Table of ContentsGREENLIGHT CAPITAL RE, LTD.
June 30, 20072008 and 2006
(expressed in thousands of U.S. dollars, except per share and share amounts)2007
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1. | GENERAL |
Greenlight Capital Re, Ltd.
(the ‘‘Company’’(“GLRE”) was incorporated as an exempted company under the Companies Law of the Cayman Islands on July 13, 2004.
The Company incorporated aGLRE’s wholly owned subsidiary, Greenlight Reinsurance, Ltd. (the
‘‘Subsidiary’’“Subsidiary”),
to provideprovides global
specialty property and casualty reinsurance. The Subsidiary has an unrestricted Class
‘‘B’’“B” insurance license under Section 4(2) of the Cayman Islands Insurance Law. The Subsidiary commenced underwriting in April 2006.
In August 2004, GLRE raised gross proceeds of $212.2 million from private placements of Class A and Class B ordinary shares. In May 2007, GLRE raised proceeds of $208.3 million, net of underwriting fees, in an initial public offering of Class A ordinary shares as well as an additional $50.0 million from a private placement of Class B ordinary shares.
The Class A ordinary shares of GLRE are listed on Nasdaq Global Select Market under the symbol “GLRE.”
As used herein, the “Company” refers collectively to GLRE and the Subsidiary.
These unaudited
interim condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America
(‘‘(“U.S.
GAAP’’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
interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31,
2006.2007. In the opinion of management, these unaudited
interim condensed consolidated financial statements reflect all 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 six months ended June 30, 20072008 are not necessarily indicative of the results to be expected for the full year.
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2. | Significant accounting policiesSIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
The condensed consolidated financial statements include the accounts of GLRE and the consolidated financial statements of the Subsidiary. All significant intercompany transactions and balances have been eliminated on consolidation. These condensed consolidated financial statements also include the accounts of the joint venture created between the Company and DME Advisors, LP (“DME”) effective January 1, 2008. Please refer to Note 6 for more details relating to the joint venture. DME’s share of interest in the joint venture is recorded as a minority interest.
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 consolidated financial statements and the reported amounts of income and expenses during the period. Actual results could differ from these estimates.
Restricted Cash and Cash Equivalents
The Company is required to maintain cash in segregated accounts with prime brokers and swap counterparties. The amount of restricted cash held by prime brokers is used to support the liability created from securities sold, not yet purchased, as well as net cash from foreign currency transactions. Cash held for the benefit of swap counterparties is used to collateralize the current value of any amounts that may be due to the counterparty under the swap contract.
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GREENLIGHT CAPITAL RE, LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Loss and Loss Adjustment Expense Reserves and Recoverables
The Company establishes reserves for contracts based on estimates of the ultimate cost of all losses including losses incurred but not reported. These estimated ultimate reserves are based on reports received from ceding companies, historical experience as well as the Company’s own actuarial estimates. These estimates are reviewed periodically and adjusted when deemed necessary. Since reserves are based on 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 expense recoverables include the amounts due from retrocessionaires for paid and 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 recoverable when recovery becomes unlikely.
Investments in Securities and Securities Sold, Not Yet Purchased Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards (“SFAS’) No. 157, “Fair Value Measurements,” which establishes a framework for measuring fair value by creating a hierarchy of fair value measurements based on inputs used in deriving fair values and enhances disclosure requirements for fair value measurements. The adoption of SFAS No. 157 had no material impact to the Company’s results of operations or financial condition as there were no material changes in the valuation techniques used by the Company to measure fair value. The Company’s investments in bondsdebt and equitiesequity securities that are classified as ‘‘trading securities’’“trading securities” are valuedcarried at fair value. The fair values of the listed equity and debt investments are derived based on quoted prices (unadjusted) in active markets for identical assets (Level 1 inputs). The fair values of private debt securities are derived based on inputs that are observable, either directly or indirectly (Level 2 inputs), or on inputs that are unobservable (Level 3 inputs).
The Company’s “Other Investments” may include investments in private equities, limited partnerships, futures, exchange traded options and over-the-counter options (“OTC”), which are all carried at fair value. The Company maximizes the
last reported sales price onuse of observable direct or indirect inputs (Level 2 inputs) when deriving the
balance sheet dates as reported by a recognized exchange. Securitiesfair values for
which recognized exchange quotations“Other Investments”. For limited partnerships and private equities, where observable inputs are not
readily available,
(e.g., private equity)the fair values are
reportedderived based on unobservable inputs (Level 3 inputs) such as
other investments and are valued at management’s
best estimate (utilizingassumptions developed from available information, using the services of
the investment advisor. Amounts invested in exchange traded and OTC call and put options are recorded as an
investment advisor) of theasset or liability at inception. Subsequent to initial recognition unexpired exchange traded option contracts are recorded at fair market value based on
quoted prices
received fromin active markets (Level 1 inputs). For OTC options or exchange traded options where a quoted price in an active market
makers when available.Premiums and discounts on fixed income securitiesis not available, fair values are amortized into net investment income over the life of the security.
derived based upon observable inputs (Level 2 inputs) such as market maker quotes.
For securities classified as trading“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 and amortized cost, as appropriate) and included in net investment income in the condensed consolidated statements of income.
Table of ContentsFor
Premiums and discounts on debt securities
for which exchange quotations are
not readily available, any realized and unrealized gains or losses are determined on the basis of the specific identification method. Realized gains and losses are reported inamortized into net investment income
inover the
condensed consolidated statements of income. Unrealized gains and losses, if any, are included in accumulated other comprehensive income as a separate component of shareholders’ equity. A decline in market value of a security below cost that is deemed other than temporary is charged to earnings and results in the establishment of a new cost basislife of the security.
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.
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GREENLIGHT CAPITAL RE, LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Investments in OptionsAmounts invested in exchange traded call and put options are recorded as an asset or liability at inception. Subsequent to initial recognition, unexpired option contracts are recorded at fair market value which is based upon the last quoted prices of the call and put options. Realized and unrealized gains and losses are included in net investment income in the condensed consolidated statements of income.
Investments in Total Return Swap Agreements
Total return swap agreements, included
inon the condensed consolidated balance sheets as financial contracts receivable and
financial contracts payable, are derivative financial instruments entered into 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 does not own, over a specified time frame. In addition, the Company may also be obligated to pay or receive other payments based on either interest rate, 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 market value movements of the underlying security together with any other payments due. These contracts are carried at
estimated fair value,
derived based on observable inputs (Level 2 inputs) with the resultant unrealized gains and losses reflected in net investment
income 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
lo ssloss in net investment income in the condensed consolidated statements of income.
Basic earnings per share
isare based on weighted average
Ordinary Sharesordinary shares outstanding
during the three and
excludessix month periods ended June 30, 2008 and 2007 and exclude dilutive effects of stock options and unvested stock awards. Diluted earnings per share assumes the exercise of all dilutive stock options and stock awards using the treasury stock method.
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| | Three Months Ended
| | | Six Months Ended
| |
| | June 30, | | | June 30, | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
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Weighted average shares outstanding | | | 35,981,386 | | | | 27,472,993 | | | | 35,981,349 | | | | 24,515,973 | |
Effect of dilutive service provider stock options | | | 172,087 | | | | 183,930 | | | | 173,347 | | | | 159,698 | |
Effect of dilutive employee and director options and stock awards | | | 498,968 | | | | 323,498 | | | | 489,760 | | | | 220,207 | |
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| | | 36,652,441 | | | | 27,980,421 | | | | 36,644,456 | | | | 24,895,878 | |
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Anti-dilutive stock options outstanding | | | 50,000 | | | | — | | | | 50,000 | | | | 233,000 | |
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| | | Three Months Ended June 30, | | | Six Months Ended June 30, |
| | | 2007 | | | 2006 | | | 2007 | | | 2006 |
Weighted average Ordinary Shares outstanding | | | | | 27,472,993 | | | | | | 21,346,666 | | | | | | 24,515,973 | | | | | | 21,290,186 | |
Effect of dilutive service provider stock options | | | | | 183,930 | | | | | | 89,040 | | | | | | 159,698 | | | | | | 70,888 | |
Effect of dilutive employee and director options and stock awards | | | | | 323,498 | | | | | | 9,936 | | | | | | 220,207 | | | | | | 9,784 | |
| | | | | 27,980,421 | | | | | | 21,445,642 | | | | | | 24,895,878 | | | | | | 21,370,858 | |
There were 233,000 and 898,000 anti-dilutive stock options outstanding as of June 30, 2007 and 2006, respectively.
Table of ContentsRecently IssuedAdopted Accounting Standards
In September 2006, the Financial Accounting Standards Board (‘‘FASB’’(“FASB”) issued SFAS No. 157, ‘‘Fair“Fair Value Measurements.’’ The Statement” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement applies to other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. This StatementSFAS No. 157 does not require any new fair value measurements. This Statement ismeasurements but applies whenever other standards require or permit assets or liabilities to be measured by fair value. The Company adopted SFAS No. 157 for its financial assets and financial liabilities effective for the Company beginning January 1, 2008. Management hasThe adoption of SFAS No. 157 did not completed its review of the new guidance; however, the effect of the Statement’s implementation is not expected to behave a material toimpact on the Company’s condensed consolidated financial positionstatements.
In February 2008, the FASB approved the issuance of FASB Staff Position (“FSP”)FAS 157-2. FSPFAS 157-2 defers the effective date of SFAS No. 157 until January 1, 2009 for non-financial assets and non-financial liabilities except those items recognized or
results of operations.disclosed at fair value on an annual or more frequently recurring basis.
In February 2007, the FASB issued SFAS No. 159, ‘‘The“The Fair Value Option for Financial Assets and Financial Liabilities.’’ The Statement” SFAS No. 159 permits entities to choose to measure eligible items at fair value at specified election dates. For items for which the fair value option has been elected, unrealized gains and losses are to be reported in earnings at each subsequent reporting date. The fair value option is irrevocable unless a new election date occurs, may be applied instrument by instrument, with a few exceptions, and applies only to entire instruments and not to portions of instruments. This StatementSFAS No. 159 provides an opportunity to mitigate volatility in reported earnings caused by
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GREENLIGHT CAPITAL RE, LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
measuring related assets and liabilities differently without having to apply complex hedge accounting. The Company adopted SFAS No. 159 effective January 1, 2008. As a result, the unrealized gains and losses on the Company’s investments in private equities and limited partnerships, are now included in net investment income in the condensed consolidated statements of income, as opposed to other comprehensive income. The adoption of SFAS No. 159 did not have a material impact on the Company’s condensed consolidated financial statements except for the change in presentation of cash flows relating to investments in the condensed consolidated statement of cash flows as described below.
Additionally, SFAS No. 159 amends SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” such that cash flows relating to “trading securities” must be classified in the condensed consolidated statement of cash flows based on the nature and purpose for which the securities were acquired. Prior to adopting SFAS No. 159, the Company classified cash flows relating to investments as operating activities. The Company has determined that activities that generate investment income or loss should be classified under investing activities to reflect the underlying nature and purpose of the Company’s investing strategies. Therefore, upon adoption of SFAS No. 159, the Company has classified cash flows relating to investments in securities, restricted cash and cash equivalents, and financial contracts receivable and payable, as investing activities. Prior period comparatives have not been reclassified.
Recently Issued Accounting Standards
In December 2007, the FASB issued SFAS No. 141 (Revised), “Business Combinations.” SFAS No. 141 (Revised) is effective for acquisitions during the Companyfiscal years beginning January 1, 2008.after December 15, 2008 and early adoption is prohibited. This statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The Company did not elect early adoption. Management has not completed its reviewstatement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the newfinancial statements to evaluate the nature and financial effects of the business combination. Management is reviewing this guidance; however, the effect of the Statement’sstatement’s implementation will depend upon the extent and magnitude of acquisitions, if any, after December 31, 2008.
In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements — an amendment of ARB No. 51.” SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008 and early adoption is prohibited. This statement establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Management is reviewing this guidance; however, the effect of the statement’s implementation is not expected to be material to the Company’s results of operations or financial position.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This statement changes the disclosure requirements for derivative instruments and hedging activities by requiring enhanced disclosures about how and why an entity uses derivative instruments, how an entity accounts for the derivatives and hedged items, and how derivatives and hedged items affect an entity’s financial position, performance and cash flows. Management is reviewing this guidance; however, the effect of the statement’s implementation is not expected to be material to the Company’s derivative disclosures.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. generally accepted accounting principles (GAAP). SFAS No. 162 directs the GAAP hierarchy to the Company, not the independent auditors, as the entity is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. SFAS No. 162 is effective 60 days
10
Additionally,
GREENLIGHT CAPITAL RE, LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to remove the GAAP hierarchy from the auditing standards. Management does not expect SFAS No. 162 to have a material effect on the Company’s results of operations or financial position.
In March 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts — an interpretation of FASB Statement No. 60.” SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. Earlier application is not permitted except for disclosures about the risk-management activities of the insurance enterprise which is effective for the first interim period beginning after the issuance of SFAS No. 163. This statement requires an insurance enterprise to recognize a claim liability prior to an insured event when there is evidence that credit deterioration has occurred in an insured financial obligation. This statement also clarifies how FASB Statement No. 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. Finally, this statement requires expanded disclosures about financial guarantee contracts focusing on the insurance enterprise’s risk-management activities in evaluating credit deterioration in its insured financial obligations. Management is reviewing this statement; however, the effect of the statement’s implementation is not expected to be material to the Company’s results of operations or financial position. Also as of June 30, 2008, the Company had no financial guarantee contracts that required expanded disclosures under this statement.
