10-Q 1 glre-2013331x10q.htm 10-Q GLRE-2013.3.31-10Q



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
__________________________
FORM 10-Q 
__________________________
(Mark One)
 x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended March 31, 2013

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

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

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

Class A Ordinary Shares, $0.10 par value
30,567,575
Class B Ordinary Shares, $0.10 par value
6,254,949
(Class)                      
Outstanding as of May 3, 2013





GREENLIGHT CAPITAL RE, LTD.
 
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
Quantitative and Qualitative Disclosures about Market Risk                                                                                                              
Controls and Procedures                                                                                                           
Legal Proceedings                                                                                                          
Risk Factors                                                                                                               
Unregistered Sales of Equity Securities and Use of Proceeds                                                      
Defaults Upon Senior Securities                                                                                                               
Other Information                                                                                                               
Exhibits                                                                                                               



 

2


PART I — FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS 
GREENLIGHT CAPITAL RE, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
March 31, 2013 and December 31, 2012
(expressed in thousands of U.S. dollars, except per share and share amounts)
 
March 31, 2013
 
December 31, 2012
 
(unaudited)
 
(audited)
Assets
 
 
 
Investments
 
 
 
Debt instruments, trading, at fair value
$
7,100

 
$
1,763

Equity securities, trading, at fair value
1,112,684

 
1,042,715

Other investments, at fair value
146,340

 
133,450

Total investments
1,266,124

 
1,177,928

Cash and cash equivalents
10,973

 
21,890

Restricted cash and cash equivalents
1,378,563

 
1,206,837

Financial contracts receivable, at fair value
61,636

 
22,744

Reinsurance balances receivable
195,998

 
173,221

Loss and loss adjustment expenses recoverable
21,133

 
34,451

Deferred acquisition costs, net
64,027

 
59,177

Unearned premiums ceded
2,468

 
3,616

Notes receivable
15,865

 
19,330

Other assets
3,424

 
3,559

Total assets
$
3,020,211

 
$
2,722,753

Liabilities and equity
 
 
 
Liabilities
 
 
 
Securities sold, not yet purchased, at fair value
$
1,092,473

 
$
908,368

Financial contracts payable, at fair value
14,847

 
19,637

Due to prime brokers
366,681

 
326,488

Loss and loss adjustment expense reserves
349,902

 
356,470

Unearned premium reserves
207,594

 
188,185

Reinsurance balances payable
35,282

 
35,292

Funds withheld
13,068

 
17,415

Other liabilities
13,449

 
10,488

Performance compensation payable to related party
16,113

 

Total liabilities
2,109,409

 
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, 30,567,227 (2012: 30,447,179): Class B: par value $0.10; authorized, 25,000,000; issued and outstanding, 6,254,949 (2012: 6,254,949))
3,682

 
3,670

Additional paid-in capital
493,492

 
492,469

Retained earnings
382,302

 
325,569

Shareholders’ equity attributable to shareholders
879,476

 
821,708

Non-controlling interest in joint venture
31,326

 
38,702

Total equity
910,802

 
860,410

Total liabilities and equity
$
3,020,211

 
$
2,722,753

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

3


GREENLIGHT CAPITAL RE, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 
For the three months ended March 31, 2013 and 2012
(expressed in thousands of U.S. dollars, except per share and share amounts)
 
Three months ended March 31
 
2013
 
2012
Revenues
 
 
 
Gross premiums written
$
126,964

 
$
152,220

Gross premiums ceded
3,978

 
(10,994
)
Net premiums written
130,942

 
141,226

Change in net unearned premium reserves
(21,471
)
 
(39,637
)
Net premiums earned
109,471

 
101,589

Net investment income
61,139

 
71,606

Other income (expense), net
389

 
(212
)
Total revenues
170,999

 
172,983

Expenses
 
 
 
Loss and loss adjustment expenses incurred, net
66,278

 
63,307

Acquisition costs, net
41,296

 
36,025

General and administrative expenses
3,760

 
4,624

Total expenses
111,334

 
103,956

Income before income tax expense
59,665

 
69,027

Income tax expense
(308
)
 
(262
)
Net income including non-controlling interest
59,357

 
68,765

Income attributable to non-controlling interest in joint venture
(2,624
)
 
