of derivative activities varies from period to period depending on potential investment opportunities.

For the three months ended March 31, 2015, the Company’s volume of derivative activities (based on notional amounts) was as follows:
2015
 
Three months ended March 31
Derivatives not designated as hedging instruments
 
  Entered
 
Exited
 
 
($ in thousands)
Forwards
 
$

 
$
4,725

Futures
 
84,989

 
56,748

Options, warrants and rights (1)
 

 
69,777

Total return swaps
 
14,900

 
39,748

Weather derivative swap
 
2,340

 

Total
 
$
102,229

 
$
170,998

(1) Exited amount excludes options which expired or were exercised during the period.


18


For the three months ended March 31, 2014, the Company’s volume of derivative activities (based on notional amounts) was as follows:
2014
 
Three months ended March 31
Derivatives not designated as hedging instruments
 
  Entered
 
Exited
 
 
($ in thousands)
Forwards
 
$

 
$
63,191

Futures
 
35,862

 
114,667

Options, warrants and rights (1)
 
402,220

 
59,506

Total return swaps
 
44,469

 
29,082

Total
 
$
482,551

 
$
266,446

(1) Exited amount excludes options which expired or were exercised during the period.

The Company does not offset its derivative instruments and presents all amounts in the condensed consolidated balance sheets on a gross basis. The Company has pledged cash collateral to derivative counterparties to support the current value of amounts due to the counterparties based on the value of the underlying security.

As of March 31, 2015, the gross and net amounts of derivative instruments and the cash collateral applicable to derivative instruments were as follows:

March 31, 2015
 
(i)
 
(ii)
 
(iii) = (i) - (ii)
 
(iv) Gross amounts not offset in the balance sheet
 
(v) = (iii) + (iv)
Description
 
Gross amounts of recognized assets (liabilities)
 
Gross amounts offset in the balance sheet
 
Net amounts of assets (liabilities) presented in the balance sheet
 
Financial instruments available for offset
 
Cash collateral (received) pledged
 
Net amount of asset (liability)
 
 
($ in thousands)
Financial contracts receivable
 
$
41,482

 
$

 
$
41,482

 
$
(21,247
)
 
$
(10,621
)
 
$
9,614

Financial contracts payable
 
(40,312
)
 

 
(40,312
)
 
21,247

 
19,065

 


As of December 31, 2014, the gross and net amounts of derivative instruments and the cash collateral applicable to derivative instruments were as follows:

December 31, 2014
 
(i)
 
(ii)
 
(iii) = (i) - (ii)
 
(iv) Gross amounts not offset in the balance sheet
 
(v) = (iii) + (iv)
Description
 
Gross amounts of recognized assets (liabilities)
 
Gross amounts offset in the balance sheet
 
Net amounts of assets (liabilities) presented in the balance sheet
 
Financial instruments available for offset
 
Cash collateral (received) pledged
 
Net amount of asset (liability)
 
 
($ in thousands)
Financial contracts receivable
 
$
47,171

 
$

 
$
47,171

 
$
(24,265
)
 
$
(9,452
)
 
$
13,454

Financial contracts payable
 
(44,592
)
 

 
(44,592
)
 
24,265

 
20,327

 




19


4.        DUE TO PRIME BROKERS
 
As of March 31, 2015, the amount due to prime brokers is comprised of margin-borrowing from prime brokers relating to investments purchased on margin, as well as the margin-borrowing for providing collateral to support some of the Company’s outstanding letters of credit (see Note 8). Under term margin agreements and certain letter of credit facility agreements, the Company pledges certain investment securities to borrow cash from the prime brokers. The borrowed cash is placed in a custodial account in the name of the Company and this custodial account provides collateral for any letters of credit issued. Since there is no legal right of offset, the Company’s liability for the cash borrowed from the prime brokers is included on the condensed consolidated balance sheets as due to prime brokers while the cash held in the custodial account is included on the condensed consolidated balance sheets as restricted cash and cash equivalents. At March 31, 2015, the amounts due to prime brokers included $134.9 million (December 31, 2014: $135.0 million) of cash borrowed under the term margin agreements to provide collateral for letters of credit facilities and $120.8 million (December 31, 2014: $76.1 million) of borrowing relating to investment purchases.