Fair Value Hierarchy
Effective January 1, 2008, the Company adopted SFAS No. 157 and SFAS No. 159. As a result, all of the Company’s “trading securities” continue to be carried at fair value, and the net unrealized gains or losses continue to be included in net investment income in the condensed consolidated statements of income. For private equity securities, the unrealized gains and losses, if any, which would have been previously recorded in other comprehensive income, are included in net investment income in the condensed consolidated statements of income in order to apply a consistent treatment for the Company’s entire investment portfolio. The change in treatment resulted in no cumulative-effect adjustment to the opening balance of retained earnings. The fair values of the private equity securities, existing at the date the Company adopted SFAS No. 159, amends SFAS No. 115, ‘‘Accountingremained unchanged from the carrying values of those securities immediately prior to electing the fair value option.
The following table presents the Company’s investments, categorized by the level of the fair value hierarchy as of June 30, 2008:
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| | Fair Value Measurements as of June 30, 2008 | |
| | | | | | | | Significant
| | | | |
| | | | | | | | Other
| | | Significant
| |
| | | | | Quoted Prices in
| | | Observable
| | | Unobservable
| |
| | Total as of
| | | Active Markets
| | | Inputs
| | | Inputs
| |
Description | | June 30, 2008 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| | ($ in thousands) | |
|
Listed equity securities | | $ | 588,604 | | | $ | 588,604 | | | $ | — | | | $ | — | |
Debt securities | | | 6,328 | | | | — | | | | 3,261 | | | | 3,067 | |
Private equity securities | | | 7,963 | | | | — | | | | 1,700 | | | | 6,263 | |
Options | | | 3,050 | | | | 1,215 | | | | 1,835 | | | | — | |
Financial contracts receivable/payable, net | | | 2,977 | | | | — | | | | 2,977 | | | | — | |
| | | | | | | | | | | | | | | | |
| | $ | 608,922 | | | $ | 589,819 | | | $ | 9,773 | | | $ | 9,330 | |
| | | | | | | | | | | | | | | | |
Listed equity securities, sold not yet purchased | | $ | (409,218 | ) | | $ | (409,218 | ) | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | |
| | $ | (409,218 | ) | | $ | (409,218 | ) | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | |
11
GREENLIGHT CAPITAL RE, LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the reconciliation of the balances for Certain Investmentsall investments measured at fair value using significant unobservable inputs (Level 3):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |
| | Three Months Ended June 30, 2008 | | | Six Months Ended June 30, 2008 | |
| | | | | Private
| | | | | | | | | Private
| | | | |
| | Debt
| | | Equity
| | | | | | Debt
| | | Equity
| | | | |
| | Securities | | | Securities | | | Total | | | Securities | | | Securities | | | Total | |
| | ($ in thousands) | |
|
Beginning balance | | $ | 865 | | | $ | 10,943 | | | $ | 11,808 | | | $ | 865 | | | $ | 8,115 | | | $ | 8,980 | |
Purchases, sales, issuance, and settlements | | | 2,204 | | | | 804 | | | | 3,008 | | | | 2,204 | | | | 3,565 | | | | 5,769 | |
Total gains or losses (realized & unrealized) included in earnings | | | (2 | ) | | | (279 | ) | | | (281 | ) | | | (2 | ) | | | (212 | ) | | | (214 | ) |
Transfers in and/or out of Level 3 | | | — | | | | (5,205 | ) | | | (5,205 | ) | | | — | | | | (5,205 | ) | | | (5,205 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance | | $ | 3,067 | | | $ | 6,263 | | | $ | 9,330 | | | $ | 3,067 | | | $ | 6,263 | | | $ | 9,330 | |
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Transfers from Level 3 represent the fair value of private equity securities of an entity that were transferred to Level 1 when the entity’s shares were publicly listed during the second quarter of fiscal 2008, resulting in
Debt and Equity Securities,’’ such that cash flows relating to trading securities must be classified in the Condensed Consolidated Statement of Cash Flowsfair value being based on the
nature and purpose for which the securities were acquired. Currently, the Company classifies cash flows from trading securities as operating activities. While the Company’s management has not completed its review of SFAS No. 159, the Company anticipates that cash flows relating to trading securities may be classified as investing activities rather than operating activities beginning January 1, 2008. | |
3. | REINSURANCE |
The Company utilizes retrocession agreements to reduce the risk of loss on business assumed. The Company currently hasquoted price in place coverages that provide for recovery of a portion of certain loss and loss expenses incurred on certain contracts. Loss and loss adjustment expense recoverables from the reinsurers are recorded as assets. an active market.
For the
three and six months ended June 30,
2007 loss2008, change in unrealized losses of $0.3 million and
loss adjustment expenses incurred$0.2 million respectively, on securities still held at the reporting date, and valued using unobservable inputs, are
included as net
investment income in the condensed consolidated statements of
lossincome. There were no realized gains or losses for the three and
loss expenses recovered and recoverable of $5.9 million (2006: $0). Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company regularly evaluates the financial condition of its reinsurers. Atsix months ended June 30,
2007 the Company has loss recoverables of $1.5 million (2006: $0) with a reinsurer rated ‘‘A (excellent)’’ by A.M. Best Company. Additionally, the Company ha s loss recoverables of $3.8 million (2006: $0) with two unrated reinsurers. At June 30, 2007 the Company retains funds and other collateral from the unrated reinsurers for amounts in excess of the loss recoverable asset. The Company did not purchase any retrocessional coverage in 2006. | |
4. | 2008, relating to securities valued using unobservable inputs. Financial Instruments
|
Other Investments
“Other
investmentsInvestments” include
bonds andoptions as well as private equities for which
fair value isquoted prices in active markets are not readily
determined as well as options.available. Options are derivative financial instruments that give the buyer, in exchange for a premium payment, the right, but not the obligation, to either purchase from (call option) or sell to (put option) the writer, a specified underlying security at a specified price on or before a specified
Table of Contentsdate. The Company enters into exchange traded option contracts to meet certain investment objectives. For these exchange traded option contracts, the exchange acts as the counterparty to specific transactions and therefore bears the risk of delivery to and from counterparties of specific positions.
At For OTC options the dealer acts as the counterparty and therefore the Company is exposed to credit risk to the extent the dealer is unable to meet its obligations. As of June 30, 2007,2008, the Company did not hold any OTC options.
As of June 30, 2008, the following securities were included in other investments are“Other Investments”:
| | | | | | | | | | | | | | | | |
| | | | | Unrealized
| | | Unrealized
| | | Fair Market
| |
| | Cost | | | Gains | | | Losses | | | Value | |
| | ($ in thousands) | |
|
Private equity securities | | $ | 9,565 | | | $ | — | | | $ | (1,602 | ) | | $ | 7,963 | |
Put options | | | 2,477 | | | | 594 | | | | (21 | ) | | | 3,050 | |
| | | | | | | | | | | | | | | | |
| | $ | 12,042 | | | $ | 594 | | | $ | (1,623 | ) | | $ | 11,013 | |
| | | | | | | | | | | | | | | | |
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GREENLIGHT CAPITAL RE, LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | |
| | | | | Unrealized
| | | Unrealized
| | | Fair Market
| |
| | Cost | | | Gains | | | Losses | | | Value | |
| | ($ in thousands) | |
|
Private equity securities | | $ | 10,932 | | | $ | 150 | | | $ | (247 | ) | | $ | 10,835 | |
Call options | | | 1,943 | | | | 776 | | | | (1,409 | ) | | | 1,310 | |
Put options | | | 2,821 | | | | 3,266 | | | | (1,182 | ) | | | 4,905 | |
Futures | | | — | | | | 1,526 | | | | — | | | | 1,526 | |
| | | | | | | | | | | | | | | | |
| | $ | 15,696 | | | $ | 5,718 | | | $ | (2,838 | ) | | $ | 18,576 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | Cost | | | Unrealized gains/(losses) | | | Fair market value |
Equities – unlisted | | | | $ | 4,032 | | | | | $ | (28 | ) | | | | $ | 4,004 | |
Call options | | | | | 367 | | | | | | 352 | | | | | | 719 | |
Put options | | | | | 123 | | | | | | (123 | ) | | | | | — | |
| | | | $ | 4,522 | | | | | $ | 201 | | | | | $ | 4,723 | |
During the six months ended June 30, 2007, and 2006, other-than-temporary impairment losses on unlistedprivate equities of $323 and $808 respectively,$0.3 million were reported and included in net realized gains on securities within net investment income, in the condensed consolidated statements of income.
5. Share capital
The Company utilizes retrocession agreements to reduce the risk of loss on business assumed. At June 30, 2008, the Company had in place coverages that provide for recovery of a portion of loss and loss expenses incurred on certain contracts. Loss and loss adjustment expense recoverables from the retrocessionaires are recorded as assets. For the six months ended June 30, 2008, loss and loss adjustment expenses incurred are net of loss and loss expenses recovered and recoverable of $5.4 million (2007: $5.9 million). Retrocession contracts do not relieve the Company from its obligations to policyholders. Failure of retrocessionaires to honor their obligations could result in losses to the Company. The Company regularly evaluates the financial condition of its retrocessionaires. At June 30, 2008, the Company had loss and loss adjustment expense recoverables of $0 (2007: $1.3 million) with a retrocessionaire rated “A (excellent)” by A.M. Best Company. In addition, included in the reinsurance balances receivable on the balance sheet as of June 30, 2008 were $1.5 million (2007: $1.3 million) in losses reimbursable from a retrocessionaire rated “A (excellent)” by A.M. Best Company. Additionally, at June 30, 2008, the Company had loss and loss adjustment expense recoverables of $7.7 million (2007: $5.4 million) with two unrated retrocessionaires. At June 30, 2008, the Company retained funds and other collateral from the unrated retrocessionaires for amounts in excess of the loss recoverable asset, and the Company has recorded no provision for uncollectible losses recoverable.
On January 10, 2007, 1,426,630 Class B ordinary shares were transferred from Greenlight Capital Investors, LLC (“GCI”) to its underlying owners and automatically converted into an equal number of Class A ordinary shares on a one-for-one basis, upon transfer. The remaining Class B ordinary shares were transferred from GCI to David Einhorn, the Chairman of the Company’s Board of Directors and a principal shareholder of the Company, and remained as Class B ordinary shares.
On May 30, 2007, the Company completed the sale of 11,787,500 Class A
Ordinary Sharesordinary shares at $19.00 per share in an initial public offering. Included in the 11,787,500 shares sold were 1,537,500 shares purchased by the underwriters to cover over-allotments. Concurrently, 2,631,579 Class B
Ordinary Sharesordinary shares were sold at $19.00 per share as part of a private placement. The net proceeds to the Company of the initial public offering and private placement were approximately $255.7 million after the deduction of underwriting fees and other offering expenses.
Additionally, during
During the six months ended June 30, 2007, 108,1602008, 141,465 (2007: 108,160) restricted shares of Class A Ordinary Sharesordinary shares were issued to employees as part ofpursuant 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 vest on March 15, 2010,24, 2011, subject to the grantee’s continued service with the Company.
13
GREENLIGHT CAPITAL RE, LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During the six months ended June 30, 2008, 660 stock options were exercised which had a weighted average exercise price of $13.85. For any options exercised, the Company issues new Class A ordinary shares from the shares authorized for issuance as part of the Company’s stock incentive plan. The intrinsic value of options exercised during the six months ended June 30, 2008, was $6,067. During the six months ended June 30, 2007, no stock options were exercised.
During the six months ended June 30, 2008, the Company also issued to certain directors 13,26420,724 (2007: 13,264) restricted shares of Class A Ordinary Sharesordinary shares as part of the directors’ remuneration. Each of these restricted shares issued to the directors contain similar restrictions to those issued to employees and these shares will vest on the earlier of the first anniversary of the sharesshare issuance or the Company’s next annual general meeting, subject to the grantee’s continued service with the Company. Additionally, t he Company
The following table is a summary of voting ordinary shares issued
5,005 Class A Ordinary Shares representing the vesting of directors’ stock awards granted in 2004.The Company recognizes compensation expense on a straight line basis over the vesting period using the fair value of the shares awarded, at the time of the grant. Fair value for 102,160 shares of restricted stock which were issued prior to the initial public offering, was determined based on the mid-point of anticipated book value multiples for the Company’s initial public offering relative to the Company’s diluted book value per share as of the grant date. Fair value for 19,264 shares of restricted stock which were issued on May 24, 2007, was determined based on the initial public offering price of $19.00 per share.
The common shares of Company are listed on Nasdaq Global Select Market under the symbol ‘‘GLRE’’.
Table of ContentsOn January 10, 2007, 1,426,630 Class B Ordinary Shares were transferred from Greenlight Capital Investors, LLC (‘‘GCI’’) to its underlying owners and automatically converted into an equal number of Class A Ordinary Shares on a one-for-one basis, upon transfer. The remaining Class B Ordinary Shares were transferred from GCI to Mr. David Einhorn and remained as Class B Ordinary Shares.
outstanding: | | | | | | | | | | | | | | | | |
| | June 30, 2008 | | | June 30, 2007 | |
| | Class A | | | Class B | | | Class A | | | Class B | |
|
Balance — beginning of period | | | 29,847,787 | | | | 6,254,949 | | | | 16,507,228 | | | | 5,050,000 | |
Issue of ordinary shares | | | 162,849 | | | | — | | | | 11,913,929 | | | | 2,631,579 | |
Transfer from Class B to Class A | | | — | | | | — | | | | 1,426,630 | | | | (1,426,630 | ) |
| | | | | | | | | | | | | | | | |
Balance — end of period | | | 30,010,636 | | | | 6,254,949 | | | | 29,847,787 | | | | 6,254,949 | |
| | | | | | | | | | | | | | | | |
| |
6. | Related party transactionsRELATED PARTY TRANSACTIONS |
Director Stock Awards
During the year ended December 31, 2004, certain directors received a stock award of 5,000 Class A Ordinary Shares, vesting equally over three years. The directors each paid five hundred dollars to acquire the right to the stock award.
