NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2018
1
.
ORGANIZATION AND BASIS OF PRESENTATION
Greenlight Capital Re, Ltd. (“GLRE”) was incorporated as an exempted company under the Companies Law of the Cayman Islands on July 13, 2004. GLRE’s principal wholly-owned subsidiary, Greenlight Reinsurance, Ltd. (“Greenlight Re”), provides global specialty property and casualty reinsurance. Greenlight Re has a Class D insurer license issued in accordance with the terms of The Insurance Law, 2010 and underlying regulations thereto (the “Law”) and is subject to regulation by the Cayman Islands Monetary Authority (“CIMA”), in terms of the Law. Greenlight Re commenced underwriting in April 2006. During 2008, Verdant Holding Company, Ltd. (“Verdant”), a wholly-owned subsidiary of GLRE, was incorporated in the state of Delaware. During 2010, GLRE established Greenlight Reinsurance Ireland, Designated Activity Company (“GRIL”), a wholly-owned reinsurance subsidiary based in Dublin, Ireland. GRIL is authorized as a non-life reinsurance undertaking in accordance with the provisions of the European Union (Insurance and Reinsurance) Regulations 2015 (“Irish Regulations”). GRIL provides multi-line property and casualty reinsurance capacity to the European broker market and provides GLRE with an additional platform to serve clients located in Europe and North America. As used herein, the “Company” refers collectively to GLRE and its consolidated subsidiaries.
The Company and its reinsurance subsidiaries are party to a joint venture agreement (the “venture agreement”) with DME Advisors, LP (“DME Advisors”) and DME Advisors LLC (“DME”) under which the Company, its reinsurance subsidiaries and DME are participants in a joint venture (the “Joint Venture”) for the purpose of managing certain jointly held assets. The Joint Venture created through the venture agreement has been consolidated in accordance with ASC 810, Consolidation (ASC 810). The Company has recorded DME’s minority interests as redeemable non-controlling interests in related party and non-controlling interests in related party in the
condensed consolidated
balance sheets. DME and DME Advisors are related to the Company and each is an affiliate of David Einhorn, Chairman of the Company’s Board of Directors.
On September 1, 2018, the Company entered into an amended and restated exempted limited partnership agreement (the “LPA”) of Solasglas Investments, LP (“SILP”), with DME Advisors II, LLC (“DME II”), as General Partner, Greenlight Re, GRIL and the initial limited partner (each, a “Partner”). The LPA, in conjunction with a participation agreement, is intended to replace the venture agreement and to assign and/or transfer Greenlight Re’s and GRIL’s invested assets in the Joint Venture to SILP. The Joint Venture will terminate on the earlier of January 2, 2019 or the date on which all assets are transferred to SILP.
The Class A ordinary shares of GLRE are listed on Nasdaq Global Select Market under the symbol “GLRE”.
These unaudited
condensed consolidated
financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. These unaudited
condensed consolidated
financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended
December 31, 2017
. In the opinion of management, these unaudited
condensed consolidated
financial statements reflect all of the normal recurring adjustments considered necessary for a fair presentation of the Company’s financial position and results of operations as of the dates and for the periods presented.
The results for the three and
nine months ended September 30, 2018
are not necessarily indicative of the results expected for the full calendar year.
Reclassifications
Prior to the year ended December 31, 2017, the Company presented the redeemable and non-redeemable portion of the non-controlling interest in the related party joint venture under the permanent equity section of the balance sheet. The United States Securities and Exchange Commission (“SEC”) guidance, which is applicable to SEC registrants, requires shares that are not required to be accounted for in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic
Distinguishing Liabilities from Equity
, and having redemption features that are not solely within the control of the issuer, to be classified outside of the permanent equity section and instead presented in the mezzanine section of the
condensed consolidated
balance sheets.
Effective from the year ended December 31, 2017, the Company presented the redeemable non-controlling interest in the related party joint venture in the mezzanine section on the Company’s
condensed consolidated
balance sheet in accordance with the SEC guidance noted above. The comparative
condensed consolidated
statement of shareholders’ equity for the
nine months ended September 30, 2017
has been reclassified to conform to the current period presentation of the redeemable non-controlling interest in the related party joint venture. The reclassification had no impact on shareholders’ equity attributable to shareholders or retained earnings. In addition, this change did not impact the
condensed consolidated
statements of income, earnings per share or
condensed consolidated
statement of cash flows. See Note
10
for additional information regarding the non-controlling interests in the related party joint venture.
Additionally, effective from the second quarter of 2018, contracts that cover more than one line of business are grouped as “multi-line” regardless of whether a portion of the underlying business is covered by another line of business. The prior period comparative information in Note
12
has been reclassified to conform to the current period presentation.
2
.
SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of
condensed consolidated
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
condensed consolidated
financial statements and the reported amounts of income and expenses during the period. Actual results could differ from these estimates.
Restricted Cash and Cash Equivalents
The Company’s Joint Venture is required to maintain certain cash in segregated accounts with prime brokers and derivative counterparties. The amount of restricted cash held by prime brokers is primarily used to support the liability created in the Joint Venture from securities sold, not yet purchased and derivatives.
Restricted cash and cash equivalent balances are held to collateralize regulatory trusts and letters of credit issued to cedents (see Notes
5
and
11
). The amount of cash encumbered varies depending on the collateral required by those cedents.
The following table reconciles the cash, cash equivalents, and restricted cash reported within the
condensed consolidated
balance sheets to the total presented in the
condensed consolidated
statements of cash flows:
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|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
($ in thousands)
|
|
Cash and cash equivalents
|
$
|
43,912
|
|
|
$
|
27,285
|
|
|
Restricted cash and cash equivalents
|
673,835
|
|
|
1,503,813
|
|
|
Total cash, cash equivalents and restricted cash presented in the condensed consolidated statements of cash flows
|
$
|
717,747
|
|
|
$
|
1,531,098
|
|
Premium Revenue Recognition
The Company accounts for reinsurance contracts in accordance with U.S. GAAP. In the event that a reinsurance contract does not transfer sufficient risk, deposit accounting is used and the contract is reported as a deposit liability. Similarly for ceded contracts that do not transfer sufficient risk, deposit accounting is used and the contract is reported as a deposit asset.
The Company writes excess of loss contracts and quota share contracts. The Company estimates the ultimate premiums for the entire contract period. These estimates are based on information received from the ceding companies and estimates from actuarial pricing models used by the Company. For excess of loss contracts, the total ultimate estimated premiums are recorded as premiums written at the inception of the contract. For quota share contracts, the premiums are recorded as written based on cession statements from cedents which typically are received monthly or quarterly depending on the terms specified in each contract. For any reporting lag, premiums written are estimated based on the portion of the ultimate estimated premiums relating to the risks underwritten during the lag period.
Premium estimates are reviewed by management at least quarterly. Such review includes a comparison of actual reported premiums to expected ultimate premiums along with a review of the aging and collection of premium estimates. Based on management’s review, the appropriateness of the premium estimates is evaluated, and any adjustments to these estimates are recorded in the period in which they are determined. Changes in premium estimates, including premium receivable on both excess of loss and quota share contracts, are expected and may result in significant adjustments in any period. A significant portion of amounts included in reinsurance balances receivable represent estimated premiums written, net of commissions and brokerage, and are not currently due based on the terms of the underlying contracts.
Certain contracts allow for reinstatement premiums in the event of a full limit loss prior to the expiry of a contract. A reinstatement premium is not due until there is a loss event and, therefore, in accordance with U.S. GAAP, the Company records a reinstatement premium as written only in the event that a client incurs a loss on the contract and the contract allows for a reinstatement of coverage upon payment of an additional premium. For catastrophe contracts, which contractually require the payment of a reinstatement premium upon the occurrence of a loss, the reinstatement premiums are earned over the original contract period. Reinstatement premiums, that are contractually calculated on a pro-rata basis of the original contract period, are earned over the remaining coverage period. For additional premiums which are due on a contract that has no remaining coverage period, the additional premiums are earned in full when due.
Certain contracts may provide for a penalty to be paid if the contract is terminated and canceled prior to its expiration term. Cancellation penalties are recognized in the period the notice of cancellation is received and are recorded in the consolidated statements of income under “other income (expense), net”.
Premiums written are generally recognized as earned over the contract period in proportion to the period of risk covered. Unearned premiums consist of the unexpired portion of reinsurance provided.
Reinsurance Premiums Ceded
The Company reduces the risk of future losses on business assumed by reinsuring certain risks and exposures with other reinsurers (retrocessionaires). The Company remains liable to the extent that any retrocessionaire fails to meet its obligations and to the extent the Company does not hold sufficient security for their unpaid obligations.
Ceded premiums are written during the period in which the risks incept and are expensed over the contract period in proportion to the period of protection. Unearned premiums ceded consist of the unexpired portion of reinsurance obtained.
Deferred Acquisition Costs
Policy acquisition costs, such as commission and brokerage costs, relate directly to, and vary with, the writing of reinsurance contracts. Acquisition costs relating solely to bound contracts are deferred subject to ultimate recoverability and are amortized over the related contract term. The Company evaluates the recoverability of deferred acquisition costs by determining if the sum of future earned premiums and anticipated investment income is greater than the expected future claims and expenses. If a loss is probable on the unexpired portion of policies in force, a premium deficiency loss is recognized. At
September 30, 2018 and December 31, 2017
, the deferred acquisition costs were considered fully recoverable and
no
premium deficiency loss was recorded.
Acquisition costs also include profit commissions which are expensed when incurred. Profit commissions are calculated and accrued based on the expected loss experience for contracts and recorded when the current loss estimate indicates that a profit commission is probable under the contract terms. As of
September 30, 2018
,
$12.8 million
(
December 31, 2017
:
$11.9 million
) of profit commission reserves were included in reinsurance balances payable on the
condensed consolidated
balance sheets.
For the three and nine months ended September 30, 2018
,
$1.9 million
and
$13.5 million
, respectively (
2017
:
$(3.5) million
and
$2.2 million
, respectively) of net profit commission expense was included in acquisition costs in the
condensed consolidated
statements of income.
Funds Withheld
Funds withheld include reinsurance balances retained by the Company on retroceded contracts as collateral in accordance with the contract terms. Any interest expense that the Company incurs while these funds are withheld, is included under net investment income (loss) in the
condensed consolidated
statements of income.
Loss and Loss Adjustment Expense Reserves and Recoverable
The Company establishes reserves for contracts based on estimates of the ultimate cost of all losses including losses incurred but not reported (“IBNR”). These estimated ultimate reserves are based on the Company’s own actuarial estimates derived from reports received from ceding companies, industry data and historical experience. These estimates are reviewed by the Company at least quarterly and adjusted as necessary. Since reserves are estimates, the final settlement of losses may vary from the reserves established and any adjustments to the estimates, which may be material, are recorded in the period they are determined.
Loss and loss adjustment expenses recoverable include the amounts due from retrocessionaires for unpaid loss and loss adjustment expenses on retrocession agreements. Ceded losses incurred but not reported are estimated based on the Company’s actuarial estimates. These estimates are reviewed periodically and adjusted when deemed necessary. The Company may not be able to ultimately recover the loss and loss adjustment expense recoverable amounts due to the retrocessionaires’ inability to pay. The Company regularly evaluates the financial condition of its retrocessionaires and records provisions for uncollectible reinsurance expenses recoverable when recovery is no longer probable.
Consideration paid by the Company for retroactive reinsurance that meets the conditions for reinsurance accounting (e.g. loss portfolio transfers) are reported as loss and loss adjustment expenses recoverable to the extent those amounts do not exceed the associated liabilities. If the amounts paid for retroactive reinsurance exceed the liabilities, the Company increases the related liabilities, at the time the reinsurance contract is effective, and the excess is charged to net income as losses incurred. If the liabilities exceed the amounts paid, the recoverable balance is increased to reflect the difference, and the resulting gain is deferred and amortized over the estimated loss payout period. Changes in the estimated amount of liabilities relating to the underlying reinsured contracts are recognized in net income in the period of the change.
Notes Receivable
Notes receivable include promissory notes receivable from third party entities. These notes are recorded at cost along with accrued interest, if any, which approximates the fair value. Interest income and realized gains or losses on sale of notes receivable are included under net investment income (loss) in the
condensed consolidated
statements of income.
The Company regularly reviews all notes receivable individually for impairment and records valuation allowance provisions for uncollectible and non-performing notes. The Company places notes on non-accrual status when the recorded value of the note is not considered impaired but there is uncertainty as to the collection of interest in accordance with the terms of the note. For notes receivable placed on non-accrual status, the notes are recorded excluding any accrued interest amount. The Company resumes accrual of interest on a note when none of the principal or interest remains past due, and the Company expects to collect the remaining contractual principal and interest. Interest collected on notes that are placed on non-accrual status is treated on a cash-basis and recorded as interest income when collected, provided that the recorded value of the note is deemed to be fully collectible. Where doubt exists as to the collectability of the remaining recorded value of the notes placed on non-accrual status, any payments received are applied to reduce the recorded value of the notes.
At
September 30, 2018
,
$11.0 million
of notes receivable (net of any valuation allowance) were on non-accrual status (
December 31, 2017
:
$14.4 million
) and any payments received were applied to reduce the recorded value of the notes.