Greenlight Re's investment guidelines, among other stipulations in the guidelines, allow for up to 15% (GRIL: 5%) net margin leverage for extended periods of time and up to 30% (GRIL: 20%) net margin leverage for periods of less than 30 days.


5.        RETROCESSION
 
The Company, from time to time, purchases retrocessional coverage for one or more of the following reasons: to manage its overall exposure, to reduce its net liability on individual risks, to obtain additional underwriting capacity and to balance its underwriting portfolio. Additionally, retrocession can be used as a mechanism to share the risks and rewards of business written and therefore can be used as a tool to align the Company's interests with those of its counterparties. The Company currently has coverages that provide for recovery of a portion of loss and loss expenses incurred on certain contracts. Loss and loss adjustment expense recoverable from the retrocessionaires are recorded as assets.

For the three months ended March 31, 2015, loss and loss adjustment expenses incurred of $63.2 million (2014: $67.4 million) reported on the condensed consolidated statements of income are net of loss and loss expenses recovered and recoverable of $0.2 million (2014: $0.3 million).

Retrocession contracts do not relieve the Company from its obligations to the insureds. Failure of retrocessionaires to honor their obligations could result in losses to the Company. At March 31, 2015, the Company had losses receivable and loss reserves recoverable of $2.6 million (December 31, 2014: $18.3 million) from unrated retrocessionaires. During the three months ended March 31, 2015, the Company reached a settlement to commute a retrocession contract with one of the unrated retrocessionaires which resulted in a decrease in the losses recoverable from unrated retrocessionaires.

At March 31, 2015 and December 31, 2014$2.6 million and $2.8 million, respectively, of losses recoverable from unrated retrocessionaires were secured by cash collateral held by the Company.

The Company regularly evaluates the financial condition of all its retrocessionaires to assess the ability of the retrocessionaires to honor their obligations. At March 31, 2015 and December 31, 2014, no provision for uncollectible losses recoverable was considered necessary.

 
6.        SHARE-BASED COMPENSATION
 
The Company has a stock incentive plan for directors, employees and consultants which is administered by the Compensation Committee of the Board of Directors. The Company's shares authorized for issuance include 3,500,000 (December 31, 2014: 3,500,000) Class A ordinary shares relating to the Company’s stock incentive plan for eligible employees, directors and consultants. As of March 31, 2015, 718,635 (December 31, 2014: 803,558) Class A ordinary shares remained available for future issuance under the Company's stock incentive plan.
 
Employee and Director Restricted Shares
 
As part of its stock incentive plan, the Company issues restricted shares for which the fair value is equal to the price of the Company’s Class A ordinary shares on the grant date. Compensation based on the grant date fair market value of the shares is expensed on a straight line basis over the vesting period.

20


For the three months ended March 31, 2015, 78,102 (2014: 119,566) restricted Class A ordinary shares were issued to employees pursuant to the Company’s stock incentive plan. These shares contain certain restrictions relating to, among other things, vesting, forfeiture in the event of termination of employment and transferability. Each of these restricted shares will cliff vest after three years from the date of issuance, subject to the grantee’s continued service with the Company. During the vesting period, the holder of the restricted shares retains voting rights and is entitled to any dividends declared by the Company.

The restricted share award activity during the three months ended March 31, 2015 was as follows:
 
 
Number of
non-vested
restricted
 shares
 
Weighted
 average
grant date
fair value
Balance at December 31, 2014
 
330,087

 
$
27.90

Granted
 
78,102

 
32.21

Vested
 
(85,218
)
 
24.36

Forfeited
 

 

Balance at March 31, 2015
 
322,971

 
$
29.88

 
Employee and Director Stock Options

For the three months ended March 31, 2015, 90,000 (2014: 72,000) stock options were exercised by directors and employees resulting in 58,982 (2014: 47,313) Class A ordinary shares issued, net of shares surrendered as a result of the cashless exercise of stock options. When stock options are granted, the Company reduces the corresponding number from the shares authorized for issuance as part of the Company’s stock incentive plan. The intrinsic value of options exercised during the three months ended March 31, 2015 was $1.9 million (2014: $1.5 million).

