Item 1. FINANCIAL STATEMENTS
GREENLIGHT CAPITAL RE, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2013
and
December 31, 2012
(expressed in thousands of U.S. dollars, except per share and share amounts)
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|
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|
|
|
|
|
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June 30, 2013
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|
December 31, 2012
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|
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(unaudited)
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(audited)
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|
Assets
|
|
|
|
|
Investments
|
|
|
|
|
Debt instruments, trading, at fair value
|
$
|
8,506
|
|
|
$
|
1,763
|
|
|
Equity securities, trading, at fair value
|
912,202
|
|
|
1,042,715
|
|
|
Other investments, at fair value
|
93,741
|
|
|
133,450
|
|
|
Total investments
|
1,014,449
|
|
|
1,177,928
|
|
|
Cash and cash equivalents
|
177,838
|
|
|
21,890
|
|
|
Restricted cash and cash equivalents
|
1,226,080
|
|
|
1,206,837
|
|
|
Financial contracts receivable, at fair value
|
56,117
|
|
|
22,744
|
|
|
Reinsurance balances receivable
|
171,849
|
|
|
173,221
|
|
|
Loss and loss adjustment expenses recoverable
|
20,136
|
|
|
34,451
|
|
|
Deferred acquisition costs, net
|
63,712
|
|
|
59,177
|
|
|
Unearned premiums ceded
|
2,901
|
|
|
3,616
|
|
|
Notes receivable
|
15,919
|
|
|
19,330
|
|
|
Other assets
|
6,269
|
|
|
3,559
|
|
|
Total assets
|
$
|
2,755,270
|
|
|
$
|
2,722,753
|
|
|
Liabilities and equity
|
|
|
|
|
Liabilities
|
|
|
|
|
Securities sold, not yet purchased, at fair value
|
$
|
950,076
|
|
|
$
|
908,368
|
|
|
Financial contracts payable, at fair value
|
27,345
|
|
|
19,637
|
|
|
Due to prime brokers
|
249,728
|
|
|
326,488
|
|
|
Loss and loss adjustment expense reserves
|
301,859
|
|
|
356,470
|
|
|
Unearned premium reserves
|
207,726
|
|
|
188,185
|
|
|
Reinsurance balances payable
|
35,307
|
|
|
35,292
|
|
|
Funds withheld
|
10,184
|
|
|
17,415
|
|
|
Other liabilities
|
9,906
|
|
|
10,488
|
|
|
Performance compensation payable to related party
|
21,923
|
|
|
—
|
|
|
Total liabilities
|
1,814,054
|
|
|
1,862,343
|
|
|
Equity
|
|
|
|
|
Preferred share capital (par value $0.10; authorized, 50,000,000; none issued)
|
—
|
|
|
—
|
|
|
Ordinary share capital (Class A: par value $0.10; authorized, 100,000,000; issued and outstanding, 30,617,161 (2012: 30,447,179): Class B: par value $0.10; authorized, 25,000,000; issued and outstanding, 6,254,949 (2012: 6,254,949))
|
3,687
|
|
|
3,670
|
|
|
Additional paid-in capital
|
494,509
|
|
|
492,469
|
|
|
Retained earnings
|
410,802
|
|
|
325,569
|
|
|
Shareholders’ equity attributable to shareholders
|
908,998
|
|
|
821,708
|
|
|
Non-controlling interest in joint venture
|
32,218
|
|
|
38,702
|
|
|
Total equity
|
941,216
|
|
|
860,410
|
|
|
Total liabilities and equity
|
$
|
2,755,270
|
|
|
$
|
2,722,753
|
|
The accompanying Notes to the Condensed Consolidated Financial Statements are an
integral part of the Condensed Consolidated Financial Statements.
GREENLIGHT CAPITAL RE, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the
three and six months ended June 30, 2013 and 2012
(expressed in thousands of U.S. dollars, except per share and share amounts)
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Three months ended June 30
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Six months ended June 30
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2013
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|
2012
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2013
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|
2012
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Revenues
|
|
|
|
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|
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|
|
Gross premiums written
|
$
|
135,198
|
|
|
$
|
83,986
|
|
|
$
|
262,162
|
|
|
$
|
236,206
|
|
|
Gross premiums ceded
|
(2,514
|
)
|
|
4,602
|
|
|
1,464
|
|
|
(6,393
|
)
|
|
Net premiums written
|
132,684
|
|
|
88,588
|
|
|
263,626
|
|
|
229,813
|
|
|
Change in net unearned premium reserves
|
316
|
|
|
41,426
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|
|
(21,155
|
)
|
|
1,789
|
|
|
Net premiums earned
|
133,000
|
|
|
130,014
|
|
|
242,471
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|
|
231,602
|
|
|
Net investment income (loss)
|
24,247
|
|
|
(36,896
|
)
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|
85,386
|
|
|
34,711
|
|
|
Other income (expense), net
|
(488
|
)
|
|
(236
|
)
|
|
(100
|
)
|
|
(448
|
)
|
|
Total revenues
|
156,759
|
|
|
92,882
|
|
|
327,757
|
|
|
265,865
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses incurred, net
|
78,345
|
|
|
87,337
|
|
|
144,623
|
|
|
150,644
|
|
|
Acquisition costs, net
|
42,936
|
|
|
37,905
|
|
|
84,232
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|
|
73,930
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General and administrative expenses
|
5,943
|
|
|
4,359
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|
|
9,703
|
|
|
8,982
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|
|
Total expenses
|
127,224
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|
129,601
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|
|
238,558
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|
|
233,556
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|
Income (loss) before income tax expense
|
29,535
|
|
|
(36,719
|
)
|
|
89,199
|
|
|
32,309
|
|
|
Income tax benefit (expense)
|
(142
|
)
|
|
201
|
|
|
(450
|
)
|
|
(62
|
)
|
|
Net income (loss) including non-controlling interest
|
29,393
|
|
|
(36,518
|
)
|
|
88,749
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|
|
32,247
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|
|
Income (loss) attributable to non-controlling interest in joint venture
|
(893
|
)
|
|
449
|
|
|
(3,516
|
)
|
|
(3,183
|
)
|
|
Net income (loss)
|
$
|
28,500
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|
|
$
|
(36,069
|
)
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|
$
|
85,233
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|
|
$
|
29,064
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|
|
Earnings (loss) per share
|
|
|
|
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|
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Basic
|
$
|
0.77
|
|
|
$
|
(0.98
|
)
|
|
$
|
2.32
|
|
|
$
|
0.80
|
|
|
Diluted
|
$
|
0.76
|
|
|
$
|
(0.98
|
)
|
|
$
|
2.27
|
|
|
$
|
0.78
|
|
|
Weighted average number of ordinary shares used in the determination of earnings (loss) per share
|
|
|
|
|
|
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|
Basic
|
36,830,046
|
|
|
36,660,267
|
|
|
36,780,438
|
|
|
36,605,610
|
|
|
Diluted
|
37,537,500
|
|
|
36,660,267
|
|
|
37,481,162
|
|
|
37,338,484
|
|
The accompanying Notes to the Condensed Consolidated Financial Statements are an
integral part of the Condensed Consolidated Financial Statements.
GREENLIGHT CAPITAL RE, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
For the
six months ended June 30, 2013 and 2012
(expressed in thousands of U.S. dollars)
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Ordinary share capital
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Additional paid-in capital
|
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Retained earnings
|
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Shareholders' equity attributable to shareholders
|
|
Non-controlling
interest in joint venture
|
|
Total equity
|
|
Balance at December 31, 2011
|
$
|
3,654
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|
|
$
|
488,478
|
|
|
$
|
310,971
|
|
|
$
|
803,103
|
|
|
$
|
42,595
|
|
|
$
|
845,698
|
|
|
Issue of Class A ordinary shares, net of forfeitures
|
14
|
|
|
—
|
|
|
—
|
|
|
14
|
|
|
—
|
|
|
14
|
|
|
Share-based compensation expense, net of forfeitures
|
—
|
|
|
1,737
|
|
|
—
|
|
|
1,737
|
|
|
—
|
|
|
1,737
|
|
|
Non-controlling interest withdrawal from joint venture, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(34,000
|
)
|
|
(34,000
|
)
|
|
Income attributable to non-controlling interest in joint venture
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,183
|
|
|
3,183
|
|
|
Net income
|
—
|
|
|
—
|
|
|
29,064
|
|
|
29,064
|
|
|
—
|
|
|
29,064
|
|
|
Balance at June 30, 2012
|
$
|
3,668
|
|
|
$
|
490,215
|
|
|
$
|
340,035
|
|
|
$
|
833,918
|
|
|
$
|
11,778
|
|
|
$
|
845,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
$
|
3,670
|
|
|
$
|
492,469
|
|
|
$
|
325,569
|
|
|
$
|
821,708
|
|
|
$
|
38,702
|
|
|
$
|
860,410
|
|
|
Issue of Class A ordinary shares, net of forfeitures
|
17
|
|
|
443
|
|
|
—
|
|
|
460
|
|
|
—
|
|
|
460
|
|
|
Share-based compensation expense, net of forfeitures
|
—
|
|
|
1,597
|
|
|
—
|
|
|
1,597
|
|
|
—
|
|
|
1,597
|
|
|
Non-controlling interest withdrawal from joint venture, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,000
|
)
|
|
(10,000
|
)
|
|
Income attributable to non-controlling interest in joint venture
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,516
|
|
|
3,516
|
|
|
Net income
|
—
|
|
|
—
|
|
|
85,233
|
|
|
85,233
|
|
|
—
|
|
|
85,233
|
|
|
Balance at June 30, 2013
|
$
|
3,687
|
|
|
$
|
494,509
|
|
|
$
|
410,802
|
|
|
$
|
908,998
|
|
|
$
|
32,218
|
|
|
$
|
941,216
|
|
The accompanying Notes to the Condensed Consolidated Financial Statements are an
integral part of the Condensed Consolidated Financial Statements.
GREENLIGHT CAPITAL RE, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the six months ended June 30, 2013 and 2012
(expressed in thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30
|
|
|
2013
|
|
2012
|
|
Cash provided by (used in) operating activities
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
85,233
|
|
|
$
|
29,064
|
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities
|
|
|
|
|
Net change in unrealized gains and losses on investments and financial contracts
|
(19,436
|
)
|
|
(62,309
|
)
|
|
Net realized (gains) losses on investments and financial contracts
|
(91,978
|
)
|
|
5,513
|
|
|
Foreign exchange (gains) losses on restricted cash and cash equivalents
|
(18,897
|
)
|
|
1,208
|
|
|
Income attributable to non-controlling interest in joint venture
|
3,516
|
|
|
3,183
|
|
|
Share-based compensation expense, net of forfeitures
|
1,597
|
|
|
1,737
|
|
|
Depreciation expense
|
125
|
|
|
125
|
|
|
Net change in
|
|
|
|
|
Reinsurance balances receivable
|
1,372
|
|
|
(38,680
|
)
|
|
Loss and loss adjustment expenses recoverable
|
14,315
|
|
|
(7,153
|
)
|
|
Deferred acquisition costs, net
|
(4,535
|
)
|
|
8,404
|
|
|
Unearned premiums ceded
|
715
|
|
|
15,304
|
|
|
Other assets
|
(2,835
|
)
|
|
612
|
|
|
Loss and loss adjustment expense reserves
|
(54,611
|
)
|
|
53,368
|
|
|
Unearned premium reserves
|
19,541
|
|
|
(16,969
|
)
|
|
Reinsurance balances payable
|
15
|
|
|
5,755
|
|
|
Funds withheld
|
(7,231
|
)
|
|
(4,846
|
)
|
|
Other liabilities
|
(582
|
)
|
|
(2,277
|
)
|
|
Performance compensation payable to related party
|
21,923
|
|
|
7,870
|
|
|
Net cash (used in) provided by operating activities
|
(51,753
|
)
|
|
(91
|
)
|
|
Investing activities
|
|
|
|
|
Purchases of investments, trading
|
(386,521
|
)
|
|
(503,559
|
)
|
|
Sales of investments, trading
|
635,958
|
|
|
379,180
|
|
|
Purchases of financial contracts
|
(34,309
|
)
|
|
(36,322
|
)
|
|
Dispositions of financial contracts
|
52,556
|
|
|
15,072
|
|
|
Securities sold, not yet purchased
|
448,095
|
|
|
282,022
|
|
|
Dispositions of securities sold, not yet purchased
|
(424,843
|
)
|
|
(269,706
|
)
|
|
Change in due to prime brokers
|
(76,760
|
)
|
|
104,648
|
|
|
Change in restricted cash and cash equivalents, net
|
(346
|
)
|
|
33,365
|
|
|
Change in notes receivable, net
|
3,411
|
|
|
(1,645
|
)
|
|
Non-controlling interest withdrawal from joint venture
|
(10,000
|
)
|
|
(34,000
|
)
|
|
Net cash provided by (used in) investing activities
|
207,241
|
|
|
(30,945
|
)
|
|
Financing activities
|
|
|
|
|
Net proceeds from share issue
|
17
|
|
|
14
|
|
|
Net proceeds from exercise of stock options
|
443
|
|
|
—
|
|
|
Net cash provided by financing activities
|
460
|
|
|
14
|
|
|
Net (decrease) increase in cash and cash equivalents
|
155,948
|
|
|
(31,022
|
)
|
|
Cash and cash equivalents at beginning of the period
|
21,890
|
|
|
42,284
|
|
|
Cash and cash equivalents at end of the period
|
$
|
177,838
|
|
|
$
|
11,262
|
|
|
Supplementary information
|
|
|
|
|
Interest paid in cash
|
$
|
15,555
|
|
|
$
|
13,796
|
|
|
Interest received in cash
|
558
|
|
|
498
|
|
|
Income tax paid in cash
|
—
|
|
|
—
|
|
The accompanying Notes to the Condensed Consolidated Financial Statements are an
integral part of the Condensed Consolidated Financial Statements.
GREENLIGHT CAPITAL RE, LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2013
1
.
ORGANIZATION AND BASIS OF PRESENTATION
Greenlight Capital Re, Ltd. ("GLRE") was incorporated as an exempted company under the Companies Law of the Cayman Islands on July 13, 2004. GLRE’s principal wholly-owned subsidiary, Greenlight Reinsurance, Ltd. ("Greenlight Re"), provides global specialty property and casualty reinsurance. Greenlight Re has a Class D insurer license issued in accordance with the terms of The Insurance Law, 2010 and underlying regulations thereto (the "Law") and is subject to regulation by the Cayman Islands Monetary Authority, ("CIMA"), in terms of the Law. Greenlight Re commenced underwriting in April 2006. Effective May 30, 2007, GLRE completed an initial public offering of
11,787,500
Class A ordinary shares at
$19.00
per share. Concurrently,
2,631,579
Class B ordinary shares of GLRE were sold at
$19.00
per share in a private placement offering. During 2008, Verdant Holding Company, Ltd. ("Verdant"), a wholly owned subsidiary of GLRE, was incorporated in the state of Delaware. During 2010, GLRE established Greenlight Reinsurance Ireland, Ltd. ("GRIL"), a wholly-owned reinsurance subsidiary based in Dublin, Ireland. GRIL is authorized as a non-life reinsurance undertaking in accordance with the provisions of the European Communities (Reinsurance) Regulations 2006 ("Irish Regulations"). GRIL provides multi-line property and casualty reinsurance capacity to the European broker market and provides GLRE with an additional platform to serve clients located in Europe and North America. As used herein, the "Company" refers collectively to GLRE and its subsidiaries.
The Class A ordinary shares of GLRE are listed on Nasdaq Global Select Market under the symbol "GLRE".
These unaudited condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended
December 31, 2012
. 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
six months ended June 30, 2013
are not necessarily indicative of the results expected for the full calendar year.
Reclassifications
Certain prior period balances have been reclassified to conform to the current period presentation. The reclassifications resulted in no changes to net income or retained earnings for any of the periods presented.
2
.
SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the period. Actual results could differ from these estimates.
Restricted Cash and Cash Equivalents
The Company is required to maintain certain cash in segregated accounts with prime brokers and derivative counterparties. The amount of restricted cash held by prime brokers is primarily used to support the liability created from securities sold, not yet purchased, and for collateralizing the letters of credit issued under certain letter of credit facilities (see Notes
4
and
8
). The amount of cash encumbered varies depending on the market value of the securities sold, not yet purchased, and letters of credit issued. In addition, derivative counterparties require cash collateral to support the current value of any amounts that may be due to the counterparty based on the value of the underlying financial instrument.
Deferred Acquisition Costs
Policy acquisition costs, such as commission and brokerage costs, relate directly to, and vary with, the writing of reinsurance contracts. Acquisition costs relating solely to bound contracts are deferred subject to ultimate recoverability and are amortized over the related contract term. The Company evaluates the recoverability of deferred acquisition costs by determining if the sum of future earned premiums and anticipated investment income is greater than the expected future claims and expenses. If a loss is probable on the unexpired portion of policies in force, a premium deficiency loss is recognized. At
June 30, 2013 and December 31, 2012
, 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
June 30, 2013
,
$10.0 million
(
December 31, 2012
:
$9.6 million
) of profit commission reserves were included in reinsurance balances payable on the condensed consolidated balance sheets.
For the three and six months ended June 30, 2013
,
$0.4 million
and
$1.3 million
(
2012
:
$0.3 million
and
$0.3 million
) of net profit commission expenses were included in acquisition costs, respectively, on the condensed consolidated statements of income.
Loss and Loss Adjustment Expense Reserves and Recoverable
The Company establishes reserves for contracts based on estimates of the ultimate cost of all losses including losses incurred but not reported ("IBNR"). These estimated ultimate reserves are based on the Company’s own actuarial estimates derived from reports received from ceding companies, industry data and historical experience. These estimates are reviewed by the Company periodically on a contract by contract basis and adjusted as necessary. Since reserves are estimates, the final settlement of losses may vary from the reserves established and any adjustments to the estimates, which may be material, are recorded in the period they are determined.
