10-Q 1 glre-june201610qforq22016.htm Q2 2016 FORM 10Q Document



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 June 30, 2016

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

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

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

Class A Ordinary Shares, $0.10 par value
31,065,939
Class B Ordinary Shares, $0.10 par value
6,254,895
(Class)                      
Outstanding as of July 29, 2016





GREENLIGHT CAPITAL RE, LTD.
 
TABLE OF CONTENTS
 
 
 
Page
 
Condensed Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015
 
Condensed Consolidated Statements of Income for the three and six months ended June 30, 2016 and 2015 (unaudited)
 
Condensed Consolidated Statements of Shareholders' Equity for the six months ended June 30, 2016 and 2015 (unaudited)
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 (unaudited)
 
Notes to the Condensed Consolidated Financial Statements (unaudited)
Quantitative and Qualitative Disclosures about Market Risk                                                                                                              
Controls and Procedures                                                                                                           
Legal Proceedings                                                                                                          
Risk Factors                                                                                                               
Unregistered Sales of Equity Securities and Use of Proceeds                                                      
Defaults Upon Senior Securities                                                                                                               
Other Information                                                                                                               
Exhibits                                                                                                               



 

2


PART I — FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS 
GREENLIGHT CAPITAL RE, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
June 30, 2016 and December 31, 2015
(expressed in thousands of U.S. dollars, except per share and share amounts)
 
June 30, 2016
 
December 31, 2015
 
(unaudited)
 
(audited)
Assets
 
 
 
Investments
 
 
 
Debt instruments, trading, at fair value
$
93,893

 
$
39,087

Equity securities, trading, at fair value
899,904

 
905,994

Other investments, at fair value
176,670

 
119,083

Total investments
1,170,467

 
1,064,164

Cash and cash equivalents
45,556

 
112,162

Restricted cash and cash equivalents
1,077,546

 
1,236,589

Financial contracts receivable, at fair value
23,725

 
13,215

Reinsurance balances receivable
216,803

 
187,940

Loss and loss adjustment expenses recoverable
72,328

 
3,368

Deferred acquisition costs, net
52,828

 
59,823

Unearned premiums ceded
3,669

 
3,251

Notes receivable, net
34,785

 
25,146

Other assets
7,077

 
6,864

Total assets
$
2,704,784

 
$
2,712,522

Liabilities and equity
 
 
 
Liabilities
 
 
 
Securities sold, not yet purchased, at fair value
$
797,773

 
$
882,906

Financial contracts payable, at fair value
5,290

 
28,245

Due to prime brokers
415,459

 
396,453

Loss and loss adjustment expense reserves
354,703

 
305,997

Unearned premium reserves
201,376

 
211,954

Reinsurance balances payable
96,986

 
18,326

Funds withheld
6,112

 
7,143

Other liabilities
10,839

 
12,725

Total liabilities
1,888,538

 
1,863,749

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

 

Ordinary share capital (Class A: par value $0.10; authorized, 100,000,000; issued and outstanding, 31,060,643 (2015: 30,772,572): Class B: par value $0.10; authorized, 25,000,000; issued and outstanding, 6,254,895 (2015: 6,254,895))
3,732

 
3,703

Additional paid-in capital
498,189

 
496,401

Retained earnings
290,961

 
325,287

Shareholders’ equity attributable to shareholders
792,882

 
825,391

Non-controlling interest in joint venture
23,364

 
23,382

Total equity
816,246

 
848,773

Total liabilities and equity
$
2,704,784

 
$
2,712,522

 
  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 and six months ended June 30, 2016 and 2015
(expressed in thousands of U.S. dollars, except per share and share amounts)
 
Three months ended June 30
 
Six months ended June 30
 
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
Gross premiums written
$
92,237

 
$
92,990

 
$
259,029

 
$
222,672

Gross premiums ceded
(3,522
)
 
(1,868
)
 
(5,629
)
 
(3,494
)
Net premiums written
88,715

 
91,122

 
253,400

 
219,178

Change in net unearned premium reserves
36,867

 
563

 
10,294

 
(32,700
)
Net premiums earned
125,582

 
91,685

 
263,694

 
186,478

Net investment income (loss)
(38,054
)
 
(20,305
)
 
(9,619
)
 
(45,134
)
Other income (expense), net
282

 
(3,760
)
 
11

 
(2,172
)
Total revenues
87,810

 
67,620

 
254,086

 
139,172

Expenses
 
 
 
 
 
 
 
Loss and loss adjustment expenses incurred, net
111,376

 
76,653

 
202,044

 
139,860

Acquisition costs, net
35,484

 
23,939

 
74,447

 
50,780

General and administrative expenses
4,994

 
6,894

 
11,993

 
13,054

Total expenses
151,854

 
107,486

 
288,484

 
203,694

Income (loss) before income tax
(64,044
)
 
(39,866
)
 
(34,398
)
 
(64,522
)
Income tax (expense) benefit
258

 
(54
)
 
54

 
161

Net income (loss) including non-controlling interest
(63,786
)
 
(39,920
)
 
(34,344
)
 
(64,361
)
Loss (income) attributable to non-controlling interest in joint venture
791

 
324

 
18

 
718

Net income (loss)
$
(62,995
)
 
$
(39,596
)
 
$
(34,326
)
 
$
(63,643
)
Earnings (loss) per share
 
 
 
 
 
 
 
Basic
$
(1.69
)
 
$
(1.06
)
 
$
(0.92
)
 
$
(1.71
)
Diluted
$
(1.69
)
 
$
(1.06
)
 
$
(0.92
)
 
$
(1.71
)
Weighted average number of ordinary shares used in the determination of earnings and loss per share
 
 
 
 
 
 
 
Basic
37,281,392

 
37,303,265

 
37,194,428

 
37,168,279

Diluted
37,281,392

 
37,303,265

 
37,194,428

 
37,168,279

 

 
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 six months ended June 30, 2016 and 2015
(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, 2014
$
3,738

 
$
500,553

 
$
660,860

 
$
1,165,151

 
$
28,890

 
$
1,194,041

Issue of Class A ordinary shares, net of forfeitures
22

 