Employee and director stock option activity during the three months ended March 31, 2015 was as follows: 
 
 
Number of
 options
 
Weighted
 average
 exercise
 price
 
Weighted
 average
 grant date
 fair value
Balance at December 31, 2014
 
1,116,308

 
$
17.58

 
$
7.73

Granted
 

 

 

Exercised
 
(90,000
)
 
11.10

 
5.57

Forfeited
 

 

 

Expired
 

 

 

Balance at March 31, 2015
 
1,026,308

 
$
18.15

 
$
7.92


 Employee Restricted Stock Units

The Company issues RSUs to certain employees as part of the stock incentive plan. The grant date fair value of the RSUs is equal to the price of the Company’s Class A ordinary shares on the grant date. Compensation cost based on the grant date fair market value of the RSUs is expensed on a straight line basis over the vesting period.
 
For the three months ended March 31, 2015, 6,821 (2014: 9,668) RSUs were issued to employees pursuant to the Company’s stock incentive plan. These shares contain certain restrictions relating to, among other things, vesting, forfeiture in the event of termination of employment and transferability. Each of these RSUs will cliff vest after three years from the date of issuance, subject to the grantee’s continued service with the Company. On the vesting date, the Company converts each RSU into one Class A ordinary share and issues new Class A ordinary shares from the shares authorized for issuance as part of the Company’s stock incentive plan.


21


Employee RSU activity during the three months ended March 31, 2015 was as follows: 
 
 
Number of
non-vested
RSUs
 
Weighted
 average
grant date
fair value
Balance at December 31, 2014
 
15,609

 
$
29.72

Granted
 
6,821

 
32.21

Vested
 

 

Forfeited
 

 

Balance at March 31, 2015
 
22,430

 
$
30.48


For the three months ended March 31, 2015 and 2014, the general and administrative expenses included stock compensation expense (net of forfeitures) of $1.0 million and $1.0 million, respectively, for the expensing of the fair value of stock options, restricted stocks and RSUs granted to employees and directors.


7.      RELATED PARTY TRANSACTIONS 
 
Investment Advisory Agreement
 
Effective January 1, 2014, the Company and its reinsurance subsidiaries were party to a joint venture agreement with DME Advisors, LP ("DME Advisors") under which the Company, its reinsurance subsidiaries and DME Advisors LLC ("DME") are participants of a joint venture for the purpose of managing certain jointly held assets (the "venture agreement"). In addition, the Company, its reinsurance subsidiaries and DME have entered into a separate investment advisory agreement with DME Advisors (the "advisory agreement"). DME and DME Advisors are related to the Company and each is an affiliate of David Einhorn, Chairman of the Company’s Board of Directors.
 
Pursuant to the venture agreement, performance allocation equal to 20% of the net investment income of the Company’s share of the account managed by DME Advisors is allocated, subject to a loss carry forward provision, to DME’s account. The loss carry forward provision allows DME to earn a reduced performance allocation of 10% on net investment income in any year subsequent to the year in which the investment account incurs a loss, until all the losses are recouped and an additional amount equal to 150% of the aggregate investment loss is earned. DME is not entitled to earn a performance allocation in a year in which the investment portfolio incurs a loss. For the three months ended March 31, 2015, no performance allocation (2014: nil) was recorded due to gross investment loss reported during the period.
 
Pursuant to the advisory agreement, a monthly management fee, equal to 0.125% (1.5% on an annual basis) of the Company’s investment account managed by DME Advisors, is paid to DME Advisors. Included in the net investment income (loss) for the three months ended March 31, 2015 were management fees of $5.2 million (2014: $5.0 million). The management fees have been fully paid as of March 31, 2015.
 
Pursuant to the venture and advisory agreements, the Company has agreed to indemnify DME and DME Advisors for any expense, loss, liability, or damage arising out of any claim asserted or threatened in connection with DME Advisors serving as the Company’s investment advisor. The Company will reimburse DME and DME Advisors for reasonable costs and expenses of investigating and/or defending such claims provided such claims were not caused due to gross negligence, breach of contract or misrepresentation by DME or DME Advisors. For the three months ended March 31, 2015, there were no indemnification payments made by the Company.