Loss and loss adjustment expenses recoverable include the amounts due from retrocessionaires for unpaid loss and loss adjustment expenses on retrocession agreements. Ceded losses incurred but not reported are estimated based on the Company’s actuarial estimates. These estimates are reviewed periodically and adjusted when deemed necessary. The Company may not be able to ultimately recover the loss and loss adjustment expense recoverable amounts due to the retrocessionaires’ inability to pay. The Company regularly evaluates the financial condition of its retrocessionaires and records provisions for uncollectible reinsurance expenses recoverable when recovery is no longer probable.
Notes Receivable
Notes receivable include promissory notes receivable from third party entities. These notes are recorded at cost along with accrued interest, if any, which approximates the fair value. The Company regularly reviews all notes receivable individually for impairment and records provisions for uncollectible and non-performing notes. The Company places notes on non-accrual status when the value of the note is not considered impaired but there is uncertainty as to the collection of interest based on the terms of the note. The Company resumes accrual of interest on a note when none of the principal or interest remains past due or outstanding, 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.
For the six months ended June 30, 2013
, the notes earned interest at annual interest rates ranging from
6.0%
to
16.0%
and had remaining maturity terms ranging from approximately
2 years
to
6 years
. Interest income earned on notes receivable is included under net investment income in the
condensed consolidated
statements of income.
At
June 30, 2013
, included in the notes receivable balance was
$10.5 million
(
December 31, 2012
:
$16.5 million
), related to a note placed on non-accrual status based on expectations of the Company’s ability to collect any interest that would accrue up to maturity. For the
six months ended June 30, 2013 and 2012
,
no
interest was received relating to the notes placed on non-accrual status. During the
six months ended June 30, 2013 and 2012
, the Company recorded an impairment charge of
$6.0 million
and
nil
, respectively, relating to the accrued interest and principal on the note placed on non-accrual status. There were
no
impairment charges for the three months ended June 30, 2013 and 2012. Impairment charges are included under net investment income in the
condensed consolidated
statements of income.
At
June 30, 2013
, included in the notes receivable balance was
$0.1 million
of accrued interest (
December 31, 2012
:
$2.0 million
). Based on management’s assessment, the recorded values of the notes, net of valuation allowance, at
June 30, 2013 and December 31, 2012
, were expected to be fully collectible and therefore no other provision for uncollectible amounts was deemed necessary at
June 30, 2013 and December 31, 2012
.
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 risk, or a contract provides retroactive reinsurance. Any losses on such contracts are charged to earnings immediately. Any gains relating to such contracts are deferred and amortized over the estimated remaining settlement period. All such deferred gains are included in reinsurance balances payable in the
condensed consolidated
balance sheets. Amortized gains are recorded in the
condensed consolidated
statements of income as other income. At
June 30, 2013
, included in the
condensed consolidated
balance sheets under reinsurance balances receivable and reinsurance balances payable were
$2.5 million
and
$0
of deposit assets and deposit liabilities (
December 31, 2012
:
$5.1 million
and
$0.7 million
), respectively.
For the three and six months ended June 30, 2013
,
$0.5 million
and
$0.5 million
, respectively, was included in other income (expense), net, relating to losses on deposit accounted contracts (
2012
:
$0.2 million
and
$0.4 million
).
For the three and six months ended June 30, 2013
and 2012, there were
no
gains on deposit accounted contracts.
Fixed Assets
Fixed assets are included in other assets on the
condensed consolidated
balance sheets and are recorded at cost when acquired. Fixed assets are comprised of computer software, furniture and fixtures and leasehold improvements and are depreciated, using the straight-line method, over their estimated useful lives, which are
five years
for both computer software, and furniture and fixtures. Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or remaining lease term.
At
June 30, 2013
, the cost, accumulated depreciation and net book values of the fixed assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Accumulated depreciation
|
|
Net book value
|
|
|
($ in thousands)
|
|
Computer software
|
$
|
200
|
|
|
$
|
(200
|
)
|
|
$
|
—
|
|
|
Furniture and fixtures
|
451
|
|
|
(277
|
)
|
|
174
|
|
|
Leasehold improvements
|
1,487
|
|
|
(572
|
)
|
|
915
|
|
|
Total
|
$
|
2,138
|
|
|
$
|
(1,049
|
)
|
|
$
|
1,089
|
|
At
December 31, 2012
, the cost, accumulated depreciation and net book values of the fixed assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Accumulated depreciation
|
|
Net book value
|
|
|
($ in thousands)
|
|
Computer software
|
$
|
200
|
|
|
$
|
(200
|
)
|
|
$
|
—
|
|
|
Furniture and fixtures
|
451
|
|
|
(232
|
)
|
|
219
|
|
|
Leasehold improvements
|
1,487
|
|
|
(492
|
)
|
|
995
|
|
|
Total
|
$
|
2,138
|
|
|
$
|
(924
|
)
|
|
$
|
1,214
|
|
The Company periodically reviews fixed assets that have finite lives, and that are not held for sale, for impairment by comparing the carrying value of the assets to their estimated future undiscounted cash flows. For the
six months ended June 30, 2013 and 2012
, there were
no
impairments in fixed assets.
Financial Instruments
Investments in Securities and Investments in Securities Sold, Not Yet Purchased
The Company’s investments in debt instruments and equity securities that are classified as "trading securities" are carried at fair value. The fair values of the listed equity investments are derived based on quoted prices (unadjusted) in active markets for identical assets (Level 1 inputs). The fair values of listed equities that have restrictions on sale or transfer which expire within one year, are determined by adjusting the observed market price of the equity using a liquidity discount based on observable market inputs. The fair values of debt instruments are derived based on inputs that are observable, either directly or indirectly, such as market maker or broker quotes reflecting recent transactions (Level 2 inputs), and are generally derived based on the average of multiple market maker or broker quotes which are considered to be binding. Where quotes are not available, debt instruments are valued using cash flow models using assumptions and estimates that may be subjective and non-observable (Level 3 inputs).
The Company’s "other investments" may include investments in private and unlisted equity securities, limited partnerships, and commodities, which are all carried at fair value. The fair values of commodities are determined based on quoted prices in active markets for identical assets (Level 1). The Company maximizes the use of observable direct or indirect inputs (Level 2 inputs) when deriving the fair values for "other investments". For limited partnerships and private and unlisted equity securities, where observable inputs are not available, the fair values are derived based on unobservable inputs (Level 3 inputs) such as management’s assumptions developed from available information using the services of the investment advisor, including the most recent net asset values obtained from the managers of those underlying investments.
For securities classified as "trading securities" and "other investments", any realized and unrealized gains or losses are determined on the basis of the specific identification method (by reference to cost or amortized cost, as appropriate) and included in net investment income 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 are included in financial contracts receivable. Derivative financial instrument liabilities are generally included in financial contracts payable. The Company's derivatives do not qualify as hedges for financial reporting purposes and are recorded in the
condensed consolidated
balance sheets on a gross basis and not offset against any collateral pledged or received. Pursuant to the International Swaps and Derivatives Association ("ISDA") master agreements, securities lending agreements and other derivatives agreements, the Company and its counterparties typically have the ability to net certain payments owed to each other in specified circumstances. In addition, in the event a party to one of the ISDA master agreements, securities lending agreements or other derivatives agreements defaults, or a transaction is otherwise subject to termination, the non-defaulting party generally has the right to set off against payments owed to the defaulting party or collateral held by the non-defaulting party.
Financial Contracts
The Company enters into financial contracts with counterparties as part of its investment strategy. Financial contracts which include total return swaps, credit default swaps ("CDS"), futures, options, currency forwards and other derivative instruments are recorded at their fair value with any unrealized gains and losses included in net investment income in the 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 the contract's current fair value, the Company will be obligated to make payments upon settlement of the contract.
Total return swap agreements, included on the
condensed consolidated
balance sheets as financial contracts receivable and financial contracts payable, are derivative financial instruments whereby the Company is either entitled to receive or obligated to pay the product of a notional amount multiplied by the movement in an underlying security, which the Company may not own, over a specified time frame. In addition, the Company may also be obligated to pay or receive other payments
based on interest rates, dividend payments and receipts, or foreign exchange movements during a specified period. The Company measures its rights or obligations to the counterparty based on the fair value movements of the underlying security together with any other payments due. These contracts are carried at fair value, based on observable inputs (Level 2 inputs) with the resultant unrealized gains and losses reflected in net investment income in the 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 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, 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 purchases and sells 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).
Comprehensive Income (Loss)
The Company has no other comprehensive income (loss), other than the net income (loss) disclosed in the
condensed consolidated
statements of income.
Earnings (Loss) Per Share
Basic earnings (loss) per share are based on the weighted average number of common shares and participating securities outstanding during the period. Diluted earnings (loss) per share includes the dilutive effect of restricted stock units ("RSU") and additional potential common shares issuable when stock options are exercised and are determined using the treasury stock method. The Company treats its unvested restricted stock as participating securities in accordance with U.S. GAAP which requires that unvested stock awards which contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid (referred to as "participating securities"), be included in the number of shares outstanding for both basic and diluted earnings per share calculations. In the event of a net loss, all RSUs, stock options outstanding and all participating securities are excluded from the calculation of both basic and diluted loss per share since their inclusion would be anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
|
Six months ended June 30
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Weighted average shares outstanding - basic
|
36,830,046
|
|
|
36,660,267
|
|
|
36,780,438
|
|
|
36,605,610
|
|
|
Effect of dilutive service provider share-based awards
|
148,142
|
|
|
—
|
|
|
146,862
|
|
|
148,971
|
|
|
Effect of dilutive employee and director share-based awards
|
559,312
|
|
|
—
|
|
|
553,862
|
|
|
583,903
|
|
|
Weighted average share outstanding - diluted
|
37,537,500
|
|
|
36,660,267
|
|
|
37,481,162
|
|
|
37,338,484
|
|
|
Anti-dilutive stock options outstanding
|
180,000
|
|
|
180,000
|
|
|
180,000
|
|
|
180,000
|
|
|
Participating securities excluded from calculation of loss per share
|
—
|
|
|
307,931
|
|
|
—
|
|
|
—
|
|
Taxation
Under current Cayman Islands law, no corporate entity, including the Company, 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 the Company or its 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. Verdant’s taxable income is generally expected to be taxed at a rate of
35%
.
GRIL is incorporated in Ireland and therefore is subject to the Irish corporation tax rate of
12.5%
on its trading income, and
25%
on its non-trading income, if any.
Any deferred tax asset is evaluated for recovery and a valuation allowance is recorded when it is more likely than not that the deferred tax asset will not be realized in the future. The Company has not taken any income tax positions that are subject to significant uncertainty or that are reasonably likely to have a material impact on the Company.
Recently Adopted Accounting Standards
In January 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2013-01 ("ASU 2013-01"), Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. ASU 2013-01 clarifies the scope of Accounting Standards Update No. 2011-11 ("ASU 2011-11"), Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 originally required enhanced disclosures by requiring improved information about financial instruments and derivative instruments. ASU 2013-01 clarifies that ASU 2011-11 applies to derivatives including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. ASU 2013-01 also clarifies that other types of financial assets and financial liabilities subject to a master netting arrangement are no longer subject to the disclosure requirements of ASU 2011-11. ASU 2011-11 and ASU 2013-01 became effective for the Company during the first quarter of 2013 with retrospective disclosure required for all comparative periods presented. The adoption of ASU 2011-11 and ASU 2013-01 did not have a material impact on the Company’s results of operations or financial position as it only affected the Company's disclosures.
3
.
FINANCIAL INSTRUMENTS
In the normal course of its business, the Company purchases and sells various financial instruments, which include listed and unlisted equities, corporate and sovereign debt, commodities, futures, put and call options, currency forwards, other derivatives and similar instruments sold, not yet purchased.
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 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
June 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements as of June 30, 2013
|
|
Description
|
|
Quoted prices in
active markets
(Level 1)
|
|
Significant other
observable
inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Total
|
|
Assets:
|
|
($ in thousands)
|
|
Debt instruments
|
|
$
|
—
|
|
|
$
|
3,668
|
|
|
$
|
4,838
|
|
|
$
|
8,506
|
|
|
Listed equity securities
|
|
912,202
|
|
|
—
|
|
|
—
|
|
|
912,202
|
|
|
Commodities
|
|
50,484
|
|
|
—
|
|
|
—
|
|
|
50,484
|
|
|
Private and unlisted equity securities
|
|
—
|
|
|
—
|
|
|
43,257
|
|
|
43,257
|
|
|
Financial contracts receivable
|
|
1,536
|
|
|
54,581
|
|
|
—
|
|
|
56,117
|
|
|
|
|
$
|
964,222
|
|
|
$
|
58,249
|
|
|
$
|
48,095
|
|
|
$
|
1,070,566
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Listed equity securities, sold not yet purchased
|
|
$
|
(730,163
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(730,163
|
)
|
|
Debt instruments, sold not yet purchased
|
|
—
|
|
|
(219,913
|
)
|
|
—
|
|
|
(219,913
|
)
|
|
Financial contracts payable
|
|
(1,542
|
)
|
|
(25,803
|
)
|
|
—
|
|
|
(27,345
|
)
|
|
|
|
$
|
(731,705
|
)
|
|
$
|
(245,716
|
)
|
|
$
|
—
|
|
|
$
|
(977,421
|
)
|
The following table presents the Company’s investments, categorized by the level of the fair value hierarchy as of
December 31, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements as of December 31, 2012
|
|
Description
|
|
Quoted prices in
active markets
(Level 1)
|
|
Significant other
observable
inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Total
|
|
Assets:
|
|
($ in thousands)
|
|
Debt instruments
|
|
$
|
—
|
|
|
$
|
1,503
|
|
|
$
|
260
|
|
|
$
|
1,763
|
|
|
Listed equity securities
|
|
1,040,562
|
|
|
2,153
|
|
|
—
|
|
|
1,042,715
|
|
|
Commodities
|
|
94,649
|
|
|
—
|
|
|
—
|
|
|
94,649
|
|
|
Private and unlisted equity securities
|
|
—
|
|
|
—
|
|
|
38,801
|
|
|
38,801
|
|
|
Financial contracts receivable
|
|
—
|
|
|
22,744
|
|
|
—
|
|
|
22,744
|
|
|
|
|
$
|
1,135,211
|
|
|
$
|
26,400
|
|
|
$
|
39,061
|
|
|
$
|
1,200,672
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Listed equity securities, sold not yet purchased
|
|
$
|
(679,897
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(679,897
|
)
|
|
Debt instruments, sold not yet purchased
|
|
—
|
|
|
(228,471
|
)
|
|
—
|
|
|
(228,471
|
)
|
|
Financial contracts payable
|
|
—
|
|
|
(19,637
|
)
|
|
—
|
|
|
(19,637
|
)
|
|
|
|
$
|
(679,897
|
)
|
|
$
|
(248,108
|
)
|
|
$
|
—
|
|
|
$
|
(928,005
|
)
|
The following table presents the reconciliation of the balances for all investments measured at fair value using significant unobservable inputs (Level 3) for the
three and six months ended June 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
|
|
|
Three months ended June 30
|
|
Six months ended June 30
|
|
|
|
Debt instruments
|
|
Private and unlisted equity securities
|
|
Total
|
|
Debt instruments
|
|
Private and unlisted equity securities
|
|
Total
|
|
|
|
($ in thousands)
|
|
($ in thousands)
|
|
Beginning balance
|
|
$
|
2,666
|
|
|
$
|
56,044
|
|
|
$
|
58,710
|
|
|
$
|
260
|
|
|
$
|
38,801
|
|
|
$
|
39,061
|
|
|
Purchases
|
|
2,188
|
|
|
9,936
|
|
|
12,124
|
|
|
4,626
|
|
|
31,339
|
|
|
35,965
|
|
|
Sales
|
|
—
|
|
|
(5,192
|
)
|
|
(5,192
|
)
|
|
(29
|
)
|
|
(6,105
|
)
|
|
(6,134
|
)
|
|
Issuances
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Settlements
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total realized and unrealized gains (losses) and amortization included in earnings, net
|
|
(16
|
)
|
|
2,103
|
|
|
2,087
|
|
|
(19
|
)
|
|
(1,144
|
)
|
|
(1,163
|
)
|
|
Transfers into Level 3
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Transfers out of Level 3
|
|
—
|
|
|
(19,634
|
)
|
|
(19,634
|
)
|
|
—
|
|
|
(19,634
|
)
|
|
(19,634
|
)
|
|
Ending balance
|
|
$
|
4,838
|
|
|
$
|
43,257
|
|
|
$
|
48,095
|
|
|
$
|
4,838
|
|
|
$
|
43,257
|
|
|
$
|
48,095
|
|
The following table presents the reconciliation of the balances for all investments measured at fair value using significant unobservable inputs (Level 3) for the
three and six months ended June 30, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
|
|
|
Three months ended June 30
|
|
Six months ended June 30
|
|
|
|
Debt instruments
|
|
Private and unlisted equity securities
|
|
Financial contracts receivable
|
|
Total
|
|
Debt instruments
|
|
Private and unlisted equity securities
|
|
Financial contracts receivable
|
|
Total
|
|
|
|
($ in thousands)
|
|
($ in thousands)
|
|
Beginning balance
|
|
$
|
418
|
|
|
$
|
35,758
|
|
|
$
|
125
|
|
|
$
|
36,301
|
|
|
$
|
465
|
|
|
$
|
31,178
|
|
|
$
|
263
|
|
|
$
|
31,906
|
|
|
Purchases
|
|
—
|
|
|
3,541
|
|
|
—
|
|
|
3,541
|
|
|
—
|
|
|
6,912
|
|
|
—
|
|
|
6,912
|
|
|
Sales
|
|
—
|
|
|
(306
|
)
|
|
—
|
|
|
(306
|
)
|
|
(1
|
)
|
|
(492
|
)
|
|
—
|
|
|
(493
|
)
|
|
Issuances
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Settlements
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total realized and unrealized gains (losses) and amortization included in earnings, net
|
|
(75
|
)
|
|
960
|
|
|
(111
|
)
|
|
774
|
|
|
(121
|
)
|
|
2,355
|
|
|
(249
|
)
|
|
1,985
|
|
|
Transfers into Level 3
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Transfers out of Level 3
|
|
—
|
|
|
(1,148
|
)
|
|
—
|
|
|
(1,148
|
)
|
|
—
|
|
|
(1,148
|
)
|
|
—
|
|
|
(1,148
|
)
|
|
Ending balance
|
|
$
|
343
|
|
|
$
|
38,805
|
|
|
$
|
14
|
|
|
$
|
39,162
|
|
|
$
|
343
|
|
|
$
|
38,805
|
|
|
$
|
14
|
|
|
$
|
39,162
|
|
During the
three and six months ended June 30, 2013
,
$19.6 million
of securities, at fair value based on the date of transfer, were transferred from Level 3 to Level 1, as these securities began actively trading on a listed exchange during the second quarter of
2013
. Since there were no lock-up restrictions on these securities, they were classified as Level 1 upon
transfer. During the six months ended June 30, 2013,
$2.4 million
of securities at fair value based on the date of transfer, were transferred from Level 2 to Level 1 as the lock-up period restrictions on those securities expired.