 

 
22

 

 
22

Repurchase of Class A ordinary shares
(14
)
 
(1,945
)
 
(2,280
)
 
(4,239
)
 

 
(4,239
)
Share-based compensation expense, net of forfeitures

 
2,033

 

 
2,033

 

 
2,033

Income (loss) attributable to non-controlling interest in joint venture

 

 

 

 
(718
)
 
(718
)
Net income (loss)

 

 
(63,643
)
 
(63,643
)
 

 
(63,643
)
Balance at June 30, 2015
$
3,746

 
$
500,641

 
$
594,937

 
$
1,099,324

 
$
28,172

 
$
1,127,496

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
$
3,703

 
$
496,401

 
$
325,287

 
$
825,391

 
$
23,382

 
$
848,773

Issue of Class A ordinary shares, net of forfeitures
29

 

 

 
29

 

 
29

Share-based compensation expense, net of forfeitures

 
1,788

 

 
1,788

 

 
1,788

Income (loss) attributable to non-controlling interest in joint venture

 

 

 

 
(18
)
 
(18
)
Net income (loss)

 

 
(34,326
)
 
(34,326
)
 

 
(34,326
)
Balance at June 30, 2016
$
3,732

 
$
498,189

 
$
290,961

 
$
792,882

 
$
23,364

 
$
816,246



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 six months ended June 30, 2016 and 2015
(expressed in thousands of U.S. dollars)
 
 
Six months ended June 30
 
2016
 
2015
Cash provided by (used in) operating activities
 
 
 
Net income (loss)
$
(34,326
)
 
$
(63,643
)
Adjustments to reconcile net income or loss to net cash provided by (used in) operating activities
 
 
 
Net change in unrealized gains and losses on investments and financial contracts
(108,841
)
 
49,137

Net realized gains (losses) on investments and financial contracts
112,315

 
(40,277
)
Foreign exchange (gains) losses on investments
2,309

 
16,370

Income (loss) attributable to non-controlling interest in joint venture
(18
)
 
(718
)
Share-based compensation expense, net of forfeitures
1,817

 
2,055

Depreciation expense
203

 
203

Net change in
 
 
 
Reinsurance balances receivable
(28,863
)
 
(36,183
)
Loss and loss adjustment expenses recoverable
(68,960
)
 
(454
)
Deferred acquisition costs, net
6,995

 
(8,635
)
Unearned premiums ceded
(418
)
 
1,344

Other assets
(416
)
 
(3,467
)
Loss and loss adjustment expense reserves
48,706

 
6,192

Unearned premium reserves
(10,578
)
 
31,436

Reinsurance balances payable
78,660

 
5,840

Funds withheld
(1,031
)
 
303

Other liabilities
(1,886
)
 
(179
)
Net cash provided by (used in) operating activities
(4,332
)
 
(40,676
)
Investing activities
 
 
 
Purchases of investments, trading
(632,044
)
 
(478,199
)
Sales of investments, trading
538,465

 
500,276

Payments for financial contracts
(34,592
)
 
(18,826
)
Proceeds from financial contracts
12,656

 
6,601

Securities sold, not yet purchased
474,965

 
534,837

Dispositions of securities sold, not yet purchased
(586,774
)
 
(364,581
)
Change in due to prime brokers
19,006

 
303,993

Change in restricted cash and cash equivalents, net
155,683

 
(357,829
)
Change in notes receivable, net
(9,639
)
 
(2,432
)
Net cash provided by (used in) investing activities
(62,274
)
 
123,840

Financing activities
 
 
 
Repurchase of Class A ordinary shares

 
(4,239
)
Net cash provided by (used in) financing activities

 
(4,239
)
Net increase (decrease) in cash and cash equivalents
(66,606
)
 
78,925

Cash and cash equivalents at beginning of the period
112,162

 
12,030

Cash and cash equivalents at end of the period
$
45,556

 
$
90,955

Supplementary information
 
 
 
Interest paid in cash
$
5,275

 
$
14,201

Income tax paid in cash

 

Non-cash transfer to notes receivable

 
25,859


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)
 
June 30, 2016
 
 
1.   ORGANIZATION AND BASIS OF PRESENTATION
 
Greenlight Capital Re, Ltd. ("GLRE") was incorporated as an exempted company under the Companies Law of the Cayman Islands on July 13, 2004. GLRE’s principal wholly-owned subsidiary, Greenlight Reinsurance, Ltd. ("Greenlight Re"), provides global specialty property and casualty reinsurance. Greenlight Re has a Class D insurer license issued in accordance with the terms of The Insurance Law, 2010 and underlying regulations thereto (the "Law") and is subject to regulation by the Cayman Islands Monetary Authority ("CIMA"), in terms of the Law. Greenlight Re commenced underwriting in April 2006. During 2008, Verdant Holding Company, Ltd. ("Verdant"), a wholly-owned subsidiary of GLRE, was incorporated in the state of Delaware. During 2010, GLRE established Greenlight Reinsurance Ireland, Designated Activity Company ("GRIL"), a wholly-owned reinsurance subsidiary based in Dublin, Ireland. GRIL is authorized as a non-life reinsurance undertaking in accordance with the provisions of the European Union (Insurance and Reinsurance) Regulations 2015 ("Irish Regulations"). GRIL provides multi-line property and casualty reinsurance capacity to the European broker market and provides GLRE with an additional platform to serve clients located in Europe and North America.  As used herein, the "Company" refers collectively to GLRE and its consolidated subsidiaries.

The 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, 2015. 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, 2016 are not necessarily indicative of the results expected for the full calendar year.

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

 Restricted Cash and Cash Equivalents
 
The Company 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 derivatives. Additionally, restricted cash and cash equivalent balances are held to collateralize regulatory trusts and letters of credit issued to cedents (see Notes 4 and 8). The amount of cash encumbered varies depending on the market value of the securities sold, not yet purchased, and the collateral required by the cedents in the form of trust accounts and letters of credit. 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


Premium Revenue Recognition 

The Company accounts for reinsurance contracts in accordance with U.S. GAAP. In the event that a reinsurance contract does not transfer sufficient risk, deposit accounting is used and the contract is reported as a deposit liability. 