David Einhorn also serves as the Chairman of the Board of Directors of Green Brick Partners Inc ("GRBK"), a publicly traded company. During the year end December 31, 2014, the Company, along with certain affiliates of DME Advisors, provided debt financing to GRBK and acquired equity shares of GRBK. As of March 31, 2015, $21.6 million (December 31, 2014: $21.6 million) of the GRBK debt and $18.6 million (December 31, 2014: $18.4 million) of GRBK listed equities were included on the balance sheet as "debt instruments, trading, at fair value" and "equity securities, trading, at fair value", respectively. The debt matures on October 27, 2019, and carries an annual interest rate of 9.0% until October 27, 2015, and 10.0% thereafter. During the three months ended March 31, 2015, the Company's investment income included $0.5 million of interest relating to this debt.
 

22


Service Agreement
 
The Company has entered into a service agreement with DME Advisors, pursuant to which DME Advisors provides investor relations services to the Company for compensation of five thousand dollars per month (plus expenses). The agreement is automatically renewed annually until terminated by either the Company or DME Advisors for any reason with 30 days prior written notice to the other party. 
 

8.      COMMITMENTS AND CONTINGENCIES 
 
Letters of Credit
 
At March 31, 2015, the Company had the following letter of credit facilities, which automatically renew each year unless terminated by either party in accordance with the required notice period:
 
 
Facility
 
Termination Date
 
Notice period required for termination
 
 
($ in thousands)
 
 
 
 
Bank of America, N.A.
 
$
200,000

 
July 20, 2015
 
90 days prior to termination date
Butterfield Bank (Cayman) Limited
 
60,000

 
June 30, 2016
 
90 days prior to termination date
Citibank Europe plc
 
400,000

 
October 11, 2015
 
120 days prior to termination date
JP Morgan Chase Bank N.A.
 
100,000

 
January 27, 2016
 
120 days prior to termination date
 
 
$
760,000

 
 
 
 

As of March 31, 2015, an aggregate amount of $281.3 million (December 31, 2014: $273.7 million) in letters of credit were issued under the above facilities. Under the facilities, the Company provides collateral that may consist of equity securities, restricted cash, and cash and cash equivalents. As of March 31, 2015, total equity securities, restricted cash, and cash and cash equivalents with a fair value in the aggregate of $316.5 million (December 31, 2014: $302.6 million) were pledged as collateral against the letters of credit issued (also see Note 4). Each of the facilities contain customary events of default and restrictive covenants, including but not limited to, limitations on liens on collateral, transactions with affiliates, mergers and sales of assets, as well as solvency and maintenance of certain minimum pledged equity requirements, and restricts issuance of any debt without the consent of the letter of credit provider. Additionally, if an event of default exists, as defined in the letter of credit facilities, Greenlight Re will be prohibited from paying dividends to its parent company. The Company was in compliance with all the covenants of each of these facilities as of March 31, 2015 and December 31, 2014.

  Operating Lease Obligations
 
Greenlight Re has entered into lease agreements for office space in the Cayman Islands. Under the terms of the lease agreements, Greenlight Re is committed to annual rent payments ranging from $0.3 million at inception to $0.5 million at lease termination. The leases expire on June 30, 2018 and Greenlight Re has the option to renew the leases for a further five-year term. Included in the schedule below are the minimum lease payment obligations relating to these leases as of March 31, 2015.

GRIL has entered into a lease agreement for office space in Dublin, Ireland. Under the terms of this lease agreement, GRIL is committed to average annual rent payments denominated in Euros approximating €0.1 million until May 2016 (net of rent inducements), which shall be adjusted to the prevailing market rates for each of three subsequent five-year terms. GRIL has the option to terminate the lease agreement in 2016 and 2021. Included in the schedule below are the net minimum lease payment obligations relating to this lease as of March 31, 2015.

The total rent expense related to leased office space for the three months ended March 31, 2015 was $0.1 million (2014: $0.1 million). 

Specialist Service Agreement

The Company has entered into a service agreement with a specialist service provider for the provision of administration and support in developing and maintaining business relationships, reviewing and recommending programs and managing risks relating to certain specialty lines of business. The specialist service provider does not have any authority to bind the Company to any reinsurance contracts. Under the terms of the agreement, the Company has committed to quarterly payments to the specialist service provider. If the agreement is terminated, the Company is obligated to make minimum payments for twelve

23


months starting on September 1 of the year in which the agreement is terminated, to ensure contracts to which the Company is bound are adequately administered by the specialist service provider. Included in the schedule below are the minimum payment obligations relating to the agreement as of March 31, 2015.
 