During the
three and six months ended June 30, 2012
,
$29.4 million
, of securities at fair value based on the date of transfer, were transferred from Level 2 to Level 1 as the lock-up period restrictions on those securities expired. Additionally, for the
three and six months ended June 30, 2012
,
$1.1 million
of securities, at fair value based on the date of transfer, were transferred from Level 3 to Level 2, as these securities began actively trading on a listed exchange during the second quarter of
2012
. However, due to lock-up period restrictions on these securities, a liquidity discount was used in determining their fair value at
June 30
,
2012
, and therefore classified as Level 2.
There were no other transfers between Level 1, Level 2 or Level 3 during the
three and six months ended June 30, 2013
or
2012
.
For the
three and six months ended June 30, 2013
, realized gains of
$0.03 million
and
$0.3 million
, (
2012
: realized gains of
$0.1 million
and
$0.2 million
, respectively), and increase (decrease) in unrealized gains of
$2.1 million
and
$(1.5) million
(
2012
: increase of
$0.8 million
and
$2.0 million
, respectively) on securities held at the reporting date and valued using unobservable inputs are included in net investment income in the
condensed consolidated
statements of income. In addition, for the
three and six months ended June 30, 2013
, amortization expense of
$0
and
$0
(2012:
$0.1 million
and
$0.2 million
), respectively, relating to financial contracts receivable valued using unobservable inputs, was included in other income (expense), net.
Investments
Debt instruments, trading
At
June 30, 2013
, the following investments were included in debt instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
Cost/
amortized
cost
|
|
Unrealized
gains
|
|
Unrealized
losses
|
|
Fair
value
|
|
|
|
($ in thousands)
|
|
Corporate debt – U.S.
|
|
$
|
6,714
|
|
|
$
|
—
|
|
|
$
|
(1,876
|
)
|
|
$
|
4,838
|
|
|
Corporate debt – Non U.S.
|
|
3,761
|
|
|
38
|
|
|
(131
|
)
|
|
3,668
|
|
|
Total debt instruments
|
|
$
|
10,475
|
|
|
$
|
38
|
|
|
$
|
(2,007
|
)
|
|
$
|
8,506
|
|
At
December 31, 2012
, the following investments were included in debt instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
Cost/
amortized
cost
|
|
Unrealized
gains
|
|
Unrealized
losses
|
|
Fair
value
|
|
|
|
($ in thousands)
|
|
Corporate debt – U.S.
|
|
$
|
2,317
|
|
|
$
|
205
|
|
|
$
|
(1,856
|
)
|
|
$
|
666
|
|
|
Corporate debt – Non U.S.
|
|
1,179
|
|
|
—
|
|
|
(82
|
)
|
|
1,097
|
|
|
Total debt instruments
|
|
$
|
3,496
|
|
|
$
|
205
|
|
|
$
|
(1,938
|
)
|
|
$
|
1,763
|
|
The maturity distribution for debt instruments held at
June 30, 2013 and December 31, 2012
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
|
|
Cost/
amortized
cost
|
|
Fair
value
|
|
Cost/
amortized
cost
|
|
Fair
value
|
|
|
|
($ in thousands)
|
|
Within one year
|
|
$
|
4,598
|
|
|
$
|
4,598
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
From one to five years
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
From five to ten years
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
More than ten years
|
|
5,877
|
|
|
3,908
|
|
|
3,496
|
|
|
1,763
|
|
|
|
|
$
|
10,475
|
|
|
$
|
8,506
|
|
|
$
|
3,496
|
|
|
$
|
1,763
|
|
Investment in Equity Securities, Trading
At
June 30, 2013
, the following long positions were included in investment securities, trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
Cost
|
|
Unrealized
gains
|
|
Unrealized
losses
|
|
Fair
value
|
|
|
|
($ in thousands)
|
|
Equities – listed
|
|
$
|
721,272
|
|
|
$
|
199,348
|
|
|
$
|
(38,064
|
)
|
|
$
|
882,556
|
|
|
Exchange traded funds
|
|
50,253
|
|
|
—
|
|
|
(20,607
|
)
|
|
29,646
|
|
|
|
|
$
|
771,525
|
|
|
$
|
199,348
|
|
|
$
|
(58,671
|
)
|
|
$
|
912,202
|
|
At
December 31, 2012
, the following long positions were included in investment securities, trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
Cost
|
|
Unrealized
gains
|
|
Unrealized
losses
|
|
Fair
value
|
|
|
|
($ in thousands)
|
|
Equities – listed
|
|
$
|
875,322
|
|
|
$
|
199,519
|
|
|
$
|
(70,275
|
)
|
|
$
|
1,004,566
|
|
|
Exchange traded funds
|
|
38,819
|
|
|
—
|
|
|
(670
|
)
|
|
38,149
|
|
|
|
|
$
|
914,141
|
|
|
$
|
199,519
|
|
|
$
|
(70,945
|
)
|
|
$
|
1,042,715
|
|
Other Investments
"Other investments" include commodities and private and unlisted equity securities. As of
June 30, 2013 and December 31, 2012
, commodities were comprised of gold bullion.
At
June 30, 2013
, the following securities were included in other investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
Cost
|
|
Unrealized
gains
|
|
Unrealized
losses
|
|
Fair
value
|
|
|
|
($ in thousands)
|
|
Commodities
|
|
$
|
41,836
|
|
|
$
|
8,648
|
|
|
$
|
—
|
|
|
$
|
50,484
|
|
|
Private and unlisted equity securities
|
|
43,809
|
|
|
6,893
|
|
|
(7,445
|
)
|
|
43,257
|
|
|
|
|
$
|
85,645
|
|
|
$
|
15,541
|
|
|
$
|
(7,445
|
)
|
|
$
|
93,741
|
|
At
December 31, 2012
, the following securities were included in other investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
Cost
|
|
Unrealized
gains
|
|
Unrealized
losses
|
|
Fair
value
|
|
|
|
($ in thousands)
|
|
Commodities
|
|
$
|
59,930
|
|
|
$
|
34,719
|
|
|
$
|
—
|
|
|
$
|
94,649
|
|
|
Private and unlisted equity securities
|
|
36,671
|
|
|
4,914
|
|
|
(2,784
|
)
|
|
38,801
|
|
|
|
|
$
|
96,601
|
|
|
$
|
39,633
|
|
|
$
|
(2,784
|
)
|
|
$
|
133,450
|
|
As of
June 30, 2013
, included in private and unlisted equity securities are investments in private equity funds with a fair value of
$29.4 million
(December 31,
2012
:
$24.3 million
) determined based on unadjusted net asset values reported by the managers of these securities. Some of these values were reported from periods prior to
June 30, 2013
. The private equity funds have varying lock-up periods and as of
June 30, 2013
,
100%
of the funds were not redeemable due to restrictions, and therefore have been categorized within Level 3 of the fair value hierarchy. As of
June 30, 2013
, the Company had
$8.2 million
(December 31,
2012
:
$12.6 million
) of unfunded commitments relating to private equity funds whose fair values are determined based on unadjusted net asset values reported by the managers of these securities. These commitments are included in the amounts presented in the schedule of commitments and contingencies in Note
8
of these condensed consolidated financial statements.
Investments in Securities Sold, Not Yet Purchased
At
June 30, 2013
, the following securities were included in investments in securities sold, not yet purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
Proceeds
|
|
Unrealized gains
|
|
Unrealized losses
|
|
Fair value
|
|
|
|
($ in thousands)
|
|
Equities – listed
|
|
$
|
(738,571
|
)
|
|
$
|
92,039
|
|
|
$
|
(76,825
|
)
|
|
$
|
(723,357
|
)
|
|
Exchange traded funds
|
|
(6,318
|
)
|
|
—
|
|
|
(488
|
)
|
|
(6,806
|
)
|
|
Corporate debt – U.S.
|
|
(7,353
|
)
|
|
9
|
|
|
(142
|
)
|
|
(7,486
|
)
|
|
Sovereign debt – Non U.S.
|
|
(207,122
|
)
|
|
689
|
|
|
(5,994
|
)
|
|
(212,427
|
)
|
|
|
|
$
|
(959,364
|
)
|
|
$
|
92,737
|
|
|
$
|
(83,449
|
)
|
|
$
|
(950,076
|
)
|
At
December 31, 2012
, the following securities were included in investments in securities sold, not yet purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
Proceeds
|
|
Unrealized gains
|
|
Unrealized losses
|
|
Fair value
|
|
|
|
($ in thousands)
|
|
Equities – listed
|
|
$
|
(697,278
|
)
|
|
$
|
76,172
|
|
|
$
|
(58,791
|
)
|
|
$
|
(679,897
|
)
|
|
Corporate debt – U.S.
|
|
(7,353
|
)
|
|
26
|
|
|
(381
|
)
|
|
(7,708
|
)
|
|
Sovereign debt – Non U.S.
|
|
(207,122
|
)
|
|
—
|
|
|
(13,641
|
)
|
|
(220,763
|
)
|
|
|
|
$
|
(911,753
|
)
|
|
$
|
76,198
|
|
|
$
|
(72,813
|
)
|
|
$
|
(908,368
|
)
|
Financial Contracts
As of
June 30, 2013 and December 31, 2012
, the Company had entered into total return swaps, CDS, options, futures, forwards and interest rate options contracts with various financial institutions to meet certain investment objectives. Under the terms of each of these financial contracts, the Company is either entitled to receive or is obligated to make payments which are based on the product of a formula contained within each contract that includes the change in the fair value of the underlying or reference security.
At
June 30, 2013
, the fair values of financial contracts outstanding were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Contracts
|
|
Listing
currency
|
|
Notional amount of
underlying instruments
|
|
Fair value of net assets
(obligations)
on financial
contracts
|
|
|
|
|
|
($ in thousands)
|
|
Financial contracts receivable
|
|
|
|
|
|
|
|
Interest rate options
|
|
USD
|
|
2,018,948
|
|
|
$
|
143
|
|
|
Futures
|
|
JPY
|
|
38,987
|
|
|
1,536
|
|
|
Forwards
|
|
JPY/KRW
|
|
97,652
|
|
|
1,581
|
|
|
Total return swaps – equities
|
|
GBP/EUR/HKD/USD
|
|
111,626
|
|
|
31,819
|
|
|
Warrants and rights on listed equities
|
|
EUR
|
|
575
|
|
|
575
|
|
|
Put options
|
|
USD
|
|
189,363
|
|
|
17,812
|
|
|
Call options
|
|
USD
|
|
98,366
|
|
|
2,651
|
|
|
Total financial contracts receivable, at fair value
|
|
|
|
|
|
$
|
56,117
|
|
|
Financial contracts payable
|
|
|
|
|
|
|
|
Credit default swaps, purchased – sovereign debt
|
|
USD
|
|
251,467
|
|
|
$
|
(4,195
|
)
|
|
Credit default swaps, purchased – corporate debt
|
|
USD
|
|
273,877
|
|
|
(3,857
|
)
|
|
Futures
|
|
USD
|
|
11,834
|
|
|
(1,542
|
)
|
|
Total return swaps – equities
|
|
GBP/EUR/USD
|
|
101,447
|
|
|
(17,751
|
)
|
|
Total financial contracts payable, at fair value
|
|
|
|
|
|
$
|
(27,345
|
)
|
At
December 31, 2012
, the fair values of financial contracts outstanding were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Contracts
|
|
Listing
currency
|
|
Notional amount of
underlying instruments
|
|
Fair value of net assets
(obligations)
on financial
contracts
|
|
|
|
|
|
($ in thousands)
|
|
Financial contracts receivable
|
|
|
|
|
|
|
|
Interest rate options
|
|
USD
|
|
2,299,933
|
|
|
$
|
109
|
|
|
Credit default swaps, purchased – corporate debt
|
|
USD
|
|
39,665
|
|
|
265
|
|
|
Total return swaps – equities
|
|
GBP/HKD/JPY
|
|
3,664
|
|
|
163
|
|
|
Put options
|
|
USD
|
|
314,695
|
|
|
17,709
|
|
|
Call options
|
|
USD
|
|
90,374
|
|
|
4,498
|
|
|
Total financial contracts receivable, at fair value
|
|
|
|
|
|
$
|
22,744
|
|
|
Financial contracts payable
|
|
|
|
|
|
|
|
Credit default swaps, purchased – sovereign debt
|
|
USD
|
|
251,467
|
|
|
$
|
(5,443
|
)
|
|
Credit default swaps, purchased – corporate debt
|
|
USD
|
|
234,212
|
|
|
(3,365
|
)
|
|
Total return swaps – equities
|
|
GBP/HKD
|
|
76,697
|
|
|
(9,193
|
)
|
|
Put options
|
|
USD
|
|
16,071
|
|
|
(1,636
|
)
|
|
Total financial contracts payable, at fair value
|
|
|
|
|
|
$
|
(19,637
|
)
|
As of
June 30, 2013 and December 31, 2012
, included in interest rate options are contracts on U.S. and Japanese interest rates denominated in U.S. dollars. Included in put options (under financial contracts receivable) are options on foreign currencies, primarily the Japanese Yen and the Australian Dollar, denominated in U.S. dollars.
During the
three and six months ended June 30, 2013 and 2012
, 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
|
Gain (loss) on derivatives recognized
in income
|
|
|
|
|
|
Three months ended June 30
|
Six months ended June 30
|
|
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
|
|
($ in thousands)
|
($ in thousands)
|
|
Interest rate options
|
|
Net investment income (loss)
|
|
$
|
68
|
|
|
$
|
(1,251
|
)
|
|
$
|
35
|
|
|
$
|
(1,603
|
)
|
|
Credit default swaps, purchased – corporate debt
|
|
Net investment income (loss)
|
|
(657
|
)
|
|
(185
|
)
|
|
(2,258
|
)
|
|
(4,000
|
)
|
|
Credit default swaps, purchased – sovereign debt
|
|
Net investment income (loss)
|
|
(117
|
)
|
|
1,027
|
|
|
(16
|
)
|
|
(3,944
|
)
|
|
Total return swaps – equities
|
|
Net investment income (loss)
|
|
9,019
|
|
|
(1,772
|
)
|
|
20,682
|
|
|
(2,482
|
)
|
|
Options, warrants, and rights
|
|
Net investment income (loss)
|
|
20,770
|
|
|
(14,981
|
)
|
|
32,706
|
|
|
(10,167
|
)
|
|
Futures
|
|
Net investment income (loss)
|
|
1,608
|
|
|
(3,176
|
)
|
|
1,049
|
|
|
(7,959
|
)
|
|
Currency forwards
|
|
Net investment income (loss)
|
|
3,327
|
|
|
—
|
|
|
7,062
|
|
|
—
|
|
|
Weather derivative swap
|
|
Other income (expense), net
|
|
—
|
|
|
(111
|
)
|
|
—
|
|
|
(249
|
)
|
|
Total
|
|
|
|
$
|
34,018
|
|
|
$
|
(20,449
|
)
|
|
$
|
59,260
|
|
|
$
|
(30,404
|
)
|
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 six months ended June 30, 2013
, the Company’s volume of derivative activities (based on notional amounts) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
Three months ended June 30
|
|
Six months ended June 30
|
|
Derivatives not designated as hedging instruments
|
|
Entered
|
|
Exited
|
|
Entered
|
|
Exited
|
|
|
|
($ in thousands)
|
|
($ in thousands)
|
|
Total return swaps
|
|
$
|
139,989
|
|
|
$
|
18,828
|
|
|
$
|
171,256
|
|
|
$
|
48,111
|
|
|
Options
|
|
212,874
|
|
|
537,770
|
|
|
532,979
|
|
|
541,824
|
|
|
Futures
|
|
91,320
|
|
|
39,495
|
|
|
218,519
|
|
|
167,249
|
|
|
Currency forwards
|
|
267,319
|
|
|
—
|
|
|
386,937
|
|
|
115,883
|
|
|
Interest rate options
|
|
—
|
|
|
267,100
|
|
|
—
|
|
|
280,985
|
|
|
Total
|
|
$
|
711,502
|
|
|
$
|
863,193
|
|
|
$
|
1,309,691
|
|
|
$
|
1,154,052
|
|
For the three and six months ended June 30, 2012
, the Company’s volume of derivative activities (based on notional amounts) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
Three months ended June 30
|
|
Six months ended June 30
|
|
Derivatives not designated as hedging instruments
|
|
Entered
|
|
Exited
|
|
Entered
|
|
Exited
|
|
|
|
($ in thousands)
|
|
($ in thousands)
|
|
Credit default swaps
|
|
$
|
—
|
|
|
$
|
43,014
|
|
|
$
|
—
|
|
|
$
|
45,966
|
|
|
Total return swaps
|
|
728
|
|
|
6,625
|
|
|
2,806
|
|
|
20,554
|
|
|
Options
|
|
169,304
|
|
|
59,119
|
|
|
444,207
|
|
|
202,704
|
|
|
Futures
|
|
301,197
|
|
|
336,611
|
|
|
764,267
|
|
|
629,556
|
|
|
Total
|
|
$
|
471,229
|
|
|
$
|
445,369
|
|
|
$
|
1,211,280
|
|
|
$
|
898,780
|
|
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 swap counterparties to support the current value of amounts due to the counterparties based on the value of the underlying security. As of
June 30, 2013 and December 31, 2012
, the gross and net amounts of derivative instruments and the cash collateral applicable to derivative instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
(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
|
|
Cash collateral (received) pledged
|
|
Net amount of asset (liability)
|
|
|
|
($ in thousands)
|
|
Financial contracts receivable
|
|
$
|
56,117
|
|
|
$
|
—
|
|
|
$
|
56,117
|
|
|
$
|
(17,681
|
)
|
|
$
|
38,436
|
|
|
Financial contracts payable
|
|
$
|
(27,345
|
)
|
|
$
|
—
|
|
|
$
|
(27,345
|
)
|
|
$
|
54,737
|
|
|
$
|
27,392
|
|
|
Securities sold, not yet purchased
|
|
$
|
(950,076
|
)
|
|
$
|
—
|
|
|
$
|
(950,076
|
)
|
|
$
|
950,076
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
(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
|
|
Cash collateral (received) pledged
|
|
Net amount of asset (liability)
|
|
|
|
($ in thousands)
|
|
Financial contracts receivable
|
|
$
|
22,744
|
|
|
$
|
—
|
|
|
$
|
22,744
|
|
|
$
|
(947
|
)
|
|
$
|
21,797
|
|
|
Financial contracts payable
|
|
$
|
(19,637
|
)
|
|
$
|
—
|
|
|
$
|
(19,637
|
)
|
|
$
|
39,268
|
|
|
$
|
19,631
|
|
|
Securities sold, not yet purchased
|
|
$
|
(908,368
|
)
|
|
$
|
—
|
|
|
$
|
(908,368
|
)
|
|
$
|
908,368
|
|
|
$
|
—
|
|
4
.