The Company writes excess of loss contracts as well as quota share contracts. The Company estimates the ultimate premiums for the entire contract period. These estimates are based on information received from the ceding companies and estimates from actuarial pricing models used by the Company. For excess of loss contracts, the total ultimate estimated premiums are recorded as premiums written at the inception of the contract. For quota share contracts, the premiums are recorded as written based on cession statements from cedents which typically are received monthly or quarterly depending on the terms specified in each contract. For any reporting lag, premiums written are estimated based on the portion of the ultimate estimated premiums relating to the risks underwritten during the lag period. 

Premium estimates are reviewed by management at least quarterly. Such review includes a comparison of actual reported premiums to expected ultimate premiums along with a review of the aging and collection of premium estimates. Based on management’s review, the appropriateness of the premium estimates is evaluated, and any adjustments to these estimates are recorded in the period in which they are determined. Changes in premium estimates, including premium receivable on both excess of loss and quota share contracts, are expected and may result in significant adjustments in any period. A significant portion of amounts included in reinsurance balances receivable represent estimated premiums written, net of commissions and brokerage, and are not currently due based on the terms of the underlying contracts.

Certain contracts allow for reinstatement premiums in the event of a full limit loss prior to the expiry of a contract. A reinstatement premium is not due until there is a full limit loss event and therefore, in accordance with U.S. GAAP, the Company records a reinstatement premium as written only in the event that a client incurs a full limit loss on the contract and the contract allows for a reinstatement of coverage upon payment of an additional premium. For catastrophe contracts which contractually require the payment of a reinstatement premium equal to or greater than the original premium upon the occurrence of a full limit loss, the reinstatement premiums are earned over the original contract period. Reinstatement premiums that are contractually calculated on a pro-rata basis of the original premiums, are earned over the remaining coverage period. For additional premiums which are due on a contract that has no remaining coverage period, the additional premiums are earned in full when due.

Certain contracts may provide for a penalty to be paid if the contract is terminated and canceled prior to its expiration term. Cancellation penalties are recognized in the period the notice of cancellation is received and are recorded in the consolidated statements of income under "other income (expense), net".

Premiums written are generally recognized as earned over the contract period in proportion to the period of risk covered. Unearned premiums consist of the unexpired portion of reinsurance provided.

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, 2016 and December 31, 2015, 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, 2016, $12.2 million (December 31, 2015: $12.2 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, 2016, $1.5 million and $2.6 million, respectively (2015: $1.1 million and $1.6 million, respectively) of net profit commission expense was included in acquisition costs on the condensed consolidated statements of income.
  

8


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.

Amounts paid by the Company for retroactive reinsurance that meets the conditions for reinsurance accounting are reported as loss and loss adjustment expenses recoverable to the extent those amounts do not exceed the associated liabilities. If the amounts paid for retroactive reinsurance exceed the liabilities, the Company increases the related liabilities, at the time the reinsurance contract is effective, and the excess is charged to net income as losses incurred. If the liabilities exceed the amounts paid, the recoverable balance is increased to reflect the difference, and the resulting gain is deferred and amortized over the estimated loss payout period. Changes in the estimated amount of liabilities relating to the underlying reinsured contracts are recognized in net income in the period of the change.

 Notes Receivable
 
Notes receivable include promissory notes receivable from third party entities. These notes are recorded at cost along with accrued interest, if any, which approximates the fair value. Interest income and realized gains or losses on sale of notes receivable are included under net investment income (loss) in the condensed consolidated statements of income.

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

At June 30, 2016, $20.9 million of notes receivable (net of any valuation allowance) were on non-accrual status
(December 31, 2015: $23.0 million) and any payments received were applied to reduce the recorded value of the notes.
 
At June 30, 2016 and December 31, 2015, there was no accrued interest included in the notes receivable balance. Based on management’s assessment, the recorded values of the notes receivable, net of valuation allowance, at June 30, 2016 and December 31, 2015, were expected to be fully collectible.

Deposit Assets and Liabilities
 
In accordance with U.S. GAAP, deposit accounting is used in the event that a reinsurance contract does not transfer sufficient insurance risk, or a contract provides retroactive reinsurance that does not meet the conditions for reinsurance accounting. 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, 2016 and December 31, 2015, there were no material deposit assets or deposit liabilities and no material gains or losses on deposit accounted contracts.

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 certain private equity fund investments the Company has elected to measure the fair value using the net asset value practical expedient allowed under U.S. GAAP, and accordingly these investments are not classified as Level 1, 2 or 3 in the fair value hierarchy.

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

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

The Company enters into financial contracts with counterparties as part of its investment strategy. Financial contracts, which include total return swaps, credit default swaps ("CDS"), futures, options, currency forwards and other derivative instruments, are recorded at their fair value with any unrealized gains and losses included in net investment income (loss) in the condensed consolidated statements of income. Financial contracts receivable represents derivative contracts whereby, based upon the contract's current fair value, the Company will be entitled to receive payments upon settlement of the contract. Financial contracts payable represents derivative contracts whereby, based upon each contract's current fair value, the Company will be obligated to make payments upon settlement of the contract.
 

10


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

Comprehensive Income (Loss)

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

Earnings (Loss) Per Share
 
Basic earnings per share are based on the weighted average number of common shares and participating securities outstanding during the period. Diluted earnings per share includes the dilutive effect of restricted stock units ("RSU") and additional potential common shares issuable when stock options are exercised and are determined using the treasury stock method. The Company treats its unvested restricted stock as participating securities in accordance with U.S. GAAP, which requires that unvested stock awards which contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid (referred to as "participating securities"), be included in the number of shares outstanding for both basic and diluted earnings per share calculations. In the event of a net loss, all RSUs, stock options outstanding and 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
 
2016
 
2015
 
2016
 
2015
Weighted average shares outstanding - basic
37,281,392

 
37,303,265

 
37,194,428

 
37,168,279

Effect of dilutive employee and director share-based awards

 

 

 

Weighted average shares outstanding - diluted
37,281,392

 
37,303,265

 
37,194,428

 
37,168,279

Anti-dilutive stock options outstanding
435,991

 
71,821

 
435,991

 
71,821

Participating securities excluded from calculation of loss per share 
371,642

 
310,193

 
371,642

 
310,193



11


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

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

Any deferred tax asset is evaluated for recovery and a valuation allowance is recorded when it is more likely than not that the deferred tax asset will not be realized in the future. The Company has not taken any income tax positions that are subject to significant uncertainty or that are reasonably likely to have a material impact on the Company. 