During the six months ended June 30, 2007, 5,005 (2006: 0) shares vested and were issued to the directors and as a result, $1 (2006: $0) has been expensed and added to shareholders’ equity.
Director Fees
Effective May 1, 2007 the four independent directors’ compensation was changed to include an annual retainer fee plus restricted stock rather than a retainer fee and per meeting fees which was previously in effect. The directors have the option of receiving the annual retainer in cash or restricted shares. During the six months ended June 30, 2007, director fees of $80 (2006: $30) were incurred. The amount was split among the four independent directors.
Investment Advisory Agreement The Company
has entered intowas party to an Investment Advisory Agreement (the
‘‘Investment Agreement’’“Investment Agreement”) with DME
Advisors, L.P. (‘‘DME’’).until December 31, 2007. DME is a related party and an affiliate of David Einhorn,
the Chairman of the Company’s Board of Directors
(the “Board”) and
a principal shareholderthe beneficial owner of all of the
Company.issued and outstanding Class B ordinary shares. Effective January 1, 2008, the Company terminated the Investment Agreement and entered into an agreement (the “Advisory Agreement”) wherein the Company and DME agreed to create a joint venture for the purposes of managing certain jointly held assets. Pursuant to this agreement, there were no changes to the monthly management fee or performance compensation contained in the Investment Agreement.
Pursuant to the
InvestmentAdvisory Agreement,
a performance
feecompensation equal to 20% of the net income of the
Company’s share of the account managed by DME is
payable,allocated, subject to a loss carry forward provision, to
DME.DME’s account. Included in
net investment
feesincome for
both the three months
ended June 30, 2007 is a performance fee of $1.3 million (2006: $1.8 million), and
for the six months ended June 30,
20072008 is a performance compensation expense of $6.1 million (2007: $1.3
million (2006: $6.1 million). At June 30,
20072008 and December 31,
2006, $1.32007, $6.1 million and
$14.6$6.9 million, respectively, remained payable.
Additionally, pursuant to the InvestmentAdvisory Agreement, a monthly management fee equal to 0.125% (1.5% on an annual basis) of the Company’s share of the account managed by DME is paid to DME. Included in the net investment feesincome for the three months ended June 30, 20072008 are management fees of $2.4$2.7 million (2006: $1.1(2007: $1.7 million), and. Included in net investment income for the six months ended June 30, 2007 $3.72008, are management fees of $5.1 million (2006: $1.9(2007: $3.0 million). The management fees were fully paid as of June 30, 20072008, and December 31, 2006.2007.
Service Agreement
In February 2007, the Company entered into a service agreement with DME, pursuant to which DME will provide investor relations services to the Company for compensation of $5,000 per month (plus expenses). The agreement had an initial term of one year, and continues for sequential one year periods until terminated by the Company or DME. Either party may terminate the agreement for any reason with 30 days prior written notice to the other party.
14
Other Transactions
Included in the condensed consolidated statements of income is interest income of $0 (2006: $0.6 million,) relating to a related party promissory note issued by GCI in exchange for Class B Ordinary Shares. During fiscal 2006 this promissory note was fully repaid by GCI, including both principal and interest.
GREENLIGHT CAPITAL RE, LTD.
Table of ContentsNOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) | |
7. | Commitments and contingenciesCOMMITMENTS AND CONTINGENCIES |
Letters of Credit
At June 30, 2008, the Company had one letter of credit agreement for a total facility of $400 million of which the Company had issued $116.8 million (December 31, 2007: $76.5 million) letters of credit. In addition, a $25.0 million letter of credit agreement with another bank was terminated on June 6, 2008; although, letters of credit of $23.9 million issued under the agreement prior to June 6, 2008, remain outstanding until their respective expiration dates. At June 30, 2008, total investments and cash equivalents with a fair market value of $225.1 million (December 31, 2007: $148.9 million) have been pledged as security against the letters of credit issued. Each of the credit facilities requires that the Company comply with covenants, including restrictions on the Company’s ability to place a lien or charge on the pledged assets, and restricts issuance of any debt without the consent of the letter of credit provider. The Company was in compliance with all the covenants of each of its letter of credit facilities as of June 30, 2008.
Effective September 1, 2005, the Company entered into a five-year non-cancelable lease agreement to rent office space. The total rent expense charged for the six months ended June 30, 2008, was $46,589 (2007: $44,370).
Specialist Service Agreement
Effective September 1, 2007,
was $44 (2006: $42).the Company entered into a service agreement with a specialist whereby the specialist service provider provides administration and support in developing and maintaining relationships, reviewing and recommending programs and managing risks on certain specialty lines of business. The followingservice 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 service provider. If the agreement is a schedule of futureterminated after two years, the Company is obligated to make minimum rental payments required underfor another two years, as presented in the operating lease fortable below, to ensure any bound contracts are adequately run-off by the next five years:
| | | | | | |
Year | | | Total |
2007 | | | | $ | 90 | |
2008 | | | | | 95 | |
2009 | | | | | 99 | |
2010 | | | | | 69 | |
2011 | | | | | — | |
| | | | $ | 353 | |
Periodically, 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 June 30,
2007,2008, the Company had commitments to invest an additional
$2$26.9 million in private
equity investments.Lettersequities.
Schedule of CreditEffective October 15, 2005, the Company signed a letterCommitments and Contingencies
As of
credit agreement with a U.S. bank, for a facility of up to $200 million.Effective June 6, 2007, the Company signed a letter of credit agreement with a Cayman Islands incorporated bank, for a facility of up to $25 million.
At June 30, 2007, letters2008, the following is a schedule of credit totaling $54.0 million (2006: $36.5 million) had been issued.future minimum payments required under the above commitments for the next five years:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | Total | |
| | ($ in thousands) | |
|
Operating lease obligations | | $ | 48 | | | $ | 99 | | | $ | 69 | | | $ | — | | | $ | — | | | $ | 216 | |
Specialist service agreement | | | 326 | | | | 576 | | | | 400 | | | | 150 | | | | — | | | | 1,452 | |
Private equity and limited partnerships(1) | | | 26,913 | | | | — | | | | — | | | | — | | | | — | | | | 26,913 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 27,287 | | | $ | 675 | | | $ | 469 | | | $ | 150 | | | $ | — | | | $ | 28,581 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | |
(1) | | Given the nature of these investments, the Company is unable to determine with any degree of accuracy when the remaining commitments will be called. Therefore, for purposes of the above table, the Company has assumed that all commitments will be paid within one year. |
15
Litigation
GREENLIGHT CAPITAL RE, LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Litigation
In the normal course of business, the Company may become involved in various claims, litigation and legal proceedings. As of June 30, 2007,2008, the Company was not a party to any litigation or arbitration proceedings.
Table of Contents | |
8. | 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 June 30, 2008 | | | Three Months Ended June 30, 2007 | | | Six Months Ended June 30, 2008 | | | Six Months Ended June 30, 2007 | |
| | ($ in millions) | |
|
Property | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial lines | | $ | 1.6 | | | | 6.3 | % | | $ | 5.3 | | | | 8.1 | % | | $ | 6.1 | | | | 6.3 | % | | $ | 10.0 | | | | 9.6 | % |
Personal lines | | | (4.2 | ) | | | (16.5 | ) | | | 15.8 | | | | 24.2 | | | | (4.1 | ) | | | (4.3 | ) | | | 30.8 | | | | 29.8 | |
Casualty | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
General liability | | | 8.7 | | | | 34.2 | | | | 16.5 | | | | 25.2 | | | | 10.3 | | | | 10.7 | | | | 17.0 | | | | 16.4 | |
Motor liability | | | 12.1 | | | | 47.6 | | | | — | | | | — | | | | 36.9 | | | | 38.4 | | | | — | | | | — | |
Professional liability | | | 2.2 | | | | 8.7 | | | | 27.3 | | | | 41.7 | | | | 2.2 | | | | 2.3 | | | | 27.3 | | | | 26.4 | |
Specialty | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Health | | | 2.5 | | | | 9.8 | | | | 0.5 | | | | 0.8 | | | | 28.5 | | | | 29.7 | | | | 14.8 | | | | 14.3 | |
Medical malpractice | | | (0.9 | ) | | | (3.5 | ) | | | — | | | | — | | | | 6.9 | | | | 7.2 | | | | 3.6 | | | | 3.5 | |
Workers’ compensation | | | 3.4 | | | | 13.4 | | | | — | | | | — | | | | 9.3 | | | | 9.7 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 25.4 | | | | 100.0 | % | | $ | 65.4 | | | | 100.0 | % | | $ | 96.1 | | | | 100.0 | % | | $ | 103.5 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, 2007 | | | Three Months Ended June 30, 2006 | | | Six Months Ended June 30, 2007 | | | Six Months Ended June 30, 2006 |
| | | ($ in millions) | | | ($ in millions) | | | ($ in millions) | | | ($ in millions) |
Homeowners’ | | | | $ | 15.8 | | | | | | 24.2 | % | | | | $ | — | | | | | | — | % | | | | $ | 30.8 | | | | | | 29.8 | % | | | | $ | — | | | | | | — | % |
Professional Liability | | | | | 27.2 | | | | | | 41.6 | | | | | | — | | | | | | — | | | | | | 27.2 | | | | | | 26.3 | | | | | | — | | | | | | — | |
Health | | | | | 0.6 | | | | | | 0.9 | | | | | | — | | | | | | — | | | | | | 14.8 | | | | | | 14.3 | | | | | | — | | | | | | — | |
General Liability | | | | | 14.5 | | | | | | 22.2 | | | | | | — | | | | | | — | | | | | | 14.5 | | | | | | 14.0 | | | | | | — | | | | | | — | |
Property Catastrophe | | | | | 5.3 | | | | | | 8.1 | | | | | | 9.9 | | | | | | 84.3 | | | | | | 10.0 | | | | | | 9.7 | | | | | | 9.9 | | | | | | 84.3 | |
Medical Malpractice | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 3.7 | | | | | | 3.5 | | | | | | — | | | | | | — | |
Casualty Clash | | | | | 2.0 | | | | | | 3.0 | | | | | | — | | | | | | — | | | | | | 2.5 | | | | | | 2.4 | | | | | | — | | | | | | — | |
Marine | | | | | — | | | | | | — | | | | | | 1.8 | | | | | | 15.7 | | | | | | — | | | | | | — | | | | | | 1.8 | | | | | | 15.7 | |
| | | | $ | 65.4 | | | | | | 100.0 | % | | | | $ | 11.7 | | | | | | 100.0 | % | | | | $ | 103.5 | | | | | | 100.0 | % | | | | $ | 11.7 | | | | | | 100.0 | % |
Gross Premiums Written by Geographic Area of Risks Insured
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended June 30,
| | | | | | | |
| | Three Months Ended June 30, 2008 | | | 2007 | | | Six Months Ended June 30, 2008 | | | Six Months Ended June 30, 2007 | |
| | ($ in millions) | |
|
USA | | $ | 21.6 | | | | 85.0 | % | | $ | 33.6 | | | | 51.3 | % | | $ | 86.2 | | | | 89.7 | % | | $ | 66.6 | | | | 64.3 | % |
Worldwide(1) | | | 3.0 | | | | 11.8 | | | | 29.2 | | | | 44.6 | | | | 9.1 | | | | 9.5 | | | | 34.2 | | | | 33.0 | |
Europe | | | — | | | | — | | | | 2.1 | | | | 3.3 | | | | — | | | | — | | | | 2.1 | | | | 2.1 | |
Caribbean | | | 0.8 | | | | 3.2 | | | | 0.5 | | | | 0.8 | | | | 0.8 | | | | 0.8 | | | | 0.6 | | | | 0.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 25.4 | | | | 100.0 | % | | $ | 65.4 | | | | 100.0 | % | | $ | 96.1 | | | | 100.0 | % | | $ | 103.5 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, 2007 | | | Three Months Ended June 30, 2006 | | | Six Months Ended June 30, 2007 | | | Six Months Ended June 30, 2006 |
| | | ($ in millions) | | | ($ in millions) | | | ($ in millions) | | | ($ in millions) |
USA | | | | $ | 33.6 | | | | | | 51.3 | % | | | | $ | 6.3 | | | | | | 54.3 | % | | | | $ | 66.6 | | | | | | 64.3 | % | | | | $ | 6.3 | | | | | | 54.3 | % |
Worldwide(1) | | | | | 29.2 | | | | | | 44.6 | | | | | | — | | | | | | — | | | | | | 34.2 | | | | | | 33.0 | | | | | | — | | | | | | — | |
Europe | | | | | 2.1 | | | | | | 3.3 | | | | | | 3.5 | | | | | | 30.0 | | | | | | 2.1 | | | | | | 2.1 | | | | | | 3.5 | | | | | | 30.0 | |
Caribbean | | | | | 0.5 | | | | | | 0.8 | | | | | | 0.5 | | | | | | 4.3 | | | | | | 0.6 | | | | | | 0.6 | | | | | | 0.5 | | | | | | 4.3 | |
Japan | | | | | — | | | | | | — | | | | | | 1.4 | | | | | | 11.4 | | | | | | — | | | | | | — | | | | | | 1.4 | | | | | | 11.4 | |
| | | | $ | 65.4 | | | | | | 100.0 | % | | | | $ | 11.7 | | | | | | 100.0 | % | | | | $ | 103.5 | | | | | | 100.0 | % | | | | $ | 11.7 | | | | | | 100.0 | % |
(1) | ‘‘Worldwide’’“Worldwide” risk comprise individual policies that insure risks on a worldwide basis. |
Table of Contents | |
9. | SUBSEQUENT EVENTS |
On July 9, 2008, the Company entered into a lease agreement for new office space in the Cayman Islands. Under the terms of the lease agreement, the Company is committed to annual rent payments ranging from $253,539
16
GREENLIGHT CAPITAL RE, LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
to $311,821 for ten years starting from the earlier of December 1, 2008 or when the premises are occupied. The Company also has the option to renew the lease for a further five year term.