At
September 30, 2018
and
December 31, 2017
,
$0.1 million
and
$0.1 million
, respectively, of accrued interest was included in the notes receivable balance. Based on management’s assessment, the recorded values of the notes receivable, net of valuation allowance, at
September 30, 2018 and December 31, 2017
, were expected to be fully collectible.
Deposit Assets and Liabilities
In accordance with U.S. GAAP, deposit accounting is used in the event that a reinsurance contract does not transfer sufficient insurance risk. The deposit method of accounting requires an asset or liability to be recognized based on the consideration paid or received. The deposit asset or liability balance is subsequently adjusted using the interest method with a corresponding income or expense recorded in the
condensed consolidated
statements of income as other income or expense. The Company’s deposit assets and liabilities are recorded in the
condensed consolidated
balance sheets under reinsurance balances receivable and reinsurance balances payable, respectively. At
September 30, 2018
, deposit assets and deposit liabilities were
$13.1 million
and
$48.7 million
, respectively (
December 31, 2017
:
$19.4 million
and
$28.1 million
, respectively).
For the three and nine months ended September 30, 2018
, interest expense on deposit accounted contracts was
$0.3 million
and
$0.8 million
, respectively.
For the three and nine months ended September 30, 2018
, interest income on deposit accounted contracts was
$0.4 million
and
$0.9 million
, respectively.
For the three and nine months ended September 30, 2017
, there was no material interest expense or interest income on deposit accounted contracts.
Equity Method Accounted Investments
Where the Company’s ownership interest in a corporation exceeds 20% (but is less than 50%), the Company is deemed to have significant influence and the investment is accounted for using the equity method in accordance with U.S. GAAP. Additionally, if the Company’s investment represents greater than 5% of the participating interest in limited partnerships and limited liability entities, the Company is also deemed to have significant influence and the investment is accounted using the equity method (see Notes
3
and
4
).
Under the equity method, the carrying value of the investments is recorded on the condensed consolidated balance sheets and adjusted for the Company’s share of income or loss of the investee each period. The income or loss relating to the Company’s share of the investee is reported as investment income on the condensed consolidated statements of income.
Variable Interest Entities
The Company considers whether its variable interest investments should be consolidated as subsidiaries. Subsidiaries are those entities over which the Company has control. The Company controls an investee if and only if the Group has both of the following:
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|
•
|
The power to direct the activities of a variable interest entity (“VIE”) that most significantly impact the VIE’s economic performance, and
|
|
|
|
|
•
|
The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
|
The Company considers all relevant facts and circumstances in assessing whether it has power over an investee, including: the purpose and design of an investee, relevant activities, substantive and protective rights, and voting rights and potential voting rights.
The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the elements of control. Subsidiaries are consolidated from the date the Company obtains control and are excluded from consolidation from the date the Company loses control.
Where the Company does not control such entities, they are carried at fair value through profit or loss within financial investments in the condensed consolidated balance sheet.
Financial Instruments
Investments in Securities and Investments in Securities Sold, Not Yet Purchased
The Company’s Joint Venture enters into investments in debt instruments and equity securities that are classified as “trading securities” are carried at fair value. The fair values of the listed equity investments are derived based on quoted prices (unadjusted) in active markets for identical assets (Level 1 inputs). The fair values of listed equities that have restrictions on sale or transfer which expire within one year, are determined by adjusting the observed market price of the equity using a liquidity discount based on observable market inputs. The fair values of debt instruments are derived based on inputs that are observable, either directly or indirectly, such as market maker or broker quotes reflecting recent transactions (Level 2 inputs), and are generally derived based on the average of multiple market maker or broker quotes which are considered to be binding. Where quotes are not available, debt instruments are valued using cash flow models using assumptions and estimates that may be subjective and non-observable (Level 3 inputs).
The Company’s Joint Venture enters into “other investments” may include investments in private and unlisted equity securities, limited partnerships and commodities, which are all carried at fair value. The fair values of commodities are determined based on quoted prices in active markets for identical assets (Level 1). The Company maximizes the use of observable direct or indirect inputs (Level 2 inputs) when deriving the fair values for “other investments”. For limited partnerships and private and unlisted equity securities, where observable inputs are not available, the fair values are derived based on unobservable inputs (Level 3 inputs) such as management’s assumptions developed from available information using the services of the investment advisor, including the most recent net asset values obtained from the managers of those underlying investments. For certain private equity fund investments, the Company has elected to measure the fair value using the net asset value practical expedient allowed under U.S. GAAP, and, accordingly, these investments are not classified as Level 1, 2 or 3 in the fair value hierarchy.
For securities classified as “trading securities” and “other investments”, any realized and unrealized gains or losses are determined on the basis of the specific identification method (by reference to cost or amortized cost, as appropriate) and included in net investment income (loss) in the
condensed consolidated
statements of income.
Dividend income and expense are recorded on the ex-dividend date. The ex-dividend date is the date as of when the underlying security must have been traded to be eligible for the dividend declared. Interest income and interest expense are recorded on an accrual basis.
Derivative Financial Instruments
U.S. GAAP requires that an entity recognize all derivatives in the balance sheet at fair value. It also requires that unrealized gains and losses resulting from changes in fair value be included in income or comprehensive income, depending on whether the instrument qualifies as a hedge transaction, and if so, the type of hedge transaction. The Company’s derivative financial instrument assets held in the Joint Venture are included in financial contracts receivable. Derivative financial instrument liabilities relating to the Joint Venture are generally included in financial contracts payable. The Company’s derivatives do not qualify as hedges for financial reporting purposes and are recorded in the
condensed consolidated
balance sheets on a gross basis and not offset against any collateral pledged or received. Pursuant to the International Swaps and Derivatives Association (“ISDA”) master agreements, securities lending agreements and other agreements, the Company’s Joint Venture and its counterparties typically have the ability to net certain payments owed to each other in specified circumstances. In addition, in the event a party to one of the ISDA master agreements, securities lending agreements or other agreements defaults, or a transaction is otherwise subject to termination, the non-defaulting party generally has the right to set off outstanding balances due from the defaulting party against payments owed to the defaulting party or collateral held by the non-defaulting party.
Additionally. the Company may, from time to time, enter into underwriting contracts such as industry loss warranty contracts (“ILW”) that are treated as derivatives for U.S GAAP purposes.
Financial Contracts
The Company’s Joint Venture enters into financial contracts with counterparties as part of its investment strategy. Financial contracts, which include total return swaps, credit default swaps (“CDS”), futures, options, currency forwards and other derivative instruments, are recorded at their fair value with any unrealized gains and losses included in net investment income (loss) in the
condensed consolidated
statements of income. Financial contracts receivable represents derivative
contracts whereby, based upon the contract’s current fair value, the Company will be entitled to receive payments upon settlement of the contract. Financial contracts payable represents derivative contracts whereby, based upon each contract’s current fair value, the Company will be obligated to make payments upon settlement of the contract.
Total return swap agreements, included on the
condensed consolidated
balance sheets as financial contracts receivable and financial contracts payable, are derivative financial instruments whereby the Company’s Joint Venture 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’s Joint Venture may not own, over a specified time frame. In addition, the Company’s Joint Venture may also be obligated to pay or receive other payments based on interest rates, dividend payments and receipts, or foreign exchange movements during a specified period. The Company measures its rights or obligations to the counterparty based on the fair value movements of the underlying security together with any other payments due. These contracts are carried at fair value, based on observable inputs (Level 2 inputs) with the resultant unrealized gains and losses reflected in net investment income (loss) in the
condensed consolidated
statements of income. Additionally, any changes in the value of amounts received or paid on swap contracts are reported as a gain or loss in net investment income (loss) in the
condensed consolidated
statements of income.
Financial contracts may also include exchange traded futures or options contracts that are based on the movement of a particular index, equity security, commodity, currency or interest rate. Where such contracts are traded in an active market, the Company’s obligations or rights on these contracts are recorded at fair value based on the observable quoted prices of the same or similar financial contracts in an active market (Level 1) or on broker quotes which reflect market information based on actual transactions (Level 2). Amounts invested in exchange traded options and over the counter (“OTC”) options are recorded either as an asset or liability at inception. Subsequent to initial recognition, unexpired exchange traded option contracts are recorded at fair value based on quoted prices in active markets (Level 1). For OTC options or exchange traded options where a quoted price in an active market is not available, fair values are derived based upon observable inputs (Level 2) such as multiple quotes from brokers and market makers, which are considered to be binding.
The Company’s Joint Venture may purchase and sell CDS for strategic investment purposes. A CDS is a derivative instrument that provides protection against an investment loss due to specified credit or default events of a reference entity. The seller of a CDS guarantees to pay the buyer a specified amount if the reference entity defaults on its obligations or fails to perform. The buyer of a CDS pays a premium over time to the seller in exchange for obtaining this protection. A CDS trading in an active market is valued at fair value based on broker or market maker quotes for identical instruments in an active market (Level 2) or based on the current credit spreads on identical contracts (Level 2).
Transfer of Financial Assets
The Company accounts for transfers of financial assets as sales when it has surrendered control over the related assets. Whether control has been relinquished requires, among other things, an evaluation of relevant legal considerations and an assessment of the nature and extent of the Company’s continuing involvement with the assets transferred. Gains and losses stemming from transfers reported as sales, if any, are included as realized gains (losses) within net investment income in the accompanying condensed consolidated statements of income.
In instances where a transfer of financial assets does not qualify for sale accounting, U.S. GAAP accounting guidance requires that the transaction be accounted for as a collateralized borrowing. Accordingly, the related assets remain on the Company’s condensed consolidated balance sheets and continue to be reported and accounted for as if the transfer had not occurred (see Notes
3
and
4
).
Share-Based Compensation
The Company has established a stock incentive plan for directors, employees and consultants.
U.S. GAAP requires the Company to recognize share-based compensation transactions using the fair value at the grant date of the award. The Company measures compensation for restricted shares and restricted stock units (“RSUs”) based on the price of the Company’s common shares at the grant date. For restricted shares and RSUs with both service and performance vesting conditions, the expense is recognized based on management’s estimate of the probability of the performance conditions being achieved based on historical results and expectations of future results. If the performance conditions is expected to be met, the expense is attributed to the period for which the requisite service has been rendered. For restricted shares and RSUs with only service vesting conditions, the expense is recognized on a straight line basis over the vesting period, net of any estimated or expected forfeitures.
The forfeiture rate is estimated based on the Company’s historical actual forfeitures relating to restricted shares and RSUs granted to employees. The forfeiture rate is reviewed annually and adjusted as necessary. No forfeiture rate is used for restricted shares granted to directors which vest over a twelve-month period.
Determining the fair value of share purchase options at the grant date requires significant estimation and judgment. The Company uses an option-pricing model (Black-Scholes option pricing model) to assist in the calculation of fair value for share purchase options. The model requires estimation of various inputs such as estimated term, forfeiture and dividend rates and expected volatility. In determining the grant date fair value, the Company uses the full life of the options, ten years, as the estimated term of the options, and has assumed no forfeitures and no dividends paid during the life of the options. The estimate of expected volatility is based on the daily historical trading data of the Company’s Class A ordinary shares from the date that these shares commenced trading (May 24, 2007) to the grant date.
For share purchase options issued under the employee stock incentive plan, the compensation cost is calculated and expensed over the vesting periods on a graded vesting basis (see Note
9
).
If actual results differ significantly from these estimates and assumptions, particularly in relation to the Company’s estimation of volatility which requires the most judgment, share-based compensation expense, primarily with respect to future share-based awards, could be materially impacted.
Convertible Notes
The Company accounts for its notes issued with equity conversion features by first considering if an embedded derivative is considered to be present under ASC Topic 815,
Derivatives and Hedging
, based on the terms and conditions for settlement of the instrument and the means of settlement in cash or in the Company’s shares. Any embedded derivative features are bifurcated from the underlying contract and accounted for as a derivative. Conversion options that are not bifurcated are accounted for under ASC Topic 470-20,
Debt with Conversion and Other Options
. The Company assesses the applicability of the cash conversion option, and if applicable bifurcates the convertible note between liabilities and shareholders’ equity. The Company records a liability equivalent to the present value of comparable debt at the time of issuance without the conversion features and the remainder of the proceeds are accounted for within shareholders’ equity.
Convertible Notes Issuance Costs
Costs incurred in issuing convertible notes, which include underwriters’ fees, legal and accounting fees, printing and other fees are capitalized and presented as a direct deduction from the principal amount of senior convertible notes payable in the condensed consolidated balance sheets. These costs are amortized over the term of the debt and are included in interest expense in the condensed consolidated statements of income (loss). In the case where issuance costs relate to a note issuance with conversion features that is bifurcated between liabilities and shareholders’ equity, costs are allocated ratably to the liability and shareholders’ equity balances.
Foreign Exchange
The reporting and functional currency of the Company and all its subsidiaries is the U.S. dollar. Transactions in foreign currencies are recorded in U.S. dollars at the exchange rates in effect on the transaction date. Monetary assets and liabilities in foreign currencies at the balance sheet date are translated at the exchange rate in effect at the balance sheet date and translation exchange gains and losses, if any, are included in “other income (expense), net” in the
condensed consolidated
statements of income.
Comprehensive Income (Loss)
The Company has no comprehensive income or loss, other than the net income or loss disclosed in the
condensed consolidated
statements of income.