Private Equity and Limited Partnerships
 
From time to time, the Company makes investments in private equity vehicles. As part of the Company's participation in such private equity investments, the Company may make funding commitments. As of March 31, 2015, the Company had commitments to invest an additional $8.0 million (December 31, 2014: $8.9 million) in private equity investments. Included in the schedule below are the minimum payment obligations relating to these investments as of March 31, 2015.
 
Schedule of Commitments and Contingencies
 
The following is a schedule of future minimum payments required under the above commitments: 
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
 
($ in thousands)
Operating lease obligations
$
349

 
$
466

 
$
466

 
$
233

 
$

 
$

 
$
1,514

Specialist service agreement
525

 
300

 

 

 

 

 
825

Private equity and limited partnerships (1)
7,971

 

 

 

 

 

 
7,971

 
$
8,845

 
$
766

 
$
466

 
$
233

 
$

 
$

 
$
10,310

(1) Given the nature of these investments, the Company is unable to determine with any degree of accuracy when these commitments will be called. Therefore, for purposes of the above table, the Company has assumed that all commitments with no fixed payment schedules will be called during the year ended December 31, 2015.
 
Litigation
 
From time to time, in the normal course of business, the Company may be involved in formal and informal dispute resolution procedures, which may include arbitration or litigation, the outcomes of which determine the rights and obligations under the Company's reinsurance contracts and other contractual agreements. In some disputes, the Company may seek to enforce its rights under an agreement or to collect funds owing to it. In other matters, the Company may resist attempts by others to collect funds or enforce alleged rights. While the final outcome of legal disputes cannot be predicted with certainty, the Company does not believe that any existing dispute, when finally resolved, will have a material adverse effect on the Company's business, financial condition or operating results.

 

24


9.      SEGMENT REPORTING
 
The Company manages its business on the basis of one operating segment, Property & Casualty Reinsurance.
 
The following tables provide a breakdown of the Company's gross premiums written by line of business and by geographic area of risks insured for the periods indicated:
 
Gross Premiums Written by Line of Business 
 
 
Three months ended March 31
 
 
2015
 
2014
 
 
($ in thousands)
Property
 
 
 
 
 
 
 
 
Aviation
 
$
266

 
0.2
%
 
$
290

 
0.2
%
Commercial
 
6,449

 
5.0

 
6,345

 
5.3

Energy
 
1,670

 
1.3

 
2,131

 
1.8

Motor physical damage
 
7,593

 
5.9

 
7,176

 
6.0

Personal
 
22,016

 
17.0

 
38,007

 
32.0

Total Property
 
37,994

 
29.4

 
53,949

 
45.3

Casualty
 
 
 
 
 
 
 
 
General liability
 
6,398

 
4.9

 
1,191

 
1.0

Marine liability
 
3,934

 
3.0

 
3,847

 
3.2

Motor liability
 
43,331

 
33.4

 
38,114

 
32.1

Professional liability
 
15,059

 
11.6

 
312

 
0.3

Total Casualty
 
68,722

 
52.9

 
43,464

 
36.6

Specialty
 
 
 
 
 
 
 
 
Financial
 
1,556

 
1.2

 
1,200

 
1.0

Health
 
20,681

 
15.9

 
20,288

 
17.1

Workers’ compensation
 
729

 
0.6

 

 

Total Specialty
 
22,966

 
17.7

 
21,488

 
18.1

 
 
$
129,682

 
100.0
%
 
$
118,901

 
100.0
%

Gross Premiums Written by Geographic Area of Risks Insured
 
 
Three months ended March 31
 
 
2015
 
2014
 
 
($ in thousands)
U.S. and Caribbean
 
$
94,396

 
72.8
%
 
$
104,525

 
87.9
%
Worldwide (1)
 
33,304

 
25.7

 
14,064

 
11.8

Europe
 
1,933

 
1.5

 
312

 
0.3

Asia
 
49

 
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