0001385613-18-000141.txt : 20181105 0001385613-18-000141.hdr.sgml : 20181105 20181105161421 ACCESSION NUMBER: 0001385613-18-000141 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 83 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181105 DATE AS OF CHANGE: 20181105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREENLIGHT CAPITAL RE, LTD. CENTRAL INDEX KEY: 0001385613 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 000000000 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-33493 FILM NUMBER: 181160064 BUSINESS ADDRESS: STREET 1: 65 MARKET STREET, SUITE 1207, STREET 2: CAMANA BAY, P.O. BOX 31110 CITY: GRAND CAYMAN STATE: E9 ZIP: KY1-1205 BUSINESS PHONE: 345 943 4573 MAIL ADDRESS: STREET 1: 65 MARKET STREET, SUITE 1207, STREET 2: CAMANA BAY, P.O. BOX 31110 CITY: GRAND CAYMAN STATE: E9 ZIP: KY1-1205 FORMER COMPANY: FORMER CONFORMED NAME: Greenlight Capital Re, Ltd. DATE OF NAME CHANGE: 20070109 10-Q 1 glre-2018093010qdocument.htm 10-Q Q3 2018 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 September 30, 2018

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, JASMINE COURT,
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 every Interactive Data File required to be submitted 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 such files). 
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨           Smaller reporting company ¨ Emerging growth company ¨

If an emerging growth company, indicate by check mark if registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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
30,131,606
Class B Ordinary Shares, $0.10 par value
6,254,715
(Class)                      
Outstanding as of November 2, 2018





GREENLIGHT CAPITAL RE, LTD.
 
TABLE OF CONTENTS
 
 
 
Page
 
Condensed Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017
 
Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017 (unaudited)
 
Condensed Consolidated Statements of Shareholders' Equity for the nine months ended September 30, 2018 and 2017 (unaudited)
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (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 
September 30, 2018 and December 31, 2017
(expressed in thousands of U.S. dollars, except per share and share amounts)
 
September 30, 2018
 
December 31, 2017
 
(unaudited)
 
(audited)
Assets
 
 
 
Investments
 
 
 
Investment in related party investment fund, at fair value
$
346,721

 
$

Debt instruments, trading, at fair value
25

 
7,180

Equity securities, trading, at fair value
57,776

 
1,203,672

Other investments, at fair value
73,505

 
152,132

Total investments
478,027

 
1,362,984

Cash and cash equivalents
43,912

 
27,285

Restricted cash and cash equivalents
673,835

 
1,503,813

Financial contracts receivable, at fair value
69,166

 
12,893

Reinsurance balances receivable
289,366

 
301,762

Loss and loss adjustment expenses recoverable
37,835

 
29,459

Deferred acquisition costs, net
52,717

 
62,350

Unearned premiums ceded
25,900

 
25,120

Notes receivable, net
29,436

 
28,497

Other assets
4,118

 
3,230

Total assets
$
1,704,312

 
$
3,357,393

Liabilities and equity
 
 
 
Liabilities
 
 
 
Due to related party investment fund
$
111,697

 
$

Securities sold, not yet purchased, at fair value

 
912,797

Financial contracts payable, at fair value
20,749

 
22,222

Due to prime brokers and other financial institutions
43,687

 
672,700

Loss and loss adjustment expense reserves
474,943

 
464,380

Unearned premium reserves
227,517

 
255,818

Reinsurance balances payable
137,321

 
144,058

Funds withheld
16,129

 
23,579

Other liabilities
8,615

 
10,413

Convertible senior notes payable, net of deferred costs
89,606

 

Total liabilities
1,130,264

 
2,505,967

Redeemable non-controlling interest in related party joint venture
15,310

 
7,169

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, 30,131,606 (2017: 31,104,830): Class B: par value $0.10; authorized, 25,000,000; issued and outstanding, 6,254,715 (2017: 6,254,715))
3,639

 
3,736

Additional paid-in capital
498,600

 
503,316

Retained earnings
54,742

 
324,272

Shareholders’ equity attributable to shareholders
556,981

 
831,324

Non-controlling interest in related party joint venture
1,757

 
12,933

Total equity
558,738

 
844,257

Total liabilities, redeemable non-controlling interest and equity
$
1,704,312

 
$
3,357,393

 
  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 nine months ended September 30, 2018 and 2017
(expressed in thousands of U.S. dollars, except per share and share amounts)
 
Three months ended September 30
 
Nine months ended September 30
 
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
Gross premiums written
$
115,154

 
$
181,588

 
$
432,388

 
$
553,691

Gross premiums ceded
(15,456
)
 
(7,931
)
 
(72,536
)
 
(13,880
)
Net premiums written
99,698

 
173,657

 
359,852

 
539,811

Change in net unearned premium reserves
14,406

 
(964
)
 
28,912

 
(54,892
)
Net premiums earned
114,104

 
172,693

 
388,764

 
484,919

Income (loss) from investment in related party investment fund [net of related party expenses of $803; $0; $803 and $0, respectively]
(10,025
)
 

 
(10,025
)
 

Net investment income (loss) [net of related party expenses of $1,832; $8,369; $10,418 and $17,013, respectively]
(70,851
)
 
63,976

 
(256,723
)
 
36,445

Other income (expense), net
(683
)
 