Earnings (Loss) Per Share
Basic earnings (or loss) per share are based on the weighted average number of common shares and participating securities outstanding during the period. Diluted earnings (or loss) per share includes the dilutive effect of RSU issued that would convert to common shares upon vesting and additional potential common shares issuable when stock options are exercised and are determined using the treasury stock method. In addition, the diluted earnings (or loss) per share calculation includes those common shares with the potential to be issued by virtue of convertible debt and other such convertible
instruments using the treasury stock method. Diluted earnings (or loss) per share contemplates a conversion to common shares of all convertible instruments only if they are dilutive in nature with regards to earnings per share. The Company treats its unvested restricted stock as participating securities in accordance with U.S. GAAP, which requires that unvested stock awards which contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid (referred to as “participating securities”), be included in the number of shares outstanding for both basic and diluted earnings per share calculations. In the event of a net loss, all RSUs, stock options outstanding, convertible debt and participating securities are excluded from the calculation of both basic and diluted loss per share since their inclusion would be anti-dilutive.
|
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Three months ended September 30
|
|
Nine months ended September 30
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Weighted average shares outstanding - basic
|
35,952,472
|
|
|
37,345,985
|
|
|
35,951,384
|
|
|
36,994,969
|
|
|
Effect of dilutive employee and director share-based awards
|
—
|
|
|
29,288
|
|
|
—
|
|
|
27,378
|
|
|
Weighted average shares outstanding - diluted
|
35,952,472
|
|
|
37,375,273
|
|
|
35,951,384
|
|
|
37,022,347
|
|
|
Anti-dilutive stock options outstanding
|
935,627
|
|
|
358,741
|
|
|
935,627
|
|
|
351,074
|
|
|
Participating securities excluded from calculation of loss per share
|
433,849
|
|
|
—
|
|
|
433,849
|
|
|
332,134
|
|
Taxation
Under current Cayman Islands law, no corporate entity, including GLRE and Greenlight Re, is obligated to pay taxes in the Cayman Islands on either income or capital gains. The Company has an undertaking from the Governor-in-Cabinet of the Cayman Islands, pursuant to the provisions of the Tax Concessions Law, as amended, that, in the event that the Cayman Islands enacts any legislation that imposes tax on profits, income, gains or appreciations, or any tax in the nature of estate duty or inheritance tax, such tax will not be applicable to GLRE, Greenlight Re nor their respective operations, or to the Class A or Class B ordinary shares or related obligations, until February 1, 2025.
Verdant is incorporated in Delaware and, therefore, is subject to taxes in accordance with the U.S. federal rates and regulations prescribed by the U.S. Internal Revenue Service (“IRS”). Verdant’s taxable income is generally expected to be taxed at a marginal rate of
21%
. Verdant’s tax years 2014 and beyond, remain open and subject to examination by the IRS.
GRIL is incorporated in Ireland and, therefore, is subject to the Irish corporation tax rate of
12.5%
on its trading income, and
25%
on its non-trading income, if any.
Any deferred tax asset is evaluated for recovery and a valuation allowance is recorded when it is more likely than not that the deferred tax asset will not be realized in the future. The Company has not taken any income tax positions that are subject to significant uncertainty or that are reasonably likely to have a material impact on the Company.
Recent Accounting Pronouncements
In February 2018, the FASB issued ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2018-03”)
.
The new guidance is intended to clarify certain aspects of the guidance issued in ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). ASU 2018-03, among other items, clarifies that the prospective transition approach for equity securities without a readily determinable fair value in the amendments in ASU 2016-01 is meant only for instances in which the measurement alternative is applied. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018, and public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments in ASU 2016-01. All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted ASU 2016-01. The Company has adopted ASU 2018-03 during the third quarter of 2018 using the prospective transition approach. The adoption had no impact on the Company’s net income or loss.
In January 2016, the FASB issued ASU 2016-01
.
The new guidance is intended to improve the recognition and measurement of financial instruments. ASU 2016-01, among other things, requires equity investments to be measured at fair value with changes in fair value recognized in net income or loss, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and requires separate presentation of financial
assets and financial liabilities by measurement category and form of financial asset. ASU 2016-01 affects public and private companies, not-for-profit organizations, and employee benefit plans that hold financial assets or owe financial liabilities. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2016-01 during the first quarter of fiscal year 2018 and the adoption of this guidance did not have any significant impact on the Company’s net income or loss or retained earnings since the Company’s investments are recorded at fair value and the unrealized gains and losses are recognized in net income or loss. The Company has implemented the new disclosures required under ASU 2016-01 commencing from the first quarter of 2018.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”)
.
Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for any organization in any interim or annual period. The Company currently has operating leases for its office spaces as disclosed in Note
11
of the
condensed consolidated
financial statements which will be recognized as right-of-use asset upon adoption of ASU 2016-02. The Company is in the process of evaluating the impact of adopting ASU 2016-02 on the Company’s consolidated financial statements and anticipates implementing ASU 2016-02 during the first quarter of fiscal year 2019.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurements of Credit Losses on Financial Instruments” (“ASU 2016-13”)
.
ASU 2016-13 amends the guidance on reporting credits losses and affects loans, debt securities, trade receivables, reinsurance recoverables and other financial assets that have the contractual right to receive cash. The amendments are effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted for any organization for annual periods beginning after December 15, 2018 and interim periods within those annual periods. The Company is in the process of evaluating the impact of the requirements of ASU 2016-13 on the Company’s consolidated financial statements and anticipates implementing ASU 2016-13 during the first quarter of fiscal year 2020.
In November 2016, the FASB issued ASU 2016-18, “Statements of Cash Flows - Restricted Cash (Topic 230)” (“ASU 2016-18”). ASU 2016-18 requires restricted cash and cash equivalents to be included with cash and cash equivalents in the statement of cash flows and the nature of the restrictions on cash and cash equivalents to be disclosed. ASU 2016-18 is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption was permitted. The Company adopted ASU 2016-18 during the first quarter of fiscal year 2018 and amended the presentation in the statement of cash flows to include the restricted cash and cash equivalents with cash and cash equivalents in the
condensed consolidated
statements of cash flows and retrospectively reclassified comparative periods presented. The adoption had no impact on the Company’s net income or loss or retained earnings.
The FASB has issued ASU No. 2014-09, “Revenue from Contracts with Customers”, and related amendments, ASU 2015-14, ASU 2016-10, ASU 2016-12, ASU 2016-20, ASU 2017-05 and ASU 2017-13, (collectively, “Topic 606”). Topic 606 creates a new comprehensive revenue recognition standard that will serve as a single source of revenue guidance for all companies that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of non-financial assets, unless those contracts are within the scope of other standards, such as insurance contracts. Topic 606 becomes effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted Topic 606 during the first quarter of the fiscal year 2018, and since all of the Company’s revenues relate to reinsurance contracts and investment income, the adoption of Topic 606 did not have a material impact on the Company’s revenues and related disclosures.
3
.
INVESTMENT IN RELATED PARTY INVESTMENT FUND
Prior to September 1, 2018, the Company through its Joint Venture, purchased and sold various financial instruments, which included listed and unlisted equities, corporate and sovereign debt, commodities, futures, put and call options, currency forwards, other derivatives and similar instruments sold, not yet purchased.
Effective September 1, 2018, Greenlight Re and GRIL entered into the LPA of SILP with DME II and the other parties thereto. In accordance with the LPA, DME II serves as the general partner of SILP. Pursuant to an Investment Management Agreement between DME II and SILP dated September 1, 2018 (the “SILP IMA”), DME Advisors is the investment manager for SILP. In addition, on September 1, 2018, Greenlight Re and GRIL, together the “GLRE Limited Partners”, and SILP executed a Participation Agreement pursuant to which the GLRE Limited Partners transferred a participation interest in the assets that were subject to the Joint Venture (except for certain assets that were mutually agreed and excluded from
participating) to SILP (collectively referred to as the “LP Transaction”). SILP issued limited partner interests to the GLRE Limited Partners proportionate to and based on the net asset value transferred by each such entity effective September 1, 2018. The Joint Venture
will be terminated on the earlier of January 2, 2019 or the date on which all assets have been transferred to SILP in accordance with the LPA.
As a result of the changes described above, the Company’s investment in SILP has been presented on the
condensed consolidated
balance sheets as an investment in a related party investment fund. In assessing the Company’s interest in SILP in accordance with the Company’s accounting policy for variable interest entities, the Company concluded that it did not hold the power to direct the activities which most significantly impact the economic performance of SILP, and therefore consolidation was not appropriate.
The transfer of the investment assets was accounted for as a sale in accordance with the Company’s accounting policy for transfers of financial assets.The underlying investment liabilities were extinguished from the Company’s
condensed consolidated
balance sheet as they were either settled, novated or legally transferred to SILP as part of the LP Transaction. There were no net gains or losses resulting from the transfer of net assets. There was no cash paid or received as part of the LP Transaction.
At September 30, 2018, certain assets that were subject to the Participation Agreement for which the GLRE Limited Partners received an interest in SILP had not transferred legal title to SILP. While the rights and privileges relating to those assets have been transfered to SILP, those assets are reported on the
condensed consolidated
balance sheet until legal title has transferred to SILP. In accordance with U.S. GAAP, the Company has accounted for those assets as collateralized borrowing and recorded a liability, “due to related party investment fund” relating to the Company’s obligation to transfer those assets to SILP.
The Company’s maximum exposure to loss relating to SILP is limited to the net asset value of the GLRE Limited Partners’ investment in SILP. As of September 30, 2018, the net asset value of the GLRE Limited Partners’ investment in SILP was
$346.7 million
, representing
87.4%
of SILP’s total net assets. The investment in SILP is recorded at the GLRE Limited Partners’ share of the net asset value of SILP as reported by SILP’s third party administrator, which represents fair value. The GLRE Limited Partners can redeem their assets from SILP by providing three business days’ notice to DME II. The majority of SILP’s long investments are comprised of publicly-traded equity securities and other holdings, which can be readily liquidated to meet the GLRE Limited Partners’ redemption requests. The Company’s share of change in the net asset value of SILP for the
three and nine months ended September 30, 2018
was
$(10.0) million
and
$(10.0) million
, respectively, and included in “income from investment in related party investment fund” in the
condensed consolidated
statements of income.
During the three months ended September 30, 2018, the Company transferred the rights to
$366.3 million
of net investments from Greenlight RE and GRIL’s Joint Venture investment accounts to SILP in exchange for limited partnership interests of the same amount, resulting in no net gains or losses. The transfer of assets included non-cash items as follows:
|
|
|
|
|
|
|
|
Non-cash transactions
|
($ in thousands)
|
|
Net investments transferred to related party investment fund (net of cash and restricted cash)
|
$
|
13,311
|
|
|
Participating interest transferred to related party investment fund
|
111,697
|
|
|
Total non-cash transfer of assets
|
$
|
125,008
|
|
The summarized income statement of SILP is presented below:
|
|
|
|
|
|
|
|
|
|
|
From September 1, 2018 (inception) to September 30, 2018
|
|
|
|
($ in thousands)
|
|
Investment income
|
|
|
|
Dividend income (net of withholding taxes)
|
|
$
|
1,068
|
|
|
Interest income
|
|
907
|
|
|
Total Investment income
|
|
1,975
|
|
|
|
|
|
|
Expenses
|
|
|
|
Management fee
|
|
(803
|
)
|
|
Dividends
|
|
(204
|
)
|
|
Interest
|
|
(505
|
)
|
|
Professional fees and other
|
|
(111
|
)
|
|
Total expenses
|
|
(1,623
|
)
|
|
Net investment income
|
|
352
|
|
|
|
|
|
|
Realized and change in unrealized gains (losses) on investments
|
|
|
|
Net realized gain (loss) on investments
|
|
(44,811
|
)
|
|
Net change in unrealized appreciation on investments
|
|
33,056
|
|
|
Net gain (loss) on investments
|
|
(11,755
|
)
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(11,403
|
)
|
The summarized statement of assets and liabilities of SILP is presented below:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
|
($ in thousands)
|
|
Assets
|
|
|
|
Investments, at fair value
|
|
$
|
683,521
|
|
|
Due from brokers
|
|
239,309
|
|
|
Cash and cash equivalents
|
|
2,992
|
|
|
Interest and dividends receivable
|
|
1,893
|
|
|
Total assets
|
|
927,715
|
|
|
|
|
|
|
Liabilities and partners’ capital
|
|
|
|
Liabilities
|
|
|
|
Investments sold, not yet purchased, at fair value
|
|
(476,655
|
)
|
|
Due to brokers
|
|
(52,902
|
)
|
|
Interest and dividends payable
|
|
(1,094
|
)
|
|
Other liabilities
|
|
(499
|
)
|
|
Total liabilities
|
|
(531,150
|
)
|
|
|
|
|
|
Net Assets
|
|
$
|
396,565
|
|
|
|
|
|
|
GLRE Limited Partners’ share of Net Assets
|
|
$
|
346,721
|
|
4
.