Recent Accounting Pronouncements
        
In May 2015, the FASB issued Accounting Standards Update 2015-07, "Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share or Its Equivalent" ("ASU 2015-07"). The amendments apply to reporting entities that elect to measure the fair value of an investment using the net asset value ("NAV") per share (or its equivalent) as a practical expedient. The amendments remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the NAV per share as a practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the NAV per share as a practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The amendments in ASU 2015-07 are effective for reporting periods beginning after December 15, 2015, with early adoption permitted. Entities are required to apply the amendments in this update retrospectively to all periods presented. The Company adopted ASU 2015-07 during the first quarter of 2016. As the Company measures certain investments in private equity funds using the NAV as a practicable expedient, upon adoption of ASU 2015-07, the fair value of these investments was removed from the fair value hierarchy for all periods presented in the Company’s condensed consolidated financial statements. The Company will continue to disclose information on those investments for which fair value is measured at NAV as a practical expedient.

In May 2015, the FASB issued ASU 2015-09, "Financial Services - Insurance (Topic 944): Disclosures about Short-Duration Contracts" ("ASU 2015-09"). ASU 2015-09 requires additional disclosures for short-duration contracts including incurred and paid claims development information, claims duration information, quantitative claims frequency information (unless impracticable), and an explanation of significant changes in methodologies and assumptions used to calculate the loss and loss adjustment expense reserves. ASU 2015-09 is effective for public entities for annual reporting periods beginning after December 15, 2015, and interim reporting periods within annual reporting periods beginning after December 15, 2016 with early adoption permitted. The Company is evaluating the impact of the disclosure requirements of ASU 2015-09 and is preparing to disclose the additional information in its consolidated financial statements for the fiscal year ending December 31, 2016 and interim and annual periods thereafter.

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"). The new guidance is intended to improve the recognition and measurement of financial instruments. ASU 2016-01, among other things, requires equity investments to be measured at fair value with changes in fair value recognized in net income or loss; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset. ASU 2016-01 affects public and private companies, not-for-profit organizations, and employee benefit plans that hold financial assets or owe financial liabilities. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is in the process of evaluating the impact of adopting ASU 2016-01 on the Company's consolidated financial statements. However, the adoption of this guidance is not expected to have a significant impact on the Company's net income or loss or retained earnings since the Company's investments are currently classified as "trading" and the unrealized gains and losses are already recognized in net income or loss.

12



In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for any organization in any interim or annual period. The Company is in the process of evaluating the impact of adopting ASU 2016-02 on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). ASU 2016-09 is intended to improve the accounting for employee share-based payments and affects all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any organization in any interim or annual period. The Company is in the process of evaluating the impact of the requirements of ASU 2016-09 on 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 (loss) in the condensed consolidated statements of income.
 
The following table presents the Company’s investments, categorized by the level of the fair value hierarchy as of June 30, 2016:
 
 
Fair value measurements as of June 30, 2016
 
 
Quoted prices in
active markets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
Assets: 
 
($ in thousands)
Debt instruments
 
$

 
$
93,307

 
$
586

 
$
93,893

Listed equity securities
 
891,952

 
7,952

 

 
899,904

Commodities
 
158,004

 

 

 
158,004

Private and unlisted equity securities
 

 

 
5,987

 
5,987

Private equity funds measured at net asset value (1)
 


 


 


 
12,679

Total investments
 
$
1,049,956

 
$
101,259

 
$
6,573

 
$
1,170,467

Financial contracts receivable
 
$
15

 
$
23,710

 
$

 
$
23,725

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Listed equity securities, sold not yet purchased
 
$
(714,535
)
 
$

 
$

 
$
(714,535
)
Debt instruments, sold not yet purchased
 

 
(83,238
)
 

 
(83,238
)
Securities sold, not yet purchased, at fair value
 
$
(714,535
)
 
$
(83,238
)
 
$

 
$
(797,773
)
Financial contracts payable
 
$

 
$
(5,290
)
 
$

 
$
(5,290
)
(1) Investments measured at fair value using the net asset value practical expedient have not been classified in the fair value hierarchy. The fair value amounts are presented in the above table to facilitate reconciliation to the amounts presented in the condensed consolidated balance sheets.

13



The following table presents the Company’s investments, categorized by the level of the fair value hierarchy as of December 31, 2015:
 
 
Fair value measurements as of December 31, 2015
 
 
Quoted prices in
active markets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
Assets: 
 
($ in thousands)
Debt instruments
 
$

 
$
38,582

 
$
505

 
$
39,087

Listed equity securities
 
900,369

 
5,625

 

 
905,994

Commodities
 
98,046

 

 

 
98,046

Private and unlisted equity securities
 

 

 
8,452

 
8,452

Private equity funds measured at net asset value (1)
 

 

 

 
12,585

 
 
$
998,415

 
$
44,207

 
$
8,957

 
$
1,064,164

Financial contracts receivable
 
$
20

 
$
13,195

 
$

 
$
13,215

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Listed equity securities, sold not yet purchased
 
$
(808,481
)
 
$

 
$

 
$
(808,481
)
Debt instruments, sold not yet purchased
 

 
(74,425
)
 

 
(74,425
)
Securities sold, not yet purchased, at fair value
 
$
(808,481
)
 
$
(74,425
)
 
$

 
$
(882,906
)
Financial contracts payable
 
$
(488
)
 
$
(27,757
)
 
$

 
$
(28,245
)
(1) Investments measured at fair value using the net asset value practical expedient have not been classified in the fair value hierarchy. The fair value amounts are presented in the above table to facilitate reconciliation to the amounts presented in the condensed consolidated balance sheets.