(520
)
 
(1,246
)
 
(224
)
Total revenues
32,545

 
236,149

 
120,770

 
521,140

Expenses
 
 
 
 
 
 
 
Loss and loss adjustment expenses incurred, net
86,780

 
168,918

 
267,419

 
379,746

Acquisition costs, net
28,331

 
38,011

 
107,163

 
126,651

General and administrative expenses
7,136

 
8,202

 
20,050

 
21,292

Interest expense
927

 

 
927

 

Total expenses
123,174

 
215,131

 
395,559

 
527,689

Income (loss) before income tax
(90,629
)
 
21,018

 
(274,789
)
 
(6,549
)
Income tax (expense) benefit
355

 
(65
)
 
1,448

 
109

Net income (loss) including non-controlling interest
(90,274
)
 
20,953

 
(273,341
)
 
(6,440
)
Loss (income) attributable to non-controlling interest in related party joint venture
1,159

 
(1,078
)
 
4,106

 
(780
)
Net income (loss)
$
(89,115
)
 
$
19,875

 
$
(269,235
)
 
$
(7,220
)
Earnings (loss) per share
 
 
 
 
 
 
 
Basic
$
(2.48
)
 
$
0.53

 
$
(7.49
)
 
$
(0.20
)
Diluted
$
(2.48
)
 
$
0.53

 
$
(7.49
)
 
$
(0.20
)
Weighted average number of ordinary shares used in the determination of earnings and loss per share
 
 
 
 
 
 
 
Basic
35,952,472

 
37,345,985

 
35,951,384

 
36,994,969

Diluted
35,952,472

 
37,375,273

 
35,951,384

 
37,022,347

 

 
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 nine months ended September 30, 2018 and 2017
(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, 2016
$
3,737

 
$
500,337

 
$
370,168

 
$
874,242

 
$
11,561

 
$
885,803

Issue of Class A ordinary shares, net of forfeitures
12

 

 

 
12

 

 
12

Repurchase of Class A ordinary shares
(14
)
 
(1,861
)
 
(944
)
 
(2,819
)
 

 
(2,819
)
Share-based compensation expense, net of forfeitures

 
3,290

 

 
3,290

 

 
3,290

Change in non-controlling interest in related party joint venture

 

 

 

 
1,267

 
1,267

Net income (loss)

 

 
(7,220
)
 
(7,220
)
 

 
(7,220
)
Balance at September 30, 2017
$
3,735

 
$
501,766

 
$
362,004

 
$
867,505

 
$
12,828

 
$
880,333

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
3,736

 
$
503,316

 
$
324,272

 
$
831,324

 
$
12,933

 
$
844,257

Issue of Class A ordinary shares, net of forfeitures
21

 

 

 
21

 

 
21

Repurchase of Class A ordinary shares
(118
)
 
(16,090
)
 
(295
)
 
(16,503
)
 

 
(16,503
)
Share-based compensation expense, net of forfeitures

 
3,478

 

 
3,478

 

 
3,478

Issuance of convertible notes

 
7,896

 

 
7,896

 

 
7,896

Change in non-controlling interest in related party joint venture

 

 

 

 
(11,176
)
 
(11,176
)
Net income (loss)

 

 
(269,235
)
 
(269,235
)
 

 
(269,235
)
Balance at September 30, 2018
$
3,639

 
$
498,600

 
$
54,742

 
$
556,981

 
$
1,757

 
$
558,738



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 nine months ended September 30, 2018 and 2017
(expressed in thousands of U.S. dollars) 
 
Nine months ended September 30
 
2018
 
2017
Cash provided by (used in) operating activities
 
 
 
Net income (loss)
$
(269,235
)
 
$
(7,220
)
Adjustments to reconcile net income or loss to net cash provided by (used in) operating activities
 
 
 
Loss (income) from investments in related party investment fund
10,025

 

Loss (income) from equity accounted investment
96

 

Net change in unrealized gains and losses on investments and financial contracts
4,620

 
25,462

Net realized (gains) losses on investments and financial contracts
254,062

 
(86,746
)
Foreign exchange (gains) losses on investments
(216
)
 
(2,173
)
Income (loss) attributable to total non-controlling interest in related party joint venture
(4,106
)
 
780

Share-based compensation expense, net of forfeitures
3,499

 
3,302

Amortization and interest expense
927

 

Depreciation expense
243

 
275

Net change in
 
 
 
Reinsurance balances receivable
12,396

 
(75,127
)
Loss and loss adjustment expenses recoverable
(8,376
)
 
(15,743
)
Deferred acquisition costs, net
9,633

 
(16,219
)
Unearned premiums ceded
(780
)
 
(3,754
)
Other assets
(1,131
)
 
(1,669
)
Loss and loss adjustment expense reserves
10,563

 
139,137

Unearned premium reserves
(28,301
)
 
59,091

Reinsurance balances payable
(6,737
)
 
34,877

Funds withheld
(7,450
)
 
10,560

Other liabilities
(1,798
)
 
(1,788
)
Performance compensation payable to related party

 
3,955

Net cash provided by (used in) operating activities
(22,066
)
 
67,000

Investing activities
 
 
 
Proceeds from redemptions from related party investment fund
9,509

 