DUE TO PRIME BROKERS
As of
June 30, 2013
, the amount due to prime brokers is comprised of margin-borrowing from prime brokers relating to investments purchased on margin as well as the margin-borrowing for providing collateral to support some of the Company’s outstanding letters of credit (see Note
8
). Under term margin agreements and certain letter of credit facility agreements, the Company pledges certain investment securities to borrow cash from the prime brokers. The borrowed cash is placed in a custodial account in the name of the Company and this custodial account provides collateral for any letters of credit issued. Since there is no legal right of offset, the Company’s liability for the cash borrowed from the prime brokers is included on the condensed consolidated balance sheets as due to prime brokers while the cash held in the custodial account is included on the condensed consolidated balance sheets as restricted cash and cash equivalents. At
June 30, 2013
, the amounts due to prime brokers included
$228.7 million
(
December 31, 2012
:
$252.7 million
) of cash borrowed under the term margin agreements to provide collateral for letters of credit facilities and
$21.0 million
(
December 31, 2012
:
$73.7 million
) of borrowing relating to investment purchases.
The Company's investment guidelines allow for temporary (30 days) leverage for investment purposes up to
20%
of net invested assets, and for an extended time period, up to
5%
of net invested assets. During the first six months of 2013, the Board of Directors granted temporary waivers of the 5% leverage restriction. These waivers allowed for an aggregate of 20% net margin leverage for extended periods which terminated on July 24, 2013. At a meeting held on July 24, 2013 the Board of Directors revised, with immediate effect, Greenlight Re's investment guidelines such that the Company may employ up to
15%
net margin leverage for extended periods of time and up to
30%
net margin leverage for periods of less than 30 days.
5
.
RETROCESSION
The Company, from time to time, purchases retrocessional coverage for one or more of the following reasons: to manage its overall exposure, to reduce its net liability on individual risks, to obtain additional underwriting capacity and to balance its underwriting portfolio. Additionally, retrocession can be used as a mechanism to share the risks and rewards of business written and therefore can be used as a tool to align the Company's interests with those of its counterparties. The Company currently has coverages that provide for recovery of a portion of loss and loss expenses incurred on certain contracts. Loss and loss adjustment expense recoverable from the retrocessionaires are recorded as assets.
For the three months ended June 30, 2013
, loss and loss adjustment expenses incurred of
$78.3 million
(2012:
$87.3 million
) reported on the condensed consolidated statements of income are net of loss and loss expenses recovered and recoverable of
$0.7 million
(2012:
$6.7 million
).
For the six months ended June 30, 2013
, loss and loss adjustment expenses incurred of
$144.6 million
(
2012
:
$150.6 million
) reported on the
condensed consolidated
statements of income are net of loss and loss expenses recovered and recoverable of negative
$10.7 million
(
2012
:
$16.0 million
). The negative loss and loss expenses recovered was due to reversal of loss reserves on retrocession contracts that were novated during the first quarter of 2013.
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
June 30, 2013
,
$0.01 million
of loss and loss adjustment expenses were recoverable from a retrocessionaire rated "A+ (Superior)" by A.M. Best. (
December 31, 2012
:
$0.1 million
). Additionally, the Company had losses recoverable of
$20.1 million
(
December 31, 2012
:
$34.3 million
) with unrated retrocessionaires. At
June 30, 2013 and December 31, 2012
, the Company retained
$5.7 million
and
$11.4 million
, respectively, of cash collateral from unrated retrocessionaires with whom the Company had losses recoverable and held other collateral in the form of guarantees. Additionally, the Company retained funds withheld of
$4.4 million
and
$6.0 million
as of
June 30, 2013 and December 31, 2012
, respectively, on other retroceded contracts. The Company regularly evaluates the financial condition of its retrocessionaires to assess the ability of the retrocessionaires to honor their obligations. At
June 30, 2013 and December 31, 2012
,
no
provision for uncollectible losses recoverable was considered necessary.
6
.
SHARE-BASED COMPENSATION
The Company has a stock incentive plan for directors, employees and consultants. Shares authorized for issuance are comprised of
300,000
(
2012
:
300,000
) Class A ordinary shares in relation to share purchase options granted to a service provider and
3,500,000
(
2012
:
3,500,000
) Class A ordinary shares authorized for the Company’s stock incentive plan for eligible directors, employees and consultants. As of
June 30, 2013
,
250,000
(
2012
:
250,000
) Class A ordinary shares remained available for future issuance relating to share purchase options granted to the service provider, and
999,675
(
2012
:
1,136,504
)
Class A ordinary shares remained available for future issuance under the Company's stock incentive plan. The stock incentive plan is administered by the Compensation Committee of the Board of Directors.
Service Provider Share Purchase Options
An affiliate of Greenlight Capital Inc. entered into a consulting agreement (the "Consulting Agreement") with First International Securities Ltd. ("First International") in August 2002. First International received a cash payment of
$75,000
for the preparation and delivery of a feasibility study relating to the formation, capitalization, licensing and operation of the Company. Additionally, upon consummation of the initial private offering, First International Capital Holdings Ltd., the successor to First International, received a
10
-year share purchase option to purchase
400,000
Class A ordinary shares. These share purchase options were granted on September 20, 2004 and have an exercise price of
$10
per share. The Company previously repurchased
100,000
of the share purchase options. During the year ended December 31, 2011,
50,000
share purchase options were exercised resulting in the issuance of
25,843
Class A ordinary shares. As of
June 30, 2013
, there were
250,000
share purchase options outstanding (
2012
:
250,000
) with an exercise price of
$10
per share option, which will expire in 2014.
Employee and Director Restricted Shares
As part of the stock incentive plan, the Company issues restricted shares for which the fair value is equal to the price of the Company’s Class A ordinary shares on the grant date. Compensation based on the grant date fair market value of the shares is expensed on a straight line basis over the vesting period.
For the six months ended June 30, 2013
,
111,231
(
2012
:
110,701
) restricted Class A ordinary shares were issued to employees pursuant to the Company’s stock incentive plan. These shares contain certain restrictions relating to, among other things, vesting, forfeiture in the event of termination of employment and transferability. Each of these restricted shares will cliff vest after
3 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 six months ended June 30, 2013
, the Company also issued to non-employee directors an aggregate of
36,374
(2012:
35,994
) restricted Class A ordinary shares as part of their remuneration for services to the Company. Each of these restricted shares issued to the directors contain similar restrictions to those issued to employees and will vest on the earlier of the first anniversary of the share issuance or the Company’s next annual general meeting, subject to the grantee’s continued service with the Company.
For the six months ended June 30, 2013
,
16,123
(
2012
:
6,191
) restricted shares were forfeited by employees who left the Company prior to the vesting period.
For the six months ended June 30, 2013
, in accordance with U.S. GAAP, stock compensation expense of
$0.2 million
(
2012
:
$0.1 million
) relating to the forfeited restricted shares was reversed.
The restricted share award activity during the
six months ended June 30, 2013
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
non-vested
restricted
shares
|
|
Weighted
average
grant date
fair value
|
|
Balance at December 31, 2012
|
|
308,406
|
|
|
$
|
24.93
|
|
|
Granted
|
|
147,605
|
|
|
24.59
|
|
|
Vested
|
|
(110,194
|
)
|
|
25.08
|
|
|
Forfeited
|
|
(16,123
|
)
|
|
24.57
|
|
|
Balance at June 30, 2013
|
|
329,694
|
|
|
$
|
24.74
|
|
Employee and Director Stock Options
For the six months ended June 30, 2013
,
38,500
(
2012
:
0
) stock options were exercised. The intrinsic value of options exercised during the
six months ended June 30, 2013
was
$0.5 million
(
2012
:
$0
). For any options exercised, the Company issues new Class A ordinary shares from the shares authorized for issuance as part of the Company’s stock incentive plan.
Employee and director stock option activity during the
six months ended June 30, 2013
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
options
|
|
Weighted
average
exercise
price
|
|
Weighted
average
grant date
fair value
|
|
Balance at December 31, 2012
|
|
1,421,290
|
|
|
$
|
15.36
|
|
|
$
|
6.87
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Exercised
|
|
(38,500
|
)
|
|
11.60
|
|
|
5.76
|
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Expired
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Balance at June 30, 2013
|
|
1,382,790
|
|
|
$
|
15.46
|
|
|
$
|
6.90
|
|
Employee Restricted Stock Units
The Company issues restricted stock units ("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 based on the grant date fair market value of the RSUs is expensed on a straight line basis over the vesting period.
For the six months ended June 30, 2013
,
5,347
(
2012
:
0
) RSUs were issued to employees pursuant to the Company’s stock incentive plan. These shares contain certain restrictions relating to, among other things, vesting, forfeiture in the event of termination of employment and transferability. Each of these RSUs will cliff vest after
3 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
non-vested
RSUs
|
|
Weighted
average
grant date
fair value
|
|
Balance at December 31, 2012
|
|
—
|
|
|
$
|
—
|
|
|
Granted
|
|
5,347
|
|
|
24.41
|
|
|
Vested
|
|
—
|
|
|
—
|
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
Balance at June 30, 2013
|
|
5,347
|
|
|
$
|
24.41
|
|
For the three months ended June 30, 2013 and 2012
, the general and administrative expenses included stock compensation expense of
$0.8 million
and
$0.9 million
, respectively, for the expensing of the fair value of stock options, restricted stocks and RSUs granted to employees and directors. For the
six months ended June 30, 2013 and 2012
, the stock compensation expense was
$1.6 million
and
$1.7 million
, respectively.
7
.
RELATED PARTY TRANSACTIONS
Investment Advisory Agreement
The Company and its reinsurance subsidiaries are party to an Investment Advisory Agreement (the "Advisory Agreement") with DME Advisors under which the Company, its reinsurance subsidiaries and DME Advisors created a joint venture for the purpose of managing certain jointly held assets. DME Advisors is a related party and an affiliate of David Einhorn, Chairman of the Company’s Board of Directors.
Pursuant to the Advisory Agreement, performance allocation equal to
20%
of the net income of the Company’s share of the account managed by DME Advisors is allocated, subject to a loss carry forward provision, to DME Advisors’ account. The loss carry forward provision allows DME Advisors to earn a reduced performance allocation of
10%
on net investment income in any year subsequent to the year in which the investment account incurs a loss, until all the losses are recouped and an additional amount equal to
150%
of the aggregate investment loss is earned. DME Advisors is not entitled to earn a performance allocation in a year in which the investment portfolio incurs a loss.
For the three and six months ended June 30,
2013
, included in net investment income is performance allocation of
$5.8 million
and
$21.9 million
, respectively (
2012
:
$(9.1) million
and
$7.9 million
, respectively).
Additionally, pursuant to the Advisory Agreement, a monthly management fee, equal to
0.125%
(
1.5%
on an annual basis) of the Company’s investment account managed by DME Advisors, is paid to DME Advisors. Included in the net investment income for the
three and six months ended June 30, 2013
are management fees of
$4.5 million
and
$8.8 million
, respectively (
2012
:
$4.2 million
and
$8.3 million
, respectively). The management fees have been fully paid as of
June 30, 2013
.
Pursuant to the Advisory Agreement, the Company has agreed to indemnify DME Advisors for any expense, loss, liability, or damage arising out of any claim asserted or threatened in connection with DME Advisors serving as the Company’s investment advisor. The Company will reimburse DME 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 Advisors.
For the six months ended June 30, 2013
, there were no indemnification payments made by the Company.
Service Agreement
The Company has entered into a service agreement with DME Advisors, pursuant to which DME Advisors provides investor relations services to the Company for compensation of
$5,000
per month (plus expenses). The agreement is automatically renewed annually until terminated by either the Company or DME Advisors for any reason with 30 days prior written notice to the other party.
8
.
COMMITMENTS AND CONTINGENCIES
Letters of Credit
At
June 30, 2013
, the Company had the following letter of credit facilities, which automatically renew each year unless terminated by either party in accordance with the required notice period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
|
|
Termination Date
|
|
Notice period required for termination
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Bank of America, N.A.
|
|
$
|
200,000
|
|
|
July 20, 2014
|
|
90 days prior to termination date
|
|
Butterfield Bank (Cayman) Limited
|
|
60,000
|
|
|
June 30, 2014
|
|
90 days prior to termination date
|
|
Citibank Europe plc
|
|
400,000
|
|
|
October 11, 2014
|
|
120 days prior to termination date
|
|
JP Morgan Chase Bank N.A.
|
|
100,000
|
|
|
January 27, 2014
|
|
120 days prior to termination date
|
|
|
|
$
|
760,000
|
|
|
|
|
|
As of
June 30, 2013
, an aggregate amount of
$378.8 million
(
December 31, 2012
:
$416.5 million
) in letters of credit were issued under the above facilities. Under the facilities, the Company provides collateral that may consist of equity securities, restricted cash, and cash and cash equivalents. As of
June 30, 2013
, total equity securities, restricted cash, and cash and cash equivalents with a fair value in the aggregate of
$406.7 million
(
December 31, 2012
:
$441.7 million
) were pledged as security against the letters of credit issued (also see Note
4
). Each of the facilities contain customary events of default and restrictive covenants, including but not limited to, limitations on liens on collateral, transactions with affiliates, mergers and sales of assets, as well as solvency and maintenance of certain minimum pledged equity requirements, and restricts issuance of any debt without the consent of the letter of credit provider. Additionally, if an event of default exists, as defined in the letter of credit facilities, Greenlight Re will be prohibited from paying dividends to its parent company. The Company was in compliance with all the covenants of each of these facilities as of
June 30, 2013 and December 31, 2012
.
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 expiry. The leases expire on June 30, 2018 and Greenlight Re has the option to renew the leases for a further
5
year term. Included in the schedule below are the minimum lease payment obligations relating to these leases as of
June 30, 2013
.
GRIL has entered into a lease agreement for office space in Dublin, Ireland. Under the terms of this lease agreement, GRIL is committed to average annual rent payments denominated in Euros approximating
€0.07 million
until May 2016 (net of rent inducements), and adjusted to the prevailing market rates for each of three subsequent five-year terms. GRIL has the option to terminate the lease agreement in 2016 and 2021. Included in the schedule below are the net minimum lease payment obligations relating to this lease as of
June 30, 2013
.
The total rent expense related to leased office space for the
three and six months ended June 30, 2013
was
$0.12 million
and
$0.21 million
, respectively (
2012
:
$0.08 million
and
$0.19 million
, respectively).
Specialist Service Agreement
The Company has entered into a service agreement with a specialist service provider for the provision of administration and support in developing and maintaining business relationships, reviewing and recommending programs and managing risks relating to certain specialty lines of business. The specialist service provider does not have any authority to bind the Company to any reinsurance contracts. Under the terms of the agreement, the Company has committed to quarterly payments to the service provider. If the agreement is terminated, the Company is obligated to make minimum payments for another two years to ensure contracts to which the Company is bound are adequately administered by the specialist service provider. Included in the schedule below are the minimum payment obligations relating to this agreement.
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
June 30, 2013
, the Company had commitments to invest an additional
$11.8 million
(
December 31, 2012
:
$20.8 million
) in private equity investments. Included in the schedule below are the minimum payment obligations relating to these investments.
Schedule of Commitments and Contingencies
The following is a schedule of future minimum payments required under the above commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
Thereafter
|
|
Total
|
|
|
($ in thousands)
|
|
Operating lease obligations
|
$
|
277
|
|
|
$
|
554
|
|
|
$
|
554
|
|
|
$
|
499
|
|
|
$
|
466
|
|
|
$
|
232
|
|
|
$
|
2,582
|
|
|
Specialist service agreement
|
250
|
|
|
400
|
|
|
150
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
800
|
|
|
Private equity and limited partnerships (1)
|
11,795
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,795
|
|
|
|
$
|
12,322
|
|
|
$
|
954
|
|
|
$
|
704
|
|
|
$
|
499
|
|
|
$
|
466
|
|
|
$
|
232
|
|
|
$
|
15,177
|
|
(1)
Given the nature of these investments, the Company is unable to determine with any degree of accuracy when these commitments will be called. Therefore, for purposes of the above table, the Company has assumed that all commitments with no fixed payment schedules will be called during the year ended
December 31, 2013
.
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.
9
.
SEGMENT REPORTING
The Company manages its business on the basis of
one
operating segment, Property & Casualty Reinsurance.