FINANCIAL INSTRUMENTS
Investments
Debt instruments, trading
At
September 30, 2018
, the following investments were included in debt instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost/amortized cost
|
|
Unrealized gains
|
|
Unrealized losses
|
|
Fair
value
|
|
|
|
($ in thousands)
|
|
Corporate debt – U.S.
|
|
$
|
716
|
|
|
$
|
—
|
|
|
$
|
(691
|
)
|
|
$
|
25
|
|
|
Total debt instruments
|
|
$
|
716
|
|
|
$
|
—
|
|
|
$
|
(691
|
)
|
|
$
|
25
|
|
At
December 31, 2017
, the following investments were included in debt instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost/amortized cost
|
|
Unrealized gains
|
|
Unrealized losses
|
|
Fair
value
|
|
|
|
($ in thousands)
|
|
Corporate debt – U.S.
|
|
$
|
8,508
|
|
|
$
|
—
|
|
|
$
|
(7,186
|
)
|
|
$
|
1,322
|
|
|
Corporate debt – Non U.S.
|
|
2,109
|
|
|
—
|
|
|
(2,057
|
)
|
|
52
|
|
|
Municipal debt – U.S.
|
|
5,831
|
|
|
—
|
|
|
(25
|
)
|
|
5,806
|
|
|
Total debt instruments
|
|
$
|
16,448
|
|
|
$
|
—
|
|
|
$
|
(9,268
|
)
|
|
$
|
7,180
|
|
The maturity distribution for debt instruments held at
September 30, 2018 and December 31, 2017
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
Cost/
amortized
cost
|
|
Fair
value
|
|
Cost/
amortized
cost
|
|
Fair
value
|
|
|
|
($ in thousands)
|
|
Within one year
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,557
|
|
|
$
|
441
|
|
|
From one to five years
|
|
716
|
|
|
25
|
|
|
—
|
|
|
—
|
|
|
From five to ten years
|
|
—
|
|
|
—
|
|
|
2,109
|
|
|
52
|
|
|
More than ten years
|
|
—
|
|
|
—
|
|
|
6,782
|
|
|
6,687
|
|
|
|
|
$
|
716
|
|
|
$
|
25
|
|
|
$
|
16,448
|
|
|
$
|
7,180
|
|
Equity securities, trading
At
September 30, 2018
, the following long positions were included in equity securities, trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Unrealized
gains
|
|
Unrealized
losses
|
|
Fair
value
|
|
|
|
($ in thousands)
|
|
Equities – listed
|
|
$
|
58,752
|
|
|
$
|
3,738
|
|
|
$
|
(4,714
|
)
|
|
$
|
57,776
|
|
|
Total equity securities
|
|
$
|
58,752
|
|
|
$
|
3,738
|
|
|
$
|
(4,714
|
)
|
|
$
|
57,776
|
|
At
December 31, 2017
, the following long positions were included in equity securities, trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Unrealized
gains
|
|
Unrealized
losses
|
|
Fair
value
|
|
|
|
($ in thousands)
|
|
Equities – listed
|
|
$
|
1,014,426
|
|
|
$
|
208,350
|
|
|
$
|
(19,104
|
)
|
|
$
|
1,203,672
|
|
|
Total equity securities
|
|
$
|
1,014,426
|
|
|
$
|
208,350
|
|
|
$
|
(19,104
|
)
|
|
$
|
1,203,672
|
|
Other Investments
“Other investments” include commodities and private securities and unlisted funds. As of
September 30, 2018 and December 31, 2017
, all commodities were comprised of gold bullion.
At
September 30, 2018
, the following securities were included in other investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Unrealized
gains
|
|
Unrealized
losses
|
|
Fair
value
|
|
|
|
($ in thousands)
|
|
Commodities
|
|
$
|
29,493
|
|
|
$
|
4,971
|
|
|
$
|
—
|
|
|
$
|
34,464
|
|
|
Private investments and unlisted equity funds
|
|
29,964
|
|
|
7,436
|
|
|
(13
|
)
|
|
37,387
|
|
|
|
|
$
|
59,457
|
|
|
$
|
12,407
|
|
|
$
|
(13
|
)
|
|
$
|
71,851
|
|
|
Investment accounted for under the equity method
|
|
|
|
|
|
|
|
$
|
1,654
|
|
|
Total Other Investments
|
|
|
|
|
|
|
|
$
|
73,505
|
|
At
September 30, 2018
, the Company held a non-controlling interest in AccuRisk Holdings LLC (“AccuRisk”). In addition to
16.7%
of the outstanding voting shares of AccuRisk, the Company also held convertible promissory notes issued by AccuRisk which are convertible into voting shares at the Company’s option at any time. When taking into account the conversion option, the Company’s interest in AccuRisk was
34.2%
. The Company has determined that it has significant influence over AccuRisk and has accounted for the voting shares under the equity method. The carrying value of AccuRisk is adjusted based on the Company’s share of ownership, including share of income and expenses reported in quarterly
management accounts. The AccuRisk convertible promissory notes are recorded at cost plus accrued interest less any impairment and included in Notes Receivable on the
condensed consolidated
balance sheet. For the
three and nine months ended September 30, 2018
, the Company’s share of AccuRisk’s net income (loss) was
$(0.1) million
and
$(0.1) million
, respectively, which was included in net investment income on the
condensed consolidated
statements of income.
At
December 31, 2017
, the following securities were included in other investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Unrealized
gains
|
|
Unrealized
losses
|
|
Fair
value
|
|
|
|
($ in thousands)
|
|
Commodities
|
|
$
|
101,184
|
|
|
$
|
20,318
|
|
|
$
|
—
|
|
|
$
|
121,502
|
|
|
Private investments and unlisted equity funds
|
|
25,316
|
|
|
5,314
|
|
|
—
|
|
|
30,630
|
|
|
|
|
$
|
126,500
|
|
|
$
|
25,632
|
|
|
$
|
—
|
|
|
$
|
152,132
|
|
Private and unlisted equity funds include private equity securities that did not have readily determinable fair values and the Company applied the measurement alternative under ASU 2016-01 and ASU 2018-03. At
September 30, 2018
the carrying value of the private equity securities without readily determinable fair value was
$5.8 million
(December 31,
2017
:
$3.9
million). The carrying values of the private equity securities are determined based on the original cost, reviewed for impairment and any subsequent changes in the valuation based on periodic third party valuations or recent observable transactions of those securities. There were no meaningful upward or downward adjustments to the carrying values of the private equity securities for the
three and nine months ended September 30, 2018
.
Investments in Securities Sold, Not Yet Purchased
Securities sold, not yet purchased, are securities that the Company has sold, but does not own, in anticipation of a decline in the market value of the security. The Company’s risk is that the value of the security will increase rather than decline. Consequently, the settlement amount of the liability for securities sold, not yet purchased, may exceed the amount recorded in the
condensed consolidated
balance sheet as the Company is obligated to purchase the securities sold, not yet purchased, in the market at prevailing prices to settle its obligations. To establish a position in a security sold, not yet purchased, the Company needs to borrow the security for delivery to the buyer. On each day the transaction is open, the liability for the obligation to replace the borrowed security is marked-to-market and an unrealized gain or loss is recorded. At the time the transaction is closed, the Company realizes a gain or loss equal to the difference between the price at which the security was sold and the cost of replacing the borrowed security. While the transaction is open, the Company will also incur an expense for any dividends or interest which will be paid to the lender of the securities.
At
September 30, 2018
, there were no investments in securities sold, not yet purchased.
At
December 31, 2017
, the following securities were included in investments in securities sold, not yet purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
|
|
Unrealized gains
|
|
Unrealized losses
|
|
Fair value
|
|
|
|
($ in thousands)
|
|
Equities – listed
|
|
$
|
(643,148
|
)
|
|
$
|
17,541
|
|
|
$
|
(187,045
|
)
|
|
$
|
(812,652
|
)
|
|
Sovereign debt – Non U.S.
|
|
(96,231
|
)
|
|
—
|
|
|
(3,914
|
)
|
|
(100,145
|
)
|
|
|
|
$
|
(739,379
|
)
|
|
$
|
17,541
|
|
|
$
|
(190,959
|
)
|
|
$
|
(912,797
|
)
|
Financial Contracts
Prior to the change in the Company’s investment account structure described in Note
3
above, the Company had entered into total return equity swaps, interest rate swaps, commodity swaps, options, warrants, rights, futures and forward contracts with various financial institutions to meet certain investment objectives. Under the terms of each of these financial contracts, the Company was either entitled to receive or was obligated to make payments, which are based on the product of a formula contained within each contract that includes the change in the fair value of the underlying or reference security. As of September 30, 2018, the Company was in the process of transferring the remaining financial contracts to SILP and any financial contracts with legal title not yet transferred to SILP, have been reported on the Company’s balance sheet as financial contracts receivable and financial contracts payable.
At
September 30, 2018
, the fair values of financial contracts outstanding and awaiting transfer to SILP were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Contracts
|
|
Listing
currency
(1)
|
|
Notional amount of
underlying instruments
|
|
Fair value of net assets
(obligations)
on financial
contracts
|
|
|
|
|
|
($ in thousands)
|
|
Financial contracts receivable
|
|
|
|
|
|
|
|
Commodity Swaps
|
|
USD
|
|
13,570
|
|
|
$
|
1,117
|
|
|
Forwards
|
|
KRW
|
|
28,168
|
|
|
253
|
|
|
Interest rate options
|
|
USD
|
|
1,783,000
|
|
|
679
|
|
|
Interest rate swaps
|
|
JPY
|
|
21,087
|
|
|
288
|
|
|
Put options
|
|
USD
|
|
143,371
|
|
|
60,352
|
|
|
Total return swaps – equities
|
|
GBP/EUR/KRW/USD
|
|
58,072
|
|
|
6,477
|
|
|
Total financial contracts receivable, at fair value
|
|
|
|
|
|
$
|
69,166
|
|
|
Financial contracts payable
|
|
|
|
|
|
|
|
Call options
|
|
USD
|
|
531
|
|
|
$
|
(42
|
)
|
|
Put options
|
|
USD
|
|
34,316
|
|
|
(19,597
|
)
|
|
Total return swaps – equities
|
|
EUR/RON/USD
|
|
35,401
|
|
|
(1,110
|
)
|
|
Total financial contracts payable, at fair value
|
|
|
|
|
|
$
|
(20,749
|
)
|
(1)
USD = US Dollar; EUR = Euro; GBP = British Pound; JPY = Japanese Yen; KRW = Korean Won; RON = Romanian New Leu.
At
December 31, 2017
, the fair values of financial contracts outstanding were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Contracts
|
|
Listing currency
(1)
|
|
Notional amount of
underlying instruments
|
|
Fair value of net assets
(obligations)
on financial
contracts
|
|
|
|
|
|
($ in thousands)
|
|
Financial contracts receivable
|
|
|
|
|
|
|
|
Call options
|
|
USD
|
|
2,656
|
|
|
$
|
91
|
|
|
Commodity Swaps
|
|
USD
|
|
17,833
|
|
|
2,142
|
|
|
Forwards
|
|
KRW
|
|
41,379
|
|
|
801
|
|
|
Futures
|
|
USD
|
|
5,874
|
|
|
12
|
|
|
Interest rate swaps
|
|
JPY
|
|
21,269
|
|
|
479
|
|
|
Put options
(2)
|
|
USD
|
|
155
|
|
|
1
|
|
|
Total return swaps – equities
|
|
EUR/GBP/USD
|
|
34,965
|
|
|
9,357
|
|
|
Warrants and rights on listed equities
|
|
EUR/USD
|
|
29
|
|
|
10
|
|
|
Total financial contracts receivable, at fair value
|
|
|
|
|
|
$
|
12,893
|
|
|
Financial contracts payable
|
|
|
|
|
|
|
|
Commodity Swaps
|
|
USD
|
|
26,795
|
|
|
$
|
(353
|
)
|
|
Put options
|
|
USD
|
|
130
|
|
|
(14
|
)
|
|
Total return swaps – equities
|
|
EUR/GBP/KRW/RON/USD
|
|
60,663
|
|
|
(21,855
|
)
|
|
Total financial contracts payable, at fair value
|
|
|
|
|
|
$
|
(22,222
|
)
|
(1)
USD = US Dollar; EUR = Euro; GBP = British Pound; JPY = Japanese Yen; KRW = Korean Won; RON = Romanian New Leu.
(2)
Includes options on the Chinese Yuan, denominated in U.S. dollars.
Options are derivative financial instruments that give the buyer, in exchange for a premium payment, the right, but not the obligation, to either purchase from (call option) or sell to (put option) the writer, a specified underlying security at a specified price on or before a specified date. The Company enters into option contracts to meet certain investment objectives. For exchange traded option contracts, the exchange acts as the counterparty to specific transactions and therefore bears the risk of delivery to and from counterparties of specific positions.
As of
September 30, 2018
, the Company held
$60.4 million
OTC put options (long) (
December 31, 2017
:
nil
) and
$19.6 million
OTC put options (short) (
December 31, 2017
:
nil
).