Contributions to related party investment fund
(241,248
)
 

Purchases of investments, trading
(379,187
)
 
(898,573
)
Sales of investments, trading
967,127

 
772,588

Payments for financial contracts
(129,016
)
 
(19,939
)
Proceeds from financial contracts
37,002

 
68,323

Securities sold, not yet purchased
340,693

 
972,991

Dispositions of securities sold, not yet purchased
(844,379
)
 
(1,054,357
)
Change in due to prime brokers and other financial institutions
(629,013
)
 
227,869

Change in notes receivable, net
(939
)
 
4,081

Non-controlling interest contribution into (withdrawal from) related party joint venture, net
1,071

 

Net cash provided by (used in) investing activities
(868,380
)
 
72,983

Financing activities
 
 
 
Net proceeds from issuance of convertible senior notes payable, net of costs
96,575

 

Repurchase of Class A ordinary shares
(16,503
)
 
(2,819
)
Net cash provided by (used in) financing activities
80,072

 
(2,819
)
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash
(2,977
)
 
2,203

Net increase (decrease) in cash, cash equivalents and restricted cash
(813,351
)
 
139,367

Cash, cash equivalents and restricted cash at beginning of the period (see Note 2)
1,531,098

 
1,242,509

Cash, cash equivalents and restricted cash at end of the period (see Note 2)
$
717,747

 
$
1,381,876

Supplementary information
 
 
 
Interest paid in cash
$
9,848

 
$
5,875

Non-cash transfer of investments (Note 3)
125,008

 


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)
 
September 30, 2018
 
 
1.   ORGANIZATION AND BASIS OF PRESENTATION
 
Greenlight Capital Re, Ltd. (“GLRE”) was incorporated as an exempted company under the Companies Law of the Cayman Islands on July 13, 2004. GLRE’s principal wholly-owned subsidiary, Greenlight Reinsurance, Ltd. (“Greenlight Re”), provides global specialty property and casualty reinsurance. Greenlight Re has a Class D insurer license issued in accordance with the terms of The Insurance Law, 2010 and underlying regulations thereto (the “Law”) and is subject to regulation by the Cayman Islands Monetary Authority (“CIMA”), in terms of the Law. Greenlight Re commenced underwriting in April 2006. During 2008, Verdant Holding Company, Ltd. (“Verdant”), a wholly-owned subsidiary of GLRE, was incorporated in the state of Delaware. During 2010, GLRE established Greenlight Reinsurance Ireland, Designated Activity Company (“GRIL”), a wholly-owned reinsurance subsidiary based in Dublin, Ireland. GRIL is authorized as a non-life reinsurance undertaking in accordance with the provisions of the European Union (Insurance and Reinsurance) Regulations 2015 (“Irish Regulations”). GRIL provides multi-line property and casualty reinsurance capacity to the European broker market and provides GLRE with an additional platform to serve clients located in Europe and North America.  As used herein, the “Company” refers collectively to GLRE and its consolidated subsidiaries.

The Company and its reinsurance subsidiaries are party to a joint venture agreement (the “venture agreement”) with DME Advisors, LP (“DME Advisors”) and DME Advisors LLC (“DME”) under which the Company, its reinsurance subsidiaries and DME are participants in a joint venture (the “Joint Venture”) for the purpose of managing certain jointly held assets. The Joint Venture created through the venture agreement has been consolidated in accordance with ASC 810, Consolidation (ASC 810). The Company has recorded DME’s minority interests as redeemable non-controlling interests in related party and non-controlling interests in related party in the condensed consolidated balance sheets. DME and DME Advisors are related to the Company and each is an affiliate of David Einhorn, Chairman of the Company’s Board of Directors.

On September 1, 2018, the Company entered into an amended and restated exempted limited partnership agreement (the “LPA”) of Solasglas Investments, LP (“SILP”), with DME Advisors II, LLC (“DME II”), as General Partner, Greenlight Re, GRIL and the initial limited partner (each, a “Partner”). The LPA, in conjunction with a participation agreement, is intended to replace the venture agreement and to assign and/or transfer Greenlight Re’s and GRIL’s invested assets in the Joint Venture to SILP. The Joint Venture will terminate on the earlier of January 2, 2019 or the date on which all assets are transferred to SILP.

The Class A ordinary shares of GLRE are listed on Nasdaq Global Select Market under the symbol “GLRE”.

These unaudited condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2017. In the opinion of management, these unaudited condensed consolidated financial statements reflect all of the normal recurring adjustments considered necessary for a fair presentation of the Company’s financial position and results of operations as of the dates and for the periods presented.

The results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results expected for the full calendar year.

Reclassifications
Prior to the year ended December 31, 2017, the Company presented the redeemable and non-redeemable portion of the non-controlling interest in the related party joint venture under the permanent equity section of the balance sheet. The United States Securities and Exchange Commission (“SEC”) guidance, which is applicable to SEC registrants, requires shares that are not required to be accounted for in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic Distinguishing Liabilities from Equity, and having redemption features that are not solely within the control of the issuer, to be classified outside of the permanent equity section and instead presented in the mezzanine section of the condensed consolidated balance sheets.