In addition, on August 5, 2008, the Board adopted a share repurchase plan. Under the share repurchase plan, the Board authorized the Company to purchase up to two million of its Class A ordinary shares from time to time. Class A ordinary shares may be purchased in the open market or through privately negotiated transactions. The timing of such repurchases and actual number of shares repurchased will depend on a variety of factors including price, market conditions and applicable regulatory and corporate requirements. The share repurchase plan, which expires on June 30, 2011, does not require the Company to repurchase any specific number of shares and may be modified, suspended or terminated at any time without prior notice. As of the date of this filing, no Class A ordinary shares had been repurchased pursuant to the share repurchase plan.
17
| |
Item 2: 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
References to ‘‘we,’’ ‘‘our,’’ ‘‘our“we,” “us,” “our,” “our company,’’ ‘‘Greenlight” “Greenlight Re,’’” or the ‘‘the Company’’“the Company” refer to Greenlight Capital Re, Ltd. and our wholly-owned subsidiary, Greenlight Reinsurance, Ltd., unless the context dictates otherwise. References to our ‘‘Ordinary Shares’’“Ordinary Shares” refers collectively to our Class A Ordinary Shares and Class B Ordinary Shares. The following is a discussion and analysis of our results of operations for the three and six months ended June 30,
20072008 and
20062007 and financial condition as of June 30,
20072008 and December 31,
2006.2007. This discussion and analysis should be read in conjunction with our audited consolidated financial statements and related notes thereto contained in our
prospectus dated May 24, 2007 filed withannual report onForm 10-K for the
Securities and Exchange Commission, or SEC.fiscal year ended December 31, 2007.
Special Note About Forward-Looking Statements Certain statements in Management’s Discussion and Analysis
(‘‘(“MD
&A’’&A”), 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’’“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words
‘‘believe,’’ ‘‘project,’’ ‘‘expect,’’ ‘‘anticipate,’’ ‘‘estimate,’’ ‘‘intend,’’ ‘‘strategy,’’ ‘‘plan,’’ ‘‘may,’’ ‘ ‘should,’’ ‘‘will,’’ ‘‘would,’’ ‘‘will“believe,” “project,” “predict,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “may,” “should,” “will,” “would,” “will be,
’’ ‘‘will” “will continue,
’’ ‘‘will” “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. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled
‘‘Risk Factors’’“Risk Factors” (refer to Part
II,I, Item 1A)
. contained in our annual report onForm 10-K for the fiscal year ended December 31, 2007. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of 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 on which they were made.
We intend to communicate
certain events that we believe may have a material adverse impact on the Company’s 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 Securities Exchange Act of 1934, as amended, 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 to the Company’s operations or financial position.
We are a Cayman Islands-based specialty property and casualty reinsurer with a reinsurance and investment strategy that we believe differentiates us from our competitors. Our goal is to build long-term shareholder value by selectively offering customized reinsurance solutions, in markets where capacity and alternatives are limited,
thatwhich we believe will provide favorable long-term returns on equity.
We aim to complement our underwriting results with a non-traditional investment approach in order to achieve higher rates of return over the
long-termlong term than reinsurance companies that employ more traditional, fixed-income investment strategies. We manage our investment portfolio according to a value-oriented philosophy, in which we take long positions in perceived undervalued securities and short positions in perceived overvalued securities.
Because we have a limited operating history, and an opportunistic underwriting philosophy, period-to-period comparisons of our underwriting results are not yet possible and may not be meaningful in the near future.meaningful. In addition, our historical investment results may not necessarily be indicative of future performance. In addition, due to the nature of our reinsurance and investment strategies, our operating results will likely fluctuate from period to period.
18
Table of ContentsSegments
Segments
We manage our business on the basis of one operating segment, property and casualty reinsurance, in accordance with the qualitative and quantitative criteria established by SFAS 131, ‘‘Disclosure“Disclosure about Segments of an Enterprise and Related Information.’’” Within the property and casualty reinsurance segment, we analyze our underwriting operations using two categories:
| | |
| • | frequency business; and |
Frequency business is characterized by contracts containing a potentially large number of smaller losses emanating from multiple events. Clients generally buy this protection to increase their own underwriting capacity and typically select a reinsurer based upon the reinsurer’s financial strength and expertise. We expect the results of frequency business to be less volatile than those of severity business from period to period due to its greater predictability. We also expect that over time the profit margins and return on equity for our frequency business will be lower than those of our severity business.
Severity business is typically characterized by contracts with the potential for significant losses emanating from one event or multiple events. Clients generally buy this protection to remove volatility from their balance sheets and, accordingly, we expect the results of severity business to be volatile from period to period. However, over the long term, we also expect that our severity business will generate higher profit margins and return on equity than those of our frequency business.
Outlook and TrendsHistorically,
Due to our increasing market recognition and a stronger capital base, we continue to expect to see an increase in frequency business written in 2008 compared to 2007 and continued diversification of business by client, line of business, broker and geography. In the second quarter of 2008, our premium estimates on certain contracts were lower than initially expected mainly due to our clients writing less exposures in a softening pricing environment. This has caused second quarter premium to decline.
At the same time, we believe there is an excess of capacity in the property and casualty market has experienced capacity shortages in certain product linesreinsurance business as a whole, mainly due to extended periodstwo consecutive years of competitivelow natural catastrophe losses. In the absence of a market changing event in 2008, we believe that this excess capacity will exert downward pricing higher than expected losses and changes in rating agency capital requirements. Overall,pressure on a number of the property and casualty market is currently experiencing a general softening of rates. However, whileproducts we expect that the property and casualty market will continuesell or wish to see adverse pricing trendssell in the near term,term. We intend to maintain our underwriting standards and discipline in the face of such potential market conditions.
Although current general market conditions in the reinsurance business may not be favorable, we continue to believe that specific sectors within the reinsurance marketplace may provide attractive opportunities. In particular, we continue to anticipate that we will see attractive opportunities during the remainder of 2008 in certain market segments will experience capacity or structural shortages. casualty and property lines, including some property catastrophe coverages, motor liability, health and medical malpractice risks, for reasons set forth in our annual report onForm 10-K for the fiscal year ended December 31, 2007.
We
monitorintend to continue monitoring market conditions to be positioned to participate in future underserved or capacity-constrained markets as they arise and
intend to offer products that we believe will generate favorable returns on equity over the long term. Accordingly, our underwriting results and product line concentrations in any given period
will likely fluctuate and may not be indicative of our future results of operations.
Currently, we believe that market disruptions in some segments of the health markets have created some short-term opportunities, even as we are facing unfavorable general market conditions. In addition, we continue to develop business relating to the Cayman Islands’ captive market, which we believe can generate above average risk adjusted returns.
Critical Accounting Policies Our consolidated financials statements are prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect reported and disclosed amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. We believe that the critical accounting policies set forth in our prospectus dated May 24,annual report onForm 10-K for the fiscal year ended December 31, 2007, as filed with the SEC continue to
19
describe the more significant judgments and estimates used in the preparation of our consolidated financial statements. These accounting policies pertain to revenue recognition, loss and loss adjustment expensesexpense reserves and investment valuation. Effective January 1, 2008, as a result of adopting SFAS No. 157 and SFAS No. 159 we record unrealized gains and losses, if any, on private investments in net investment income in the condensed consolidated statements of income. There was no material impact to our results of operations or financial condition as a result of this change. We did not make any material changes to our valuation techniques or models during the period.
If actual events differ significantly from the underlying judgments or estimates used by management in the application of these accounting policies, there could be a material effect on our results of operations and financial condition.
For the Three and Six Months Ended June 30, 20072008, and 2006Our net income increased by $14.8 million for2007
For the three months ended June 30, 20072008, our net income increased by $12.2 million as compared to the same period in 20062007 mainly due to expanded underwriting operations, as well as$11.1 million higher investment income. Ourincome compared to the same period in 2007. The investment portfolio reported a net investment income of $31.0 million, a return of 4.5%, for the second quarter of 2008 as compared to net investment income of $19.9 million, a return of 6.8%, for the second quarter 2007 as comparedof 2007. The higher investment income reported in 2008 is primarily due to $7.2an increase in invested assets resulting from the net proceeds of our initial public offering in May 2007. Additionally, underwriting income increased to $6.1 million a 2.9% return, for the second quarterthree months ended June 30, 2008, from $4.3 million for the three months ended June 30, 2007. The increase in underwriting income for the three months ended June 30, 2008, was primarily due to lower loss and loss adjustment expenses, net of 2006.loss recoveries.
Table of ContentsOur net income decreased by $13.9 million for
For the six months ended June 30, 20072008, our net income increased by $20.6 million as compared to the same period in 2006 primarily as the result of a decrease of $18.82007 mainly due to $19.7 million inhigher investment income compared to the same period in 2007. The investment portfolio reported a net investment income of $25.3 million, a return of 3.6%, for the period duefirst half of 2008 as compared to ana net investment loss duringincome of $5.5 million, a return of 2.3%, for the first quarterhalf of 2007 on2007. Additionally, our long equity position in New Century Financial Corp. a subprime mortgage lender that filedunderwriting income accounted for bankruptcy protection under Chapter 11approximately $3.0 million of the U.S. Bankruptcy Code on April 2, 2007. This decreaseincrease, while higher general and administrative expenses offset a portion of the increases in income duringour underwriting and investment results.
One of our primary financial goals is to increase the
firstlong-term value in fully diluted book value per share. For the three months ended June 30, 2008, fully diluted book value increased by $0.89 per share, or 5.4%, to $17.29 from $16.40 at March 31, 2008. For the six months
of 2007 was partially offsetended June 30, 2008, fully diluted book value increased by
higher income being reported$0.72 per share, or 4.3%, to $17.29 from
our underwriting operations, which commenced in April 2006.$16.57 at December 31, 2007.
Details of gross premiums written are provided below ($below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | ($ in thousands) | |
|
Frequency | | $ | 20,801 | | | | 82.0 | % | | $ | 30,943 | | | | 47.3 | % | | $ | 77,646 | | | | 80.8 | % | | $ | 63,801 | | | | 61.6 | % |
Severity | | | 4,559 | | | | 18.0 | | | | 34,502 | | | | 52.7 | | | | 18,480 | | | | 19.2 | | | | 39,708 | | | | 38.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 25,360 | | | | 100.0 | % | | $ | 65,445 | | | | 100.0 | % | | $ | 96,126 | | | | 100.0 | % | | $ | 103,509 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
We expect quarterly reporting of premiums written to be volatile as our underwriting portfolio continues to develop and due to our strategy to insure a concentrated portfolio of significant risks. Additionally, the composition of premiums written between frequency and severity business will vary from quarter to quarter depending on the specific market opportunities that we pursue. The volatility in
thousands): | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | | Six months ended June 30, |
| | | 2007 | | | 2006 | | | 2007 | | | 2006 |
Frequency | | | | $ | 30,943 | | | | | $ | — | | | | | $ | 63,801 | | | | | $ | — | |
Severity | | | | | 34,502 | | | | | | 11,662 | | | | | | 39,708 | | | | | | 11,662 | |
Total | | | | $ | 65,445 | | | | | $ | 11,662 | | | | | $ | 103,509 | | | | | $ | 11,662 | |
The increasepremiums is reflected in the premiums written for both our frequency and severity business when comparing the three and six month periods ended June 30, 2008 to the same periods in 2007. The main contributing factor for the lower severity premiums written for the three and six month periods ended June 30, 2008 is premiums on a resultmulti-year professional liability severity contract written in the second quarter of 2007 which were recognized as written at inception in accordance with our accounting policy
20
for premium recognition. For the six months ended June 30, 2008, approximately $44.1 million, or 45.9%, of the
increased underwriting operationsgross premiums written were attributed to new contracts entered into during the first half of
the Company.2008. A
more detailed analysis of gross premiums written by line of business can be found in Note 8 to the
interim condensed consolidated financial statements.
We entered into one retrocessional contract duringcontracts amounting to $5.6 million of ceded premiums for the three months ended June 30, 2008 compared to $14.5 million of ceded premiums for same period in 2007. We have entered into a total of three retrocessionalThis decrease is attributed mainly to the following two factors.
| | |
| • | A frequency contract was renewed during the three month period ended June 30, 2008 which had $5.9 million lower ceded premiums than the original contract entered into during the three months ended June 30, 2007. The lower ceded premiums on this contract were due to a combination of us retaining additional risk compared to the original contract, and due to lower estimated subject premiums on the assumed contract. |
|
| • | Premium adjustments were recorded on two frequency contracts during the three month period ended June 30, 2008 which accounted for approximately $3.0 million of the decrease. |
For the six months ended June 30,
2007 relating2008, our premiums ceded decreased by $13.4 million, or 47.4%, mainly due to the
risks assumed from two frequency reinsurance contracts. We did not purchase any retrocessional coverage in 2006.following factors.
| | |
| • | A frequency contract was renewed at lower estimated subject premiums. |
|
| • | A frequency contract was restructured on renewal wherein we retained certain additional risks previously ceded to a third party. |
|
| • | Premium adjustments were recorded on two frequency contracts during the six month period ended June 30, 2008. |
Details of net premiums written are provided below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | Six Months Ended June, 30 | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | ($ in thousands) | |
|
Frequency | | $ | 15,186 | | | | 76.9 | % | | $ | 16,409 | | | | 32.2 | % | | $ | 62,758 | | | | 77.3 | % | | $ | 35,524 | | | | 47.2 | % |
Severity | | | 4,559 | | | | 23.1 | | | | 34,502 | | | | 67.8 | | | | 18,481 | | | | 22.7 | | | | 39,708 | | | | 52.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 19,745 | | | | 100.0 | % | | $ | 50,911 | | | | 100.0 | % | | $ | 81,239 | | | | 100.0 | % | | $ | 75,232 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Our severity business includes contracts that contain or may contain natural peril loss exposure. As of
June 30, 2007,August 1, 2008, our maximum aggregate loss exposure to any series of natural peril events was
$44.2$69.5 million. For purposes of the preceding sentence, aggregate loss exposure is equal to the difference between the aggregate limits available in the contracts that contain natural peril exposure and reinstatement premiums for the same contracts.