The following tables provide a breakdown of the Company's gross premiums written by line of business and by geographic area of risks insured for the periods indicated:
Gross Premiums Written by Line of Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
Six months ended June 30
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
($ in thousands)
|
|
($ in thousands)
|
|
Property
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aviation
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
96
|
|
|
—
|
%
|
|
$
|
—
|
|
|
—
|
%
|
|
Commercial lines
|
|
4,609
|
|
|
3.4
|
%
|
|
2,460
|
|
|
2.9
|
%
|
|
9,735
|
|
|
3.7
|
|
|
11,645
|
|
|
4.9
|
|
|
Energy
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
%
|
|
1,553
|
|
|
0.6
|
|
|
—
|
|
|
—
|
|
|
Motor physical damage
|
|
14,508
|
|
|
10.7
|
|
|
17,701
|
|
|
21.1
|
|
|
27,338
|
|
|
10.4
|
|
|
35,842
|
|
|
15.2
|
|
|
Personal lines
|
|
39,638
|
|
|
29.3
|
|
|
5,524
|
|
|
6.6
|
|
|
73,660
|
|
|
28.1
|
|
|
52,559
|
|
|
22.3
|
|
|
Total Property
|
|
58,755
|
|
|
43.4
|
|
|
25,685
|
|
|
30.6
|
|
|
112,382
|
|
|
42.8
|
|
|
100,046
|
|
|
42.4
|
|
|
Casualty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General liability (1)
|
|
(975
|
)
|
|
(0.7
|
)
|
|
6,499
|
|
|
7.7
|
|
|
(2,212
|
)
|
|
(0.8
|
)
|
|
14,925
|
|
|
6.3
|
|
|
Marine liability
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
603
|
|
|
0.2
|
|
|
2,240
|
|
|
0.9
|
|
|
Motor liability
|
|
74,022
|
|
|
54.8
|
|
|
37,334
|
|
|
44.5
|
|
|
130,700
|
|
|
49.9
|
|
|
89,477
|
|
|
37.9
|
|
|
Professional liability (1)
|
|
113
|
|
|
0.1
|
|
|
(666
|
)
|
|
(0.8
|
)
|
|
1,124
|
|
|
0.4
|
|
|
(666
|
)
|
|
(0.3
|
)
|
|
Total Casualty
|
|
73,160
|
|
|
54.2
|
|
|
43,167
|
|
|
51.4
|
|
|
130,215
|
|
|
49.7
|
|
|
105,976
|
|
|
44.8
|
|
|
Specialty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
|
|
1,050
|
|
|
0.8
|
|
|
1,372
|
|
|
1.6
|
|
|
1,297
|
|
|
0.5
|
|
|
3,305
|
|
|
1.4
|
|
|
Health
|
|
9,779
|
|
|
7.2
|
|
|
7,532
|
|
|
9.0
|
|
|
22,483
|
|
|
8.6
|
|
|
19,386
|
|
|
8.2
|
|
|
Workers’ compensation (1)
|
|
(7,546
|
)
|
|
(5.6
|
)
|
|
6,230
|
|
|
7.4
|
|
|
(4,215
|
)
|
|
(1.6
|
)
|
|
7,493
|
|
|
3.2
|
|
|
Total Specialty
|
|
3,283
|
|
|
2.4
|
|
|
15,134
|
|
|
18.0
|
|
|
19,565
|
|
|
7.5
|
|
|
30,184
|
|
|
12.8
|
|
|
|
|
$
|
135,198
|
|
|
100.0
|
%
|
|
$
|
83,986
|
|
|
100.0
|
%
|
|
$
|
262,162
|
|
|
100.0
|
%
|
|
$
|
236,206
|
|
|
100.0
|
%
|
(1) The negative balance represents reversal of premiums due to premium adjustments, termination of contracts or premiums returned upon novation or commutation of contracts.
Gross Premiums Written by Geographic Area of Risks Insured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
Six months ended June 30
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
($ in thousands)
|
|
($ in thousands)
|
|
U.S.
|
|
$
|
134,806
|
|
|
99.7
|
%
|
|
$
|
83,201
|
|
|
99.1
|
%
|
|
$
|
252,345
|
|
|
96.3
|
%
|
|
$
|
221,366
|
|
|
93.7
|
%
|
|
Worldwide (1)
|
|
—
|
|
|
—
|
|
|
1,123
|
|
|
1.3
|
|
|
9,434
|
|
|
3.6
|
|
|
15,178
|
|
|
6.4
|
|
|
Caribbean (2)
|
|
280
|
|
|
0.2
|
|
|
328
|
|
|
0.4
|
|
|
(95
|
)
|
|
—
|
|
|
328
|
|
|
0.1
|
|
|
Europe (2)
|
|
112
|
|
|
0.1
|
|
|
(666
|
)
|
|
(0.8
|
)
|
|
478
|
|
|
0.1
|
|
|
(666
|
)
|
|
(0.3
|
)
|
|
|
|
$
|
135,198
|
|
|
100.0
|
%
|
|
$
|
83,986
|
|
|
100.0
|
%
|
|
$
|
262,162
|
|
|
100.0
|
%
|
|
$
|
236,206
|
|
|
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 premiums returned upon novation or commutation of contracts.
|
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References to "we," "us," "our," "our company," or "the Company" refer to Greenlight Capital Re, Ltd. ("GLRE") and its wholly-owned subsidiaries, Greenlight Reinsurance, Ltd, ("Greenlight Re"), Greenlight Reinsurance Ireland, Ltd. ("GRIL") and Verdant Holding Company, Ltd. ("Verdant"), unless the context dictates otherwise. References to our "Ordinary Shares" refers collectively to our Class A Ordinary Shares and Class B Ordinary Shares.
The following is a discussion and analysis of our results of operations for
three and six months ended June 30, 2013 and 2012
and financial condition as of
June 30, 2013 and December 31, 2012
. The following discussion should be read in conjunction with the audited consolidated financial statements and accompanying notes, which appear in our annual report on Form 10-K for the fiscal year ended
December 31, 2012
.
Special Note About Forward-Looking Statements
Certain statements in Management’s Discussion and Analysis ("MD&A"), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements generally are identified by the words "believe," "project," "predict," "expect," "anticipate," "estimate," "intend," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled "Risk Factors" (refer to Part I, Item 1A) contained in our annual report on Form 10-K for the fiscal year ended
December 31, 2012
. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned not to place undue reliance on the forward looking statements which speak only to the dates on which they were made.
We intend to communicate certain events that we believe may have a material adverse impact on our operations or financial position, including property and casualty catastrophic events and material losses in our investment portfolio, in a timely manner through a public announcement. Other than as required by the Exchange Act, we do not intend to make public announcements regarding reinsurance or investments events that we do not believe, based on management's estimates and current information, will have a material adverse impact on our operations or financial position.
General
We are a Cayman Islands headquartered global specialty property and casualty reinsurer with a reinsurance and investment strategy that we believe differentiates us from most of our competitors. Our goal is to build long-term shareholder value by selectively offering customized reinsurance solutions, in markets where capacity and alternatives are limited, which we believe will yield favorable long-term returns on equity.
We aim to complement our underwriting results with a non-traditional investment approach in order to achieve higher rates of return over the long term than reinsurance companies that employ more traditional, fixed-income investment strategies. We manage our investment portfolio according to a value-oriented philosophy, in which we take long positions in perceived undervalued securities and short positions in perceived overvalued securities.
Because we employ an opportunistic underwriting philosophy, period-to-period comparisons of our underwriting results may not be meaningful. In addition, our historical investment results may not necessarily be indicative of future performance. Due to the nature of our reinsurance and investment strategies, our operating results will likely fluctuate from period to period.
Segments
We manage our business on the basis of one operating segment, property and casualty reinsurance, in accordance with the qualitative and quantitative criteria established by U.S. GAAP. Within the property and casualty reinsurance segment, we analyze our underwriting operations using two categories:
● frequency business; and
● severity business.
Frequency business is generally characterized as contracts containing a potentially large number of small losses emanating from multiple events. Clients generally buy this protection to increase their own underwriting capacity and typically select a reinsurer based upon the reinsurer’s financial strength, service and expertise. We expect the results of frequency business to be less volatile than those of severity business from period to period due to greater predictability. We also expect that over time the profit margins and return on equity of our frequency business will be lower than those of our severity business.
Severity business is generally characterized as contracts with the potential for significant losses emanating from one event or multiple events. Clients generally buy this protection to remove volatility from their balance sheets, and accordingly, we expect the results of severity business to be volatile from period to period. However, over the long term, we also expect that our severity business will generate higher profit margins and return on equity than those of our frequency business.
Outlook and Trends
We believe the reinsurance industry in general has been, and for the foreseeable future will remain, over capitalized. Over the past year there has been an influx of new capital for peak zone catastrophe risk from alternative capital market participants such as hedge funds, pension funds and other fixed income bond managers. Additionally, we believe that the slowdown in worldwide economic activity continues to weaken the overall demand for property and casualty insurance and, accordingly, reinsurance. Notwithstanding the foregoing, the over capitalization of the reinsurance industry may be countered by the introduction of more stringent capital requirements in the industry (particularly in Europe), the recalibration of catastrophe risk models to reflect recent catastrophic activity and a sustained low interest rate environment. We believe the introduction of Solvency II for European insurers and reinsurers may create a demand for capital and/or reinsurance solutions for some smaller and less diversified companies. We believe that we are well positioned to compete for frequency business due to our increasing market recognition, the development of strategic relationships and Greenlight Re's "A (Excellent)" rating by A.M. Best.
We believe we are currently in a gradually hardening insurance market, but due to the poor economic conditions and industry over capitalization, rate increases will not significantly exceed loss trends. Meanwhile, the reinsurance industry remains over capitalized and competitive with many sectors continuing to operate at levels that we believe are economically irrational. The over capitalization of the market is not uniform. There are a number of insurers and reinsurers that have suffered and continue to suffer from capacity issues. We continue to assess the possibility of partnering with companies with this profile. If the reinsurance market continues to soften, our strategy is to reduce premium writings rather than accept mispriced risk, and conserve our capital for a more opportune environment. Significant price increases could occur if financial and credit markets experience adverse shocks that result in the loss of capital of insurers and reinsurers, or if there are major catastrophic events, especially in North America. The persistent low interest rate environment has reduced the earnings of many insurance and reinsurance companies and we believe, the continuation of low interest rates, coupled with the reduction of prior years' reserve redundancies, could cause the industry to adopt overall higher pricing.
As of
June 30, 2013
, our reinsurance portfolio was principally concentrated in four areas: Florida homeowners; U.S. employer health stop loss; catastrophe retrocession and non-standard private passenger automobile. While each of these areas is competitive, we believe we are supporting programs with good risk adjusted returns due in part to improving loss experience or rate increases that are in excess of loss trends. In particular, the Florida homeowners' insurance market continues to experience rate increases coupled with the positive impact of state legislation addressing sinkhole fraud. However, we anticipate the reinsurance pricing in this market becoming more competitive. While property catastrophe retrocession pricing remained stable during the January renewal season, we have observed significant flexible capital from non-traditional sources being deployed mainly in peak zone catastrophe excess of loss business. U.S. employer health stop loss and non-standard private passenger automobile are stable at what we believe are profitable levels.
We intend to continue to monitor market conditions to position ourselves to participate in future under-served or capacity-constrained markets as they arise and intend to offer products that we believe will generate favorable returns on equity
over the long term. Accordingly, our underlying results and product line concentrations in any given period may not be indicative of our future results of operations.
Our investment portfolio is conservatively postured with a net long position of
43.0%
as of
June 30, 2013
. Equity markets in the first half of 2013 increased substantially, despite lackluster growth in corporate earnings. The increase in stock prices seems driven by a more stable environment and continued monetary policy stimulus. In the face of a more challenging earnings backdrop, a Chinese slowdown, and a continuation of emergency policies, we believe the market's rapid advance is creating a potentially unstable condition which could resolve a number of ways and is difficult to predict. We ended the quarter with a reduced gross exposure, positioning us to ride out future volatility and to take advantage of new opportunities. Given the investment environment, we anticipate, for the foreseeable future, to continue holding a combination of a significant position in gold, macro positions in the form of options on higher interest rates and foreign exchange rates, short positions in sovereign debt and sovereign credit default swaps.
Critical Accounting Policies
Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported and disclosed amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. We believe that the critical accounting policies set forth in our annual report on Form 10-K for the fiscal year ended
December 31, 2012
continue to describe the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. These accounting policies pertain to premium revenues and risk transfer, valuation of investments, loss and loss adjustment expense reserves, acquisition costs, bonus accruals and share-based payments. If actual events differ significantly from the underlying judgments or estimates used by management in the application of these accounting policies, there could be a material effect on our results of operations and financial condition.
Recently issued accounting standards and their impact to the Company have been presented under "Recently Issued Accounting Standards" in Note
2
of the accompanying condensed consolidated financial statements.
Results of Operations
Three and six months ended June 30, 2013 and 2012
For the
three months ended June 30, 2013
, we reported a net income of
$28.5 million
, compared to a net loss of
$36.1 million
reported for the same period in
2012
. Our net investment income for the
three months ended June 30, 2013
was
$24.2 million
, compared to a net investment loss of
$36.9 million
reported for the same period in
2012
. Our investment portfolio managed by DME Advisors, LP reported a gain of
2.0%
for the three months ended June 30, 2013, compared to a loss of
3.3%
for the same period in
2012
. The underwriting income before general and administrative expenses for the
three months ended June 30, 2013
was
$11.7 million
, compared to
$4.8 million
for the same period in
2012
. The increase in underwriting income for the
three months ended June 30, 2013
was primarily due to a decrease in the composite ratio for the period. For the
three months ended June 30, 2013
, our overall composite ratio was
91.2%
, compared to
96.4%
during the same period in
2012
. General and administrative expenses for the
three months ended June 30, 2013
increased
to
$5.9 million
from
$4.4 million
for the
three months ended June 30, 2012
, primarily as a result of higher personnel costs and, to a lesser extent, due to a non-investment related foreign exchange loss reported in the second quarter of 2013, compared to a foreign exchange gain reported in the same period in 2012.
For the
six months ended June 30, 2013
, we reported net income of
$85.2 million
, compared to net income of
$29.1 million
reported for the
six months ended June 30, 2012
. Our net investment income for the
six months ended June 30, 2013
was
$85.4 million
, compared to a net investment income of
$34.7 million
reported for the same period in
2012
. Our investment portfolio managed by DME Advisors, LP reported a gain of
7.9%
for the
six months ended June 30, 2013
, compared to a gain of
3.0%
for the same period in
2012
. The underwriting income before general and administrative expenses for the
six months ended June 30, 2013
was
$13.6 million
, compared to underwriting income of
$7.0 million
reported for the
six months ended June 30, 2012
. The underwriting income for the
six months ended June 30, 2013
included a reversal of $9.7 million of loss reserves (net of reinstatement premiums) relating to super-storm Sandy due to revised loss estimates. Based on updated information received from the insurer during the first quarter of 2013, claims relating to super-storm Sandy were no longer expected to breach into the coverage layer provided by our contract. For the
six months ended June 30, 2013
, our overall composite ratio was
94.3%
, compared to
96.9%
during the same period in
2012
. General and administrative expenses
increased
for the
six months ended June 30, 2013
to
$9.7 million
from
$9.0 million
for the
six months ended June 30, 2012
, primarily as a
result of higher personnel costs, and partially offset by non-investment related foreign exchange gains compared to the same period in 2012.
Our primary financial goal is to increase the long-term value in fully diluted adjusted book value per share. For the
three months ended June 30, 2013
, the fully diluted adjusted book value per share increased by
$0.75
per share, or
3.2%
, to
$24.20
per share from
$23.45
per share at
March 31, 2013
. For the
three months ended June 30, 2013
, the basic adjusted book value per share increased by
$0.77
per share, or
3.2%
, to
$24.65
per share from
$23.88
per share at
March 31, 2013
.
For the
six months ended June 30, 2013
the fully diluted adjusted book value per share increased by
$2.19
per share, or
10.0%
, to
$24.20
per share from
$22.01
per share at
December 31, 2012
. For the
six months ended June 30, 2013
, the basic adjusted book value per share increased by
$2.26
per share, or
10.1%
, to
$24.65
per share from
$22.39
per share at
December 31, 2012
.
Basic adjusted book value per share is a non-GAAP measure as it excludes the non-controlling interest in a joint venture from total equity. In addition, fully diluted adjusted book value per share is also a non-GAAP measure and represents basic adjusted book value per share combined with the impact from dilution of all in-the-money stock options and RSUs issued and outstanding as of any period end. We believe that long-term growth in fully diluted adjusted book value per share is the most relevant measure of our financial performance. In addition, fully diluted adjusted book value per share may be of benefit to our investors, shareholders and other interested parties to form a basis of comparison with other companies within the property and casualty reinsurance industry.