During the
three and nine months ended September 30, 2018 and 2017
, the Company reported gains and losses on derivatives as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
Location of gains and losses on derivatives recognized in income
|
|
Gain (loss) on derivatives recognized in income
|
|
|
|
|
|
Three months ended September 30
|
|
Nine months ended September 30
|
|
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
($ in thousands)
|
|
Forwards
|
|
Net investment income (loss)
|
|
$
|
(76
|
)
|
|
$
|
(28
|
)
|
|
$
|
(2,983
|
)
|
|
$
|
306
|
|
|
Futures
|
|
Net investment income (loss)
|
|
(5,387
|
)
|
|
(77
|
)
|
|
(13,339
|
)
|
|
(480
|
)
|
|
Interest rate options
|
|
Net investment income (loss)
|
|
(617
|
)
|
|
—
|
|
|
(1,771
|
)
|
|
—
|
|
|
Interest rate swaps
|
|
Net investment income (loss)
|
|
194
|
|
|
113
|
|
|
(255
|
)
|
|
20
|
|
|
Options, warrants, and rights
|
|
Net investment income (loss)
|
|
(785
|
)
|
|
(6,467
|
)
|
|
(14,627
|
)
|
|
(18,579
|
)
|
|
Commodity swaps
|
|
Net investment income (loss)
|
|
246
|
|
|
1,794
|
|
|
4,402
|
|
|
(8,911
|
)
|
|
Total return swaps – equities
|
|
Net investment income (loss)
|
|
(1,743
|
)
|
|
12,635
|
|
|
(10,981
|
)
|
|
12,353
|
|
|
Total
|
|
|
|
$
|
(8,168
|
)
|
|
$
|
7,970
|
|
|
$
|
(39,554
|
)
|
|
$
|
(15,291
|
)
|
The Company generally does not enter into derivatives for risk management or hedging purposes. The volume of derivative activities varies from period to period depending on potential investment opportunities.
For the three and nine months ended September 30, 2018
, the Company’s volume of derivative activities (based on notional amounts) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
Three months ended September 30
|
|
Nine months ended September 30
|
|
Derivatives not designated as hedging instruments (notional amounts)
|
|
Entered
|
|
Exited
|
|
Entered
|
|
Exited
|
|
|
|
($ in thousands)
|
|
Commodity swaps
|
|
$
|
—
|
|
|
$
|
21,059
|
|
|
$
|
34,792
|
|
|
$
|
70,982
|
|
|
Forwards
|
|
2,291
|
|
|
28,830
|
|
|
65,819
|
|
|
76,596
|
|
|
Futures
|
|
—
|
|
|
127,882
|
|
|
423,374
|
|
|
440,594
|
|
|
Interest rate options
(1)
|
|
—
|
|
|
—
|
|
|
1,783,000
|
|
|
—
|
|
|
Options, warrants and rights
(1)
|
|
52,844
|
|
|
20,279
|
|
|
298,830
|
|
|
46,925
|
|
|
Total return swaps
|
|
8,630
|
|
|
31,537
|
|
|
25,480
|
|
|
63,676
|
|
|
Total
|
|
$
|
63,765
|
|
|
$
|
229,587
|
|
|
$
|
2,631,295
|
|
|
$
|
698,773
|
|
(1)
Exited amount excludes derivatives which expired or were exercised during the period.
For the three and nine months ended September 30, 2017
, the Company’s volume of derivative activities (based on notional amounts) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
Three months ended September 30
|
|
Nine months ended September 30
|
|
Derivatives not designated as hedging instruments (notional amounts)
|
|
Entered
|
|
Exited
|
|
Entered
|
|
Exited
|
|
|
|
($ in thousands)
|
|
Commodity swaps
|
|
$
|
—
|
|
|
$
|
17,729
|
|
|
$
|
2,025
|
|
|
$
|
34,317
|
|
|
Forwards
|
|
1,781
|
|
|
—
|
|
|
5,421
|
|
|
—
|
|
|
Futures
|
|
5,807
|
|
|
2,650
|
|
|
38,207
|
|
|
32,537
|
|
|
Options, warrants and rights
(1)
|
|
372,894
|
|
|
15,840
|
|
|
950,811
|
|
|
125,942
|
|
|
Total return swaps
|
|
—
|
|
|
20,147
|
|
|
243,495
|
|
|
316,560
|
|
|
Total
|
|
$
|
380,482
|
|
|
$
|
56,366
|
|
|
$
|
1,239,959
|
|
|
$
|
509,356
|
|
(1)
Exited amount excludes derivatives which expired or were exercised during the period.
The Company does not offset its derivative instruments and presents all amounts in the
condensed consolidated
balance sheets on a gross basis. The Company has pledged cash collateral to derivative counterparties to support the current value of amounts due to the counterparties on its derivative instruments.
As of
September 30, 2018
, the gross and net amounts of derivative instruments and the cash collateral applicable to derivative instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
(i)
|
|
(ii)
|
|
(iii) = (i) - (ii)
|
|
(iv) Gross amounts not offset in the balance sheet
|
|
(v) = (iii) + (iv)
|
|
Description
|
|
Gross amounts of recognized assets (liabilities)
|
|
Gross amounts offset in the balance sheet
|
|
Net amounts of assets (liabilities) presented in the balance sheet
|
|
Financial instruments available for offset
|
|
Cash collateral (received) pledged
|
|
Net amount of asset (liability)
|
|
|
|
($ in thousands)
|
|
Financial contracts receivable
|
|
$
|
69,166
|
|
|
$
|
—
|
|
|
$
|
69,166
|
|
|
$
|
(20,749
|
)
|
|
$
|
(25,544
|
)
|
|
$
|
22,873
|
|
|
Financial contracts payable
|
|
(20,749
|
)
|
|
—
|
|
|
(20,749
|
)
|
|
20,749
|
|
|
—
|
|
|
—
|
|
As of
December 31, 2017
, the gross and net amounts of derivative instruments and the cash collateral applicable to derivative instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
(i)
|
|
(ii)
|
|
(iii) = (i) - (ii)
|
|
(iv) Gross amounts not offset in the balance sheet
|
|
(v) = (iii) + (iv)
|
|
Description
|
|
Gross amounts of recognized assets (liabilities)
|
|
Gross amounts offset in the balance sheet
|
|
Net amounts of assets (liabilities) presented in the balance sheet
|
|
Financial instruments available for offset
|
|
Cash collateral (received) pledged
|
|
Net amount of asset (liability)
|
|
|
|
($ in thousands)
|
|
Financial contracts receivable
|
|
$
|
12,893
|
|
|
$
|
—
|
|
|
$
|
12,893
|
|
|
$
|
(5,128
|
)
|
|
$
|
(1,336
|
)
|
|
$
|
6,429
|
|
|
Financial contracts payable
|
|
(22,222
|
)
|
|
—
|
|
|
(22,222
|
)
|
|
5,128
|
|
|
17,094
|
|
|
—
|
|
Fair Value Hierarchy
The Company’s financial instruments are carried at fair value, and the net unrealized gains or losses are included in net investment income (loss) in the
condensed consolidated
statements of income.
The following table presents the Company’s investments, categorized by the level of the fair value hierarchy as of
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements as of September 30, 2018
|
|
Description
|
|
Quoted prices in
active markets
(Level 1)
|
|
Significant other
observable
inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Total
|
|
|
|
($ in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Debt instruments
|
|
$
|
—
|
|
|
$
|
25
|
|
|
$
|
—
|
|
|
$
|
25
|
|
|
Listed equity securities
|
|
57,776
|
|
|
—
|
|
|
—
|
|
|
57,776
|
|
|
Commodities
|
|
34,464
|
|
|
—
|
|
|
—
|
|
|
34,464
|
|
|
Private and unlisted equity securities
|
|
—
|
|
|
—
|
|
|
1,424
|
|
|
1,424
|
|
|
|
|
$
|
92,240
|
|
|
$
|
25
|
|
|
$
|
1,424
|
|
|
$
|
93,689
|
|
|
Unlisted equity funds measured at net asset value
(1)
|
|
|
|
|
|
|
|
30,212
|
|
|
Investment in related party investment fund measured at net asset value
(1) (2)
|
|
|
|
|
|
|
|
346,721
|
|
|
Equities without readily determinable fair values for which measurement alternative is applied
|
|
|
|
|
|
|
|
5,751
|
|
|
Investment accounted for under the equity method
|
|
|
|
|
|
|
|
1,654
|
|
|
Total investments
|
|
|
|
|
|
|
|
$
|
478,027
|
|
|
Financial contracts receivable
|
|
$
|
—
|
|
|
$
|
69,166
|
|
|
$
|
—
|
|
|
$
|
69,166
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Financial contracts payable
|
|
$
|
—
|
|
|
$
|
(20,749
|
)
|
|
$
|
—
|
|
|
$
|
(20,749
|
)
|
(1)
Investments measured at fair value using the net asset value practical expedient have not been classified in the fair value hierarchy. The fair value amounts are presented in the above table to facilitate reconciliation to the
condensed consolidated
balance sheets.
(2)
See Note 3 “Investment in related party investment fund”.
The following table presents the Company’s investments, categorized by the level of the fair value hierarchy as of
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements as of December 31, 2017
|
|
Description
|
|
Quoted prices in
active markets
(Level 1)
|
|
Significant other
observable
inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Total
|
|
|
|
($ in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Debt instruments
|
|
$
|
—
|
|
|
$
|
6,300
|
|
|
$
|
880
|
|
|
$
|
7,180
|
|
|
Listed equity securities
|
|
1,181,150
|
|
|
22,522
|
|
|
—
|
|
|
1,203,672
|
|
|
Commodities
|
|
121,502
|
|
|
—
|
|
|
—
|
|
|
121,502
|
|
|
Private and unlisted equity securities
|
|
—
|
|
|
—
|
|
|
6,108
|
|
|
6,108
|
|
|
|
|
$
|
1,302,652
|
|
|
$
|
28,822
|
|
|
$
|
6,988
|
|
|
$
|
1,338,462
|
|
|
Unlisted equity funds measured at net asset value
(1)
|
|
|
|
|
|
|
|
24,522
|
|
|
Total investments
|
|
|
|
|
|
|
|
$
|
1,362,984
|
|
|
Financial contracts receivable
|
|
$
|
22
|
|
|
$
|
12,871
|
|
|
$
|
—
|
|
|
$
|
12,893
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Listed equity securities, sold not yet purchased
|
|
$
|
(812,652
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(812,652
|
)
|
|
Debt instruments, sold not yet purchased
|
|
—
|
|
|
(100,145
|
)
|
|
—
|
|
|
(100,145
|
)
|
|
Total securities sold, not yet purchased
|
|
$
|
(812,652
|
)
|
|
$
|
(100,145
|
)
|
|
$
|
—
|
|
|
$
|
(912,797
|
)
|
|
Financial contracts payable
|
|
$
|
—
|
|
|
$
|
(22,222
|
)
|
|
$
|
—
|
|
|
$
|
(22,222
|
)
|
(1)
Investments measured at fair value using the net asset value practical expedient have not been classified in the fair value hierarchy. The fair value amounts are presented in the above table to facilitate reconciliation to the
condensed consolidated
balance sheets.
The following tables present the reconciliation of the balances for all investments measured at fair value using significant unobservable inputs (Level 3) for the
three and nine months ended September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
|
|
|
|
Three months ended September 30, 2018
|
|
|
|
Debt instruments
|
|
Private and unlisted equity securities
|
|
Total
|
|
|
|
($ in thousands)
|
|
Beginning balance
|
|
$
|
932
|
|
|
$
|
6,909
|
|
|
$
|
7,841
|
|
|
Sales
|
|
(916
|
)
|
|
(1,224
|
)
|
|
(2,140
|
)
|
|
Total realized and unrealized gains (losses) and amortization included in earnings, net
|
|
(16
|
)
|
|
(211
|
)
|
|
(227
|
)
|
|
Transfers into Level 3
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Transfers out of Level 3
|
|
—
|
|
|
(4,050
|
)
|
|
(4,050
|
)
|
|
Ending balance
|
|
$
|
—
|
|
|
$
|
1,424
|
|
|
$
|
1,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
|
|
|
|
Nine months ended September 30, 2018
|
|
|
|
Assets
|
|
|
|
Debt instruments
|
|
Private and unlisted equity securities
|
|
Total
|
|
|
|
($ in thousands)
|
|
Beginning balance
|
|
$
|
880
|
|
|
$
|
6,108
|
|
|
$
|
6,988
|
|
|
Sales
|
|
(916
|
)
|
|
(1,224
|
)
|
|
(2,140
|
)
|
|
Total realized and unrealized gains (losses) and amortization included in earnings, net
|
|
36
|
|
|
(210
|
)
|
|
(174
|
)
|
|
Transfers into Level 3
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Transfers out of Level 3
|
|
—
|
|
|
(3,250
|
)
|
|
(3,250
|
)
|
|
Ending balance
|
|
$
|
—
|
|
|
$
|
1,424
|
|
|
$
|
1,424
|
|
For the three and
nine months ended September 30, 2018
, the sales of debt instruments and private and unlisted equities measured at fair value using Level 3 inputs were the result of the LP transaction as discussed above. For the three and
nine months ended September 30, 2018
, the private and unlisted equity securities without readily determinable fair values, for which measurement alternative is applied, were transferred out of Level 3 fair value hierarchy. There were no other transfers between Level 1, Level 2 or Level 3 during the three and
nine months ended September 30, 2018
.