In addition, the maximum aggregate loss exposure to the portfolio can not be realized unless a natural peril event or series of events impacts more than one peak zone. We categorize peak zones as: United States, Europe, Japan and the rest of the world.
Subsequent to June 30, 2007, we wrote additional business with natural peril loss exposure, which increased our maximum aggregate loss exposure to $76.7 million. The following table provides single event loss exposure and aggregate loss exposure information for the peak zones of our natural peril coverage as of the date of this
filing ($ in thousands):filing: | | | | | | | | |
| | Single Event
| | | Aggregate
| |
Zone | | Loss | | | Loss | |
| | ($ in thousands) | |
|
USA(1) | | $ | 51,750 | | | $ | 69,500 | |
Europe | | | 43,750 | | | | 51,500 | |
Japan | | | 43,750 | | | | 51,500 | |
Rest of the world | | | 23,750 | | | | 31,500 | |
Maximum Aggregate | | | 51,750 | | | | 69,500 | |
| | | | | | | | | | | | |
Zone | | | Single Event Loss | | | Aggregate Loss |
United States(1) | | | | $ | 49,600 | | | | | $ | 65,100 | |
Europe | | | | | 51,655 | | | | | | 67,675 | |
Japan | | | | | 38,055 | | | | | | 54,075 | |
Rest of World | | | | | 25,771 | | | | | | 41,790 | |
Maximum Aggregate | | | | | 51,655 | | | | | | 76,675 | |
(1) | Includes the Caribbean |
Table of ContentsDetails of net premiums written are provided below ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | | Six months ended June 30, |
| | | 2007 | | | 2006 | | | 2007 | | | 2006 |
Frequency | | | | $ | 16,409 | | | | | $ | — | | | | | $ | 35,524 | | | | | $ | — | |
Severity | | | | | 34,502 | | | | | | 11,662 | | | | | | 39,708 | | | | | | 11,662 | |
Total | | | | $ | 50,911 | | | | | $ | 11,662 | | | | | $ | 75,232 | | | | | $ | 11,662 | |
Net Premiums Earned
Net premiums earned reflectsreflect the pro rata inclusion into income of net premiums written over the life of the reinsurance contracts. Details of net premiums earned are provided below ($below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | ($ in thousands) | |
|
Frequency | | $ | 15,341 | | | | 62.2 | % | | $ | 20,476 | | | | 82.0 | % | | $ | 33,295 | | | | 63.8 | % | | $ | 36,417 | | | | 79.4 | % |
Severity | | | 9,341 | | | | 37.8 | | | | 4,496 | | | | 18.0 | | | | 18,879 | | | | 36.2 | | | | 9,476 | | | | 20.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 24,682 | | | | 100.0 | % | | $ | 24,972 | | | | 100.0 | % | | $ | 52,174 | | | | 100.0 | % | | $ | 45,893 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the three months ended June 30, 2008, the earned premiums on the frequency business decreased $5.1 million compared to the same period in
thousands):2007. The decrease was mainly due to revised estimates of frequency premiums from certain 2008 contracts, and due to premiums returned on a 2007 personal lines contract. This decrease was offset by a $4.8 million increase in the severity business earned premiums for the same periods. The increase in severity earned premiums relates to the full three months of earned premiums for the three months ended June 30, 2008, on the multi-year professional liability contract written towards the end of the second quarter of 2007. | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | | Six months ended June 30, |
| | | 2007 | | | 2006 | | | 2007 | | | 2006 |
Frequency | | | | $ | 20,476 | | | | | $ | — | | | | | $ | 36,417 | | | | | $ | — | |
Severity | | | | | 4,496 | | | | | | 2,413 | | | | | | 9,476 | | | | | | 2,413 | |
Total | | | | $ | 24,972 | | | | | $ | 2,413 | | | | | $ | 45,893 | | | | | $ | 2,413 | |
For the six months ended June 30, 2008, the total earned premiums increased $6.3 million, or 13.7%. The increase in net premiums earned is attributable principally to increased
grossnet premiums written
and earned from the developing underwriting portfolio for
both the
three and six months ended June 30,
2008, as compared to the corresponding 2007 period. The increase in severity earned premiums relate to the full six months of earned premiums for the first half of fiscal 2008 on the multi-year excess of loss contract written towards the end of the second quarter of 2007.
Losses incurred include losses paid and changes in loss reserves, including reserves for losses incurred but not reported, or IBNR, net of actual and estimated loss recoverables. Details of losses incurred are provided
below ($ in thousands):below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | ($ in thousands) | |
|
Frequency | | $ | 6,102 | | | | 65.3 | % | | $ | 10,594 | | | | 95.1 | % | | $ | 14,098 | | | | 65.7 | % | | $ | 19,165 | | | | 95.2 | % |
Severity | | | 3,235 | | | | 34.7 | | | | 544 | | | | 4.9 | | | | 7,363 | | | | 34.3 | | | | 961 | | | | 4.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 9,337 | | | | 100.0 | % | | $ | 11,138 | | | | 100.0 | % | | $ | 21,461 | | | | 100.0 | % | | $ | 20,126 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | | Six months ended June 30, |
| | | 2007 | | | 2006 | | | 2007 | | | 2006 |
Frequency | | | | $ | 10,594 | | | | | $ | — | | | | | $ | 19,165 | | | | | $ | — | |
Severity | | | | | 544 | | | | | | — | | | | | | 961 | | | | | | — | |
Total | | | | $ | 11,138 | | | | | $ | — | | | | | $ | 20,126 | | | | | $ | — | |
Losses relating to frequency business were $10.6 million and $19.2 million for the three and six months ended June 30, 2007, respectively. The loss ratioratios for our frequency business was 51.7%were 42.3% and 52.6% for the six month periods ended June 30, 2008 and 2007 respectively. The lower loss ratio for frequency business for 2008 primarily reflects favorable loss development compared to the corresponding 2007 period.
We expect losses incurred on our severity business to be volatile from period to period. The loss ratios for our severity business were 39.0% and 10.1% for the six month periods ended June 30, 2008 and 2007 respectively. The increase in the loss ratio for severity business during the six month period ended June 30, 2008 is primarily due to the different composition of the severity underwriting portfolio and partially due to losses developing on a non natural peril severity contract. During the corresponding 2007 period, a majority of the severity underwriting portfolio related to natural peril and professional liability risks, while for the current six month period ended June 30, 2008, the severity contracts are diversified between medical malpractice and professional and general liability as well as natural peril risks.
During the six month period ended June 30, 2008, the aggregate development of prior period reinsurance reserves for frequency and severity businesses combined was not significant.
22
Losses incurred in the three
month and six month periods ended June 30,
2008 and 2007
respectively. There were
no frequency contracts writtencomprised of losses paid and
thus no losses incurred during the comparable 2006 periods.Losses incurred on our severity business are expected to be volatile from period to period. Losses incurred on the natural catastrophe exposed portion of our severity business have benefited from benign natural catastrophe experience during all periods reported. Additionally, given the seasonality of wind exposure, we expect that the first six months of a calendar year will generally report lower losses incurred on natural catastrophe business than the last six months of the year. Thechanges in loss ratio for our severity business was 12.1% and 10.1% for the three month and six month periods ended June 30, 2007, respectively. There were no losses incurred on our severity contracts during the comparable 2006 periods.
There were no significant developments of prior year reinsurance reserves during either the three month or six month periods ended June 30, 2007.
as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2008 | | | Three Months Ended June 30, 2007 | |
| | Gross | | | Ceded | | | Net | | | Gross | | | Ceded | | | Net | |
| | ($ in thousands) | |
|
Losses paid | | $ | 6,456 | | | $ | (2,584 | ) | | $ | 3,872 | | | $ | 2,394 | | | $ | (651 | ) | | $ | 1,743 | |
Increase (decrease) in reserves | | | 5,229 | | | | 236 | | | | 5,465 | | | | 11,911 | | | | (2,516 | ) | | | 9,395 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 11,685 | | | $ | (2,348 | ) | | $ | 9,337 | | | $ | 14,305 | | | $ | (3,167 | ) | | $ | 11,138 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30,
| | | Six Months Ended June 30,
| |
| | 2008 | | | 2007 | |
| | Gross | | | Ceded | | | Net | | | Gross | | | Ceded | | | Net | |
| | ($ in thousands) | |
|
Losses paid | | $ | 11,840 | | | $ | (4,409 | ) | | $ | 7,431 | | | $ | 2,394 | | | $ | (651 | ) | | $ | 1,743 | |
Increase (decrease) in reserves | | | 14,988 | | | | (958 | ) | | | 14,030 | | | | 23,652 | | | | (5,269 | ) | | | 18,383 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 26,828 | | | $ | (5,367 | ) | | $ | 21,461 | | | $ | 26,046 | | | $ | (5,920 | ) | | $ | 20,126 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Acquisition costs represent the amortization of commission and brokerage expenses incurred on contracts written as well as profit commissions and other underwriting expenses which are expensed
Table of Contentswhen incurred. Deferred acquisition costs are limited to the amount of commission and brokerage expenses that are expected to be recovered from future earned premiums and anticipated investment income. Details of acquisition costs are provided below ($ in thousands):
below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | ($ in thousands) | |
|
Frequency | | $ | 8,145 | | | | 88.3 | % | | $ | 8,715 | | | | 91.6 | % | | $ | 16,538 | | | | 86.3 | % | | $ | 15,187 | | | | 88.2 | % |
Severity | | | 1,083 | | | | 11.7 | | | | 800 | | | | 8.4 | | | | 2,619 | | | | 13.7 | | | | 2,040 | | | | 11.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 9,228 | | | | 100.0 | % | | $ | 9,515 | | | | 100.0 | % | | $ | 19,157 | | | | 100.0 | % | | $ | 17,227 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | | Six months ended June 30, |
| | | 2007 | | | 2006 | | | 2007 | | | 2006 |
Frequency | | | | $ | 8,715 | | | | | $ | — | | | | | $ | 15,187 | | | | | $ | — | |
Severity | | | | | 800 | | | | | | 1,093 | | | | | | 2,040 | | | | | | 1,143 | |
Total | | | | $ | 9,515 | | | | | $ | 1,093 | | | | | $ | 17,227 | | | | | $ | 1,143 | |
Increased acquisition costs are a direct result of the increases in premiums written. For the three and six monthsmonth period ended June 30, 2007,2008, the acquisition cost ratio for frequency business was 42.6%49.7% compared to 41.7% for the corresponding 2007 period. The increase was primarily the result of higher profit commissions accrued on a frequency contract due to favorable underwriting results. The acquisition cost ratio for severity business was 13.9% for the six month period ended June 30, 2008 compared to 21.5% for the corresponding 2007 period. The decrease in severity acquisition cost ratio is a result of (a) profit commissions paid during the first half of fiscal 2007 on a contract which was not renewed for the following year, (b) the non-renewal in 2008 of certain natural peril catastrophe severity contracts which had higher acquisition cost ratios, and 41.7%, respectively.(c) the earning of premiums on certain multi-year professional liability contracts, incepted in the later part of the second quarter of 2007, which have no acquisition costs associated with them. We expect that acquisition costs will be higher for frequency business than for severity business. TheOverall the total acquisition cost ratio for severity business was 17.8% and 21.5%decreased to 36.7% for the three and six monthsmonth period ended June 30, 2008 from 37.5% for the corresponding 2007 respectively. Acquisition costs incurred duringperiod.
General and Administrative Expenses
For the three
and six monthsmonth periods ended June 30,
2006 were abnormally high as a percentage of premiums earned due to one particular contract which had a high profit commission feature. This contract was not renewed in 2007.General2008 and Administrative Expenses
Our2007 our general and administrative expenses for the three months ended June 30, 2007 and 2006 were $2.9$3.2 million and $2.2$2.9 million, respectively. The increase inprimarily relates to salaries and benefits paid for additional staff hired subsequent to the second quarter of fiscal 2007.
For the six month period ended June 30, 2008 the general and administrative expenses increased $1.8 million, or 29.9% compared to same period in 2007. The increase primarily relates to higher employee bonuses approved by the Board of $0.7 million inDirectors during the comparablefirst quarter of 2008, relating to the 2007 fiscal year.
23
For the six month periods
reflectsended June 30, 2008 and 2007, the
cost of expanding our underwriting operations, including hiring additional staff and other related expenses.Our general and administrative expenses for the six months ended June 30, 2007 and 2006 were $5.9include $1.4 million and $4.2$1.5 million, respectively. The increase in general and administrative expenses of $1.7 million in the comparable periods reflects the cost of expanding our underwriting operations, including the hiring of additional staff and other related expenses. These expenses for the six months ended June 30, 2007 and 2006 both include $1.5 millionrespectively, for the expensing of the fair value of stock options and restricted stock granted to employees and directors. We expect our general and administrative expenses to increase as we incur additional expenses due to the increased reporting requirements applicable to public companies.