(3,632
)
Net income
$
56,733

 
$
65,133

Earnings per share
 
 
 
Basic
$
1.54

 
$
1.78

Diluted
$
1.52

 
$
1.75

Weighted average number of ordinary shares used in the determination of earnings per share
 
 
 
Basic
36,730,315

 
36,550,953

Diluted
37,424,894

 
37,279,371

 

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


 
 

4


GREENLIGHT CAPITAL RE, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
 
For the three months ended March 31, 2013 and 2012
(expressed in thousands of U.S. dollars)

 
Ordinary share capital
 
Additional paid-in capital
 
Retained earnings
 
Shareholders' equity attributable to shareholders
 
Non-controlling
interest in joint venture
 
Total equity
Balance at December 31, 2011
$
3,654

 
$
488,478

 
$
310,971

 
$
803,103

 
$
42,595

 
$
845,698

Issue of Class A ordinary shares, net of forfeitures
9

 

 

 
9

 

 
9

Share-based compensation expense, net of forfeitures

 
832

 

 
832

 

 
832

Non-controlling interest withdrawal from joint venture, net

 

 

 

 
(34,000
)
 
(34,000
)
Income attributable to non-controlling interest in joint venture

 

 

 

 
3,632

 
3,632

Net income

 

 
65,133

 
65,133

 

 
65,133

Balance at March 31, 2012
$
3,663

 
$
489,310

 
$
376,104

 
$
869,077

 
$
12,227

 
$
881,304

 
 
 
 
 
 
 
 
 
 
 
 
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
12

 
207

 

 
219

 

 
219

Share-based compensation expense, net of forfeitures

 
816

 

 
816

 

 
816

Non-controlling interest withdrawal from joint venture, net

 

 

 

 
(10,000
)
 
(10,000
)
Income attributable to non-controlling interest in joint venture

 

 

 

 
2,624

 
2,624

Net income

 

 
56,733

 
56,733

 

 
56,733

Balance at March 31, 2013
$
3,682

 
$
493,492

 
$
382,302

 
$
879,476

 
$
31,326

 
$
910,802



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


 

5


GREENLIGHT CAPITAL RE, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the three months ended March 31, 2013 and 2012
(expressed in thousands of U.S. dollars)
 
 
Three months ended March 31
 
2013
 
2012
Cash provided by (used in) operating activities
 
 
 

 
 
 
Net income
$
56,733

 
$
65,133

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
(65,730
)
 
(110,481
)
Net realized (gains) losses  on investments and financial contracts
(13,446
)
 
16,335

Foreign exchange (gains) losses on restricted cash and cash equivalents
(13,979
)
 
3,063

Income attributable to non-controlling interest in joint venture
2,624

 
3,632

Share-based compensation expense, net of forfeitures
816

 
832

Depreciation expense
63

 
63

Net change in
 
 
 
Reinsurance balances receivable
(22,777
)
 
(62,852
)
Loss and loss adjustment expenses recoverable
13,318

 
(6,918
)
Deferred acquisition costs, net
(4,850
)
 
(6,997
)
Unearned premiums ceded
1,148

 
229

Other assets
72

 
2,646

Loss and loss adjustment expense reserves
(6,568
)
 
36,634

Unearned premium reserves
19,409

 
39,848

Reinsurance balances payable
(10
)
 
7,669

Funds withheld
(4,347
)
 
(4,465
)
Other liabilities
2,961

 
1,378

Performance compensation payable to related party
16,113

 
16,979

Net cash (used in) provided by operating activities
(18,450
)
 
2,728

Investing activities
 
 
 
Purchases of investments, trading
(193,083
)
 
(155,872
)
Sales of investments, trading
174,204

 
174,474

Purchases of financial contracts
(26,162
)
 
(15,287
)
Dispositions of financial contracts
5,639

 
7,760

Securities sold, not yet purchased
350,963

 
153,171

Dispositions of securities sold, not yet purchased
(180,158
)
 
(157,333
)
Change in due to prime brokers
40,193

 
54,932

Change in restricted cash and cash equivalents, net
(157,747
)
 
(66,635
)
Change in notes receivable, net
3,465

 
(868
)
Non-controlling interest withdrawal from joint venture
(10,000
)
 