14


 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, 2016

 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Three months ended June 30, 2016
 
 
Assets
 
 
Debt instruments
 
 Private and unlisted equity securities
 
 Total
 
 
 ($ in thousands)
Beginning balance
 
$
496

 
$
5,931

 
$
6,427

Purchases
 

 

 

Sales
 

 

 

Issuances
 

 

 

Settlements
 

 

 

Total realized and unrealized gains (losses) and amortization included in earnings, net
 
90

 
56

 
146

Transfers into Level 3
 

 

 

Transfers out of Level 3
 

 

 

Ending balance
 
$
586

 
$
5,987

 
$
6,573



 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Six months ended June 30, 2016
 
 
Assets
 
 
Debt instruments
 
 Private and unlisted equity securities
 
 Total
 
 
 ($ in thousands)
Beginning balance
 
$
505

 
$
8,452

 
$
8,957

Purchases
 

 

 

Sales
 

 
(2,539
)
 
(2,539
)
Issuances
 

 

 

Settlements
 

 

 

Total realized and unrealized gains (losses) and amortization included in earnings, net
 
81

 
74

 
155

Transfers into Level 3
 

 

 

Transfers out of Level 3
 

 

 

Ending balance
 
$
586

 
$
5,987

 
$
6,573


There were no transfers between Level 1, Level 2 or Level 3 during the three and six months ended June 30, 2016.


15


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, 2015:

 
 
  Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Three months ended June 30, 2015
 
 
Assets
 
Liabilities
 
 
Debt instruments
 
 Private and unlisted equity securities (1)
 
Financial contracts receivable
 
Listed equity securities
 
 Total
 
Financial contracts payable
 
 
 ($ in thousands)
Beginning balance
 
$
22,259

 
$
6,449

 
$
1,763

 
$

 
$
30,471

 
$

Purchases
 

 

 

 

 

 

Sales
 

 

 

 

 

 

Issuances
 

 

 

 

 

 

Settlements
 

 

 

 

 

 

Total realized and unrealized gains (losses) and amortization included in earnings, net
 
(78
)
 

 
(583
)
 

 
(661
)
 

Transfers into Level 3
 

 

 
2,536

 
5,189

 
7,725

 
8,835

Transfers out of Level 3
 

 

 

 

 

 

Ending balance
 
$
22,181

 
$
6,449

 
$
3,716

 
$
5,189

 
$
37,535

 
$
8,835

(1) Restated to exclude investments measured at fair value using the net asset value practical expedient which are no longer classified in the fair value hierarchy.

 
 
  Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Six months ended June 30, 2015
 
 
Assets
 
Liabilities
 
 
Debt instruments
 
 Private and unlisted equity securities (1)
 
Financial contracts receivable
 
Listed equity securities
 
Total
 
Financial contracts payable
 
 
 ($ in thousands)
Beginning balance
 
$
22,259

 
$
6,449

 
$

 
$

 
$
28,708

 
$

Purchases
 

 


 
2,340

 

 
2,340

 

Sales
 

 


 

 

 

 

Issuances
 

 

 

 

 

 

Settlements
 

 

 

 

 

 

Total realized and unrealized gains (losses) and amortization included in earnings, net
 
(78
)
 


 
(1,160
)
 

 
(1,238
)
 

Transfers into Level 3
 

 

 
2,536

 
5,189

 
7,725

 
8,835

Transfers out of Level 3
 

 

 

 

 

 

Ending balance
 
$
22,181

 
$
6,449

 
$
3,716

 
$
5,189

 
$
37,535

 
$
8,835

(1) Restated to exclude investments measured at fair value using the net asset value practical expedient which are no longer classified in the fair value hierarchy.

During the three and six months ended June 30, 2015$5.2 million of equity securities that were listed on the Athens Stock Exchange (the "ASE") were transferred from Level 1 to Level 3 due to trading being halted after June 26, 2015 for all equity securities listed on the ASE. As of June 30, 2015 there was no active market with observable trading prices to determine the fair values of these securities. Therefore, the fair values for these securities as of June 30, 2015, were based on the last

16


trading price of these securities on the ASE and adjusted for the estimated decline in the fair value of American depository receipts of other comparable securities for the period from June 27, 2015 to June 30, 2015. The fair values for derivatives for which the underlying securities trade on the ASE were similarly adjusted. Therefore, $2.5 million and $8.8 million of financial contracts receivable and financial contracts payable, respectively, were transfered from Level 2 to Level 3 during the three and six months ended June 30, 2015 due to the fair values being based on unobservable inputs. There were no other transfers between Level 1, Level 2 or Level 3 during the three and six months ended June 30, 2015.

As of June 30, 2016, the Company held investments in private equity funds of $12.7 million (December 31, 2015: $12.6 million) with fair values measured using the unadjusted net asset values as reported by the managers of these funds as a practical expedient. Some of these net asset values were reported from periods prior to June 30, 2016. The private equity funds have varying lock-up periods and, as of June 30, 2016, all of the funds had redemption restrictions. The redemption restrictions have been in place since inception of the investments and are not expected to lapse in the near future. As of June 30, 2016, the Company had $9.6 million (December 31, 2015: $6.1 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 funds. These commitments are included in the amounts presented in the schedule of commitments and contingencies in Note 8 of these condensed consolidated financial statements.  

For the three and six months ended June 30, 2016, included in net investment loss in the condensed consolidated statements of income were net realized losses relating to Level 3 securities of nil and $1.4 million, respectively (three and six months ended June 30, 2015: $0.1 million and $0.1 million, respectively). In addition, for the three and six months ended June 30, 2016, amortization of nil and nil, respectively (2015: $0.6 million and $1.2 million, respectively) relating to financial contracts receivable, valued using unobservable inputs, were included in the condensed consolidated statements of income as other income (expense), net.