A summary of our net investment income is as
follows ($ in thousands):follows: | | | | | | | | | | | | | | | | |
| | Three Months Ended
| | | Six Months Ended
| |
| | June 30, | | | June 30, | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | ($ in thousands) | |
|
Realized gains and change in unrealized gains, net | | $ | 36,727 | | | $ | 17,462 | | | $ | 32,065 | | | $ | 1,418 | |
Interest, dividend and other income | | | 8,168 | | | | 6,962 | | | | 12,941 | | | | 11,251 | |
Interest, dividend and other expenses | | | (5,099 | ) | | | (1,505 | ) | | | (8,501 | ) | | | (2,868 | ) |
Investment advisor compensation | | | (8,771 | ) | | | (2,995 | ) | | | (11,242 | ) | | | (4,258 | ) |
| | | | | | | | | | | | | | | | |
Net investment income | | $ | 31,025 | | | $ | 19,924 | | | $ | 25,263 | | | $ | 5,543 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | | Six months ended June 30, |
| | | 2007 | | | 2006 | | | 2007 | | | 2006 |
Investment income | | | | $ | 23,907 | | | | | $ | 10,635 | | | | | $ | 11,577 | | | | | $ | 33,511 | |
Investment expenses | | | | | (988 | ) | | | | | (658 | ) | | | | | (1,776 | ) | | | | | (1,159 | ) |
Investment advisor fees | | | | | (2,995 | ) | | | | | (2,785 | ) | | | | | (4,258 | ) | | | | | (7,965 | ) |
Net investment income | | | | $ | 19,924 | | | | | $ | 7,192 | | | | | $ | 5,543 | | | | | $ | 24,387 | |
InvestmentFor the three months ended June 30, 2008, investment income, net of all fees and expenses, resulted in a 6.8% return of 4.5% on our investment portfolio for the three months ended June 30, 2007.portfolio. This compares to a 2.9%6.8% investment return reported for the three month periodcorresponding 2007 period. For the six months ended June 30, 2006.
Investment income,2008, the return on investment, net of all fees and expenses, resultedwas 3.6% compared to 2.3% for the first half of 2007.
Our investment advisor and its affiliates manage and expect to manage other client accounts besides ours, some of which have investment objectives similar to ours. To comply with Regulation FD, our investment returns are posted on our website on a monthly basis. Additionally, we also provide on our website the names of the largest disclosed long positions in
a 2.3% return on our investment portfolio
foras of the
six months ended June 30, 2007. This compares to a 10.6% investment return reported for the six month period ended June 30, 2006. The 2007 return was adversely affected by an investment loss on a long equity position in New Century Financial Corp.last trading day of each month.
We are not obligated to pay any taxes in the Cayman Islands on either income or capital gains. We have been granted an exemption by the Governor In Cabinet from any taxes that may be imposed in the Cayman Islands for a period of 20 years, expiring on February 1, 2025.
Due to the opportunistic and customized nature of our underwriting operations, we expect to report different loss and expense ratios in both our frequency and severity businesses from period to period.
ForThe following table provides the ratios for the six
monthsmonth periods ended June 30,
20072008 and
2006, the following ratios are reported:2007: | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2008 | | | Six Months Ended June 30, 2007 | |
| | Frequency | | | Severity | | | Total | | | Frequency | | | Severity | | | Total | |
|
Loss ratio | | | 42.3 | % | | | 39.0 | % | | | 41.1 | % | | | 52.6 | % | | | 10.1 | % | | | 43.9 | % |
Acquisition cost ratio | | | 49.7 | % | | | 13.9 | % | | | 36.7 | % | | | 41.7 | % | | | 21.5 | % | | | 37.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Composite ratio | | | 92.0 | % | | | 52.9 | % | | | 77.8 | % | | | 94.3 | % | | | 31.6 | % | | | 81.4 | % |
Internal expense ratio | | | | | | | | | | | 14.7 | % | | | | | | | | | | | 12.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Combined ratio | | | | | | | | | | | 92.5 | % | | | | | | | | | | | 94.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, 2007 | | | Six Months Ended June 30, 2006 |
| | | Frequency | | | Severity | | | Total | | | Frequency | | | Severity | | | Total |
Loss ratio | | | | | 52.6 | % | | | | | 10.1 | % | | | | | 43.9 | % | | | | | 0.0 | % | | | | | 0.0 | % | | | | | 0 | % |
Acquisition cost ratio | | | | | 41.7 | % | | | | | 21.5 | % | | | | | 37.5 | % | | | | | 0.0 | % | | | | | 47.4 | % | | | | | 47.4 | % |
Composite ratio | | | | | 94.3 | % | | | | | 31.6 | % | | | | | 81.4 | % | | | | | 0.0 | % | | | | | 47.4 | % | | | | | 47.4 | % |
Internal expense ratio | | | | | | | | | | | | | | | | | 12.9 | % | | | | | | | | | | | | | | | | | 173.5 | % |
Combined ratio | | | | | | | | | | | | | | | | | 94.3 | % | | | | | | | | | | | | | | | | | 220.9 | % |
The loss ratio is calculated by dividing loss and loss adjustment expenses incurred by net premiums earned. For the six months ended June 30, 2007,2008, our frequency businessand severity businesses reported a loss ratio of 52.6%42.3%, compared to the 10.1% reported by our severity business. Favorable loss experience due to benign natural catastrophe experience during the year as well as the seasonalityand 39.0% respectively. A more diverse mix of certain wind exposures allowedlines of business in our severity business combined with losses developing on a severity contract, contributed to report a lowerthe higher loss ratio. However, weratio for our severity business during the six months ended June 30, 2008 than in the corresponding 2007 period. We expect that theour loss ratio will be volatile for our severity business and may exceed that of our frequency business in certain periods.
24
The acquisition cost ratio is calculated by dividing acquisition costs by net premiums earned. This ratio demonstrates the higher acquisition costs incurred for our frequency business than for our severity business.
The composite ratio is the ratio of underwriting losses incurred, loss adjustment expenses and acquisition costs, excluding general and administrative expenses, to net premiums earned. Similar to the loss ratio, we expect that this ratio will be more volatile for our severity business depending on loss activity in any particular period.
The internal expense ratio is the ratio of all general and administrative expenses to net premiums earned. We expect our internal expense ratio to decrease as we continue to expand our underwriting operations.
The highHowever, the higher internal expense ratio
of 173.5% reported for the six month period ended June 30,
2006 is2008 was mainly due to
higher general and administrative expenses as a result of additional bonus expensed during the
fact that underwriting operations only commenced in April 2006 and as such start up costs were high relativeperiod relating to the
initial2007 underwriting year and also reflects the cost of additional staff hired subsequent to the second quarter of 2007. During the six month period ended June 30, 2008, our net earned premiums
earned.increased 13.7% while our general and administrative expenses increased 29.9% compared to the corresponding 2007 period, resulting in a higher internal expense ratio.
The combined ratio is the sum of the composite ratio and the internal expense ratio. It measures the total profitability of our underwriting operations. This ratio does not take
net investment income into account. The reported combined ratio for the six month period ended June 30,
20072008 was
92.5% compared to 94.3%
. for the same period in 2007. Given the nature of our opportunistic underwriting strategy, we expect that our combined ratio may be volatile from period to period.
Loss and Loss Adjustment Expense Reserves We establish reserves for contracts based on estimates of the ultimate cost of all losses including
IBNR.IBNR as well as allocated and unallocated loss expenses. These estimated ultimate reserves are based on reports received from ceding companies, historical experience and actuarial estimates. These estimates are reviewed quarterly on a contract by contract basis and adjusted when
necessary.appropriate. Since reserves are based on estimates, the setting of appropriate reserves is an inherently uncertain process. Our estimates are based upon actuarial and statistical projections and on our assessment of currently available data, predictions of future developments and estimates of future trends and other factors. The final settlement of losses may vary, perhaps materially, from the reserves initially established and any adjustments to the estimates are recorded in the period in which they are determined. Under U.S. GAAP, we are not permitted to establish loss reserves, which include case reserves and IBNR, until the occurrence of an event which may give rise to a claim. As a result, only loss reserves applicable to losses incurred up to the reporting date are established, with no allowance for the establishment of loss reserves to account for expected future losses.
For natural
catastropheperil risk exposed business, once an event has occurred
whichthat may give rise to a claim, we establish loss reserves based on loss payments and case reserves reported by our clients. We
Table of Contentsthen add to these case reserves our estimates for IBNR. To establish our IBNR loss estimates, in addition to the loss information and estimates communicated by ceding companies, we use industry information, knowledge of the business written by us and management’s judgment.
Reserves for
lossesloss and loss adjustment expenses as of June 30,
20072008 and December 31,
20062007 were comprised of the
following ($ in thousands):following: | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2008 | | | December 31, 2007 | |
| | Case
| | | | | | | | | Case
| | | | | | | |
| | Reserves | | | IBNR | | | Total | | | Reserves | | | IBNR | | | Total | |
| | ($ In thousands) | |
|
Frequency | | $ | 1,055 | | | $ | 42,759 | | | $ | 43,814 | | | $ | 1,712 | | | $ | 34,477 | | | $ | 36,189 | |
Severity | | | — | | | | 13,553 | | | | 13,553 | | | | — | | | | 6,188 | | | | 6,188 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,055 | | | $ | 56,312 | | | $ | 57,367 | | | $ | 1,712 | | | $ | 40,665 | | | $ | 42,377 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2007 | | | December 31, 2006 |
| | | Case Reserves | | | IBNR | | | Total | | | Case Reserves | | | IBNR | | | Total |
Frequency | | | | $ | 883 | | | | | $ | 25,851 | | | | | $ | 26,734 | | | | | $ | 1,058 | | | | | $ | 2,985 | | | | | $ | 4,043 | |
Severity | | | | | — | | | | | | 1,894 | | | | | | 1,894 | | | | | | — | | | | | | 934 | | | | | | 934 | |
Total | | | | $ | 883 | | | | | $ | 27,745 | | | | | $ | 28,628 | | | | | $ | 1,058 | | | | | $ | 3,919 | | | | | $ | 4,977 | |
The overall increase in loss reserves is almost entirely a direct resultfunction of the additional exposure written during the six months ended June 30, 2008, changes in loss reserves relating to the development of losses on certain severity contracts, and favorable loss development on certain frequency contracts mostly offsetting the increase in premiums written during the first six months of 2007. In eachreserves.
25
For substantially all of the contracts written as of June 30,
2007,2008, our risk exposure is limited by the fact that the contracts have defined limits of liability. Once the loss limit for a contract has been reached, we have no further exposure to additional losses from that contract.
However, certain contracts, particularly quota share contracts which relate to first dollar exposure, may not contain aggregate limits.
Liquidity and Capital Resources We are organized as a holding company with no operations of our own.
As a holding company, we have minimal continuing cash needs, and most of such needs are principally related to the payment of administrative expenses. All of our operations are conducted through our sole reinsurance subsidiary, Greenlight Reinsurance, Ltd., which underwrites risks associated with our property and casualty reinsurance programs.
We have minimal continuing cash needs which are principally related to the payment of administrative expenses. There are restrictions on Greenlight Reinsurance, Ltd.’s ability to pay dividends which are described in more detail below. It is our
initialcurrent policy to retain earnings to support the growth of our business. We currently do not expect to pay dividends on our
Ordinary Shares.ordinary shares.
As of June 30, 2008, the financial strength of our reinsurance subsidiary was rated “A-(Excellent)” by A.M. Best Company. This rating reflects the A.M. Best Company’s opinion of our financial strength, operating performance and ability to meet obligations and it is not an evaluation directed toward the protection of investors or a recommendation to buy, sell or hold our Class A ordinary shares.
Sources and Uses of Funds Our sources of funds primarily consist of premium receipts (net of brokerage and ceding commissions) and investment income
(net of advisory compensation and investment expenses), including realized gains. We use cash
from our operations to pay losses and loss adjustment expenses, profit commissions and general and administrative expenses. Substantially all of our funds, including shareholders’ capital, net of funds required for cash liquidity purposes, are invested
withby our investment advisor
to invest in accordance with our investment guidelines.
OurAs of June 30, 2008, our investment portfolio
iswas primarily comprised of publicly-traded securities which
we classify as trading securities and can be liquidated to meet current
and future liabilities. We believe that we have
sufficientthe flexibility to liquidate
theour long securities
that we own in a rising market to generate
sufficient liquidity. Similarly, we can generate liquidity
in a declining market from our short portfolio by covering securities and by freeing up restricted cash no longer required for collateral.
For the six
monthsmonth period ended June 30,
2007,2008 we
generated nethad a positive cash flow of
$2.5$33.3 million. We
used $253.2generated $23.9 million in cash from operating activities primarily
as a result of purchasing securitiesrelating to net premiums collected and retained from
the proceeds of our initial public offering described below.On May 30, 2007 we completed the sale of 11,787,500 Class A Ordinary Shares at $19.00 per share in an initial public offering. Included in the 11,787,500 shares sold by us were 1,537,500 shares purchased by the underwriters to cover over-allotments. Concurrently, 2,631,579 Class B Ordinary Shares were sold at $19.00 per share as part of a private placement. The net proceeds to the Company of the initial public offering and private placement were approximately $255.7 million after the deduction of underwriting fees and other offering expenses.
operations. As of June 30, 2007,2008, we believe we had sufficient projected cash flow from operations to meet our liquidity requirements. We expect that our operational needs for liquidity will be met by cash, or funds generated from underwriting activities or investment income. We have no current plans to issue equity
Table of Contentsor debt and expect to fund our operations for the foreseeable future from operating cash flow. However, we cannot provide assurances that in the future we will not issue equity or incur indebtedness to implement our business strategy, pay claims or make acquisitions.
We may also use available cash to repurchase our Class A ordinary shares from time to time. Currently the Board has authorized management to repurchase up to two million Class A ordinary shares from time to time.