(34,000
)
Net cash provided by (used in) investing activities
7,314

 
(39,658
)
Financing activities
 
 
 
Net proceeds from share issue
12

 
9

Net proceeds from exercise of stock options
207

 

Net cash provided by financing activities
219

 
9

Net (decrease) increase in cash and cash equivalents
(10,917
)
 
(36,921
)
Cash and cash equivalents at beginning of the period
21,890

 
42,284

Cash and cash equivalents at end of the period
$
10,973

 
$
5,363

Supplementary information
 
 
 
Interest paid in cash
$
4,250

 
$
4,786

Interest received in cash
254

 
764

Income tax paid in cash

 


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

6


GREENLIGHT CAPITAL RE, LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
March 31, 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 three months ended March 31, 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. 

7


 
Deferred Acquisition Costs
 
Policy acquisition costs, such as commission and brokerage costs, relate directly to, and vary with, the writing of reinsurance contracts. Acquisition costs relating solely to bound contracts are deferred subject to ultimate recoverability and are amortized over the related contract term. The Company evaluates the recoverability of deferred acquisition costs by determining if the sum of future earned premiums and anticipated investment income is greater than the expected future claims and expenses. If a loss is probable on the unexpired portion of policies in force, a premium deficiency loss is recognized. At March 31, 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 March 31, 2013, $10.3 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 months ended March 31, 2013, $0.9 million (2012: $31,205) of net profit commission expenses were included in acquisition costs on the condensed consolidated statements of income.
  
Loss and Loss Adjustment Expense Reserves and Recoverable
 
The Company establishes reserves for contracts based on estimates of the ultimate cost of all losses including losses incurred but not reported ("IBNR"). These estimated ultimate reserves are based on the Company’s own actuarial estimates derived from reports received from ceding companies, industry data and historical experience. These estimates are reviewed by the Company periodically on a contract by contract basis and adjusted as necessary. Since reserves are estimates, the final settlement of losses may vary from the reserves established and any adjustments to the estimates, which may be material, are recorded in the period they are determined.
 
Loss and loss adjustment expenses recoverable include the amounts due from retrocessionaires for unpaid loss and loss adjustment expenses on retrocession agreements. Ceded losses incurred but not reported are estimated based on the Company’s actuarial estimates. These estimates are reviewed periodically and adjusted when deemed necessary. The Company may not be able to ultimately recover the loss and loss adjustment expense recoverable amounts due to the retrocessionaires’ inability to pay. The Company regularly evaluates the financial condition of its retrocessionaires and records provisions for uncollectible reinsurance expenses recoverable when recovery is no longer probable.
 
Notes Receivable
 
Notes receivable include promissory notes receivable from third party entities. These notes are recorded at cost along with accrued interest, if any, which approximates the fair value. 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 collectibility 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 three months ended March 31, 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 March 31, 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 three months ended March 31, 2013 and 2012, no interest was received relating to the notes placed on non-accrual status. During the three months ended March 31, 2013, the Company recorded an impairment charge of $6.0 million (2012: $0) relating to the accrued interest and principal on the note placed on non-accrual status. Impairment charges are included under net investment income in the condensed consolidated statements of income.


8


At March 31, 2013, included in the notes receivable balance was $17,257 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 March 31, 2013 and December 31, 2012, were expected to be fully collectible and therefore no other provision for uncollectible amounts was deemed necessary at March 31, 2013 and December 31, 2012. Interest income earned on notes receivable is included under net investment income in the condensed consolidated statements of income.

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 March 31, 2013, included in the condensed consolidated balance sheets under reinsurance balances receivable and reinsurance balances payable were $4.5 million and $0.1 million of deposit assets and deposit liabilities (December 31, 2012: $5.1 million and $0.7 million), respectively. For the three months ended March 31, 2013, $10,967 was included in other income (expense), net, relating to losses on deposit accounted contracts (2012: $0.2 million). For the three months ended March 31, 2013, $0.2 million of gain on deposit accounted contracts was recorded (2012: none).
 
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 March 31, 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

 
(255
)
 
196

Leasehold improvements
1,487

 
(532
)
 
955

Total
$
2,138

 
$
(987
)
 
$
1,151

 
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 three months ended March 31, 2013 and 2012, there were no impairments in fixed assets.