For Level 3 securities still held as of the reporting date, the change in net unrealized gain for the three and six months ended June 30, 2016 of $0.1 million and $1.6 million, respectively (three and six months ended June 30, 2015: net unrealized losses of $0.4 million and $0.2 million, respectively), were included in net investment income (loss) in the condensed consolidated statements of income.
  
Investments
 
Debt instruments, trading
 
At June 30, 2016, the following investments were included in debt instruments:
 
 
Cost/amortized cost
 
Unrealized gains
 
Unrealized losses
 
Fair
 value
 
 
($ in thousands)
Corporate debt – U.S.
 
$
36,223

 
$
5,159

 
$
(6,405
)
 
$
34,977

Corporate debt – Non U.S.
 
2,109

 

 
(2,073
)
 
36

Sovereign debt – U.S.
 
36,952

 
1,670

 

 
38,622

Sovereign debt – Non U.S.
 
17,688

 
2,570

 

 
20,258

Total debt instruments
 
$
92,972

 
$
9,399

 
$
(8,478
)
 
$
93,893

 
At December 31, 2015, the following investments were included in debt instruments:
 
 
Cost/amortized cost
 
Unrealized gains
 
Unrealized losses
 
Fair
 value
 
 
($ in thousands)
Corporate debt – U.S.
 
$
25,674

 
$
155

 
$
(5,519
)
 
$
20,310

Corporate debt – Non U.S.
 
2,109

 

 
(1,795
)
 
314

Sovereign debt – Non U.S.
 
17,688

 
1,225

 
(450
)
 
18,463

Total debt instruments
 
$
45,471

 
$
1,380

 
$
(7,764
)
 
$
39,087



17


The maturity distribution for debt instruments held at June 30, 2016 and December 31, 2015 was as follows:
 
 
June 30, 2016
 
December 31, 2015
 
 
Cost/
 amortized
 cost
 
Fair
 value
 
Cost/
 amortized
 cost
 
Fair
 value
 
 
($ in thousands)
Within one year
 
$

 
$

 
$

 
$

From one to five years
 
11,151

 
6,725

 
4,202

 
4,129

From five to ten years
 
26,230

 
27,702

 
18,840

 
14,780

More than ten years
 
55,591

 
59,466

 
22,429

 
20,178

 
 
$
92,972

 
$
93,893

 
$
45,471

 
$
39,087

 
Equity securities, trading

At June 30, 2016, the following long positions were included in equity securities, trading: 
 
 
Cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair
value
 
 
($ in thousands)
Equities – listed
 
$
930,113

 
$
70,718

 
$
(124,230
)
 
$
876,601

Exchange traded funds
 
17,986

 
5,317

 

 
23,303

Total equity securities
 
$
948,099

 
$
76,035

 
$
(124,230
)
 
$
899,904


At December 31, 2015, the following long positions were included in equity securities, trading:
 
 
Cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair
value
 
 
($ in thousands)
Equities – listed
 
$
1,011,424

 
$
67,114

 
$
(187,885
)
 
$
890,653

Exchange traded funds
 
31,570

 

 
(16,229
)
 
15,341

Total equity securities
 
$
1,042,994

 
$
67,114

 
$
(204,114
)
 
$
905,994


Other Investments
 
"Other investments" include commodities and private and unlisted equity securities. As of June 30, 2016 and December 31, 2015, commodities were comprised of gold bullion. 

At June 30, 2016, the following securities were included in other investments:
 
 
Cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair
value
 
 
($ in thousands)
Commodities
 
$
130,671

 
$
27,333

 
$

 
$
158,004

Private and unlisted equity securities
 
14,678

 
3,989

 
(1
)
 
18,666

 
 
$
145,349

 
$
31,322

 
$
(1
)
 
$
176,670



18


At December 31, 2015, the following securities were included in other investments: 
 
 
Cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair
value
 
 
($ in thousands)
Commodities
 
$
102,092

 
$

 
$
(4,046
)
 
$
98,046

Private and unlisted equity securities
 
18,720

 
3,491

 
(1,174
)
 
21,037

 
 
$
120,812

 
$
3,491

 
$
(5,220
)
 
$
119,083


Investments in Securities Sold, Not Yet Purchased 

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

At June 30, 2016, the following securities were included in investments in securities sold, not yet purchased:
 
 
Proceeds
 
Unrealized gains
 
Unrealized losses
 
 Fair value
 
 
($ in thousands)
Equities – listed
 
$
(684,731
)
 
$
42,442

 
$
(72,246
)
 
$
(714,535
)
Exchange traded funds
 

 

 

 

Sovereign debt – Non U.S.
 
(73,828
)
 

 
(9,410
)
 
(83,238
)
 
 
$
(758,559
)
 
$
42,442

 
$
(81,656
)
 
$
(797,773
)

At December 31, 2015, the following securities were included in investments in securities sold, not yet purchased: 
 
 
Proceeds
 
Unrealized gains
 
Unrealized losses
 
 Fair value
 
 
($ in thousands)
Equities – listed
 
$
(803,842
)
 
$
102,469

 
$
(94,681
)
 
$
(796,054
)
Exchange traded funds
 
(9,572
)
 

 
(2,855
)
 
(12,427
)
Sovereign debt – Non U.S.
 
(77,443
)
 
3,018

 

 
(74,425
)
 
 
$
(890,857
)
 
$
105,487

 
$
(97,536
)
 
$
(882,906
)
 
Financial Contracts
 
As of June 30, 2016 and December 31, 2015, the Company had entered into total return equity swaps, commodity swaps, options, warrants, rights, futures and forward contracts with various financial institutions to meet certain investment objectives. Under the terms of each of these financial contracts, the Company 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.

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

19


of delivery to and from counterparties of specific positions. As of June 30, 2016, the Company held $2.9 million OTC put options (long) (December 31, 2015: $8.7 million).