Although Greenlight Capital Re, Ltd. is not subject to any significant legal prohibitions on the payment of dividends, Greenlight Reinsurance, Ltd. is subject to Cayman Islands regulatory constraints that affect its ability to pay dividends to Greenlight Capital Re, Ltd. and include a minimum net worth requirement. Currently, the statutory minimum net worth requirement for Greenlight Reinsurance, Ltd. is $120,000. In addition to Greenlight Reinsurance, Ltd. being restricted from paying a dividend if such a dividend would cause its net worth to drop to less than the required minimum, any dividend payment would have to be approved by the appropriate Cayman Islands regulatory authority prior to payment.
26
Greenlight Reinsurance, Ltd. is not licensed or admitted as a reinsurer in any jurisdiction other than the Cayman Islands. Because many jurisdictions do not permit domestic insurance companies to take credit on their statutory financial statements unless appropriate measures are in place for reinsurance obtained from unlicensed or non-admitted insurers, we anticipate that all of our U.S. clients and some of our
non-U.S. clients will require us to provide collateral through funds withheld, trust arrangements, letters of credit or a combination thereof.
Greenlight Reinsurance, Ltd. has
the followinga letter of credit
facilitiesfacility as of June 30,
2007: | | |
| a) | $200 million letter of credit facility with Citibank, N.A. with a termination date of October 11, 2008. The termination date is automatically extended for an additional year unless written notice of cancellation is delivered to the other party at least 120 days prior to the termination date. As of June 30, 2007, letters of credit totaling $54.0 million were outstanding. |
| | |
| b) | $25 million letter of credit facility with Bank Austria Cayman Islands Ltd. with a termination date of June 6, 2008. The termination date is automatically extended for an additional year unless written notice of cancellation is delivered to the other party at least 30 days prior to the termination date. As of June 30, 2007, there were no letters of credit issued under this facility. |
2008 of $400.0 million with Citibank, N.A. with a termination date of October 11, 2009. The termination date is automatically extended for an additional year unless written notice of cancellation is delivered to the other party at least 120 days prior to the termination date.
An additional $25.0 million letter of credit facility with UniCredit Bank Cayman Islands Ltd. (formerly Bank Austria Cayman Islands Ltd.) was terminated on June 6, 2008. Any letters of credit issued prior to the termination under this facility remain in effect until their respective expiry dates.
As of June 30, 2008, letters of credit totaling $140.7 million were outstanding under the above letters of credit facilities. Under
boththese letter of credit facilities, we are required to provide collateral that may consist of equity securities.
As of June 30, 2008, we had pledged $225.1 million of equity securities and cash equivalents as collateral for the above letter of credit facilities. The letter of credit facility agreements contain various covenants that, in part, restrict Greenlight Reinsurance, Ltd.’s ability to place a lien or charge on the pledged assets,
to effect transactions with affiliates,
to enter into a merger or sell certain assets and further restrict Greenlight Reinsurance, Ltd.’s ability to issue any debt without the consent of the letter of credit providers. Additionally, if an event of default exists, as defined in the credit agreements, Greenlight Reinsurance, Ltd. will be prohibited from paying dividends.
For the six month period ended June 30, 2008, the Company was in compliance with all of the covenants under each of the letter of credit facility agreements. In addition to the credit facilities described above, the Company is in the process of evaluating additional facilities.
As of June 30,
2007,2008, total shareholders’ equity was
$577.5$635.8 million compared to
$312.2$605.6 million at December 31,
2006.2007. This increase in total shareholders’ equity is principally due to
the net income of
$8.2$28.8 million
reported during the six
monthsmonth period ended June 30,
2007 as well as the net proceeds of $255.7 million from our initial public offering of Class A Ordinary Shares and a concurrent private offering of Class B Ordinary Shares which were both completed on May 30, 2007.2008.
Our capital structure currently consists entirely of equity issued in two separate classes of Ordinary Shares.ordinary shares. We expect that the existing capital base and internally generated funds will be sufficient to implement our business strategy. Consequently, we do not presently anticipate that we will incur any material indebtedness in the ordinary course of our business. However, we cannot provide assurances that in the future we will not be required to raise additional equity or incur indebtedness to implement our business strategy, pay claims or make acquisitions. We did not make any significant capital expenditures during the period from inception to June 30, 2007.2008.
TableOn August 5, 2008, the Board adopted a share repurchase plan authorizing the Company to repurchase up to two million Class A ordinary shares. Management may from time to time repurchase these shares to optimize the Company’s capital structure. Shares may be purchased in the open market or through privately negotiated transactions. The timing of Contentssuch repurchases and actual number of shares repurchased will depend on a variety of factors including price, market conditions and applicable regulatory and corporate requirements. The plan, which expires on June 30, 2011, does not require the Company to repurchase any specific number of shares and may be modified, suspended or terminated at any time without prior notice. The Company has not repurchased any shares under its share repurchase plan as of the date of this filing.
27
Contractual Obligations and Commitments The following table shows our aggregate contractual obligations by time period remaining to due date as of June 30,
2007 ($ in thousands):2008: | | | | | | | | | | | | | | | | | | | | |
| | | | | Less Than
| | | | | | | | | More Than
| |
| | Total | | | 1 Year | | | 1-3 Years | | | 3-5 Years | | | 5 Years | |
| | ($ in thousands) | |
|
Operating lease obligations | | $ | 216 | | | $ | 97 | | | $ | 119 | | | $ | — | | | $ | — | |
Specialist service agreement | | | 1,452 | | | | 652 | | | | 800 | | | | — | | | | — | |
Private equity investments(1) | | | 26,913 | | | | 26,913 | | | | — | | | | — | | | | — | |
Loss and loss adjustment expense reserves(2) | | | 57,367 | | | | 28,682 | | | | 15,437 | | | | 4,948 | | | | 8,300 | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 85,948 | | | $ | 56,344 | | | $ | 16,356 | | | $ | 4,948 | | | $ | 8,300 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years |
Lease obligations | | | | $ | 353 | | | | | $ | 90 | | | | | $ | 194 | | | | | $ | 69 | | | | | $ | — | |
Private equity investments(1) | | | | | 2,018 | | | | | | 2,018 | | | | | | — | | | | | | — | | | | | | — | |
Loss and loss adjustment expense reserves(2) | | | | | 28,628 | | | | | | 18,877 | | | | | | 7,693 | | | | | | 855 | | | | | | 1,203 | |
| | | | $ | 30,999 | | | | | $ | 20,985 | | | | | $ | 7,887 | | | | | $ | 924 | | | | | $ | 1,203 | |
(1) | We have made a commitment of $5.1 million to a private equity vehicle. As of June 30, 2007, $3.12008, we had made commitments to invest a total of $31.6 million in private investments. As of June 30, 2008, we had invested $4.7 million of this amount, has been called, and our remaining commitmentcommitments to this vehicle is $2.0these vehicles were $26.9 million. Given the nature of the private equity vehicle,these investments, we are unable to determine with any degree of accuracy when the remaining commitment will be called. Therefore, for purposes of the above table, we have assumed that all commitments will be made within one year. Under our investment guidelines, in effect as of the date hereof, no more than 10% of the assets in the investment portfolio may be held in private equity securities. |
|
(2) | | The amount and timing of the cash flows associated with our reinsurance contractual liabilities will fluctuate, perhaps materially, and, therefore, are highly uncertain. |
As of
On September 1, 2005, we entered into a five-year lease agreement for office premises in the Cayman Islands. The lease repayment schedule is provided above and in the accompanying
condensed consolidated financial statements.
As discussed in Note 9 of the financial statements, on July 9, 2008, we signed a ten year lease agreement for new office space in the Cayman Islands with the option to renew for an additional five year term. The lease term is effective July 1, 2008, and the rental payments commence from the earlier of December 1, 2008 or when we occupy the premises. We currently do not anticipate occupying the premises prior to December 1, 2008. Under the terms of the lease agreement, our minimum annual rent payments will be $253,539 for the first three years, increasing by 3% thereafter each year to reach $311,821 by the tenth year.
Effective September 1, 2007, we entered into a service agreement with a specialist service provider whereby the specialist service provider provides administration and support in developing and maintaining relationships, reviewing and recommending programs and managing risks on 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 after two years, the Company is obligated to make minimum payments for another two years to ensure any bound contracts are adequately run-off by the specialist service provider.
As described above, we have entered into twohad one letter of credit facilities. The $200facility as of June 30, 2008. This $400.0 million facility can be terminated by either party with effect from any October 11, the anniversary date, by providing written notification to the other party at least 120 days before the anniversary date. The earliest possible termination date of this agreement is October 11, 2008.2009.
On January 1, 2008, we entered into an agreement wherein the Company and DME agreed to create a joint venture for the purposes of managing certain jointly held assets. The $25 million facility can be terminatedterm of the agreement is January 1, 2008, through December 31, 2010, with automatic three-year renewals unless either we or DME terminate the agreement by either party with effect from any June 6, the anniversary date, by providing written notificationgiving 90 days notice prior to the other party at least 30 days beforeend of the anniversary date. The earliest possible termination date ofthree year term. Pursuant to this agreement, is June 6, 2008.we pay a monthly management fee of 0.125% on our share of the assets managed by DME and performance compensation of 20% on the net income of our share of assets managed by DME subject to a loss carryforward provision.
28
Effective January 1,
In February 2007, we entered into a
new advisoryservice agreement with DME
Advisors, L.P. that grantspursuant to which DME
Advisors, L.P. an exclusive rightwill provide investor relations services to
manage our investment portfolio in accordance with the investment guidelines as approved by the Boardus for compensation of
Directors.$5,000 per month (plus expenses). The agreement
expires on December 31, 2009,had an initial term of one year, and will
be renewedcontinue for
successive three-yearsequential one year periods
unless either weuntil terminated by us or
DME Advisors, L.P. gives 90 days notice of its desire toDME. Either party may terminate the
agreement. The fees underagreement for any reason with 30 days prior written notice to the
new advisory agreement are the same as the prior agreement we had with DME Advisors, L.P.other party.
Off-Balance Sheet Financing Arrangements We have no obligations, assets or liabilities, other than those derivatives in our investment portfolio that are disclosed in the condensed consolidated financial statements, which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
Table of Contents | |
Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We believe we are principally exposed to five types of market risk:
• equity price risk;
• foreign currency risk;
• interest rate risk;
• credit risk; and
• effects of inflation.
| | |
| • | equity price risk; |
|
| • | foreign currency risk; |
|
| • | interest rate risk; |
|
| • | credit risk; and |
|
| • | effects of inflation. |
EQUITY PRICE RISK. As of June 30,
2007,2008, our investment portfolio consisted primarily of long and short equity securities, along with certain equity-based derivative instruments, the carrying values of which are primarily based on quoted market prices. Generally, market prices of common equity securities are subject to fluctuation, which could cause the amount to be realized upon the closing of the position to differ significantly from the current reported value. This risk is partly mitigated by the presence of both long and short equity securities. As of June 30,
2007,2008, a 10% decline in the price of each of these
listed equity securities and equity-based derivative instruments would result in a
$30.7$21.4 million, or
4.9%3.0%, decline in the fair value of the total investment portfolio.
Computations of the prospective effects of hypothetical equity price changes are based on numerous assumptions, including the maintenance of the existing level and composition of investment securities and should not be relied on as indicative of future results.
FOREIGN CURRENCY RISK. Certain of our reinsurance contracts provide that ultimate losses may be payable in foreign currencies depending on the country of original loss. Foreign currency exchange rate risk exists to the extent that there is an increase in the exchange rate of the foreign currency in which losses are ultimately owed. As of June 30,
2007, there are2008, we have no known
or estimated losses payable in foreign currencies.
While we do not seek to specifically match our liabilities under reinsurance policies that are payable in foreign currencies with investments denominated in such currencies, we continually monitor our exposure to potential foreign currency losses and will consider the use of forward foreign currency exchange contracts in an effort to hedge against adverse foreign currency movements.
Through investments in securities denominated in foreign currencies, we are exposed to foreign (non-U.S.) currency risk. Foreign currency exchange rate risk is the potential for loss in the U.S. dollar value of investments due to a decline in the exchange rate of the foreign currency in which the investments are denominated. As of June 30, 2007,2008, our totalgross exposure to foreign denominated securities was approximately $235.8 million, or 37.7%,$209.0 million. However, as of June 30, 2008, the majority of our investment portfolio including cash and cash equivalents.currency exposure resulting from these foreign denominated securities was hedged, leading to a net exposure to foreign currencies of $24.6 million. As of June 30, 2007,2008, a 5% increase10% decrease in the value of the
29
United States dollar against select foreign currencies would result in an $11.8a $2.5 million, or 1.9%0.3%, decline in the value of the investment portfolio. A summary of our total net exposure to foreign denominated securitiescurrencies as of June 30, 20072008 is as follows ($follows:
| | | | |
| | US$ Equivalent
| |
Original Currency | | Fair Value | |
| | ($ in thousands) | |
|
European Union euro | | $ | (32,506 | ) |
British pounds | | | (20,969 | ) |
South Korean won | | | 7,165 | |
Hong Kong dollar | | | 8,569 | |
Japanese yen | | | 9,124 | |
Other | | | 3,974 | |
| | | | |
| | $ | (24,643 | ) |
| | | | |
Computations of the prospective effects of hypothetical currency price changes are based on numerous assumptions, including the maintenance of the existing level and composition of investment in
thousands):securities denominated in foreign currencies and related hedges, and should not be relied on as indicative of future results. | | | | | | |
Original Currency | | | US$ Equivalent
Fair Value |
EUR | | | | | 204,167 | |
GBP | | | | | 27,185 | |
Other | | | | | 4,483 | |
| | | | | 235,835 | |
INTEREST RATE RISK. Our investment portfolio has historically held a very small portion of fixed-income securities, which we classify as trading securities“trading securities” but may in the future include significant exposure to corporate debt securities, including debt securities of distressed companies. The primary market risk exposure for any fixed-income security is interest rate risk. As interest rates rise, the market value of our fixed-income portfolio falls, and the converse is also true. Additionally, some of our equity investments may also be credit sensitive and their value may fluctuate with changes in interest rates.