7



Effective from the year ended December 31, 2017, the Company presented the redeemable non-controlling interest in the related party joint venture in the mezzanine section on the Company’s condensed consolidated balance sheet in accordance with the SEC guidance noted above. The comparative condensed consolidated statement of shareholders’ equity for the nine months ended September 30, 2017 has been reclassified to conform to the current period presentation of the redeemable non-controlling interest in the related party joint venture. The reclassification had no impact on shareholders’ equity attributable to shareholders or retained earnings. In addition, this change did not impact the condensed consolidated statements of income, earnings per share or condensed consolidated statement of cash flows. See Note 10 for additional information regarding the non-controlling interests in the related party joint venture.

Additionally, effective from the second quarter of 2018, contracts that cover more than one line of business are grouped as “multi-line” regardless of whether a portion of the underlying business is covered by another line of business. The prior period comparative information in Note 12 has been reclassified to conform to the current period presentation.

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

 Restricted Cash and Cash Equivalents
 
The Company’s Joint Venture is required to maintain certain cash in segregated accounts with prime brokers and derivative counterparties. The amount of restricted cash held by prime brokers is primarily used to support the liability created in the Joint Venture from securities sold, not yet purchased and derivatives.

Restricted cash and cash equivalent balances are held to collateralize regulatory trusts and letters of credit issued to cedents (see Notes 5 and 11). The amount of cash encumbered varies depending on the collateral required by those cedents.

The following table reconciles the cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets to the total presented in the condensed consolidated statements of cash flows:
 
September 30, 2018
 
December 31, 2017
 
($ in thousands)
Cash and cash equivalents
$
43,912

 
$
27,285

Restricted cash and cash equivalents
673,835

 
1,503,813

Total cash, cash equivalents and restricted cash presented in the condensed consolidated statements of cash flows
$
717,747

 
$
1,531,098


Premium Revenue Recognition 

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

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


8


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

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

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

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

Reinsurance Premiums Ceded
 
The Company reduces the risk of future losses on business assumed by reinsuring certain risks and exposures with other reinsurers (retrocessionaires). The Company remains liable to the extent that any retrocessionaire fails to meet its obligations and to the extent the Company does not hold sufficient security for their unpaid obligations.
 
Ceded premiums are written during the period in which the risks incept and are expensed over the contract period in proportion to the period of protection. Unearned premiums ceded consist of the unexpired portion of reinsurance obtained.

Deferred Acquisition Costs
 
Policy acquisition costs, such as commission and brokerage costs, relate directly to, and vary with, the writing of reinsurance contracts. Acquisition costs relating solely to bound contracts are deferred subject to ultimate recoverability and are amortized over the related contract term. The Company evaluates the recoverability of deferred acquisition costs by determining if the sum of future earned premiums and anticipated investment income is greater than the expected future claims and expenses. If a loss is probable on the unexpired portion of policies in force, a premium deficiency loss is recognized. At September 30, 2018 and December 31, 2017, the deferred acquisition costs were considered fully recoverable and no premium deficiency loss was recorded. 

Acquisition costs also include profit commissions which are expensed when incurred. Profit commissions are calculated and accrued based on the expected loss experience for contracts and recorded when the current loss estimate indicates that a profit commission is probable under the contract terms. As of September 30, 2018, $12.8 million (December 31, 2017: $11.9 million) of profit commission reserves were included in reinsurance balances payable on the condensed consolidated balance sheets. For the three and nine months ended September 30, 2018, $1.9 million and $13.5 million, respectively (2017: $(3.5) million and $2.2 million, respectively) of net profit commission expense was included in acquisition costs in the condensed consolidated statements of income.
  
Funds Withheld
 
Funds withheld include reinsurance balances retained by the Company on retroceded contracts as collateral in accordance with the contract terms. Any interest expense that the Company incurs while these funds are withheld, is included under net investment income (loss) in the condensed consolidated statements of income.


9


Loss and Loss Adjustment Expense Reserves and Recoverable
 
The Company establishes reserves for contracts based on estimates of the ultimate cost of all losses including losses incurred but not reported (“IBNR”). These estimated ultimate reserves are based on the Company’s own actuarial estimates derived from reports received from ceding companies, industry data and historical experience. These estimates are reviewed by the Company at least quarterly and adjusted as necessary. Since reserves are estimates, the final settlement of losses may vary from the reserves established and any adjustments to the estimates, which may be material, are recorded in the period they are determined.
 
Loss and loss adjustment expenses recoverable include the amounts due from retrocessionaires for unpaid loss and loss adjustment expenses on retrocession agreements. Ceded losses incurred but not reported are estimated based on the Company’s actuarial estimates. These estimates are reviewed periodically and adjusted when deemed necessary. The Company may not be able to ultimately recover the loss and loss adjustment expense recoverable amounts due to the retrocessionaires’ inability to pay. The Company regularly evaluates the financial condition of its retrocessionaires and records provisions for uncollectible reinsurance expenses recoverable when recovery is no longer probable.

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

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

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

At September 30, 2018, $11.0 million of notes receivable (net of any valuation allowance) were on non-accrual status (December 31, 2017: $14.4 million) and any payments received were applied to reduce the recorded value of the notes.
 
At September 30, 2018 and December 31, 2017, $0.1 million and $0.1 million, respectively, of accrued interest was included in the notes receivable balance. Based on management’s assessment, the recorded values of the notes receivable, net of valuation allowance, at September 30, 2018 and December 31, 2017, were expected to be fully collectible.