At June 30, 2016, the fair values of financial contracts outstanding were as follows: 
Financial Contracts
 
Listing
currency
 (1)
 
Notional amount of
underlying instruments
 
Fair value of net assets
(obligations)
on financial
contracts
 
 
 
 
($ in thousands)
Financial contracts receivable
 
 
 
 
 
 
Commodity Swaps
 
USD
 
55,355

 
$
5,649

Put options (2)
 
USD
 
44,055

 
2,905

Total return swaps – equities
 
EUR/GBP/HKD/RON/USD
 
46,920

 
15,128

Warrants and rights on listed equities
 
EUR/USD
 
82

 
43

Total financial contracts receivable, at fair value
 
 
 
 
 
$
23,725

Financial contracts payable
 
 
 
 
 
 
Forwards
 
KRW
 
2,752

 
$
(44
)
Total return swaps – equities
 
EUR/USD
 
16,829

 
(5,246
)
Total financial contracts payable, at fair value
 
 
 
 
 
$
(5,290
)
(1) USD = US Dollar; EUR = Euro; GBP = British Pound; HKD = Hong Kong Dollar; KRW = Korean Won; RON = Romanian New Leu.
(2) Includes options on the Japanese Yen and the Chinese Yuan, denominated in U.S. dollars.

At December 31, 2015, the fair values of financial contracts outstanding were as follows: 
Financial Contracts
 
Listing currency (1)
 
Notional amount of
underlying instruments
 
Fair value of net assets
(obligations)
on financial
contracts
 
 
 
 
($ in thousands)
Financial contracts receivable
 
 
 
 
 
 
Call options (2)
 
USD
 
47,259

 
$
657

Put options (3)
 
USD
 
147,326

 
8,790

Total return swaps – equities
 
EUR/GBP/USD
 
50,205

 
3,748

Warrants and rights on listed equities
 
EUR
 
59

 
20

Total financial contracts receivable, at fair value
 
 
 
 
 
$
13,215

Financial contracts payable
 
 
 
 
 
 
Call options
 
USD
 
2,601

 
$
(64
)
Commodity Swaps
 
USD
 
42,160

 
(12,784
)
Forwards
 
KRW
 
2,908

 
(22
)
Futures
 
USD
 
21,195

 
(488
)
Total return swaps – equities
 
EUR/GBP/HKD/RON/MXN/USD
 
71,874

 
(14,887
)
Total financial contracts payable, at fair value
 
 
 
 
 
$
(28,245
)
(1) USD = US Dollar; EUR = Euro; GBP = British Pound; HKD = Hong Kong Dollar; KRW = Korean Won; MXN = Mexican Peso; RON = Romanian New Leu.
(2) Includes options on interest rate futures relating to U.S. dollar LIBOR interest rates.
(3) Includes options on the Japanese Yen and the Chinese Yuan, denominated in U.S. dollars.
  


20



During the three and six months ended June 30, 2016 and 2015, 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 June 30
 
Six months ended June 30
 
 
 
 
2016
 
2015
 
2016
 
2015
 
 
 
 
($ in thousands)
Credit default swaps, purchased – corporate debt
 
Net investment income (loss)
 
$

 
$
(50
)
 
$

 
$
(105
)
Credit default swaps, purchased – sovereign debt
 
Net investment income (loss)
 

 
(30
)
 

 
(61
)
Forwards
 
Net investment income (loss)
 
13

 
97

 
(68
)
 
233

Futures
 
Net investment income (loss)
 
309

 
(151
)
 
1,293

 
(2,228
)
Interest rate swaps
 
Net investment income (loss)
 

 
(242
)
 

 
(242
)
Options, warrants, and rights
 
Net investment income (loss)
 
555

 
(7,014
)
 
(2,248
)
 
(9,488
)
Commodity swaps
 
Net investment income (loss)
 
5,846

 
(730
)
 
281

 
(730
)
Total return swaps – equities
 
Net investment income (loss)
 
6,885

 
(80
)
 
13,804

 
4,143

Weather derivative swap
 
Other income (expense), net
 

 
(583
)
 

 
(1,160
)
Total
 
 
 
$
13,608

 
$
(8,783
)
 
$
13,062

 
$
(9,638
)

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, 2016, the Company’s volume of derivative activities (based on notional amounts) was as follows:
2016
 
Three months ended June 30
 
Six months ended June 30
Derivatives not designated as hedging instruments (notional amounts)
 
  Entered
 
Exited
 
  Entered
 
Exited
 
 
($ in thousands)
Forwards
 
$

 
$
115

 
$

 
$
178

Futures
 

 
25,456

 
174,721

 
195,166

Options, warrants and rights (1)
 
20,206

 
83,051

 
153,539

 
258,702

Commodity swaps
 

 
9,651

 
75,566

 
64,025

Total return swaps
 
567

 
20,994

 
2,050

 
49,265

Total
 
$
20,773

 
$
139,267

 
$
405,876

 
$
567,336

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


21


For the three and six months ended June 30, 2015, the Company’s volume of derivative activities (based on notional amounts) was as follows:
2015
 
Three months ended June 30
 
Six months ended June 30
Derivatives not designated as hedging instruments (notional amounts)
 
  Entered
 
Exited
 
  Entered
 
Exited
 
 
($ in thousands)
Forwards
 
$

 
$
1,368

 
$

 
$
6,093

Futures
 

 
73,785

 
84,989

 
130,533

Interest rate swaps
 
6,558,000

 

 
6,558,000

 

Options, warrants and rights (1)
 
4,710,216

 
8,418,787

 
4,710,216

 
8,488,564

Commodity swaps
 
75,994

 

 
75,994

 

Total return swaps
 
6,190

 
17,243

 
21,090

 
56,991

Weather derivative swap
 

 

 
2,340

 

Total
 
$
11,350,400

 
$
8,511,183

 
$
11,452,629

 
$
8,682,181

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

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

As of June 30, 2016, the gross and net amounts of derivative instruments and the cash collateral applicable to derivative instruments were as follows:
June 30, 2016
 
(i)
 
(ii)
 
(iii) = (i) - (ii)
 
(iv) Gross amounts not offset in the balance sheet
 
(v) = (iii) + (iv)
 
 
Gross amounts of recognized assets (liabilities)
 