The following table presents a reconciliation of the non-GAAP basic adjusted and fully diluted adjusted book value per share to the most comparable GAAP measure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
March 31, 2013
|
|
December 31, 2012
|
|
September 30, 2012
|
|
June 30, 2012
|
|
|
($ in thousands, except per share and share amounts)
|
|
Basic adjusted and fully diluted adjusted book value per share numerator:
|
|
|
|
|
|
|
|
|
|
|
Total equity (US GAAP)
|
$
|
941,216
|
|
|
$
|
910,802
|
|
|
$
|
860,410
|
|
|
$
|
894,215
|
|
|
$
|
845,696
|
|
|
Less: Non-controlling interest in joint venture
|
(32,218
|
)
|
|
(31,326
|
)
|
|
(38,702
|
)
|
|
(13,113
|
)
|
|
(11,778
|
)
|
|
Basic adjusted book value per share numerator
|
908,998
|
|
|
879,476
|
|
|
821,708
|
|
|
881,102
|
|
|
833,918
|
|
|
Add: Proceeds from in-the-money stock options issued and outstanding
|
18,528
|
|
|
18,768
|
|
|
18,975
|
|
|
19,294
|
|
|
18,215
|
|
|
Fully diluted adjusted book value per share numerator
|
$
|
927,526
|
|
|
$
|
898,244
|
|
|
$
|
840,683
|
|
|
$
|
900,396
|
|
|
$
|
852,133
|
|
|
Basic adjusted and fully diluted adjusted book value per share denominator:
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares issued and outstanding for basic adjusted book value per share denominator
|
36,872,110
|
|
|
36,822,176
|
|
|
36,702,128
|
|
|
36,678,653
|
|
|
36,678,653
|
|
|
Add: In-the-money stock options and RSUs issued and outstanding
|
1,457,408
|
|
|
1,477,908
|
|
|
1,491,290
|
|
|
1,514,290
|
|
|
1,469,000
|
|
|
Fully diluted adjusted book value per share denominator
|
38,329,518
|
|
|
38,300,084
|
|
|
38,193,418
|
|
|
38,192,943
|
|
|
38,147,653
|
|
|
Basic adjusted book value per share
|
$
|
24.65
|
|
|
$
|
23.88
|
|
|
$
|
22.39
|
|
|
$
|
24.02
|
|
|
$
|
22.74
|
|
|
Fully diluted adjusted book value per share
|
24.20
|
|
|
23.45
|
|
|
22.01
|
|
|
23.57
|
|
|
22.34
|
|
Premiums Written
Details of gross premiums written are provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
Six months ended June 30
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
($ in thousands)
|
|
($ in thousands)
|
|
Frequency
|
$
|
126,125
|
|
|
93.3
|
%
|
|
$
|
80,706
|
|
|
96.1
|
%
|
|
$
|
240,915
|
|
|
91.9
|
%
|
|
$
|
217,313
|
|
|
92.0
|
%
|
|
Severity
|
9,073
|
|
|
6.7
|
|
|
3,280
|
|
|
3.9
|
|
|
21,247
|
|
|
8.1
|
|
|
18,893
|
|
|
8.0
|
|
|
Total
|
$
|
135,198
|
|
|
100.0
|
%
|
|
$
|
83,986
|
|
|
100.0
|
%
|
|
$
|
262,162
|
|
|
100.0
|
%
|
|
$
|
236,206
|
|
|
100.0
|
%
|
We expect quarterly reporting of premiums written to be volatile as a result of our opportunistic underwriting philosophy. Additionally, the composition of premiums written between frequency and severity business may vary from year to year depending on the specific market opportunities that we pursue.
For the three months ended June 30, 2013
, our frequency gross premiums written increased by
$45.4 million
, or
56.3%
, primarily as a result of $33.5 million increase in our non-standard automobile premiums (motor liability and motor physical damage). The increase in non-standard automobile premiums was a result of our ceding insurers experiencing growth in the demand, as well as an existing contract being renewed with a higher quota share participation. We wrote no commercial automobile premiums during the
three months ended June 30, 2013
. Personal lines contributed $30.5 million of the increase in frequency gross premiums written primarily relating to continued relationships with our existing Florida homeowners' business partners and, to a lesser extent, from the addition of a new contract entered into during the
three months ended June 30, 2013
. The increases in frequency gross premiums were partially offset by decreases in the workers' compensation and general liability lines of $13.8 million and $7.5 million, respectively. During the
three months ended June 30, 2013
, we entered into a commutation agreement whereby we exited a multi-line contract which resulted in returned premiums relating to workers' compensation and general liability lines. To a lesser extent, the decrease in general liability premium was due to contracts we canceled during the fourth quarter of 2012.
For the
six months ended June 30, 2013
, our frequency gross premiums written increased by
$23.6 million
, or
10.9%
, primarily as a result of a $32.7 million increase in our non-standard automobile premiums (motor liability and motor physical damage) and $16.1 million increase in our personal lines Florida homeowners' business driven by the reasons explained above. The increases were offset by decreases in the workers' compensation and general liability lines of $11.7 million and $17.4 million, respectively, primarily due to the commutation of a multi-line contract and to a lesser extent, the decrease in general liability was due to contracts we canceled during the fourth quarter of 2012. For the
six months ended June 30, 2013
and 2012, there were no commercial motor premiums as all commercial motor contracts were canceled during 2012.
For the three months ended June 30, 2013
, the increase in severity premiums written of
$5.8 million
, or
176.6%
, compared to the same period in
2012
was principally due to a new multi-line severity contract written during the first quarter of 2013 for which the underlying business incepts at various dates throughout the year. Accordingly, premiums written are recorded based on the period in which the underlying risk incepts.
For the
six months ended June 30, 2013
, the increase in severity premiums written of
$2.4 million
, or
12.5%
, compared to the same period in
2012
was principally due to new severity contracts written during the first quarter of 2013. This increase was partially offset by the reversal of reinstatement premiums of $3.5 million in conjunction with the reversal of loss reserves relating to super-storm Sandy during the first quarter of 2013. Reinstatement premiums and additional premiums based on contractual terms are recognized as written premiums at the time losses are recorded, and, if required, adjusted in the period that changes in loss estimates are recorded.
Premiums Ceded
For the
three and six months ended June 30, 2013
, premiums ceded were
$2.5 million
and
$(1.5) million
, respectively. During the
six months ended June 30, 2013
, we novated some of our retroceded contracts and returned the premiums ceded relating to those contracts, which primarily accounted for the negative premiums ceded of
$1.5 million
.
Net Premiums Written
Details of net premiums written are provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
Six months ended June 30
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
($ in thousands)
|
|
($ in thousands)
|
|
Frequency
|
$
|
123,611
|
|
|
93.2
|
%
|
|
$
|
85,308
|
|
|
96.3
|
%
|
|
$
|
242,378
|
|
|
91.9
|
%
|
|
$
|
210,920
|
|
|
91.8
|
%
|
|
Severity
|
9,073
|
|
|
6.8
|
|
|
3,280
|
|
|
3.7
|
|
|
21,248
|
|
|
8.1
|
|
|
18,893
|
|
|
8.2
|
|
|
Total
|
$
|
132,684
|
|
|
100.0
|
%
|
|
$
|
88,588
|
|
|
100.0
|
%
|
|
$
|
263,626
|
|
|
100.0
|
%
|
|
$
|
229,813
|
|
|
100.0
|
%
|
Net Premiums Earned
Net premiums earned reflect the pro-rata inclusion into income of net premiums written over the life of the reinsurance contracts. Details of net premiums earned are provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
Six months ended June 30
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
($ in thousands)
|
|
($ in thousands)
|
|
Frequency
|
$
|
127,870
|
|
|
96.1
|
%
|
|
$
|
125,130
|
|
|
96.2
|
%
|
|
$
|
235,773
|
|
|
97.2
|
%
|
|
$
|
222,013
|
|
|
95.9
|
%
|
|
Severity
|
5,130
|
|
|
3.9
|
|
|
4,884
|
|
|
3.8
|
|
|
6,698
|
|
|
2.8
|
|
|
9,589
|
|
|
4.1
|
|
|
Total
|
$
|
133,000
|
|
|
100.0
|
%
|
|
$
|
130,014
|
|
|
100.0
|
%
|
|
$
|
242,471
|
|
|
100.0
|
%
|
|
$
|
231,602
|
|
|
100.0
|
%
|
Premiums relating to quota share contracts are earned over the contract period in proportion to the period of protection. Similarly, incoming unearned premiums are earned in proportion to the remaining period of protection.
For the three months ended June 30, 2013
, the frequency premiums earned increased by
$2.7 million
, or
2.2%
, primarily as a result of our non-standard automobile contracts (motor liability and motor physical damage), which increased net premiums earned by $12.0 million. The increase was partially offset by a decrease of $4.8 million in commercial motor premiums earned as all commercial motor coverages were canceled during 2012.
For the three months ended June 30, 2013
, our personal lines premiums earned increased by $10.2 million primarily as a result of certain Florida homeowners' contracts that were restructured during the second half of 2012.
For the three months ended June 30, 2013
, our premiums earned for workers compensation and general liability lines decreased by $5.8 million and $4.8 million, respectively, primarily due to a multi-line contract commuted during the second quarter of 2013. In addition, the financial line premiums earned decreased by $3.0 million due to the commutation of a surety and trade credit contract during 2012.
For the
six months ended June 30, 2013
, the frequency premiums earned increased by
$13.8 million
, or
6.2%
, primarily as a result of our non-standard automobile contracts (motor liability and motor physical damage) which increased net premiums earned by $37.1 million. The increase was partially offset by a decrease of $14.2 million in commercial motor premiums earned as all commercial motor coverages were canceled during 2012 and a multi-line contract was commuted during 2013. For the
six months ended June 30, 2013
, our personal line's premiums earned increased by $6.3 million primarily as a result of certain Florida homeowners' contracts that were restructured during the second half of 2012. For the
six months ended June 30, 2013
, our premiums earned for general liability line decreased by $8.5 million primarily due to contracts we canceled and the multi-line contract which we commuted during 2013. In addition, the financial line's premiums earned decreased by $5.6 million due to the commutation of a surety and trade credit contract during 2012.
Premiums written relating to severity contracts are earned over the contract period in proportion to the period of protection.
For the three months ended June 30, 2013
, severity net premiums earned increased by
$0.2 million
, or
5.0%
, primarily as a result of new severity contracts entered into during 2013, partially offset by severity contracts which expired at the end of 2012 without being renewed.
For the
six months ended June 30, 2013
, severity net premiums earned decreased by
$2.9 million
, or
30.1%
, compared to the same period in 2012. The decrease was primarily due to the reversal of $2.9 million of reinstatement premiums in conjunction with the elimination of loss reserves relating to super-storm Sandy. The new severity contracts contributed $5.1 million in earned premiums, which was offset by similar reductions in earned premiums from expired contracts and contracts renewed at lower risk exposure levels.
Losses Incurred
Losses incurred include losses paid and changes in loss reserves, including reserves for IBNR, net of actual and estimated loss recoverables. Details of net losses incurred are provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
Six months ended June 30
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
($ in thousands)
|
|
($ in thousands)
|
|
Frequency
|
$
|
77,458
|
|
|
98.9
|
%
|
|
$
|
86,681
|
|
|
99.2
|
%
|
|
$
|
154,281
|
|
|
106.7
|
%
|
|
$
|
149,890
|
|
|
99.5
|
%
|
|
Severity
|
887
|
|
|
1.1
|
|
|
656
|
|
|
0.8
|
|
|
(9,658
|
)
|
|
(6.7
|
)
|
|
754
|
|
|
0.5
|
|
|
Total
|
$
|
78,345
|
|
|
100.0
|
%
|
|
$
|
87,337
|
|
|
100.0
|
%
|
|
$
|
144,623
|
|
|
100.0
|
%
|
|
$
|
150,644
|
|
|
100.0
|
%
|
We establish reserves for each contract based on estimates of the ultimate cost of all losses, including losses incurred but not reported. These estimated ultimate reserves are based on reports received from ceding companies, industry data and historical experience as well as our own actuarial estimates. Quarterly, we review these estimates on a contract by contract basis and adjust as we deem appropriate based on updated information and our internal actuarial estimates. We expect losses incurred on our severity business to be volatile depending on the frequency and magnitude of catastrophic events from year to year.
For the three months ended June 30, 2013
, the total losses incurred on frequency contracts decreased by
$9.2 million
, or
10.6%
, primarily due to the elimination of loss reserves on contracts commuted during 2013.
For the
six months ended June 30, 2013
, the total losses incurred on frequency contracts increased by
$4.4 million
, or
2.9%
, partially due to the
6.2%
increase in frequency earned premiums discussed above, and partially offset by decreases due to contracts commuted during 2013.
Losses incurred as a percentage of premiums earned (i.e. referred to as the loss ratio) fluctuates based on the mix of business, and the favorable or adverse loss development on our larger contracts.
For the three months ended June 30, 2013 and 2012
, the loss ratios for our frequency business were
60.6%
and
69.3%
, respectively. The decrease in loss ratio was primarily attributable to the motor liability, personal and health lines. Favorable loss development relating to a commercial automobile contract contributed to the decrease in loss ratio. The change in mix of business also contributed to the decrease in overall frequency loss ratio since the personal lines loss ratios are generally lower than the loss ratios for other lines. The decrease in loss ratio was partially offset by an increase in general liability loss ratio due to adverse loss development on a contract that is in run-off.
For the six months ended June 30, 2013 and 2012
, the loss ratios for our frequency business were
65.4%
and
67.5%
, respectively. The decrease in loss ratio was primarily attributable to lower loss ratio on non-standard automobile business, partially offset by adverse development on general liability contracts currently in run-off. The loss ratio for the
six months ended June 30, 2013
was positively impacted because the commercial automobile contracts, currently in run-off, did not have any material loss developments, whereas during the comparative period in 2012, adverse loss development on commercial automobile contracts had contributed to a higher loss ratio.
For the three months ended June 30, 2013 and 2012
, the overall loss ratios for our severity business were
17.3%
and
13.4%
, respectively. The increase in severity loss ratio was due to non-catastrophe loss reserves recorded on the new severity contracts entered into during 2013.
For the six months ended June 30, 2013 and 2012
, the loss ratios for our severity business were
(144.2)%
and
7.9%
, respectively. During the
six months ended June 30, 2013
loss reserves of $15.0 million relating to super-storm Sandy were reversed which resulted in negative losses incurred and a negative loss ratio for the quarter. The loss from super-storm Sandy was previously reserved at the full limit of the excess of loss contract. However, during the first quarter of 2013, we received additional information from our client that indicated that the losses would not exceed the threshold for entering into the layer of coverage provided by our contract. Partially offsetting this decrease was an increase of $4.0 million in loss reserves, recorded during the first quarter of 2013, on a casualty clash contract based on updated information from the client indicating higher estimated ground up losses which in turn would increase the losses in the layer covered by us. To a lesser extent, the severity loss ratio for
six months ended June 30, 2013
was impacted by the non-catastrophe loss reserves recorded on new severity contracts entered into during 2013.
Losses incurred can be further broken down into losses paid (recovered) and changes in loss and loss adjustment expense reserves as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
|
|
|
2013
|
|
|
|
|
|
2012
|
|
|
|
|
Gross
|
|
Ceded
|
|
Net
|
|
Gross
|
|
Ceded
|
|
Net
|
|
|
($ in thousands)
|
|
Losses paid (recovered)
|
$
|
127,150
|
|
|
$
|
(1,733
|
)
|
|
$
|
125,417
|
|
|
$
|
77,135
|
|
|
$
|
(6,483
|
)
|
|
$
|
70,652
|
|
|
Change in loss and loss adjustment expense reserves
|
(48,069
|
)
|
|
997
|
|
|
(47,072
|
)
|
|
16,913
|
|
|
(228
|
)
|
|
16,685
|
|
|
Total
|
$
|
79,081
|
|
|
$
|
(736
|
)
|
|
$
|
78,345
|
|
|
$
|
94,048
|
|
|
$
|
(6,711
|
)
|
|
$
|
87,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30
|
|
|
|
|
2013
|
|
|
|
|
|
2012
|
|
|
|
|
Gross
|
|
Ceded
|
|
Net
|
|
Gross
|
|
Ceded
|
|
Net
|
|
|
($ in thousands)
|
|
Losses paid (recovered)
|
$
|
187,152
|
|
|
$
|
(3,584
|
)
|
|
$
|
183,568
|
|
|
$
|
113,161
|
|
|
$
|
(8,662
|
)
|
|
$
|
104,499
|
|
|
Change in loss and loss adjustment expense reserves
|
(53,261
|
)
|
|
14,316
|
|
|
(38,945
|
)
|
|
53,499
|
|
|
(7,354
|
)
|
|
46,145
|
|
|
Total
|
$
|
133,891
|
|
|
$
|
10,732
|
|
|
$
|
144,623
|
|
|
$
|
166,660
|
|
|
$
|
(16,016
|
)
|
|
$
|
150,644
|
|
For the
six months ended June 30, 2013
, our net losses incurred on prior period contracts increased by $1.3 million, which primarily related to the following:
|
|
|
|
●
|
$17.7 million of adverse loss development, net of retrocesssion recoveries, relating to general liability business. Loss reserves were increased on these contracts after a detailed review of existing claims data received from the clients, audits of claim files at the third party claims administrators and actuarial analysis based on all available information;
|
|
|
|
|
●
|
Elimination of $15.0 million of reserves relating to super-storm Sandy based on additional information received from our client which indicated that the losses would not exceed the threshold for entering into the layer of coverage provided by our contract. As a result of the reversal of loss reserves we also reversed reinstatement premiums of $2.6 million;
|
|
|
|
|
●
|
$4.0 million of adverse loss development on a 2007 casualty clash contract based on updated claims and loss information received from the client. The new information indicated that ground up losses under the contract estimated by the client had increased resulting in additional losses attaching to our layer. As a result of this increase in loss reserves, we recorded reinstatement premiums of $1.2 million; and
|
|
|
|
|
●
|
$2.5 million of favorable loss development, relating to commercial automobile business due to better than expected loss development on open claims and settling of claims at lower amounts than expected. Loss reserves were decreased on these contracts after a detailed review of existing claims data received from the clients, audits of claim files at the third party claims administrators and actuarial analysis based on all available information.
|
There were no other significant developments of prior period reserves during the
six months ended June 30, 2013
.
For the six months ended June 30, 2012, our net loss reserves on prior period contracts increased by $10.9 million which primarily related to the following:
|
|
|
|
●
|
$5.3 million of adverse loss development, net of retrocesssion recoveries, on multi-line commercial motor and general liability quota share contracts based on data received from the clients and a reassessment in connection with our quarterly reserve analysis which indicated higher large loss activity on the accounts than originally expected;
|
|
|
|
|
●
|
$2.1 million of adverse loss development, net of retrocession recoveries, on a Florida homeowners' contract due to a combination of an increase in attritional losses as well as an increase in sinkhole losses based on updated information received from the ceding insurer during the period as well as a reassessment in connection with our quarterly reserve analysis; and
|
|
|
|
|
●
|
$2.1 million of adverse loss development on a 2010 natural peril contract relating to the 2010 New Zealand earthquake. This adverse loss development resulted from revised estimated losses expected on the underlying policies by the ceding insurer.
|
There were no other significant developments of prior period reserves during the
six months ended June 30, 2012
.