10


Deposit Assets and Liabilities
 
In accordance with U.S. GAAP, deposit accounting is used in the event that a reinsurance contract does not transfer sufficient insurance risk. The deposit method of accounting requires an asset or liability to be recognized based on the consideration paid or received. The deposit asset or liability balance is subsequently adjusted using the interest method with a corresponding income or expense recorded in the condensed consolidated statements of income as other income or expense. The Company’s deposit assets and liabilities are recorded in the condensed consolidated balance sheets under reinsurance balances receivable and reinsurance balances payable, respectively. At September 30, 2018, deposit assets and deposit liabilities were $13.1 million and $48.7 million, respectively (December 31, 2017: $19.4 million and $28.1 million, respectively). For the three and nine months ended September 30, 2018, interest expense on deposit accounted contracts was $0.3 million and $0.8 million, respectively. For the three and nine months ended September 30, 2018, interest income on deposit accounted contracts was $0.4 million and $0.9 million, respectively. For the three and nine months ended September 30, 2017, there was no material interest expense or interest income on deposit accounted contracts.

Equity Method Accounted Investments

Where the Company’s ownership interest in a corporation exceeds 20% (but is less than 50%), the Company is deemed to have significant influence and the investment is accounted for using the equity method in accordance with U.S. GAAP. Additionally, if the Company’s investment represents greater than 5% of the participating interest in limited partnerships and limited liability entities, the Company is also deemed to have significant influence and the investment is accounted using the equity method (see Notes 3 and 4).

Under the equity method, the carrying value of the investments is recorded on the condensed consolidated balance sheets and adjusted for the Company’s share of income or loss of the investee each period. The income or loss relating to the Company’s share of the investee is reported as investment income on the condensed consolidated statements of income.

Variable Interest Entities

The Company considers whether its variable interest investments should be consolidated as subsidiaries. Subsidiaries are those entities over which the Company has control. The Company controls an investee if and only if the Group has both of the following:

The power to direct the activities of a variable interest entity (“VIE”) that most significantly impact the VIE’s economic performance, and
The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

The Company considers all relevant facts and circumstances in assessing whether it has power over an investee, including: the purpose and design of an investee, relevant activities, substantive and protective rights, and voting rights and potential voting rights.

The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the elements of control. Subsidiaries are consolidated from the date the Company obtains control and are excluded from consolidation from the date the Company loses control.

Where the Company does not control such entities, they are carried at fair value through profit or loss within financial investments in the condensed consolidated balance sheet.

11



Financial Instruments
 
Investments in Securities and Investments in Securities Sold, Not Yet Purchased
 
The Company’s Joint Venture enters into investments in debt instruments and equity securities that are classified as “trading securities” are carried at fair value. The fair values of the listed equity investments are derived based on quoted prices (unadjusted) in active markets for identical assets (Level 1 inputs). The fair values of listed equities that have restrictions on sale or transfer which expire within one year, are determined by adjusting the observed market price of the equity using a liquidity discount based on observable market inputs. The fair values of debt instruments are derived based on inputs that are observable, either directly or indirectly, such as market maker or broker quotes reflecting recent transactions (Level 2 inputs), and are generally derived based on the average of multiple market maker or broker quotes which are considered to be binding. Where quotes are not available, debt instruments are valued using cash flow models using assumptions and estimates that may be subjective and non-observable (Level 3 inputs).

The Company’s Joint Venture enters into “other investments” may include investments in private and unlisted equity securities, limited partnerships and commodities, which are all carried at fair value. The fair values of commodities are determined based on quoted prices in active markets for identical assets (Level 1). The Company maximizes the use of observable direct or indirect inputs (Level 2 inputs) when deriving the fair values for “other investments”. For limited partnerships and private and unlisted equity securities, where observable inputs are not available, the fair values are derived based on unobservable inputs (Level 3 inputs) such as management’s assumptions developed from available information using the services of the investment advisor, including the most recent net asset values obtained from the managers of those underlying investments. For certain private equity fund investments, the Company has elected to measure the fair value using the net asset value practical expedient allowed under U.S. GAAP, and, accordingly, these investments are not classified as Level 1, 2 or 3 in the fair value hierarchy.

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

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

Additionally. the Company may, from time to time, enter into underwriting contracts such as industry loss warranty contracts (“ILW”) that are treated as derivatives for U.S GAAP purposes.
 
Financial Contracts

The Company’s Joint Venture enters into financial contracts with counterparties as part of its investment strategy. Financial contracts, which include total return swaps, credit default swaps (“CDS”), futures, options, currency forwards and other derivative instruments, are recorded at their fair value with any unrealized gains and losses included in net investment income (loss) in the condensed consolidated statements of income. Financial contracts receivable represents derivative

12


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

Transfer of Financial Assets

The Company accounts for transfers of financial assets as sales when it has surrendered control over the related assets. Whether control has been relinquished requires, among other things, an evaluation of relevant legal considerations and an assessment of the nature and extent of the Company’s continuing involvement with the assets transferred. Gains and losses stemming from transfers reported as sales, if any, are included as realized gains (losses) within net investment income in the accompanying condensed consolidated statements of income.