The following tables present the reconciliation of the balances for all investments measured at fair value using significant unobservable inputs (Level 3) for the
three and nine months ended September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
|
|
|
|
Three months ended September 30, 2017
|
|
|
|
Assets
|
|
|
|
Debt instruments
|
|
Private and unlisted equity securities
|
|
Total
|
|
|
|
($ in thousands)
|
|
Beginning balance
|
|
$
|
776
|
|
|
$
|
6,085
|
|
|
$
|
6,861
|
|
|
Total realized and unrealized gains (losses) and amortization included in earnings, net
|
|
58
|
|
|
42
|
|
|
100
|
|
|
Transfers into Level 3
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Transfers out of Level 3
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Ending balance
|
|
$
|
834
|
|
|
$
|
6,127
|
|
|
$
|
6,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
|
|
|
|
Nine months ended September 30, 2017
|
|
|
|
Assets
|
|
|
|
Debt instruments
|
|
Private and unlisted equity securities
|
|
Total
|
|
|
|
($ in thousands)
|
|
Beginning balance
|
|
$
|
654
|
|
|
$
|
6,109
|
|
|
$
|
6,763
|
|
|
Purchases
|
|
—
|
|
|
1,750
|
|
|
1,750
|
|
|
Total realized and unrealized gains (losses) and amortization included in earnings, net
|
|
180
|
|
|
36
|
|
|
216
|
|
|
Transfers into Level 3
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Transfers out of Level 3
|
|
—
|
|
|
(1,768
|
)
|
|
(1,768
|
)
|
|
Ending balance
|
|
$
|
834
|
|
|
$
|
6,127
|
|
|
$
|
6,961
|
|
During the
nine months ended September 30, 2017
,
$1.8 million
of the private equity securities were transferred from Level 3 as these securities commenced trading on a listed exchange. However, due to lock-up period restrictions on those securities, they were classified as Level 2. During the three months ended September 30, 2017, the lock-up period expired and these securities were transferred from Level 2 to Level 1 with the fair value based on the last traded price on an active market.
There were no other transfers between Level 1, Level 2 or Level 3 during the
three and nine months ended September 30, 2017
.
For the
three and nine months ended September 30, 2018
, there were
$0.1 million
and
$0.1 million
, respectively, net realized losses included in net investment loss in the
condensed consolidated
statements of income relating to Level 3 securities.
For Level 3 securities still held as of the reporting date, the change in net unrealized gains (losses) for the
three and nine months ended September 30, 2018
of
$(0.3) million
and
$(0.2) million
, respectively (
three and nine months ended September 30, 2017
: net unrealized gains
$0.1 million
and
$0.2 million
, respectively), were included in net investment income (loss) in the
condensed consolidated
statements of income.
5
.
DUE TO PRIME BROKERS AND OTHER FINANCIAL INSTITUTIONS
As of
September 30, 2018
, the amount due to prime brokers is comprised of margin-borrowing from prime brokers and custodians relating to investments purchased on margin. In addition, prior to September 1, 2018, under term margin agreements with prime brokers and revolving credit facilities with custodians and a letter of credit facility agreement, the Company pledged certain investment securities to borrow cash. The cash borrowed under a letter of credit facility agreement was placed in a custodial account in the name of the Company and this custodial account provided collateral for any letters of credit issued. Similarly for the trust accounts, the Company borrowed cash from prime brokers or custodians which was placed in a trust account for the benefit of the cedent. Since there was no legal right of offset, the Company’s liability for the cash borrowed from the prime brokers and custodians was included on the
condensed consolidated
balance sheets as due to prime brokers and other financial institutions while the cash held in the custodial account and trust accounts were included on the
condensed consolidated
balance sheets as restricted cash and cash equivalents. As of
September 30, 2018
, no investments were pledged for borrowing cash from prime brokers or custodians to fund the letters of credit and trust accounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
($ in thousands)
|
|
Due to Prime Brokers
|
|
$
|
13,687
|
|
|
$
|
647,700
|
|
|
Due to Other Financial Institutions
|
|
30,000
|
|
|
25,000
|
|
|
|
|
$
|
43,687
|
|
|
$
|
672,700
|
|
Greenlight Re’s investment guidelines for the Joint Venture and SILP, among other stipulations in the guidelines, allow for up to
15%
(GRIL:
5%
) net margin leverage for extended periods of time and up to
30%
(GRIL:
20%
) net margin leverage relating to investing activities for periods of less than 30 days.
6
.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
There were no significant changes in the actuarial methodology or assumptions relating to the Company’s loss and loss adjustment expense reserves for the
nine months ended September 30, 2018
.
At
September 30, 2018 and December 31, 2017
, loss and loss adjustment expense reserves were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
($ in thousands)
|
|
Case reserves
|
|
$
|
178,301
|
|
|
$
|
178,088
|
|
|
IBNR
|
|
296,642
|
|
|
286,292
|
|
|
Total
|
|
$
|
474,943
|
|
|
$
|
464,380
|
|
At
September 30, 2018 and December 31, 2017
, the loss and loss adjustment expense reserves relating to health were
$25.8 million
and
$22.2 million
, respectively.
A summary of changes in outstanding loss and loss adjustment expense reserves for the
nine months ended September 30, 2018 and 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
2018
|
|
2017
|
|
|
|
($ in thousands)
|
|
Gross balance at January 1
|
|
$
|
464,380
|
|
|
$
|
306,641
|
|
|
Less: Losses recoverable
|
|
(29,459
|
)
|
|
(2,704
|
)
|
|
Net balance at January 1
|
|
434,921
|
|
|
303,937
|
|
|
Incurred losses related to:
|
|
|
|
|
|
Current year
|
|
268,895
|
|
|
360,102
|
|
|
Prior years
|
|
(1,476
|
)
|
|
19,644
|
|
|
Total incurred
|
|
267,419
|
|
|
379,746
|
|
|
Paid losses related to:
|
|
|
|
|
|
Current year
|
|
(106,520
|
)
|
|
(130,207
|
)
|
|
Prior years
|
|
(157,614
|
)
|
|
(128,937
|
)
|
|
Total paid
|
|
(264,134
|
)
|
|
(259,144
|
)
|
|
Foreign currency revaluation
|
|
(1,098
|
)
|
|
2,792
|
|
|
Net balance at June 30
|
|
437,108
|
|
|
427,331
|
|
|
Add: Losses recoverable
|
|
37,835
|
|
|
18,447
|
|
|
Gross balance at June 30
|
|
$
|
474,943
|
|
|
$
|
445,778
|
|
The changes in the outstanding loss and loss adjustment expense reserves for health claims for the
nine months ended September 30, 2018 and 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
|
|
2018
|
|
2017
|
|
|
|
($ in thousands)
|
|
Gross balance at January 1
|
|
$
|
22,181
|
|
|
$
|
18,993
|
|
|
Less: Losses recoverable
|
|
—
|
|
|
—
|
|
|
Net balance at January 1
|
|
22,181
|
|
|
18,993
|
|
|
Incurred losses related to:
|
|
|
|
|
|
Current year
|
|
42,292
|
|
|
33,463
|
|
|
Prior years
|
|
719
|
|
|
2,949
|
|
|
Total incurred
|
|
43,011
|
|
|
36,412
|
|
|
Paid losses related to:
|
|
|
|
|
|
Current year
|
|
(19,703
|
)
|
|
(15,019
|
)
|
|
Prior years
|
|
(19,679
|
)
|
|
(18,832
|
)
|
|
Total paid
|
|
(39,382
|
)
|
|
(33,851
|
)
|
|
Foreign currency revaluation
|
|
—
|
|
|
—
|
|
|
Net balance at June 30
|
|
25,810
|
|
|
21,554
|
|
|
Add: Losses recoverable
|
|
—
|
|
|
—
|
|
|
Gross balance at June 30
|
|
$
|
25,810
|
|
|
$
|
21,554
|
|
For the
nine months ended September 30, 2018
, the net losses incurred relating to prior accident years decreased by
$1.5 million
, which primarily related to the following:
|
|
|
|
•
|
$6.1 million
of favorable loss development, net of retrocession recoveries, relating to 2017 hurricanes resulting from updated reporting received from cedents;
|
|
|
|
|
•
|
$4.2 million
of favorable prior period experience on property contracts stemming from accident years 2015 and 2016 where claims experience has been better than expected;
|
|
|
|
|
•
|
$3.5 million
of favorable loss development on prior period mortgage insurance contracts resulting from continued favorable claims experience;
|
|
|
|
|
•
|
$4.8 million
of adverse loss development on non-standard automobile contracts stemming from industry-wide issues affecting motor liability claims in Florida;
|
|
|
|
|
•
|
$3.2 million
of adverse loss development on solicitors professional indemnity contracts resulting from adverse reporting of claims in excess of expected;
|
|
|
|
|
•
|
$1.9 million
of adverse loss development on general liability contracts, spread over treaty years 2012-2017, resulting from deteriorations in claims experience;
|
|
|
|
|
•
|
$1.8 million
of adverse loss development on surety contracts, net of retrocession recoveries, due to deterioration on several previously reported claims for one legacy contract; and
|
|
|
|
|
•
|
The remaining
$0.6 million
of adverse loss development was due to development across various other multi-line, casualty and other contracts.
|
For the
nine months ended September 30, 2017
, the net loss reserves on prior period contracts increased by
$19.6 million
, primarily related to the following:
|
|
|
|
•
|
$4.2 million
of adverse loss development associated with motor contracts primarily related to higher than expected liability claim settlements;
|
|
|
|
|
•
|
$3.0 million
of adverse loss development associated with specialty health contracts where the claims experience reported by the client deteriorated from expected levels;
|
|
|
|
|
•
|
$2.9 million
of adverse loss development relating to Florida homeowners’ insurance contracts, largely driven by “assignment of benefits” issues in the state whereby homeowners assign their rights for filing and settling claims to attorneys and public adjusters; and
|
|
|
|
|
•
|
$2.0 million
of adverse loss development due to large claims reported on a surety contract.
|
The remaining
$7.5 million
of adverse development for the
nine months ended September 30, 2017
, was due to development across various other casualty and multi-line contracts.
7
.
RETROCESSION
The Company, from time to time, purchases retrocessional coverage for one or more of the following reasons: to manage its overall exposure, to reduce its net liability on individual risks, to obtain additional underwriting capacity and to balance its underwriting portfolio. Additionally, retrocession can be used as a mechanism to share the risks and rewards of business written and, therefore, can be used as a tool to align the Company’s interests with those of its counterparties. The Company currently has coverage that provides for recovery of a portion of loss and loss expenses incurred on certain contracts. Loss and loss adjustment expense recoverable from the retrocessionaires are recorded as assets.
For the three and nine months ended September 30, 2018
, loss and loss adjustment expenses incurred of
$86.8 million
and
$267.4 million
, respectively (
2017
:
$168.9 million
and
$379.7 million
, respectively), reported on the
condensed consolidated
statements of income are net of loss and loss expenses recovered and recoverable of
$11.6 million
and
$46.3 million
, respectively (
2017
:
$16.0 million
and
$15.9 million
, respectively).
Retrocession contracts do not relieve the Company from its obligations to the insureds. Failure of retrocessionaires to honor their obligations could result in losses to the Company. At
September 30, 2018
, the Company had losses receivable and loss reserves recoverable of
$31.5 million
(
December 31, 2017
:
$26.3 million
) from unrated retrocessionaires which were secured by cash and collateral held in trust accounts for the benefit of the Company. At
September 30, 2018
,
$6.3 million
(
December 31, 2017
:
$3.1 million
) of losses recoverable were from retrocessionaires rated A- or above by A.M. Best.
The Company regularly evaluates the financial condition of its retrocessionaires to assess the ability of the retrocessionaires to honor their respective obligations. At
September 30, 2018 and December 31, 2017
,
no
provision for uncollectible losses recoverable was considered necessary.
8
.
SENIOR CONVERTIBLE NOTES
On August 7, 2018, the Company issued
$100.0 million
of senior unsecured convertible notes (the “Notes”) which are due on August 1, 2023. The Notes bear interest at
4.0%
and interest is payable semi-annually on February 1 and August 1 of each year beginning on February 1, 2019.
Note holders have the option, under certain conditions, to redeem the Notes prior to maturity. If converted at
September 30, 2018
, the face value of the Notes would be cash settled and conversion settlement would result in
no
shares issued by the Company due to the share price at
September 30, 2018
being lower than the conversion price of
$17.19
per share.
If Notes are converted by the holder, the Company shall have the option to settle the conversion obligation in cash, ordinary shares of the Company, or a combination thereof pursuant to the terms of the indenture governing the Notes. The Company has therefore bifurcated the Notes into liability and equity components.
As of
September 30, 2018
, the Notes had an estimated liability carrying value of
$92.1 million
based on an estimated effective interest rate of
6.0%
, with the discount of
$7.9 million
to be amortized through the due date of the Notes. As of September 30, 2018, the Company had
$3.1 million
of unamortized costs associated with the issuance of the Notes, which are presented as a deduction from the carrying value of the Notes on the condensed consolidated balance sheets.
For the
three and nine months ended September 30, 2018
, interest expense of $
0.9 million
was recognized relating to interest coupon, amortization of Notes issuance expense and amortization of the discount.
At
September 30, 2018
, the carrying value of the equity component of the Notes was
$7.9 million
and included in additional paid-in capital on the condensed consolidated balance sheets. The fair value measurements relating to the allocation of the Notes between liability and equity components were based on observable inputs and therefore were considered to be Level 2 of the fair value hierarchy. The Company was in compliance with all covenants relating to the Notes as of
September 30, 2018
.
9
.