9


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 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

10


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 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 March 31
 
2013
 
2012
Weighted average shares outstanding - basic
36,730,315

 
36,550,953

Effect of dilutive service provider share-based awards
145,671

 
148,359

Effect of dilutive employee and director share-based awards
548,908

 
580,059

Weighted average share outstanding - diluted
37,424,894

 
37,279,371

Anti-dilutive stock options outstanding
180,000

 
180,000

Participating securities excluded from calculation of loss per share 

 


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.

11


 
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 affects 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.
 

12


The following table presents the Company’s investments, categorized by the level of the fair value hierarchy as of March 31, 2013:
 
 
Fair value measurements as of March 31, 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
 
$

 
$
4,434

 
$
2,666

 
$
7,100

Listed equity securities
 
1,112,684

 

 

 
1,112,684

Commodities
 
90,296

 

 

 
90,296

Private and unlisted equity securities
 

 

 
56,044

 
56,044

Financial contracts receivable
 

 
61,636

 

 
61,636

 
 
$
1,202,980

 
$
66,070

 
$
58,710

 
$
1,327,760

Liabilities:
 
 
 
 
 
 
 
 
Listed equity securities, sold not yet purchased
 
$
(871,194
)
 
$

 
$

 
$
(871,194
)
Debt instruments, sold not yet purchased
 

 
(221,279
)
 

 
(221,279
)
Financial contracts payable
 

 
(14,847
)
 

 
(14,847
)
 
 
$
(871,194
)
 
$
(236,126
)
 
$

 
$
(1,107,320
)
 
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
)
 

13


The following table presents the reconciliation of the balances for all investments measured at fair value using significant unobservable inputs (Level 3) for the three months ended March 31, 2013
 
 
  Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Debt instruments
 
 Private and unlisted equity securities
 
 Total
 
 
 ($ in thousands)
Beginning balance
 
$
260

 
$
38,801

 
$
39,061

Purchases
 
2,438

 
21,403

 
23,841

Sales
 
(29
)
 
(914
)
 
(943
)
Issuances
 

 

 

Settlements


 

 

Total realized and unrealized gains (losses) and amortization included in earnings, net
 
(3
)
 
(3,246
)
 
(3,249
)
Transfers into Level 3
 

 

 

Transfers out of Level 3
 

 

 

Ending balance
 
$
2,666

 
$
56,044

 
$
58,710


The following table presents the reconciliation of the balances for all investments measured at fair value using significant unobservable inputs (Level 3) for the three months ended March 31, 2012:

 
 
  Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Debt instruments
 
 Private and unlisted equity securities
 
Financial contracts receivable
 
Total
 
 
 ($ in thousands)
Beginning balance
 
$
465

 
$
31,179

 
$
263

 
$
31,907

Purchases
 

 
3,371

 

 
3,371

Sales
 
(1
)
 
(186
)
 

 
(187
)
Issuances
 

 

 

 

Settlements
 

 

 

 

Total realized and unrealized gains (losses) and amortization included in earnings, net
 
(46
)
 
1,394

 
(125
)
 
1,223

Transfers into Level 3
 

 

 

 

Transfers out of Level 3
 

 

 

 

Ending balance
 
$
418

 
$
35,758

 
$
138

 
$
36,314


During the three months ended March 31, 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. There were no other transfers between Level 1, Level 2 or Level 3 during the three months ended March 31, 2013 or 2012.

For the three months ended March 31, 2013, realized gains of $0.3 million, (2012: realized losses of $0.1 million), and decrease in unrealized gains of $3.5 million (2012: increase of $1.3 million) 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 months ended March 31, 2012, amortization expense of $0.1 million relating to financial contracts receivable valued using unobservable inputs, was included in other income (expense), net. No amortization expense was recorded for the three months ended March 31, 2013.
 

14


Investments
 
Debt instruments, trading
 
At March 31, 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.
 
$
4,727

 
$
524

 
$
(1,859
)
 
$
3,392

Corporate debt – Non U.S.
 