Table of ContentsCREDIT RISK. We are exposed to credit risk primarily from the possibility that counterparties may default on their obligations to us. The amount of the maximum exposure to credit risk is indicated by the carrying value of our financial assets. In addition, we hold the securities of our investment portfolio with several prime brokers and have credit risk from the possibility that one or more of them may default on their obligations to us. Other than our investment in derivative contracts and
corporate debt, if any, and the fact that our investments are held by prime brokers on our behalf, we have no significant concentrations of credit risk.
EFFECTS OF INFLATION. The potential exists for the development of inflationary pressures in a local economy to increase the ultimate losses which are paid on certain reinsurance contracts. The effects of inflation are considered in pricing and in estimating reserves for loss and loss adjustment expenses. However, we can not be certain of the precise effects of inflation on our results until claims are ultimately paid. We do not believe that inflation has had or will have a material effect on our combined results of operations, except insofar as inflation may affect interest rates.rates and the values of the assets in our investment portfolio.
| |
Item 4. 4T. | CONTROLS AND PROCEDURES |
Our management, with the participation of
theour Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered under this quarterly report. Based on that evaluation,
theour Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to provide reasonable assurance that material information relating to us and our consolidated subsidiary required to be disclosed in our reports filed with or submitted to the SEC, under the Securities Act of 1934, as amended, is made known to such officers by others within these entities, particularly during the period this quarterly report was prepared, in order to allow timely decisions regarding required disclosure.
There have not been any changes in our internal control over financial reporting during the
threesix months ended June 30,
20072008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Under the rules of the SEC as currently in effect, compliance with the internal control reporting requirements mandated by Section 404 of the Sarbanes-Oxley Act of 2002 is delayed for newly public companies, such as Greenlight Capital Re, Ltd. We plan to be in full compliance with these internal control reporting requirements by the required compliance dates in order to provide the required certifications for our December 31, 2008 regulatory filings.
30
We are not party to any pending or threatened material litigation and are not currently aware of any pending or threatened litigation. We may become involved in various claims and legal proceedings in the normal course of business, as a reinsurer or insurer.
Factors that could cause our actual results to differ materially from those in this report are any of the risks described in
Item 1A “Risk Factors” included in our
prospectus dated May 24,Annual Report onForm 10-K for the fiscal year ended December 31, 2007,
as filed with the SEC. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.
As of August
13, 2007,6, 2008, there have been no material changes to the risk factors disclosed in
Item 1A “Risk Factors” included in our
prospectus dated May 24,Annual Report onForm 10-K for the fiscal year ended December 31, 2007,
as filed with the SEC, except we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.
Item 2.
| |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
| |
Item 3. | Defaults Upon Senior Securities |
None.
| |
Item 4. | Submission of Matters to a Vote of Security Holders |
Annual General Meeting of Equity Securities and UseShareholders. The Company held its 2008 Annual General Meeting of
ProceedsOn May 23, 2007, the SEC declared effectiveShareholders on July 10, 2008. Pursuant to the Company’s Registration StatementThird Amended and Restated Articles of Association, each Class A ordinary share is entitled to one vote per share and each Class B ordinary share is entitled to ten votes per share; provided, however, that the total voting power of the issued and outstanding Class B ordinary shares shall not exceed 9.5% of the total voting power of all issued and outstanding ordinary shares. Since, on Form S-1, as amended (Registration No. 333-139993), filed in connectionthe record date of the 2008 Annual Meeting of Shareholders, the total voting power of the issued and outstanding Class B ordinary shares exceeded 9.5% of the total voting power, the voting power of the Class B ordinary shares was reduced with the initial public offering of its common shares, par value $0.01 per share. Under this Registration Statementexcess being allocated to the Company registered 11,787,500 Class A Ordinary Shares, including 1,537,500ordinary shares subject to the over-allotment option it granted to the underwriters. On May 30, 2007, the Company completed the offering at an initial offering price per share of $19.00 for total proceeds of approximately $224.0 million. The managing underwriters for the initial public offering were Lehman Brothers, UBS Investment Bank, Citi, Dowling & Partners Securities and Fox-Pitt, Kelton.
The Company completed a private placement of 2,631,579 Class B Ordinary Shares at $19.00 per share as part of a private placement simultaneouslyin accordance with the consummation of the initial public offering for total proceeds of $50.0 million. The Class B Ordinary Shares were purchased by David Einhorn, ChairmanArticle 53 of the Company’s BoardThird Amended and Restated Articles of Directors. This concurrent private placement was deemed to be exempt from registration underAssociation.
The following tables summarize the
Securities Act in reliance on Section 4 (2)voting results after adjustment of
the Securities Act as a transaction not involving a public offering.The aggregate proceeds of the initial public offering (including the sale of the 1,537,500 Class A Ordinary Shares sold pursuant to the underwriters’ over-allotment option) and concurrent private placement were approximately $274.0 million. Net proceeds to the Company, after deducting underwriting discounts of approximately $15.7 million and other offering expenses of approximately $2.6 million were approximately $255.7 million.
On May 24, 2007, the Company issued to certain directors, 13,264 restricted shares of Class A Ordinary Shares as part of the directors’ remuneration. These restricted shares contain certain restrictions relating to, among other things, vesting, forfeiture in the event of termination of the director and transferability. Each of these restricted shares will vestvoting power. For more information on the earlier of the first anniversary of the shares issuance orfollowing proposals, see the Company’s next annual general meeting.definitive proxy statement dated June 6, 2008.
(1) The
issuefollowing persons were elected Directors of
these shares was deemed exempt from registration underGreenlight Capital Re, Ltd. by shareholders to serve for the
Securities Act in reliance on Rule 701 under the Securities Act.Additionally, on May 24, 2007, 6,000 restricted shares of Class A Ordinary Shares were issued to an employeeterm expiring at the commencementAnnual General Meeting of his employment. These shares contain similar restrictions to those issued to the directors and these shares will vest on March 15, 2010, subject to the grantee’s continued service with the Company. The issue of these shares was deemed exempt from registration under the Securities ActShareholders in reliance on Rule 701 under the Securities Act.2009.
| | | | | | | | | | | | | | | | | | | | | | | | |
Director | | Class A For | | | Class A Against | | | Class A Abstain | | | Class B For | | | Class B Against | | | Class B Abstain | |
|
Alan Brooks | | | 62,919,747 | | | | 75,688 | | | | 4,706 | | | | 8,793,149 | | | | 0 | | | | 0 | |
David Einhorn | | | 62,919,747 | | | | 75,688 | | | | 4,706 | | | | 8,793,149 | | | | 0 | | | | 0 | |
Leonard Goldberg | | | 62,919,747 | | | | 75,688 | | | | 4,706 | | | | 8,793,149 | | | | 0 | | | | 0 | |
Ian Isaacs | | | 62,919,747 | | | | 75,688 | | | | 4,706 | | | | 8,793,149 | | | | 0 | | | | 0 | |
Frank Lackner | | | 62,919,747 | | | | 75,688 | | | | 4,706 | | | | 8,793,149 | | | | 0 | | | | 0 | |
Bryan Murphy | | | 62,919,747 | | | | 75,688 | | | | 4,706 | | | | 8,793,149 | | | | 0 | | | | 0 | |
Joseph Platt | | | 62,919,747 | | | | 75,688 | | | | 4,706 | | | | 8,793,149 | | | | 0 | | | | 0 | |
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Item 3. Defaults Upon Senior Securities
None.
Table of ContentsItem 4. Submission of Matters to a Vote of Security Holders
On April 16, 2007, the Company held its annual general meeting.
(2) The following
proposalspersons were
approvedelected Directors of Greenlight Reinsurance, Ltd. by shareholders to serve for the term expiring at the
meeting: | | |
| 1. | The following six incumbent directors were re-elected: |
Annual General Meeting of Shareholders in 2009 | | | | | | | | | | �� | | | | | | | | | | | | | | |
Director | | Class A For | | | Class A Against | | | Class A Abstain | | | Class B For | | | Class B Against | | | Class B Abstain | |
|
Alan Brooks | | | 62,899,583 | | | | 77,360 | | | | 23,198 | | | | 8,793,149 | | | | 0 | | | | 0 | |
David Einhorn | | | 62,899,583 | | | | 77,360 | | | | 23,198 | | | | 8,793,149 | | | | 0 | | | | 0 | |
Leonard Goldberg | | | 62,899,583 | | | | 77,360 | | | | 23,198 | | | | 8,793,149 | | | | 0 | | | | 0 | |
Ian Isaacs | | | 62,899,583 | | | | 77,360 | | | | 23,198 | | | | 8,793,149 | | | | 0 | | | | 0 | |
Frank Lackner | | | 62,899,583 | | | | 77,360 | | | | 23,198 | | | | 8,793,149 | | | | 0 | | | | 0 | |
Bryan Murphy | | | 62,899,583 | | | | 77,360 | | | | 23,198 | | | | 8,793,149 | | | | 0 | | | | 0 | |
Joseph Platt | | | 62,899,583 | | | | 77,360 | | | | 23,198 | | | | 8,793,149 | | | | 0 | | | | 0 | |
| | | |
Alan Brooks | | | David Einhorn |
Len Goldberg | | | Frank Lackner |
Joseph Platt | | | Jerome Simon |
(3) The shareholders approved the amendment to Article 11 of Greenlight Capital Re, Ltd.’s Third Amended and Restated Articles of Association by Special Resolution. | | | | | | | | |
| | Class A | | | Class B | |
|
For | | | 53,628,006 | | | | 8,793,149 | |
Against | | | 7,960,427 | | | | 0 | |
Abstain | | | 1,411,708 | | | | 0 | |
(4) The shareholders ratified the appointment of BDO Seidman, LLP to serve as the independent auditors of Greenlight Capital Re, Ltd. for 2008.
| | | | | | | | |
| | Class A | | | Class B | |
|
For | | | 62,902,754 | | | | 8,793,149 | |
Against | | | 82,159 | | | | 0 | |
Abstain | | | 15,229 | | | | 0 | |
(5) The shareholders ratified the appointment of BDO Seidman, LLP to serve as the independent auditors of Greenlight Reinsurance, Ltd. for 2008.
| | | | | | | | |
| | Class A | | | Class B | |
|
For | | | 62,886,338 | | | | 8,793,149 | |
Against | | | 98,574 | | | | 0 | |
Abstain | | | 15,229 | | | | 0 | |
| 2. |
Item 5. | The Company was authorized to elect the above six directors to serve on the Board of Greenlight Reinsurance, Ltd.Other Information |
None.
32
| 3. |
Item 6. | BDO Seidman, LLP was re-appointed as the Company’s independent auditor for the fiscal year ending December 31, 2007Exhibits |
| 4. | The Company was authorized to re-appoint BDO Seidman, LLP to act as independent auditor for Greenlight Reinsurance, Ltd. |
| | | | |
| 3 | .1 | | Third Amended and Restated Memorandum and Articles of Association, as revised by special resolution on July 10, 2008 |
| 31 | .1 | | Certification of the Chief Executive Officer filed hereunder pursuant to Section 302 of the Sarbanes Oxley Act of 2002 |
| 31 | .2 | | Certification of the Chief Financial Officer filed hereunder pursuant to Section 302 of the Sarbanes Oxley Act of 2002 |
| 32 | .1 | | Certification of the Chief Executive Officer filed hereunder pursuant to Section 906 of the Sarbanes Oxley Act of 2002 |
| 32 | .2 | | Certification of the Chief Financial Officer filed hereunder pursuant to Section 906 of the Sarbanes Oxley Act of 2002 |
At the meeting, 16,727,876 votes were cast, representing 69% of the eligible voting shares. 16,227,876 votes were cast in favor of each of the above four proposals and 500,000 votes abstained from voting on each of the four proposals. There were no votes voting against the proposals.
33
Item 5. Other Information
None.
Item 6. Exhibits
| | | | | | |
| 10 | .1 | | | | Letter of Credit Agreement dated June 6, 2007 between Greenlight Reinsurance, Ltd. and Bank Austria Cayman Islands Ltd. (incorporated by reference to the Company’s Form 8-K filed on June 7, 2007) |
| 31 | .1 | | | | Certification of the Chief Executive Officer filed hereunder pursuant to Section 302 of the Sarbanes Oxley Act of 2002 |
| 31 | .2 | | | | Certification of the Chief Financial Officer filed hereunder pursuant to Section 302 of the Sarbanes Oxley Act of 2002 |
| 32 | .1 | | | | Certification of the Chief Executive Officer filed hereunder pursuant to Section 906 of the Sarbanes Oxley Act of 2002 |
| 32 | .2 | | | | Certification of the Chief Financial Officer filed hereunder pursuant to Section 906 of the Sarbanes Oxley Act of 2002 |
SIGNATURES
Table of ContentsSIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GREENLIGHT CAPITAL RE, LTD.
(Registrant)
Name: Leonard Goldberg
| | | | | | |
| | | GREENLIGHT CAPITAL RE, LTD. |
| | | (Registrant) |
| | | /s/ Leonard Goldberg |
| | | Name: | | | Leonard Goldberg |
| | | Title: | | | Chief Executive Officer |
| | | Date: | | | August 13, 2007 |
| | | /s/ Tim Courtis |
| | | Name: | | | Tim Courtis |
| | | Title: | | | Chief Financial Officer |
| | | Date: | | | August 13, 2007 |
Date: August 6, 2008