SHARE-BASED COMPENSATION
The Company has a stock incentive plan for directors, employees and consultants that is administered by the Compensation Committee of the Board of Directors. The Company’s shares authorized for issuance pursuant to the stock incentive plan include
5,000,000
(
December 31, 2017
:
5,000,000
) Class A ordinary shares. As of
September 30, 2018
,
1,120,778
(
December 31, 2017
:
1,271,154
) Class A ordinary shares remained available for future issuance under the Company’s stock incentive plan.
Employee and Director Restricted Shares
As part of its stock incentive plan, the Company issues restricted shares for which the fair value is equal to the price of the Company’s Class A ordinary shares on the grant date. Compensation based on the grant date fair market value of the shares is expensed on a straight line basis over the applicable vesting period, net of any estimated forfeitures.
For the nine months ended September 30, 2018
,
191,255
(
2017
:
113,955
) Class A ordinary shares were issued to employees pursuant to the Company’s stock incentive plan. The majority of these shares contain certain restrictions relating to, among other things, vesting, forfeiture in the event of termination of employment and transferability. The restricted shares cliff vest after
three years
from the date of issuance, subject to the grantee’s continued service with the Company. During the vesting period, the holder of the restricted shares retains voting rights and is entitled to any dividends declared by the Company.
For the nine months ended September 30, 2018
,
30,660
of the restricted shares granted contained service and performance conditions. These restricted shares will cliff vest
5.5
years from the date of issuance, subject to the satisfaction of both the service and performance conditions.
For the nine months ended September 30, 2018
, the Company also issued to non-employee directors an aggregate of
54,720
(
2017
:
41,396
) restricted Class A ordinary shares as part of their remuneration for services to the Company. Each of these restricted shares issued to non-employee directors contains similar restrictions to those issued to employees and will vest on the earlier of the first anniversary of the date of the share issuance or the Company’s next annual general meeting, subject to the grantee’s continued service with the Company.
For the nine months ended September 30, 2018
,
43,252
(
2017
:
46,319
) restricted shares were forfeited by employees who left the Company prior to the expiration of the applicable vesting periods.
For the nine months ended September 30, 2018
,
in accordance with U.S. GAAP,
$0.3 million
stock compensation expense (
2017
:
nil
) relating to the forfeited restricted shares was reversed. The restricted shares forfeited during the comparative nine month period ended September 30, 2017 related to the Company’s former Chief Executive Officer (the “former CEO”) who resigned from the Company prior to the expiration of the applicable vesting periods. For the nine months ended
September 30
,
2017
,
no
stock compensation expense was reversed relating to the former CEO’s forfeited shares since the stock compensation relating to those restricted shares was reversed during the fourth quarter of 2016, when it was deemed likely that these restricted shares would be forfeited.
The following table summarizes the activity for unvested outstanding restricted share awards during the
nine months ended September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
non-vested
restricted
shares
|
|
Weighted
average
grant date
fair value
|
|
Balance at December 31, 2017
|
|
331,510
|
|
|
$
|
23.45
|
|
|
Granted
|
|
245,975
|
|
|
15.78
|
|
|
Vested
|
|
(100,384
|
)
|
|
27.74
|
|
|
Forfeited
|
|
(43,252
|
)
|
|
18.80
|
|
|
Balance at September 30, 2018
|
|
433,849
|
|
|
$
|
18.57
|
|
Employee and Director Stock Options
For the nine months ended September 30, 2018
,
no
Class A ordinary share purchase options were granted. On July 6, 2017,
480,000
Class A ordinary share purchase options were granted to the Company’s new Chief Executive Officer, pursuant to his employment contract. These options vest
16.7%
each on the anniversary thereof in 2018, 2019, 2020, 2021, 2022 and 2023, and expire
10
years after the grant date. The grant date fair value of these options was
$9.60
per share, based on the Black-Scholes option pricing model.
On August 1, 2017,
19,500
Class A ordinary share purchase options were granted to the Company’s former interim Chief Executive Officer, pursuant to his consulting agreement. These options vested
100%
on the date of the grant. The grant date fair value of these options was
$9.65
per share based on the Black-Scholes option pricing model.
For the nine months ended September 30, 2018
,
no
stock options were exercised by directors or employees resulting in
no
Class A ordinary shares issued. For the
nine months ended September 30, 2017
,
50,000
stock options were exercised by directors or employees resulting in
5,011
Class A ordinary shares issued, net of shares surrendered as a result of the cashless exercise of stock options. When stock options are granted, the Company reduces the corresponding number from the shares authorized for issuance as part of the Company’s stock incentive plan.
For the nine months ended September 30, 2018
,
80,000
stock options vested which had a weighted average grant date fair value of
$9.60
per share. For the
nine months ended September 30, 2017
,
71,335
stock options vested, relating to the resignation of the former CEO, which had a weighted average grant date fair value of
$10.51
per share, pursuant to the former CEO’s deed of settlement and release.
Employee and director stock option activity during the
nine months ended September 30, 2018
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
options
|
|
Weighted
average
exercise
price
|
|
Weighted
average
grant date
fair value
|
|
Intrinsic value ($ in millions)
|
|
Weighted average remaining contractual term
|
|
Balance at December 31, 2017
|
1,015,627
|
|
|
$
|
23.55
|
|
|
$
|
9.89
|
|
|
$
|
—
|
|
|
6.9 years
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Expired
|
(80,000
|
)
|
|
29.39
|
|
|
8.69
|
|
|
|
|
|
|
|
Balance at September 30, 2018
|
935,627
|
|
|
$
|
23.05
|
|
|
$
|
10.00
|
|
|
$
|
—
|
|
|
6.7 years
|
Employee Restricted Stock Units
The Company issues RSUs to certain employees as part of the stock incentive plan. The grant date fair value of the RSUs is equal to the price of the Company’s Class A ordinary shares on the grant date. Compensation cost based on the grant date fair market value of the RSUs is expensed on a straight line basis over the vesting period.
For the nine months ended September 30, 2018
,
28,301
(
2017
:
11,559
) RSUs were issued to employees pursuant to the Company’s stock incentive plan. These shares contain certain restrictions relating to, among other things, vesting, forfeiture in the event of termination of employment and transferability. Each of these RSUs cliff vest after
three years
from the date of issuance, subject to the grantee’s continued service with the Company. On the vesting date, the Company converts each RSU into one Class A ordinary share and issues new Class A ordinary shares from the shares authorized for issuance as part of the Company’s stock incentive plan.
For the
nine months ended September 30, 2018
,
648
(
2017
:
nil
) RSUs were forfeited by employees, resulting in an immaterial reversal (
2017
:
nil
) of stock compensation expense.
Employee RSU activity during the
nine months ended September 30, 2018
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
non-vested
RSUs
|
|
Weighted
average
grant date
fair value
|
|
Balance at December 31, 2017
|
|
22,798
|
|
|
$
|
23.50
|
|
|
Granted
|
|
28,301
|
|
|
15.90
|
|
|
Vested
|
|
(4,053
|
)
|
|
32.21
|
|
|
Forfeited
|
|
(648
|
)
|
|
21.65
|
|
|
Balance at September 30, 2018
|
|
46,398
|
|
|
$
|
18.13
|
|
For the
nine months ended September 30, 2018 and 2017
, the general and administrative expenses included stock compensation expense (net of forfeitures) of
$3.5 million
and
$3.3 million
, respectively, for the expensing of the fair value of stock options, restricted stock and RSUs granted to employees and directors, net of forfeitures.
10
.
RELATED PARTY TRANSACTIONS
Investment Advisory Agreement
DME, DME II and DME Advisors are related to the Company and each is an affiliate of David Einhorn, Chairman of the Company’s Board of Directors.
Prior to September 1, 2018, the Company and its reinsurance subsidiaries were party to the joint venture agreement with DME Advisors under which the Company, its reinsurance subsidiaries and DME were participants of the Joint Venture for the purpose of managing certain jointly held assets. In addition, prior to September 1, 2018, the Company, its reinsurance subsidiaries and DME had entered into a separate investment advisory agreement with DME Advisors (the “advisory agreement”). On September 1, 2018, the Company, DME and DME Advisors entered into a termination agreement to terminate the Joint Venture and the advisory agreement on the earlier of January 2, 2019 and the date on which all assets are transferred to SILP.
On September 1, 2018, the Company entered into an LPA with SILP, with DME II, as General Partner. DME II receives a performance allocation equal to (with capitalized terms having the meaning provided under the LPA) (a) 10% of the portion of the Positive Performance Change for each limited partner’s capital account that is less than or equal to the positive balance in such limited partner’s Carryforward Account, plus (b)
20%
of the portion of the Positive Performance Change for each limited partner’s capital account that exceeds the positive balance in such limited partner’s Carryforward Account. The Carryforward Account for Greenlight Re and GRIL include the amount of losses that were to be recouped under the Joint Venture as well as any loss generated on the assets invested in SILP, subject to adjustments for redemptions. No performance allocation was made for the
three and nine months ended September 30, 2018
due to the investment losses during those periods. The loss carry forward provision contained in the LPA allows DME II to earn reduced performance allocation of
10%
of profits in any year subsequent to any years in which SILP has incurred a loss, until all losses are recouped and an additional amount equal to
150%
of the loss is earned.
On September 1, 2018, SILP entered into a SILP investment advisory agreement (“IAA”) with DME Advisors which entitles DME Advisors to a monthly management fee equal to
0.125%
(
1.5%
on an annual basis) of each limited partner’s Investment Portfolio, as provided in the LPA. The IAA has an initial term ending on August 31, 2023 subject to automatic extension for successive three-year terms.
For the three and nine months ended September 30, 2018
, the Company’s investment loss from SILP included management fees paid by SILP to DME of
$0.8 million
and
$0.8 million
, respectively.
Pursuant to the joint venture agreement, performance allocation equal to
20%
of the net investment income of the Company’s share of the account managed by DME Advisors was allocated, subject to a loss carry forward provision, to DME’s account. The loss carry forward provision requires DME to earn a reduced performance allocation of
10%
on net investment income in any year subsequent to the year in which the investment account incurred a loss, until all the losses were recouped and an additional amount equal to
150%
of the aggregate investment loss was earned. DME was not entitled to earn a performance allocation in a year in which the investment portfolio under the Joint Venture incurred a loss.
For the three and nine months ended September 30, 2018
,
no
performance allocation was deducted due to the investment loss (
2017
:
$4.0 million
and
$4.0 million
, respectively).
Pursuant to the advisory agreement, a monthly management fee, equal to
0.125%
(
1.5%
on an annual basis) of the Company’s investment account managed by DME Advisors, was paid to DME Advisors. Included in the net investment income (loss) for the
three and nine months ended September 30, 2018
were management fees of
$2.6 million
and
$11.2 million
, respectively (
2017
:
$4.4 million
and
$13.1 million
, respectively) relating to the Joint Venture. The management fees have been fully paid as of
September 30, 2018
.
Pursuant to the joint venture agreement, advisory agreement, LPA and the IAA, the Company has agreed to indemnify DME, DME II and DME Advisors for any expense, loss, liability, or damage arising out of any claim asserted or threatened in connection with DME Advisors serving as the Company’s or SILP’s investment advisor. The Company will reimburse DME, DME II and DME Advisors for reasonable costs and expenses of investigating and/or defending such claims, provided such claims were not caused due to gross negligence, breach of contract or misrepresentation by DME, DME II or DME Advisors.
For the nine months ended September 30, 2018
, there were no indemnification payments payable or paid by the Company.
Non-controlling Interest in Related Party Joint Venture
Non-controlling interests in related party joint venture represents DME’s share of the jointly held assets under the joint venture agreement. The Joint Venture created through the joint venture agreement has been consolidated in accordance with ASC 810, Consolidation. The Company has recorded DME’s minority interests as redeemable non-controlling interests in related party and non-controlling interests in related party in the
condensed consolidated
balance sheets. A portion of the non-controlling interest is subject to contractual withdrawal rights whereby DME, at its sole discretion, can withdraw its interest above the minimum capital required to be maintained in its capital accounts. This additional capital, if any, is therefore recorded on the Company’s
condensed consolidated
balance sheets within the mezzanine section as redeemable non-controlling interest in related party joint venture whereas the required minimum capital is recorded as non-controlling interests in related party joint venture within the equity section on the Company’s
condensed consolidated
balance sheet since it does not have withdrawal rights.
The following table is a reconciliation of the beginning and ending carrying amounts of redeemable non-controlling interests in related party, non-controlling interests in related party and total non-controlling interests in related party for the
nine months ended September 30, 2018 and 2017
(see Note 1 for additional information on changes in the presentation of non-controlling interests):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable non-controlling interest in related party joint venture
|
|
Non-controlling interest in related party joint venture
|
|
Total non-controlling interest in related party joint venture
|
|
|
|
Nine months ended September 30
|
|
Nine months ended September 30
|
|
Nine months ended September 30
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Opening balance
|
|
$
|
7,169
|
|
|
$
|
5,884
|
|
—
|
|
$
|
12,933
|
|
|
$
|
11,561
|
|
—
|
|
$
|
20,102
|
|
|
$
|
17,445
|
|
|
Income (loss) attributed to non-controlling interest
|
|
(2,574
|
)
|
|
296
|
|
—
|
|
(1,532
|
)
|
|
484
|
|
—
|
|
(4,106
|
)
|
|
780
|
|
|
Net contribution into (withdrawal from) non-controlling interest
|
|
10,715
|
|
|
(783
|
)
|
—
|
|
(9,644
|
)
|
|
783
|
|
—
|
|
1,071
|
|
|
—
|
|
|
Ending balance
|
|
$
|
15,310
|
|
|
$
|
5,397
|
|
|
$
|
1,757
|
|
|
$
|
12,828
|
|
|
$
|
17,067
|
|
|
$
|
18,225
|
|
Green Brick Partners, Inc.