3,776

 
59

 
(127
)
 
3,708

Total debt instruments
 
$
8,503

 
$
583

 
$
(1,986
)
 
$
7,100

 
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 March 31, 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
 
$
2,410

 
$
2,410

 
$

 
$

From one to five years
 

 

 

 

From five to ten years
 

 

 

 

More than ten years
 
6,093

 
4,690

 
3,496

 
1,763

 
 
$
8,503

 
$
7,100

 
$
3,496

 
$
1,763

 
Investment in Equity Securities, Trading

At March 31, 2013, the following long positions were included in investment securities, trading: 
2013
 
Cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair
value
 
 
($ in thousands)
Equities – listed
 
$
903,858

 
$
221,480

 
$
(43,780
)
 
$
1,081,558

Exchange traded funds
 
38,819

 

 
(7,693
)
 
31,126

 
 
$
942,677

 
$
221,480

 
$
(51,473
)
 
$
1,112,684



15


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 March 31, 2013 and December 31, 2012, commodities were comprised of gold bullion. 

At March 31, 2013, the following securities were included in other investments:
2013
 
Cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair
value
 
 
($ in thousands)
Commodities
 
$
59,929

 
$
30,367

 
$

 
$
90,296

Private and unlisted equity securities
 
57,446

 
5,746

 
(7,148
)
 
56,044

 
 
$
117,375

 
$
36,113

 
$
(7,148
)
 
$
146,340


At December 31, 2012, the following securities were included in other investments: 
2012
 
Cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair
value
 
 
($ in thousands)
Commodities
 
$
59,929

 
$
34,719

 
$

 
$
94,648

Private and unlisted equity securities
 
36,672

 
4,914

 
(2,784
)
 
38,802

 
 
$
96,601

 
$
39,633

 
$
(2,784
)
 
$
133,450


As of March 31, 2013, included in private and unlisted equity securities are investments in private equity funds with a fair value of $27.3 million (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 March 31, 2013. The private equity funds have  varying lock-up periods and as of March 31, 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 March 31, 2013, the Company had $9.6 million (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 March 31, 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
 
$
(878,189
)
 
$
80,911

 
$
(73,916
)
 
$
(871,194
)
Corporate debt – U.S
 
(7,353
)
 
4

 
(344
)
 
(7,693
)
Sovereign debt – Non U.S
 
(207,122
)
 
341

 
(6,805
)
 
(213,586
)
 
 
$
(1,092,664
)
 
$
81,256

 
$
(81,065
)
 
$
(1,092,473
)


16


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 March 31, 2013 and December 31, 2012, the Company had entered into total return swaps, CDS, options, futures 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 March 31, 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
 
2,299,933

 
$
75

Total return swaps – equities
 
GBP/HKD/USD
 
90,371

 
13,048

Put options
 
USD
 
340,233

 
36,041

Call options
 
USD
 
124,755

 
12,472

Total financial contracts receivable, at fair value
 
 
 
 
 
$
61,636

Financial contracts payable
 
 
 
 
 
 
Credit default swaps, purchased – sovereign debt
 
USD
 
251,467

 
$
(4,713
)
Credit default swaps, purchased – corporate debt
 
USD
 
273,877

 
(3,955
)
Total return swaps – equities
 
GBP/JPY
 
16,136

 
(5,772
)
Call options
 
USD
 
6,235

 
(407
)
Total financial contracts payable, at fair value
 
 
 
 
 
$
(14,847
)
 

17


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 March 31, 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, denominated in U.S. dollars.  

During the three months ended March 31, 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
 
 
 
 
Three months ended March 31
 
 
 
 
2013
 
2012
 
 
 
 
($ in thousands)
Interest rate options
 
Net investment income (loss)
 
$
(34
)
 
$
(352
)
Credit default swaps, purchased – corporate debt
 
Net investment income (loss)
 
(1,601
)
 
(3,815
)
Credit default swaps, purchased – sovereign debt
 
Net investment income (loss)
 
102

 
(4,972
)
Total return swaps – equities
 
Net investment income (loss)
 
11,663

 
(709
)
Options, warrants, and rights
 
Net investment income (loss)
 
11,935

 
4,814

Futures
 
Net investment income (loss)
 
(559
)
 
(4,783
)
Currency forwards
 
Net investment income (loss)
 
3,735

 

Weather derivative swap
 
Other income (expense), net
 

 
(125
)
Total
 
 
 
$
25,241

 
$
(9,942
)

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.