Acquisition Costs, Net
Acquisition costs represent the amortization of commission and brokerage expenses incurred on contracts written as well as profit commissions and other underwriting expenses which are expensed when incurred. Deferred acquisition costs are limited to the amount of commission and brokerage expenses that are expected to be recovered from future earned premiums and anticipated investment income. Details of acquisition costs are provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
Six months ended June 30
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
($ in thousands)
|
|
($ in thousands)
|
|
Frequency
|
$
|
42,341
|
|
|
98.6
|
%
|
|
$
|
37,174
|
|
|
98.1
|
%
|
|
$
|
82,917
|
|
|
98.4
|
%
|
|
$
|
72,409
|
|
|
97.9
|
%
|
|
Severity
|
595
|
|
|
1.4
|
|
|
731
|
|
|
1.9
|
|
|
1,315
|
|
|
1.6
|
|
|
1,521
|
|
|
2.1
|
|
|
Total
|
$
|
42,936
|
|
|
100.0
|
%
|
|
$
|
37,905
|
|
|
100.0
|
%
|
|
$
|
84,232
|
|
|
100.0
|
%
|
|
$
|
73,930
|
|
|
100.0
|
%
|
We expect that acquisition costs will be higher for frequency business than for severity business.
For the three months ended June 30, 2013 and 2012
, the acquisition cost ratios for frequency business were
33.1%
and
29.7%
, respectively. The slightly higher acquisition costs related to higher commissions relating to non-standard automobile and Florida homeowners' contracts.
For the three months ended June 30, 2013 and 2012
, there were no other noteworthy changes in the frequency acquisition cost ratio compared to the same period in 2012.
For the
six months ended June 30, 2013 and 2012
, the acquisition cost ratios for frequency business were
35.2%
and
32.6%
, respectively. The slightly higher acquisition costs related to higher commissions relating to non-standard automobile and Florida homeowners' contracts. For the
six months ended June 30, 2013
, there were no other noteworthy changes in the frequency acquisition cost ratio compared to the same period in 2012.
For the three months ended June 30, 2013 and 2012
, the acquisition cost ratios for severity business were
11.6%
and
15.0%
, respectively. The decrease related to a surety contract canceled at the end of 2012 which had a higher commission rate than our other severity contracts.
The acquisition cost ratios for severity business were
19.6%
and
15.9%
for the
six months ended June 30, 2013 and 2012
, respectively. For the
six months ended June 30, 2013
, the severity acquisition cost ratio appears higher due to the reversal of reinstatement premiums of $2.9 million during the period as discussed earlier (see
Net Premiums Earned).
Excluding the reinstatement premiums, the severity acquisition cost ratio was 14.0%.
Overall, our total acquisition cost ratios were
34.7%
and
31.9%
for the
six months ended June 30, 2013 and 2012
, respectively.
General and Administrative Expenses
Details of general and administrative expenses are provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
Six months ended June 30
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
($ in thousands)
|
|
($ in thousands)
|
|
Internal expenses
|
$
|
5,046
|
|
|
$
|
3,258
|
|
|
$
|
7,919
|
|
|
$
|
7,026
|
|
|
Corporate expenses
|
897
|
|
|
1,101
|
|
|
1,784
|
|
|
1,956
|
|
|
General and administrative expenses
|
$
|
5,943
|
|
|
$
|
4,359
|
|
|
$
|
9,703
|
|
|
$
|
8,982
|
|
Corporate expenses include those expenses directly related to being a publicly listed entity and certain non-core operating expenses as well as non-investment related foreign exchange gains and losses.
For the three months ended June 30, 2013 and 2012
, general and administrative expenses included
$0.8 million
and
$0.9 million
, respectively, for the expensing of the fair value of stock options and restricted stock and RSUs granted to employees and directors. General and administrative expenses for the
six months ended June 30, 2013 and 2012
, included
$1.6 million
and
$1.7 million
, respectively, for the expensing of the fair value of stock options and restricted stock granted to employees and directors.
For the three and
six months ended June 30, 2013
, the increases in internal expenses were primarily related to increase in personnel costs due to higher head-count than the comparative periods.
Net Investment Income (Loss)
A summary of our net investment income (loss) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
Six months ended June 30
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
($ in thousands)
|
|
($ in thousands)
|
|
Realized gains (losses)
|
$
|
78,531
|
|
|
$
|
10,823
|
|
|
$
|
91,978
|
|
|
$
|
(5,513
|
)
|
|
Change in unrealized gains (losses)
|
(46,295
|
)
|
|
(48,048
|
)
|
|
19,436
|
|
|
62,557
|
|
|
Investment related foreign exchange gains (losses)
|
4,919
|
|
|
(1,855
|
)
|
|
18,897
|
|
|
1,208
|
|
|
Interest, dividend and other income
|
9,647
|
|
|
6,112
|
|
|
13,598
|
|
|
8,664
|
|
|
Interest, dividend and other expenses
|
(12,282
|
)
|
|
(8,866
|
)
|
|
(27,824
|
)
|
|
(16,076
|
)
|
|
Investment advisor compensation
|
(10,273
|
)
|
|
4,938
|
|
|
(30,699
|
)
|
|
(16,129
|
)
|
|
Net investment income (loss)
|
$
|
24,247
|
|
|
$
|
(36,896
|
)
|
|
$
|
85,386
|
|
|
$
|
34,711
|
|
Investment returns relating to our investment portfolio managed by DME Advisors are calculated monthly and compounded to calculate the quarterly and annual returns. The resulting actual investment income may vary depending on cash flows into or out of the investment account.
For the three months ended June 30, 2013
, investment income, net of fees and expenses, resulted in a
gain
of
2.0%
on our investments managed by DME Advisors, compared to a
loss
of
3.3%
for the three months ended
June 30
,
2012
. For the
six months ended June 30, 2013
, investment income, net of fees and expenses, resulted in a
gain
of
7.9%
on our investments managed by DME Advisors, compared to a
gain
of
3.0%
reported for the
six months ended June 30, 2012
.
For the
six months ended June 30, 2013
, included in the above table under interest, dividend and other expenses, was an impairment charge of $6.0 million related to a note receivable that was previously placed on non-accrual status, based on continued uncertainty surrounding the borrower's ability to repay the entire outstanding balance of the note on the maturity date.
We expect our investment income, including realized and unrealized gains (or losses), to fluctuate from period to period. Fluctuations in realized and unrealized gains (or losses) are a function of both the market performance of the securities held in our investment portfolio, and the timing of additions to and dispositions of securities in our investment portfolio. Our
investment advisor uses its discretion over when a gain (or loss) is realized on a particular investment. We believe that net investment income, which includes both realized and unrealized gains (or losses), is the best way to assess our investment performance, rather than analyzing the realized gains (or losses) and unrealized gains (or losses) separately.
For the three months ended June 30, 2013 and 2012
, the gross investment return (loss) on our investment portfolio managed by DME Advisors (excluding investment advisor performance allocation) was
3.1%
, and
(3.9)%
, respectively.
For the six months ended June 30, 2013 and 2012
, the gross investment returns on our investment portfolio managed by DME Advisors (excluding investment advisor performance allocation) were
10.8%
and
4.5%
. These were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
Six months ended June 30
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Long portfolio gains (losses)
|
4.2
|
%
|
|
(9.8
|
)%
|
|
13.3
|
%
|
|
5.4
|
%
|
|
Short portfolio gains (losses)
|
(1.6
|
)%
|
|
7.5
|
%
|
|
(4.9
|
)%
|
|
1.8
|
%
|
|
Macro gains (losses)
|
0.5
|
%
|
|
(1.6
|
)%
|
|
2.4
|
%
|
|
(2.7
|
)%
|
|
Gross investment return
|
3.1
|
%
|
|
(3.9
|
)%
|
|
10.8
|
%
|
|
4.5
|
%
|
For the three and six months ended June 30, 2013
, included in investment advisor compensation was
$4.5 million
and
$8.8 million
, respectively (
2012
:
$4.2 million
and
$8.3 million
, respectively) relating to management fees paid to DME Advisors and
$5.8 million
and
$21.9 million
, respectively (
2012
:
$9.1 million
reversal and
$7.9 million
, respectively) relating to performance allocation in accordance with the advisory agreement with DME Advisors. The reversal for the three months ended June 30, 2012 was a result of negative investment return during that period.
Our investment advisor, DME Advisors, and its affiliates manage and expect to manage other client accounts besides ours, some of which have investment objectives similar to ours. To comply with Regulation FD, our investment returns are posted on our website on a monthly basis. Additionally, our website (
www.greenlightre.ky
) provides the names of the largest disclosed long positions in our investment portfolio as of the last business day of the month of the relevant posting, as well as information on our long and short exposures. DME Advisors may choose not to disclose certain positions to its clients in order to protect its investment strategy. Therefore, we present on our website the largest long positions and exposure information as disclosed by DME Advisors or its affiliates to us and their other clients.
Income Taxes
We are not obligated to pay taxes in the Cayman Islands on either income or capital gains. We have been granted an exemption by the Governor-In-Cabinet from any income taxes that may be imposed in the Cayman Islands for a period of 20 years, expiring on February 1, 2025.
GRIL is incorporated in Ireland and, therefore, is subject to the Irish corporation tax. GRIL is expected to be taxed at a rate of 12.5% on its taxable trading income, and 25% on its non-trading income, if any.
Verdant is incorporated in Delaware and, therefore, is subject to taxes in accordance with the U.S. federal rates and regulations prescribed by the Internal Revenue Service. Verdant’s taxable income is expected to be taxed at a rate of 35%.
As of
June 30, 2013
, a deferred tax asset, resulting solely from the temporary differences in timing of recognition of expenses for tax purposes, of
$0.05 million
(
December 31, 2012
:
$0.1 million
) was included in other assets on the
condensed consolidated
balance sheets. As of
June 30, 2013
, an accrual for current taxes payable of
$0.9 million
(
December 31, 2012
:
$0.3 million
) was recorded in other liabilities on the
condensed consolidated
balance sheets. Based on the timing of the reversal of the temporary differences and likelihood of generating sufficient taxable income to realize the future tax benefit, management believes it is more likely than not that the deferred tax asset will be fully realized in the future and therefore no valuation allowance has been recorded. The Company has not taken any tax positions that management believes are subject to uncertainty or that are reasonably likely to have a material impact to the Company, GRIL or Verdant.
Ratio Analysis
Due to the opportunistic and customized nature of our underwriting operations, we expect to report different loss and expense ratios in both our frequency and severity businesses from period to period.
The following table provides the ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30
|
|
Six months ended June 30
|
|
|
|
|
2013
|
|
|
|
|
|
2012
|
|
|
|
|
Frequency
|
|
Severity
|
|
Total
|
|
Frequency
|
|
Severity
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
65.4
|
%
|
|
(144.2
|
)%
|
|
59.6
|
%
|
|
67.5
|
%
|
|
7.9
|
%
|
|
65.0
|
%
|
|
Acquisition cost ratio
|
35.2
|
%
|
|
19.6
|
%
|
|
34.7
|
%
|
|
32.6
|
%
|
|
15.9
|
%
|
|
31.9
|
%
|
|
Composite ratio
|
100.6
|
%
|
|
(124.6
|
)%
|
|
94.3
|
%
|
|
100.1
|
%
|
|
23.8
|
%
|
|
96.9
|
%
|
|
Internal expense ratio
|
|
|
|
|
3.3
|
%
|
|
|
|
|
|
3.0
|
%
|
|
Corporate expense ratio
|
|
|
|
|
0.7
|
%
|
|
|
|
|
|
0.9
|
%
|
|
Combined ratio
|
|
|
|
|
98.3
|
%
|
|
|
|
|
|
100.8
|
%
|
The loss ratio is calculated by dividing loss and loss adjustment expenses incurred by net premiums earned. We expect that the loss ratio will be volatile for our severity business and may exceed that of our frequency business in certain periods. Given that we opportunistically underwrite a concentrated portfolio across several lines of business that have varying expected loss ratios, we can expect there to be significant annual variations in the loss ratios reported from our frequency business. In addition, the loss ratios for both frequency and severity business can vary depending on the mix of the lines of business written.
The acquisition cost ratio is calculated by dividing acquisition costs by net premiums earned. We expect that this ratio will generally be higher for our frequency business than for our severity business.
The composite ratio is the ratio of underwriting losses incurred, loss adjustment expenses and acquisition costs, excluding general and administrative expenses, to net premiums earned. Similar to the loss ratio, we expect that this ratio will be more volatile for our severity business depending on loss activity in any particular period.
The internal expense ratio is the ratio of general and administrative expenses, excluding any corporate expenses, to net premiums earned.
The corporate expense ratio is the ratio of corporate expenses to net premiums earned. Corporate expenses include expenses relating to GLRE being a publicly listed entity and certain non-core operating expenses as well as non-investment related foreign exchange gains or losses.
The combined ratio is the sum of the composite ratio, and internal and corporate expense ratios. The combined ratio measures the total profitability of our underwriting operations and does not take net investment income or loss into account. Given the nature of our opportunistic underwriting strategy, we expect that our combined ratio may also be volatile from period to period.
Financial Condition
Investments, Financial Contracts Receivable, Financial Contracts Payable and Due to Prime Brokers
Our long investments (including financial contracts receivable) reported in the
condensed consolidated
balance sheets as of
June 30, 2013
, were
$1,070.6 million
, compared to
$1,200.7 million
as of
December 31, 2012
,
a decrease
of
$130.1 million
, or
10.8%
, primarily as a result of disposal of a portion of our long equities and, to a lesser extent, due to decrease in commodities during the
six months ended June 30, 2013
. The decrease in commodities was due to a decline in the price of gold combined with the disposal of a portion of our physical gold holdings. As of
June 30, 2013
, our exposure to long investments increased to
105%
, compared to
102%
as of
December 31, 2012
, while our exposure to short investments decreased to
62%
, compared to
64%
as of
December 31, 2012
. This exposure analysis is conducted on a delta-adjusted basis and does not include gold, CDS, sovereign debt, cash, foreign currency positions, interest rate options and other macro positions.
Financial contracts receivable as of
June 30, 2013
increased by
$33.4 million
, or
146.7%
, compared to
December 31, 2012
, primarily due to equity total return swaps entered into during the second quarter of 2013. Financial contracts payable increased by
$7.7 million
, or
39.3%
, primarily due to equity total return swaps entered into during the second quarter of 2013.
From time to time, we incur indebtedness to our prime brokers to implement our investment strategy in accordance with our investment guidelines. As of
June 30, 2013
, we had borrowed
$21.0 million
(
December 31, 2012
:
$73.7 million
) from our prime brokers in order to purchase investment securities. In accordance with our investment guidelines, DME Advisors may use margin leverage up to
5%
for extended time periods and an aggregate of
20%
for periods not exceeding 30 days. During the first six months of 2013, the Board of Directors granted temporary waivers of the 5% leverage restriction. These waivers allowed for an aggregate of 20% net margin leverage for extended periods which terminated on July 24, 2013. At a meeting held on July 24, 2013 the Board of Directors revised, with immediate effect, Greenlight Re's investment guidelines such that the Company may employ up to 15% net margin leverage for extended periods of time and up to 30% net margin leverage for periods of less than 30 days.
The amounts borrowed from prime brokers for investing decreased during the
six months ended June 30, 2013
as we disposed some of our long equity securities and a portion of our physical gold holdings. Additionally, as of
June 30, 2013
, we had borrowed
$228.7 million
(
December 31, 2012
:
$252.7 million
) under term margin agreements from prime brokers to provide collateral for some of our letters of credit outstanding whereby we pledge certain investment securities to borrow cash from the prime brokers. The decrease in collateral pledged for letters of credit was due to a reinsurance contract commutated during the second quarter of 2013.
Our investment portfolio, including any derivatives, is valued at fair value and any unrealized gains or losses are reflected in net investment income (loss) in the
condensed consolidated
statements of income. As of
June 30, 2013
,
82.8%
(
December 31, 2012
:
85.3%
) of our investment portfolio (excluding restricted and unrestricted cash and cash equivalents) was comprised of investments valued based on quoted prices in actively traded markets (Level 1),
14.8%
(
December 31, 2012
:
12.9%
) was comprised of securities valued based on observable inputs other than quoted prices (Level 2) and
2.4%
(
December 31, 2012
:
1.8%
) was comprised of securities valued based on non-observable inputs (Level 3).
In determining whether a market for a financial instrument is active or inactive, we obtain information from DME Advisors, based on feedback they receive from executing brokers, market makers, analysts and traders to assess the level of market activity and available liquidity for any given financial instrument. Where a financial instrument is valued based on broker quotes, DME Advisors requests multiple quotes. The ultimate value is based on an average of the quotes obtained. Broker quoted prices are generally not adjusted in determining the ultimate values and are obtained with the expectation of the quotes being binding. As of
June 30, 2013
,
$251.2 million
(
December 31, 2012
:
$258.5 million
) of our investments (longs, shorts and derivatives) were valued based on broker quotes, of which
$248.5 million
(
December 31, 2012
:
$254.9 million
) were based on broker quotes that utilized observable market information and classified as Level 2 fair value measurements, and
$2.7 million
(
December 31, 2012
:
$3.6 million
) were based on broker quotes that utilized non-observable inputs and classified as Level 3 fair value measurements.
During the
three and six months ended June 30, 2013
,
$19.6 million
of securities were transferred from Level 3 to Level 1 classification as these securities began publicly trading on a listed exchange without any restrictions. During the six months ended June 30, 2013,
$2.4 million
of securities at fair value based on the date of transfer, were transferred from Level 2 to Level 1 as the lock-up periods on certain securities expired and a discount factor was no longer applied in determining the fair value of the securities. A detailed reconciliation of Level 3 investments is presented in Note 3 of the accompanying
condensed consolidated
financial statements. No other transfers into or out of Level 3 took place during the
three and six months ended June 30, 2013
. Transfers between Level 1, Level 2 and Level 3 fair value measurements during the three months ended
June 30
,
2012
are disclosed in Note 3 of the accompanying condensed consolidated financial statements.
Non-observable inputs used by our investment advisor include discounted cash flow models for valuing certain corporate debt instruments. In addition, other non-observable inputs include the use of investment manager statements and management estimates based on third party appraisals of underlying assets for valuing private equity investments.