In instances where a transfer of financial assets does not qualify for sale accounting, U.S. GAAP accounting guidance requires that the transaction be accounted for as a collateralized borrowing. Accordingly, the related assets remain on the Company’s condensed consolidated balance sheets and continue to be reported and accounted for as if the transfer had not occurred (see Notes 3 and 4).

Share-Based Compensation
 
The Company has established a stock incentive plan for directors, employees and consultants.
 
U.S. GAAP requires the Company to recognize share-based compensation transactions using the fair value at the grant date of the award. The Company measures compensation for restricted shares and restricted stock units (“RSUs”) based on the price of the Company’s common shares at the grant date. For restricted shares and RSUs with both service and performance vesting conditions, the expense is recognized based on management’s estimate of the probability of the performance conditions being achieved based on historical results and expectations of future results. If the performance conditions is expected to be met, the expense is attributed to the period for which the requisite service has been rendered. For restricted shares and RSUs with only service vesting conditions, the expense is recognized on a straight line basis over the vesting period, net of any estimated or expected forfeitures.


13


The forfeiture rate is estimated based on the Company’s historical actual forfeitures relating to restricted shares and RSUs granted to employees. The forfeiture rate is reviewed annually and adjusted as necessary. No forfeiture rate is used for restricted shares granted to directors which vest over a twelve-month period.

Determining the fair value of share purchase options at the grant date requires significant estimation and judgment. The Company uses an option-pricing model (Black-Scholes option pricing model) to assist in the calculation of fair value for share purchase options. The model requires estimation of various inputs such as estimated term, forfeiture and dividend rates and expected volatility. In determining the grant date fair value, the Company uses the full life of the options, ten years, as the estimated term of the options, and has assumed no forfeitures and no dividends paid during the life of the options. The estimate of expected volatility is based on the daily historical trading data of the Company’s Class A ordinary shares from the date that these shares commenced trading (May 24, 2007) to the grant date.
 
For share purchase options issued under the employee stock incentive plan, the compensation cost is calculated and expensed over the vesting periods on a graded vesting basis (see Note 9). 

If actual results differ significantly from these estimates and assumptions, particularly in relation to the Company’s estimation of volatility which requires the most judgment, share-based compensation expense, primarily with respect to future share-based awards, could be materially impacted.
 
Convertible Notes
    
The Company accounts for its notes issued with equity conversion features by first considering if an embedded derivative is considered to be present under ASC Topic 815, Derivatives and Hedging, based on the terms and conditions for settlement of the instrument and the means of settlement in cash or in the Company’s shares. Any embedded derivative features are bifurcated from the underlying contract and accounted for as a derivative. Conversion options that are not bifurcated are accounted for under ASC Topic 470-20, Debt with Conversion and Other Options. The Company assesses the applicability of the cash conversion option, and if applicable bifurcates the convertible note between liabilities and shareholders’ equity. The Company records a liability equivalent to the present value of comparable debt at the time of issuance without the conversion features and the remainder of the proceeds are accounted for within shareholders’ equity.
Convertible Notes Issuance Costs

Costs incurred in issuing convertible notes, which include underwriters’ fees, legal and accounting fees, printing and other fees are capitalized and presented as a direct deduction from the principal amount of senior convertible notes payable in the condensed consolidated balance sheets. These costs are amortized over the term of the debt and are included in interest expense in the condensed consolidated statements of income (loss). In the case where issuance costs relate to a note issuance with conversion features that is bifurcated between liabilities and shareholders’ equity, costs are allocated ratably to the liability and shareholders’ equity balances.

Foreign Exchange
 
The reporting and functional currency of the Company and all its subsidiaries is the U.S. dollar. Transactions in foreign currencies are recorded in U.S. dollars at the exchange rates in effect on the transaction date. Monetary assets and liabilities in foreign currencies at the balance sheet date are translated at the exchange rate in effect at the balance sheet date and translation exchange gains and losses, if any, are included in “other income (expense), net” in the condensed consolidated statements of income. 

Comprehensive Income (Loss)

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

Earnings (Loss) Per Share
 
Basic earnings (or loss) per share are based on the weighted average number of common shares and participating securities outstanding during the period. Diluted earnings (or loss) per share includes the dilutive effect of RSU issued that would convert to common shares upon vesting and additional potential common shares issuable when stock options are exercised and are determined using the treasury stock method. In addition, the diluted earnings (or loss) per share calculation includes those common shares with the potential to be issued by virtue of convertible debt and other such convertible

14


instruments using the treasury stock method. Diluted earnings (or loss) per share contemplates a conversion to common shares of all convertible instruments only if they are dilutive in nature with regards to earnings per share. The Company treats its unvested restricted stock as participating securities in accordance with U.S. GAAP, which requires that unvested stock awards which contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid (referred to as “participating securities”), be included in the number of shares outstanding for both basic and diluted earnings per share calculations. In the event of a net loss, all RSUs, stock options outstanding, convertible debt and participating securities are excluded from the calculation of both basic and diluted loss per share since their inclusion would be anti-dilutive.
 