David Einhorn also serves as the Chairman of the Board of Directors of Green Brick Partners, Inc. (“GRBK”), a publicly traded company. As of
September 30, 2018
,
$35.0 million
(
December 31, 2017
:
$39.2 million
) of GRBK listed equities were included on the balance sheet as “equity securities, trading, at fair value”. The Company, along with certain affiliates of DME Advisors, collectively own
47.6%
of the issued and outstanding common shares of GRBK. Under applicable securities laws, DME Advisors may be limited at times in its ability to trade GRBK shares on behalf of the Company.
Service Agreement
The Company has entered into a service agreement with DME Advisors, pursuant to which DME Advisors provides certain investor relations services to the Company for compensation of
five thousand
dollars per month (plus expenses). The agreement is automatically renewed annually until terminated by either the Company or DME Advisors for any reason with 30 days prior written notice to the other party.
11
.
COMMITMENTS AND CONTINGENCIES
Letters of Credit and Trusts
At
September 30, 2018
, the Company had the following letter of credit facilities, which automatically renew each year unless terminated by either party in accordance with the applicable required notice period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
|
|
Termination Date
|
|
Notice period required for termination
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Butterfield Bank (Cayman) Limited
|
|
$
|
50,000
|
|
|
June 30, 2019
|
|
90 days prior to termination date
|
|
Citibank Europe plc
|
|
400,000
|
|
|
October 11, 2019
|
|
120 days prior to termination date
|
|
|
|
$
|
450,000
|
|
|
|
|
|
On March 28, 2018, the Butterfield Bank facility was decreased from
$100.0 million
to
$50.0 million
. As of
September 30, 2018
, an aggregate amount of
$216.6 million
(
December 31, 2017
:
$188.5 million
) in letters of credit were issued under the above facilities. Under the facilities, the Company provides collateral that may consist of equity securities and cash and cash equivalents. As of
September 30, 2018
, total cash and cash equivalents with a fair value in the aggregate of
$218.7 million
(
December 31, 2017
: equity securities and cash and cash equivalents of
$200.4 million
) were pledged as collateral against the letters of credit issued and include as “restricted cash and cash equivalents” in the condensed consolidated balance sheets (also see Note
5
). Each of the facilities contain customary events of default and restrictive covenants, including but not limited to, limitations on liens on collateral, transactions with affiliates, mergers and sales of assets, as well as solvency and maintenance of certain minimum pledged equity requirements, and restricts issuance of any debt without the consent of the letter of credit provider. Additionally, if an event of default exists, as defined in the letter of credit facilities, Greenlight Re will be prohibited from paying dividends to its parent company. The Company was in compliance with all the covenants of each of these facilities as of
September 30, 2018 and December 31, 2017
.
In addition to the letters of credit, the Company has established regulatory trust arrangements for certain cedents. As of
September 30, 2018
, collateral of
$436.4 million
(
December 31, 2017
:
$377.9 million
) was provided to cedents in the form of regulatory trust accounts and included as “restricted cash and cash equivalents” in the condensed consolidated balance sheets.
Revolving Credit Facility
The Joint Venture has entered into a secured revolving credit facility with The Bank of Nova Scotia (the “credit facility”), to provide funding for its investment activities. At
September 30, 2018
, the Joint Venture had the ability to borrow
$50.0 million
(the “commitment”) under the credit facility and had borrowed
$30.0 million
(
December 31, 2017
:
$25.0 million
). At
September 30, 2018
, the interest rate on the credit facility was
3.18%
(
December 31, 2017
:
2.47%
) and the Joint Venture and certain of the Company’s subsidiaries, solely as “Participants” in the Joint Venture under the venture agreement, had pledged
$34.5 million
(
December 31, 2017
:
$37.7 million
) of their physical gold holdings as collateral against the borrowed funds. For the
nine months ended September 30, 2018
, interest expense pursuant to the credit facility was
$0.7 million
(
2017
:
nil
) and was included in net investment loss in the
condensed consolidated
statements of income. The credit facility matures on
November 8, 2019
and can be extended for one year by the Joint Venture upon providing 120 days’ notice to the lender. The credit facility is expected to be transferred to SILP simultaneously with the transfer of physical gold holdings from the Joint Venture to SILP. The Joint Venture may terminate or reduce the commitment by giving 10 business days’ notice prior to the effective date of termination or reduction and prepaying the applicable principal obligation and all interest accrued thereon. The credit facility contains certain events of default and restrictive covenants, including but not limited to, limitations on liens on the pledged collateral, mergers and sales of assets and limitations on distributions. The Joint Venture was in compliance with all the covenants of this facility as of
September 30, 2018
.
Operating Lease Obligations
Greenlight Re has entered into lease agreements for office space in the Cayman Islands. Under the terms of the lease agreements, Greenlight Re is committed to annual rent payments ranging from
$0.3 million
at inception to
$0.5 million
at lease termination. The leases expired on June 30, 2018. The Company is in negotiations with the lessor for renewal of the lease and meanwhile has agreed to a monthly lease until December 31, 2018.
GRIL has entered into a lease agreement for office space in Dublin, Ireland. Under the terms of this lease agreement, GRIL is committed to minimum annual rent payments denominated in Euros approximating
€0.1 million
until May 2021, and adjusted to the prevailing market rates for each of the two subsequent five-year terms. GRIL has the option to terminate the lease agreement in 2021. Included in the schedule below are the net minimum lease payment obligations relating to this lease as of
September 30, 2018
.
The total rent expense related to leased office space for the
three and nine months ended September 30, 2018
was
$0.1 million
and
$0.4 million
, respectively (
2017
:
$0.2 million
and
$0.5 million
, respectively).
Private Equity and Limited Partnerships
From time to time, the Company makes investments in private equity vehicles. As part of the Company’s participation in such private equity investments, the Company may make funding commitments. As of
September 30, 2018
, the Company had commitments to invest an additional
$6.8 million
(
December 31, 2017
:
$6.5 million
) in private equity investments. Included in the schedule below are the minimum payment obligations relating to these investments as of
September 30, 2018
.
Schedule of Commitments and Contingencies
The following is a schedule of future minimum payments required under the above commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
|
Total
|
|
|
($ in thousands)
|
|
Operating lease obligations
|
$
|
43
|
|
|
$
|
172
|
|
|
$
|
172
|
|
|
$
|
64
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
451
|
|
|
Private equity and limited partnerships
(1)
|
$
|
6,816
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,816
|
|
|
|
$
|
6,859
|
|
|
$
|
172
|
|
|
$
|
172
|
|
|
$
|
64
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,267
|
|
(1)
Given the nature of these investments, the Company is unable to determine with any degree of accuracy when these commitments will be called. Therefore, for purposes of the above table, the Company has assumed that all commitments with no fixed payment schedules will be called during the year ending
December 31, 2018
.
Litigation
From time to time, in the normal course of business, the Company may be involved in formal and informal dispute resolution procedures, which may include arbitration or litigation, the outcomes of which determine the rights and obligations under the Company’s reinsurance contracts and other contractual agreements. In some disputes, the Company may seek to enforce its rights under an agreement or to collect funds owing to it. In other matters, the Company may resist attempts by others to collect funds or enforce alleged rights. While the final outcome of legal disputes cannot be predicted with certainty, the Company does not believe that any existing dispute, when finally resolved, will have a material adverse effect on the Company’s business, financial condition or operating results.
12
.
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 September 30
|
|
Nine months ended September 30
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
($ in thousands)
|
|
($ in thousands)
|
|
Property
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
3,752
|
|
|
3.3
|
%
|
|
$
|
5,065
|
|
|
2.8
|
%
|
|
$
|
9,464
|
|
|
2.2
|
%
|
|
$
|
10,546
|
|
|
1.9
|
%
|
|
Motor
|
|
14,554
|
|
|
12.6
|
|
|
19,354
|
|
|
10.6
|
|
|
55,368
|
|
|
12.7
|
|
|
48,863
|
|
|
8.8
|
|
|
Personal
|
|
4,998
|
|
|
4.3
|
|
|
23,706
|
|
|
13.1
|
|
|
12,323
|
|
|
2.9
|
|
|
65,488
|
|
|
11.9
|
|
|
Total Property
|
|
23,304
|
|
|
20.2
|
|
|
48,125
|
|
|
26.5
|
|
|
77,155
|
|
|
17.8
|
|
|
124,897
|
|
|
22.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Liability
|
|
14
|
|
|
—
|
|
|
1,133
|
|
|
0.6
|
|
|
1,384
|
|
|
0.3
|
|
|
3,323
|
|
|
0.6
|
|
|
Motor Liability
|
|
54,624
|
|
|
47.4
|
|
|
58,613
|
|
|
32.3
|
|
|
210,302
|
|
|
48.6
|
|
|
211,451
|
|
|
38.1
|
|
|
Professional Liability
|
|
1,799
|
|
|
1.6
|
|
|
1,295
|
|
|
0.7
|
|
|
2,909
|
|
|
0.7
|
|
|
7,516
|
|
|
1.4
|
|
|
Workers' Compensation
|
|
9,074
|
|
|
7.9
|
|
|
9,624
|
|
|
5.3
|
|
|
15,768
|
|
|
3.7
|
|
|
17,041
|
|
|
3.1
|
|
|
Multi-line *
|
|
15,527
|
|
|
13.5
|
|
|
26,430
|
|
|
14.6
|
|
|
54,920
|
|
|
12.7
|
|
|
93,593
|
|
|
16.9
|
|
|
Total Casualty
|
|
81,038
|
|
|
70.4
|
|
|
97,095
|
|
|
53.5
|
|
|
285,283
|
|
|
66.0
|
|
|
332,924
|
|
|
60.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident & Health
|
|
16,193
|
|
|
14.1
|
|
|
22,364
|
|
|
12.3
|
|
|
58,436
|
|
|
13.5
|
|
|
55,875
|
|
|
10.1
|
|
|
Financial
(1)
|
|
(5,986
|
)
|
|
(5.2
|
)
|
|
13,838
|
|
|
7.6
|
|
|
9,042
|
|
|
2.1
|
|
|
38,698
|
|
|
7.0
|
|
|
Marine
(1)
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
365
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
Other Specialty
|
|
611
|
|
|
0.5
|
|
|
166
|
|
|
0.1
|
|
|
2,107
|
|
|
0.5
|
|
|
1,297
|
|
|
0.2
|
|
|
Total Other
|
|
10,812
|
|
|
9.4
|
|
|
36,368
|
|
|
20.0
|
|
|
69,950
|
|
|
16.2
|
|
|
95,870
|
|
|
17.3
|
|
|
|
|
$
|
115,154
|
|
|
100.0
|
%
|
|
$
|
181,588
|
|
|
100.0
|
%
|
|
$
|
432,388
|
|
|
100.0
|
%
|
|
$
|
553,691
|
|
|
100.0
|
%
|
(*) Contracts that cover more than one line of business are grouped as “multi-line” regardless of whether a portion of the underlying business is covered by one of the lines of business listed above. The Company’s multi-line business predominantly relates to casualty reinsurance. The prior period comparative information has been reclassified to conform to the current period presentation.
(1)
The negative balance represents reversal of premiums due to premium adjustments, termination of contracts or premium returned upon novation or commutation of contracts.
Gross Premiums Written by Geographic Area of Risks Insured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30
|
|
Nine months ended September 30
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
($ in thousands)
|
|
($ in thousands)
|
|
U.S. and Caribbean
|
|
$
|
102,623
|
|
|
89.1
|
%
|
|
$
|
160,173
|
|
|
88.2
|
%
|
|
$
|
387,805
|
|
|
89.7
|
%
|
|
$
|
483,945
|
|
|
87.4
|
%
|
|
Worldwide
(1)
|
|
12,231
|
|
|
10.6
|
|
|
21,237
|
|
|
11.7
|
|
|
44,112
|
|
|
10.2
|
|
|
69,315
|
|
|
12.5
|
|
|
Europe
|
|
300
|
|
|
0.3
|
|
|
155
|
|
|
0.1
|
|
|
517
|
|
|
0.1
|
|
|
392
|
|
|
0.1
|
|
|
Asia
(2)
|
|
—
|
|
|
—
|
|
|
23
|
|
|
—
|
|
|
(46
|
)
|
|
—
|
|
|
39
|
|
|
—
|
|
|
|
|
$
|
115,154
|
|
|
100.0
|
%
|
|
$
|
181,588
|
|
|
100.0
|
%
|
|
$
|
432,388
|
|
|
100.0
|
%
|
|
$
|
553,691
|
|
|
100.0
|
%
|
(1)
“Worldwide” is comprised of contracts that reinsure risks in more than one geographic area and do not specifically exclude the U.S.
(2)
The negative balance represents reversal of premiums due to premium adjustments, termination of contracts or premium returned upon novation or commutation of contracts.