Restricted Cash and Cash Equivalents; Securities Sold, Not Yet Purchased
As of
June 30, 2013
, our securities sold, not yet purchased
increased
by
$41.7 million
, or
4.6%
, to
$950.1 million
from
$908.4 million
at
December 31, 2012
, as we increased the number and size of short equity positions. Our short exposure decreased from
64%
to
62%
primarily due to a decrease in short equity total return swaps. Unlike long investments, short sales theoretically involve unlimited loss potential since there is no limit as to how high the market price of a security may rise. While it is not possible to list all of the reasons why a loss on a short sale may occur, a loss on short sale may be caused by one or more of the following factors:
|
|
|
|
•
|
Fluctuations in the share price due to an overall positive investment market;
|
|
|
|
|
•
|
Sudden unexpected changes in the underlying business model of the issuer;
|
|
|
|
|
•
|
Changes in laws and regulations relating to short sales;
|
|
|
|
|
•
|
Press releases and earnings guidance issued by the issuer;
|
|
|
|
|
•
|
A merger or acquisition of the issuer at a price in excess of the current share price;
|
|
|
|
|
•
|
The shares of the issuer becoming difficult to borrow;
|
Given the various scenarios under which a loss may occur on a short sale, it is not possible to quantify the risk and uncertainty of loss relating to short sales. However, our investment advisor typically performs a detailed analysis prior to entering into a short sale. Thereafter, the investment is routinely monitored by our investment advisor. Our investment guidelines limit any single investment from constituting more than 20% of the portfolio (10% for GRIL's portfolio) at any given time, hence limiting the potential adverse impact on our results of operations and financial position.
As of
June 30, 2013
, the restricted cash included
$950.1 million
relating to collateral for securities sold, not yet purchased compared to
$910.0 million
as of
December 31, 2012
. Overall our restricted cash increased by
$19.2 million
, or
1.6%
, from
$1,206.8 million
to
$1,226.1 million
, primarily as a result of needing more collateral to support the overall increase in securities sold, not yet purchased. The cash collateral held by derivative counterparties increased by
$3.2 million
to
$47.3 million
during the
six months ended June 30, 2013
as a result of an increase in equity swaps.
Loss and Loss Adjustment Expense Reserves
Reserves for loss and loss adjustment expenses were comprised of the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
December 31, 2012
|
|
|
Case
Reserves
|
|
IBNR
|
|
Total
|
|
Case
Reserves
|
|
IBNR
|
|
Total
|
|
|
($ in thousands)
|
|
Frequency
|
$
|
119,785
|
|
|
$
|
142,993
|
|
|
$
|
262,778
|
|
|
$
|
124,927
|
|
|
$
|
182,536
|
|
|
$
|
307,463
|
|
|
Severity
|
15,758
|
|
|
23,323
|
|
|
39,081
|
|
|
15,747
|
|
|
33,260
|
|
|
49,007
|
|
|
Total
|
$
|
135,543
|
|
|
$
|
166,316
|
|
|
$
|
301,859
|
|
|
$
|
140,674
|
|
|
$
|
215,796
|
|
|
$
|
356,470
|
|
The frequency loss reserves decreased by $44.7 million, or 14.5%, principally due to the reversal of loss reserves on contracts novated and commuted during 2013, offset by adverse loss development in the general liability line. The decrease in severity loss reserves was principally due to the reversal of loss reserves relating to super-storm Sandy. For most of our contracts written as of
June 30, 2013
, our risk exposure is limited by defined limits of liability. Once the loss limit for a contract has been reached, we have no further exposure to additional losses from that contract. However, certain contracts, particularly quota share contracts that relate to first dollar exposure, may not contain aggregate limits.
Our severity business includes contracts that contain or may contain natural peril loss exposure. As of
July 1, 2013
, our maximum aggregate loss exposure to any series of natural peril events was
$143.9 million
. For purposes of the preceding sentence, aggregate loss exposure is net of any retrocession and is equal to the difference between the aggregate limits available in the contracts that contain natural peril exposure minus reinstatement premiums, if any, for the same contracts. We categorize peak zones as: United States, Europe, Japan and the rest of the world. The following table provides single event loss exposure and aggregate loss exposure information for the peak zones of our natural peril coverage as of the date of this filing:
|
|
|
|
|
|
|
|
|
|
|
|
|
Zone
|
|
Single Event Loss
|
|
Aggregate Loss
|
|
|
|
($ in thousands)
|
|
United States (1)
|
|
$
|
110,800
|
|
|
$
|
143,900
|
|
|
Europe
|
|
37,000
|
|
|
37,000
|
|
|
Japan
|
|
37,000
|
|
|
37,000
|
|
|
Rest of the world
|
|
74,500
|
|
|
74,500
|
|
|
Maximum Aggregate
|
|
110,800
|
|
|
143,900
|
|
|
(1) Includes the Caribbean
|
|
|
|
|
Loss and Loss Expenses Recoverable
For the
six months ended June 30, 2013
, loss and loss expenses recoverable decreased by
$14.3 million
, or
41.6%
, principally resulting from the novation of certain retrocession contracts during the period.
Shareholders’ Equity
Total equity reported on the balance sheet, which includes non-controlling interest,
increased
by
$80.8 million
to
$941.2 million
as of
June 30, 2013
, compared to
$860.4 million
as of
December 31, 2012
. Retained earnings
increased
due to net income of
$85.2 million
reported for the
six months ended June 30, 2013
, while the non-controlling interest
decreased
by
$6.5 million
primarily due to withdrawal of funds by DME Advisors from the joint venture during the
six months ended June 30, 2013
. The
increase
in additional paid-in capital of
$2.0 million
related to stock based compensation for the
six months ended June 30, 2013
.
Liquidity and Capital Resources
General
Greenlight Capital Re is organized as a holding company with no operations of its own. As a holding company, Greenlight Capital Re has minimal continuing cash needs, most of which are related to the payment of administrative expenses. All of our underwriting operations are conducted through our wholly-owned reinsurance subsidiaries, Greenlight Re and GRIL, which underwrite risks associated with our property and casualty reinsurance programs. There are restrictions on each of Greenlight Re’s and GRIL’s ability to pay dividends which are described in more detail below. It is our current policy to retain earnings to support the growth of our business. We currently do not expect to pay dividends on our ordinary shares.
As of
June 30, 2013
, Greenlight Re was rated "A (Excellent)" with a stable outlook by A.M. Best, while GRIL was rated "A- (Excellent)" with a stable outlook. The ratings reflect A.M. Best’s opinion of our reinsurance subsidiaries’ financial strength, operating performance and ability to meet obligations and it is not an evaluation directed toward the protection of investors or a recommendation to buy, sell or hold our Class A ordinary shares. If an independent rating agency downgrades our ratings below "A- (Excellent)" or withdraws our rating, we could be severely limited or prevented from writing any new reinsurance contracts, which would significantly and negatively affect our business. Insurer financial strength ratings are based upon factors relevant to policyholders and are not directed toward the protection of investors. Our A.M. Best ratings may be revised or revoked at the sole discretion of the rating agency.
Sources and Uses of Funds
Our sources of funds consist primarily of premium receipts (net of brokerage and ceding commissions), investment income (net of advisory compensation and investment expenses), including realized gains, and other income. We use cash from our operations to pay losses and loss adjustment expenses, profit commissions and general and administrative expenses. Substantially all of our funds, including shareholders’ capital, net of funds required for cash liquidity purposes, are invested by DME Advisors in accordance with our investment guidelines. As of
June 30, 2013
, approximately
90%
of our long investments were comprised of publicly-traded equity securities and gold bullion which can be readily liquidated to meet current and future liabilities. As of
June 30, 2013
, the majority of our investments were valued based on quoted prices in active markets for identical assets (Level 1). Given our value-oriented long and short investment strategy, if markets are distressed we would expect the liability of the short portfolio to decline. Any reduction in the liability would cause our need for restricted cash to decrease and thereby free up cash to be used for any purpose. Additionally, since the majority of our invested assets are liquid, even in distressed markets, we believe securities can be sold or covered to generate cash to pay claims. Since we classify our investments as "trading," we book all gains and losses (including unrealized gains and losses) on all our investments (including derivatives) as net investment income in our
condensed consolidated
statements of income for each reporting period.
For the
six months ended June 30, 2013 and 2012
, the net cash provided by (used in) operating activities was
$(51.8) million
and
$(0.1) million
, respectively. Included in the net cash provided by (used in) operating activities were investment related expenses (such as investment advisor compensation, and net interest and dividend expenses) of
$44.9 million
and
$23.5 million
for the
six months ended June 30, 2013 and 2012
, respectively. Subtracting the investment related expenses from the net cash provided by (used in) our operating activities results in net cash primarily provided from (used for) underwriting activities which was
$(6.8) million
and
$23.5 million
for the
six months ended June 30, 2013 and 2012
, respectively. The decrease in cash from underwriting activities was primarily a result of approximately $37.1 million paid during second quarter
of 2013 for commuting a reinsurance contract, and was partially offset by increase in premiums collected net of acquisition costs and claim payment. Generally, in a given period if the premiums collected are sufficient to cover claim payments, we would generate cash from our underwriting activities. Due to the inherent nature of our underwriting portfolio, claims are often paid several months or even years after the premiums are collected. The cash generated from underwriting activities, however, may be volatile from period to period depending on the underwriting opportunities available.
We generated
$207.2 million
from investing activities for the
six months ended June 30, 2013
, mainly from the net sale of investments. There were no significant cash flows related to financing activities during the
six months ended June 30, 2013
.
As of
June 30, 2013
, we believe we have sufficient cash flow from operations to meet our foreseeable liquidity requirements. We expect that our operational needs for liquidity will be met by cash, funds generated from underwriting activities and investment income, including realized gains. As of
June 30, 2013
, we had no plans to issue debt and expect to fund our operations for the next twelve months from operating cash flow. However, we cannot provide assurances that in the future we will not incur indebtedness to implement our business strategy, pay claims or make acquisitions.
Although GLRE is not subject to any significant legal prohibitions on the payment of dividends, Greenlight Re and GRIL are each subject to regulatory minimum capital requirements and regulatory constraints that affect their ability to pay dividends to us. In addition, any dividend payment would have to be approved by the relevant regulatory authorities prior to payment. As of
June 30, 2013
, Greenlight Re and GRIL both exceeded the regulatory minimum capital requirements.
Letters of Credit
As of
June 30, 2013
, neither Greenlight Re nor GRIL was licensed or admitted as a reinsurer in any jurisdiction other than the Cayman Islands and the European Economic Area, respectively. Because many jurisdictions do not permit domestic insurance companies to take credit on their statutory financial statements for loss recoveries or ceded unearned premium unless appropriate measures are in place from reinsurance obtained from unlicensed or non-admitted insurers, we anticipate that all of our U.S. clients and some of our non-U.S. clients will require us to provide collateral through funds withheld, trust arrangements, letters of credit or a combination thereof.
As of
June 30, 2013
, we had four letter of credit facilities with an aggregate capacity of
$760.0 million
(
December 31, 2012
:
$760.0 million
) with various financial institutions. See Note
8
of the accompanying
condensed consolidated
financial statements for details on each of these facilities. As of
June 30, 2013
, an aggregate amount of
$378.8 million
(
December 31, 2012
:
$416.5 million
) in letters of credit was issued under these facilities. Under these facilities, we provide collateral that may consist of equity securities or cash and cash equivalents. At
June 30, 2013
, total equity securities and cash and cash equivalents with a fair value in the aggregate of
$406.7 million
(
December 31, 2012
:
$441.7 million
) were pledged as security against the letters of credit issued. The decrease in letters of credit issued and the corresponding decrease in collateral pledged as security was a result of commutation of a contract during the second quarter of 2013.
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 would 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
June 30, 2013
.
Capital
Our capital structure currently consists entirely of equity issued in two separate classes of ordinary shares. We expect that the existing capital base and internally generated funds will be sufficient to implement our business strategy for the foreseeable future. Consequently, we do not presently anticipate that we will incur any material indebtedness in the ordinary course of our business other than temporary borrowing directly related to the management of our investment portfolio. However, in order to provide us with flexibility and timely access to public capital markets should we require additional capital for working capital, capital expenditures, acquisitions or other general corporate purposes, we have filed a Form S-3 registration statement, which expires in June 2015 unless renewed. We did not make any significant commitments for capital expenditures during the
six months ended June 30, 2013
.
On August 5, 2008, our Board of Directors adopted a share repurchase plan authorizing the Company to repurchase up to
2.0 million
Class A ordinary shares. From time to time, the repurchase plan has been modified at the election of our Board of Directors. On April 30, 2013, our Board of Directors amended the share repurchase plan to extend the duration of the repurchase plan to June 30, 2014 and reinstated the authorization for the Company to purchase up to
2.0 million
Class A ordinary shares or securities convertible into Class A ordinary shares in the open market or through privately negotiated transactions. The Company is not required to repurchase any of the Class A ordinary shares and the repurchase plan may be modified, suspended or terminated at any time without prior notice. No Class A ordinary shares were repurchased by the Company during the
six months ended June 30, 2013
.
On April 28, 2010, our shareholders approved an amendment to our stock incentive plan to increase the number of Class A ordinary shares available for issuance from 2.0 million to
3.5 million
. As of
June 30, 2013
, there were
999,675
Class A ordinary shares available for future issuance.
Contractual Obligations and Commitments
The following table shows our aggregate contractual obligations as of
June 30, 2013
by time period remaining:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than
5 years
|
|
Total
|
|
|
($ in thousands)
|
|
Operating lease obligations (1)
|
$
|
554
|
|
|
$
|
1,096
|
|
|
$
|
932
|
|
|
$
|
—
|
|
|
$
|
2,582
|
|
|
Specialist service agreement
|
500
|
|
|
300
|
|
|
—
|
|
|
—
|
|
|
800
|
|
|
Private equity and limited partnerships (2)
|
11,795
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,795
|
|
|
Loss and loss adjustment expense reserves (3)
|
177,182
|
|
|
74,255
|
|
|
43,428
|
|
|
6,994
|
|
|
301,859
|
|
|
|
$
|
190,031
|
|
|
$
|
75,651
|
|
|
$
|
44,360
|
|
|
$
|
6,994
|
|
|
$
|
317,036
|
|
(1) Reflects our contractual obligations pursuant to the lease agreements as described below.
(2)
As of
June 30, 2013
, we had made total commitments of
$36.2 million
in private investments of which we had invested
$24.4 million
, and our remaining commitments to these investments total
$11.8 million
. Given the nature of the private equity investments, we are unable to determine with any degree of accuracy as to when the commitments will be called. As such, for the purposes of the above table, we have assumed that all commitments with no fixed payment schedule will be made within one year. Under our investment guidelines, in effect as of the date hereof, no more than 10% of the assets in the investment portfolio may be held in private equity securities without specific approval from the Board of Directors.
(3) Due to the nature of our reinsurance operations, the amount and timing of the cash flows associated with our reinsurance contractual liabilities will fluctuate, perhaps materially, and, therefore, are highly uncertain.
As of
June 30, 2013
,
$950.1 million
of securities sold, not yet purchased, were secured by
$950.1 million
of restricted cash held by prime brokers to cover obligations relating to securities sold, not yet purchased. These amounts are not included in the contractual obligations table above because there is no maturity date for securities sold, not yet purchased, and their maturities are not set by any contract and as such their due dates cannot be estimated.
Greenlight Re has entered into lease agreements for office space in the Cayman Islands. The leases expire on June 30, 2018 and Greenlight Re has the option to renew the leases for a further 5 year term. 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 expiry. The minimum lease payment obligations are included in the above table under operating lease obligations and in Note
8
to the accompanying
condensed consolidated
financial statements.
GRIL has entered into a lease agreement for office space in Dublin, Ireland. Under the terms of this lease agreement, GRIL is committed to average annual rent payments denominated in Euros approximating
€0.07 million
until May 2016 (net of rent inducements), and adjusted to the prevailing market rates for each of the three subsequent five-year terms. GRIL has the option to terminate the lease agreement in 2016 and 2021. The minimum lease payment obligations are included in the above table under operating lease obligations and in Note
8
to the accompanying
condensed consolidated
financial statements.
We have entered into a service agreement with a specialist service provider for the provision of administration and support in developing and maintaining business relationships, reviewing and recommending programs and managing risks relating to certain specialty lines of business. The specialist service provider does not have any authority to bind the Company
to any reinsurance contracts. Under the terms of the agreement, the Company has committed to quarterly payments to the specialist service provider. If the agreement is terminated, the Company is obligated to make minimum payments for another two years to ensure any contracts to which the Company is bound are adequately administered by the specialist service provider. The minimum payments are included in the above table under specialist service agreement and in Note
8
to the accompanying
condensed consolidated
financial statements.
On January 1, 2008, we entered into an Advisory Agreement wherein the Company and DME Advisors agreed to create a joint venture for the purposes of managing certain jointly-held assets. The Advisory Agreement was amended effective August 31, 2010 to include GRIL as a participant to the agreement. The term of the Advisory Agreement is August 31, 2010 through December 31, 2013, with automatic three-year renewals unless 90 days prior to the end of the then current term, either DME Advisors terminates the agreement or any of the participants notifies DME Advisors of its desire to withdraw from the agreement. Pursuant to the Advisory Agreement, we pay a monthly management fee of 0.125% on our share of the assets managed by DME Advisors and performance allocation of 20% on the net investment income of the Company’s share of assets managed by DME Advisors subject to a loss carry forward provision. The loss carry forward provision allows DME Advisors to earn reduced performance allocation of 10% on net investment income in any year subsequent to the year in which the investment account incurs a loss, until all the losses are recouped and an additional amount equal to 150% of the aggregate loss is earned. DME Advisors is not entitled to earn performance allocation in a year in which the investment portfolio incurs a loss. For the
six months ended June 30, 2013
,
$21.9 million
of performance allocation was calculated at the 20% rate and included in net investment income.
In February 2007, we entered into a service agreement with DME Advisors pursuant to which DME Advisors will provide investor relations services to us for compensation of $5,000 per month plus expenses. The service agreement had an initial term of one year, and continues for sequential one-year periods until terminated by us or DME Advisors. Either party may terminate the service agreement for any reason with 30 days prior written notice to the other party.
Off-Balance Sheet Financing Arrangements
We have no obligations, assets or liabilities, other than those derivatives in our investment portfolio that are disclosed in the
condensed consolidated
financial statements, which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.