Three months ended September 30
 
Nine months ended September 30
 
2018
 
2017
 
2018
 
2017
Weighted average shares outstanding - basic
35,952,472

 
37,345,985

 
35,951,384

 
36,994,969

Effect of dilutive employee and director share-based awards

 
29,288

 

 
27,378

Weighted average shares outstanding - diluted
35,952,472

 
37,375,273

 
35,951,384

 
37,022,347

Anti-dilutive stock options outstanding
935,627

 
358,741

 
935,627

 
351,074

Participating securities excluded from calculation of loss per share 
433,849

 

 
433,849

 
332,134


Taxation
 
Under current Cayman Islands law, no corporate entity, including GLRE and Greenlight Re, is obligated to pay taxes in the Cayman Islands on either income or capital gains. The Company has an undertaking from the Governor-in-Cabinet of the Cayman Islands, pursuant to the provisions of the Tax Concessions Law, as amended, that, in the event that the Cayman Islands enacts any legislation that imposes tax on profits, income, gains or appreciations, or any tax in the nature of estate duty or inheritance tax, such tax will not be applicable to GLRE, Greenlight Re nor their respective operations, or to the Class A or Class B ordinary shares or related obligations, until February 1, 2025.
 
Verdant is incorporated in Delaware and, therefore, is subject to taxes in accordance with the U.S. federal rates and regulations prescribed by the U.S. Internal Revenue Service (“IRS”). Verdant’s taxable income is generally expected to be taxed at a marginal rate of 21%. Verdant’s tax years 2014 and beyond, remain open and subject to examination by the IRS.

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

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

Recent Accounting Pronouncements

In February 2018, the FASB issued ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2018-03”). The new guidance is intended to clarify certain aspects of the guidance issued in ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). ASU 2018-03, among other items, clarifies that the prospective transition approach for equity securities without a readily determinable fair value in the amendments in ASU 2016-01 is meant only for instances in which the measurement alternative is applied. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018, and public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments in ASU 2016-01. All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted ASU 2016-01. The Company has adopted ASU 2018-03 during the third quarter of 2018 using the prospective transition approach. The adoption had no impact on the Company’s net income or loss.

In January 2016, the FASB issued ASU 2016-01. The new guidance is intended to improve the recognition and measurement of financial instruments. ASU 2016-01, among other things, requires equity investments to be measured at fair value with changes in fair value recognized in net income or loss, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and requires separate presentation of financial

15


assets and financial liabilities by measurement category and form of financial asset. ASU 2016-01 affects public and private companies, not-for-profit organizations, and employee benefit plans that hold financial assets or owe financial liabilities. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2016-01 during the first quarter of fiscal year 2018 and the adoption of this guidance did not have any significant impact on the Company’s net income or loss or retained earnings since the Company’s investments are recorded at fair value and the unrealized gains and losses are recognized in net income or loss. The Company has implemented the new disclosures required under ASU 2016-01 commencing from the first quarter of 2018.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for any organization in any interim or annual period. The Company currently has operating leases for its office spaces as disclosed in Note 11 of the condensed consolidated financial statements which will be recognized as right-of-use asset upon adoption of ASU 2016-02. The Company is in the process of evaluating the impact of adopting ASU 2016-02 on the Company’s consolidated financial statements and anticipates implementing ASU 2016-02 during the first quarter of fiscal year 2019.
 
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurements of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 amends the guidance on reporting credits losses and affects loans, debt securities, trade receivables, reinsurance recoverables and other financial assets that have the contractual right to receive cash. The amendments are effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted for any organization for annual periods beginning after December 15, 2018 and interim periods within those annual periods. The Company is in the process of evaluating the impact of the requirements of ASU 2016-13 on the Company’s consolidated financial statements and anticipates implementing ASU 2016-13 during the first quarter of fiscal year 2020.

In November 2016, the FASB issued ASU 2016-18, “Statements of Cash Flows - Restricted Cash (Topic 230)” (“ASU 2016-18”). ASU 2016-18 requires restricted cash and cash equivalents to be included with cash and cash equivalents in the statement of cash flows and the nature of the restrictions on cash and cash equivalents to be disclosed. ASU 2016-18 is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption was permitted. The Company adopted ASU 2016-18 during the first quarter of fiscal year 2018 and amended the presentation in the statement of cash flows to include the restricted cash and cash equivalents with cash and cash equivalents in the condensed consolidated statements of cash flows and retrospectively reclassified comparative periods presented. The adoption had no impact on the Company’s net income or loss or retained earnings.

The FASB has issued ASU No. 2014-09, “Revenue from Contracts with Customers”, and related amendments, ASU 2015-14, ASU 2016-10, ASU 2016-12, ASU 2016-20, ASU 2017-05 and ASU 2017-13,  (collectively, “Topic 606”). Topic 606 creates a new comprehensive revenue recognition standard that will serve as a single source of revenue guidance for all companies that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of non-financial assets, unless those contracts are within the scope of other standards, such as insurance contracts. Topic 606 becomes effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted Topic 606 during the first quarter of the fiscal year 2018, and since all of the Company’s revenues relate to reinsurance contracts and investment income, the adoption of Topic 606 did not have a material impact on the Company’s revenues and related disclosures.

3. INVESTMENT IN RELATED PARTY INVESTMENT FUND

Prior to September 1, 2018, the Company through its Joint Venture, purchased and sold various financial instruments, which included listed and unlisted equities, corporate and sovereign debt, commodities, futures, put and call options, currency forwards, other derivatives and similar instruments sold, not yet purchased.