18


For the three months ended March 31, 2013, the Company’s volume of derivative activities (based on notional amounts) was as follows:
2013
 
Three months ended March 31
Derivatives not designated as hedging instruments
 
  Entered
 
Exited
 
 
($ in thousands)
Total return swaps
 
$
31,266

 
$
29,283

Options
 
320,105

 
4,054

Futures
 
127,195

 
127,754

Currency forwards
 
119,618

 
115,883

Total
 
$
598,184

 
$
276,974


For the three months ended March 31, 2012, the Company’s volume of derivative activities (based on notional amounts) was as follows:
2012
 
Three months ended March 31
Derivatives not designated as hedging instruments
 
  Entered
 
Exited
 
 
($ in thousands)
Credit default swaps
 
$

 
$
2,952

Total return swaps
 
2,078

 
13,929

Options
 
274,904

 
143,584

Futures
 
463,070

 
292,945

Total
 
$
740,052

 
$
453,410


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 March 31, 2013 and December 31, 2012, the gross and net amounts of derivative instruments and the cash collateral applicable to derivative instruments were as follows:

March 31, 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
 
$
61,636

 
$

 
$
61,636

 
$
(39,286
)
 
$
22,350

Financial contracts payable
 
(14,847
)
 

 
(14,847
)
 
30,079

 
15,232

Securities sold, not yet purchased
 
$
(1,092,473
)
 
$

 
$
(1,092,473
)
 
$
1,092,473

 
$




19


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 March 31, 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 March 31, 2013, the amounts due to prime brokers included $254.7 million (December 31, 2012: $252.7 million) of cash borrowed under the term margin agreements to provide collateral for letters of credit facilities and $111.9 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. As at December 31, 2012, the Company was in compliance with the amount of leverage for investment purposes allowed under its investment guidelines. During 2013 the Board of Directors provided a temporary waiver of the 5% leverage restriction. This waiver allows for an aggregate of 20% net margin leverage for an extended period and will be automatically rescinded on the earlier of the next meeting of the Board of Directors and July 25, 2013. Given the temporary waiver referenced above, as at March 31, 2013, the Company was in compliance with the amount of leverage for investment purposes allowed under its investment guidelines.


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

For the three months ended March 31, 2013, loss and loss adjustment expenses incurred of $66.3 million (2012: $63.3 million) reported on the condensed consolidated statements of income are net of loss and loss expenses recovered and recoverable of negative $11.5 million (2012: $9.3 million). The negative loss and loss expenses recovered was due to reversal of loss reserves on retrocession contracts that were novated during the period.

Retrocession contracts do not relieve the Company from its obligations to the insureds. Failure of retrocessionaires to honor their obligations could result in losses to the Company. At March 31, 2013, the Company had loss and loss adjustment expense recoverable of $7,500 (December 31, 2012: $0.1 million) with a retrocessionaire rated "A+ (Superior)" by A.M. Best. Additionally, the Company had losses recoverable of $21.1 million (December 31, 2012: $34.3 million) with unrated

20


retrocessionaires. At March 31, 2013 and December 31, 2012, the Company retained $6.1 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 $6.9 million and $6.0 million as of March 31, 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 March 31, 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 March 31, 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 1,029,838 (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 March 31, 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 three months ended March 31, 2013, 110,019 (2012: 101,680) 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 three months ended March 31, 2013, 7,971 (2012: 6,191) restricted shares were forfeited by employees who left the Company. For the three months ended March 31, 2013, in accordance with U.S. GAAP, stock compensation expense of $0.1 million (2012: $0.1 million) relating to the forfeited restricted shares was reversed.

The restricted share award activity during the three months ended March 31, 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
 
110,019

 
24.44

Vested
 
(74,200
)
 
24.98

Forfeited
 
(7,971
)
 
24.84

Balance at March 31, 2013
 
336,254

 
$
24.76


21



 
Employee and Director Stock Options

For the three months ended March 31, 2013, 18,000 (2012: 0) stock options were exercised. The intrinsic value of options exercised during the three months ended March 31, 2013 was $0.2 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 three months ended March 31, 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
 
(18,000
)
 
11.49

 
5.57

Forfeited
 

 

 

Expired
 

 

 

Balance at March 31, 2013
 
1,403,290

 
$
15.41

 
$
6.88


 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 three months ended March 31, 2013, 4,618 (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
 
4,618

 
24.43

Vested
 

 

Forfeited
 

 

Balance at March 31, 2013
 
4,618

 
$
24.43




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.  
 