Gross amounts offset in the balance sheet
 
Net amounts of assets (liabilities) presented in the balance sheet
 
Financial instruments available for offset
 
Cash collateral (received) pledged
 
Net amount of asset (liability)
 
 
($ in thousands)
Financial contracts receivable
 
$
23,725

 
$

 
$
23,725

 
$
(2,683
)
 
$
(11,850
)
 
$
9,192

Financial contracts payable
 
(5,290
)
 

 
(5,290
)
 
2,683

 
2,607

 


As of December 31, 2015, the gross and net amounts of derivative instruments and the cash collateral applicable to derivative instruments were as follows:
December 31, 2015
 
(i)
 
(ii)
 
(iii) = (i) - (ii)
 
(iv) Gross amounts not offset in the balance sheet
 
(v) = (iii) + (iv)
 
 
Gross amounts of recognized assets (liabilities)
 
Gross amounts offset in the balance sheet
 
Net amounts of assets (liabilities) presented in the balance sheet
 
Financial instruments available for offset
 
Cash collateral (received) pledged
 
Net amount of asset (liability)
 
 
($ in thousands)
Financial contracts receivable
 
$
13,215

 
$

 
$
13,215

 
$
(8,937
)
 
$
(2,036
)
 
$
2,242

Financial contracts payable
 
(28,245
)
 

 
(28,245
)
 
8,937

 
19,308

 



22


4.        DUE TO PRIME BROKERS
 
As of June 30, 2016, the amount due to prime brokers is comprised of margin-borrowing from prime brokers relating to investments purchased on margin, as well as margin-borrowing for providing collateral to support some of the Company’s outstanding letters of credit (see Note 8) and trust accounts. 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, 2016, the amounts due to prime brokers included $266.4 million (December 31, 2015: $301.4 million) of cash borrowed under the term margin agreements to provide collateral for letters of credit and trust accounts and $149.1 million (December 31, 2015: $95.0 million) of borrowing relating to investing activities.

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

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

For the three and six months ended June 30, 2016, loss and loss adjustment expenses incurred of $111.4 million and $202.0 million, respectively, (2015: $76.7 million and $139.9 million, respectively), reported on the condensed consolidated statements of income are net of loss and loss expenses recovered and recoverable of $0.3 million and $0.7 million, respectively (2015: $0.5 million and $0.8 million, respectively).

Retrocession contracts do not relieve the Company from its obligations to the insureds. Failure of retrocessionaires to honor their obligations could result in losses to the Company. At June 30, 2016, the Company had losses receivable and loss reserves recoverable of $71.7 million (December 31, 2015: $3.1 million) from unrated retrocessionaires and $0.6 million (December 31, 2015: $0.3 million) from a retrocessionaire rated A- by A.M. Best. At June 30, 2016 and December 31, 2015$3.0 million and $3.1 million, respectively, of losses recoverable from unrated retrocessionaires were secured by cash collateral held by the Company. In addition, at June 30, 2016, $68.7 million of the losses recoverable from an unrated retrocessionaire was secured by a guarantee from the parent entity of the retrocessionaire. Subsequently, effective July 12, 2016, a trust account was established by the retrocessionaire for the benefit of the Company to provide collateral as required by the contract in the amount of $52.7 million.

The Company regularly evaluates the financial condition of its retrocessionaires to assess the ability of the retrocessionaires to honor their respective obligations. At June 30, 2016 and December 31, 2015, 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 that is administered by the Compensation Committee of the Board of Directors. The Company's shares authorized for issuance pursuant to the stock incentive plan include 3,500,000 (December 31, 2015: 3,500,000) Class A ordinary shares. As of June 30, 2016, 475,963 (December 31, 2015: 658,775) Class A ordinary shares remained available for future issuance under the Company's stock incentive plan.
 
Employee and Director Restricted Shares
 
As part of its stock incentive plan, the Company issues restricted shares for which the fair value is equal to the price of the Company’s Class A ordinary shares on the grant date. Compensation based on the grant date fair market value of the shares is expensed on a straight line basis over the applicable vesting period, net of any estimated forfeitures.

23


For the six months ended June 30, 2016, 152,138 (2015: 78,685) 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 cliff vest after three years from the date of issuance, subject to the grantee’s continued service with the Company. During the vesting period, the holder of the restricted shares retains voting rights and is entitled to any dividends declared by the Company.

For the six months ended June 30, 2016, the Company also issued to non-employee directors an aggregate of 39,288 (2015: 28,215) restricted Class A ordinary shares as part of their remuneration for services to the Company. Each of these restricted shares issued to non-employee directors contains similar restrictions to those issued to employees and will vest on the earlier of the first anniversary of the 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, 2016, 4,177 (2015: 7,091) restricted shares were forfeited by employees who left the Company prior to the expiration of the applicable vesting periods. For the six months ended June 30, 2016, in accordance with U.S. GAAP, $0.05 million of stock compensation expense (2015: $0.1 million) relating to the forfeited restricted shares was reversed.

The restricted share award activity during the six months ended June 30, 2016 was as follows:
 
 
Number of
non-vested
restricted
 shares
 
Weighted
 average
grant date
fair value
Balance at December 31, 2015
 
307,013

 
$
29.74

Granted
 
191,426

 
21.54

Vested
 
(122,620
)
 
25.66

Forfeited
 
(4,177
)
 
32.62

Balance at June 30, 2016
 
371,642

 
$
26.83

 
Employee and Director Stock Options

For the six months ended June 30, 2016, 261,000 (2015: 186,000) stock options were exercised by directors and employees resulting in 99,617 (2015: 120,194) Class A ordinary shares issued, net of shares surrendered as a result of the cashless exercise of stock options. When stock options are granted, the Company reduces the corresponding number from the shares authorized for issuance as part of the Company’s stock incentive plan. The intrinsic value of options exercised during the six months ended June 30, 2016 was $2.0 million (2015: $3.8 million).

Employee and director stock option activity during the six months ended June 30, 2016 was as follows: 
 
 
Number of
 options
 
Weighted
 average
 exercise
 price
 
Weighted
 average
 grant date
 fair value