22


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 months ended March 31, 2013, included in net investment income is performance allocation of $16.1 million (2012: $17.0 million).
 
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 months ended March 31, 2013 are management fees of $4.3 million (2012: $4.1 million). The management fees have been fully paid as of March 31, 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 three months ended March 31, 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 March 31, 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, 2013
 
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 March 31, 2013, an aggregate amount of $432.7 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 March 31, 2013, total equity securities, restricted cash, and cash and cash equivalents with a fair value in the aggregate of $468.7 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 March 31, 2013 and December 31, 2012.


23


  Operating Lease
 
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 $253,539 to $513,798. 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 March 31, 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 €67,528 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 March 31, 2013.

The total rent expense related to leased office space for the three months ended March 31, 2013 was $0.1 million (2012: $0.1 million). 

Specialist Service Agreement
 
The Company has entered into a service agreement with a specialist service provider for the provision of administration and support in developing and maintaining business relationships, reviewing and recommending programs and managing risks relating to certain specialty lines of business. The specialist service provider does not have any authority to bind the Company to any reinsurance contracts. Under the terms of the agreement, the Company has committed to quarterly payments to the 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
 
From time to time, the Company makes investments in private equity vehicles. As part of the Company's participation in such private equity investments, the Company may make funding commitments. As of March 31, 2013, the Company had commitments to invest an additional $15.7 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
$
415

 
$
554

 
$
554

 
$
499

 
$
466

 
$
232

 
$
2,720

Specialist service agreement
492

 
400

 
150

 

 

 

 
1,042

Private equity and limited partnerships (1)
15,698

 

 

 

 

 

 
15,698

 
$
16,605

 
$
954

 
$
704

 
$
499

 
$
466

 
$
232

 
$
19,460


(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.

24



 
9.      SEGMENT REPORTING
 
The Company manages its business on the basis of one operating segment, Property & Casualty Reinsurance.
 
The following tables provide a breakdown of the Company's gross premiums written by line of business and by geographic area of risks insured for the periods indicated:
 
Gross Premiums Written by Line of Business 
 
 
Three months ended March 31
 
 
2013
 
2012
 
 
($ in thousands)
Property
 
 
 
 
 
 
 
 
Aviation
 
$
96

 
0.1
 %
 
$

 
%
Commercial lines
 
5,126

 
4.0

 
9,185

 
6.0

Energy
 
1,553

 
1.2

 

 

Motor physical damage
 
12,830

 
10.1

 
18,141

 
11.9

Personal lines
 
34,022

 
26.8

 
47,035

 
30.9

Total Property
 
53,627

 
42.2

 
74,361

 
48.8

Casualty
 
 
 
 
 
 
 
 
General liability (1)
 
(1,237
)
 
(0.9
)
 
8,421

 
5.5

Marine liability
 
603

 
0.5

 
2,240

 
1.5

Motor liability
 
56,678

 
44.6

 
52,143

 
34.3

Professional liability
 
1,012

 
0.8

 

 

Total Casualty
 
57,056

 
45.0

 
62,804

 
41.3

Specialty
 
 
 
 
 
 
 
 
Financial
 
246

 
0.2

 
1,933

 
1.3

Health
 
12,704

 
10.0

 
11,854

 
7.8

Workers’ compensation
 
3,331

 
2.6

 
1,268

 
0.8

Total Specialty
 
16,281

 
12.8

 
15,055

 
9.9

 
 
$
126,964

 
100.0
 %
 
$
152,220

 
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 March 31
 
 
2013
 
2012
 
 
($ in thousands)
U.S.
 
$
117,539

 
92.6
 %
 
$
138,164

 
90.8
%
Worldwide (1)
 
9,435

 
7.4

 
14,056

 
9.2

Caribbean (2)
 
(375
)
 
(0.3
)
 

 

Europe
 
365

 
0.3

 

 

 
 
$
126,964

 
100.0
 %
 
$
152,220

 
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.

25


 
 
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 the three months ended March 31, 2013 and 2012 and financial condition as of March 31, 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.