Effective September 1, 2018, Greenlight Re and GRIL entered into the LPA of SILP with DME II and the other parties thereto. In accordance with the LPA, DME II serves as the general partner of SILP. Pursuant to an Investment Management Agreement between DME II and SILP dated September 1, 2018 (the “SILP IMA”), DME Advisors is the investment manager for SILP. In addition, on September 1, 2018, Greenlight Re and GRIL, together the “GLRE Limited Partners”, and SILP executed a Participation Agreement pursuant to which the GLRE Limited Partners transferred a participation interest in the assets that were subject to the Joint Venture (except for certain assets that were mutually agreed and excluded from

16


participating) to SILP (collectively referred to as the “LP Transaction”). SILP issued limited partner interests to the GLRE Limited Partners proportionate to and based on the net asset value transferred by each such entity effective September 1, 2018. The Joint Venture will be terminated on the earlier of January 2, 2019 or the date on which all assets have been transferred to SILP in accordance with the LPA.

As a result of the changes described above, the Company’s investment in SILP has been presented on the condensed consolidated balance sheets as an investment in a related party investment fund. In assessing the Company’s interest in SILP in accordance with the Company’s accounting policy for variable interest entities, the Company concluded that it did not hold the power to direct the activities which most significantly impact the economic performance of SILP, and therefore consolidation was not appropriate.

The transfer of the investment assets was accounted for as a sale in accordance with the Company’s accounting policy for transfers of financial assets.The underlying investment liabilities were extinguished from the Company’s condensed consolidated balance sheet as they were either settled, novated or legally transferred to SILP as part of the LP Transaction. There were no net gains or losses resulting from the transfer of net assets. There was no cash paid or received as part of the LP Transaction.

At September 30, 2018, certain assets that were subject to the Participation Agreement for which the GLRE Limited Partners received an interest in SILP had not transferred legal title to SILP. While the rights and privileges relating to those assets have been transfered to SILP, those assets are reported on the condensed consolidated balance sheet until legal title has transferred to SILP. In accordance with U.S. GAAP, the Company has accounted for those assets as collateralized borrowing and recorded a liability, “due to related party investment fund” relating to the Company’s obligation to transfer those assets to SILP.

The Company’s maximum exposure to loss relating to SILP is limited to the net asset value of the GLRE Limited Partners’ investment in SILP. As of September 30, 2018, the net asset value of the GLRE Limited Partners’ investment in SILP was $346.7 million, representing 87.4% of SILP’s total net assets. The investment in SILP is recorded at the GLRE Limited Partners’ share of the net asset value of SILP as reported by SILP’s third party administrator, which represents fair value. The GLRE Limited Partners can redeem their assets from SILP by providing three business days’ notice to DME II. The majority of SILP’s long investments are comprised of publicly-traded equity securities and other holdings, which can be readily liquidated to meet the GLRE Limited Partners’ redemption requests. The Company’s share of change in the net asset value of SILP for the three and nine months ended September 30, 2018 was $(10.0) million and $(10.0) million, respectively, and included in “income from investment in related party investment fund” in the condensed consolidated statements of income.

During the three months ended September 30, 2018, the Company transferred the rights to $366.3 million of net investments from Greenlight RE and GRIL’s Joint Venture investment accounts to SILP in exchange for limited partnership interests of the same amount, resulting in no net gains or losses. The transfer of assets included non-cash items as follows:

Non-cash transactions
($ in thousands)
Net investments transferred to related party investment fund (net of cash and restricted cash)
$
13,311

Participating interest transferred to related party investment fund
111,697

Total non-cash transfer of assets
$
125,008




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The summarized income statement of SILP is presented below:

 
 
From September 1, 2018 (inception) to September 30, 2018
 
 
($ in thousands)
Investment income
 
 
Dividend income (net of withholding taxes)
 
$
1,068

Interest income
 
907

Total Investment income
 
1,975

 
 
 
Expenses
 
 
Management fee
 
(803
)
Dividends
 
(204
)
Interest
 
(505
)
Professional fees and other
 
(111
)
Total expenses
 
(1,623
)
Net investment income
 
352

 
 
 
Realized and change in unrealized gains (losses) on investments
 
 
Net realized gain (loss) on investments
 
(44,811
)
Net change in unrealized appreciation on investments
 
33,056

Net gain (loss) on investments
 
(11,755
)
 
 
 
Net income (loss)
 
$
(11,403
)
















18


The summarized statement of assets and liabilities of SILP is presented below:

 
 
September 30, 2018
 
 
($ in thousands)
Assets
 
 
Investments, at fair value
 
$
683,521

Due from brokers
 
239,309

Cash and cash equivalents
 
2,992

Interest and dividends receivable
 
1,893

Total assets
 
927,715

 
 
 
Liabilities and partners’ capital
 
 
Liabilities
 
 
Investments sold, not yet purchased, at fair value
 
(476,655
)
Due to brokers
 
(52,902
)
Interest and dividends payable
 
(1,094
)
Other liabilities
 
(499
)
Total liabilities
 
(531,150
)
 
 
 
Net Assets
 
$
396,565

 
 
 
GLRE Limited Partners’ share of Net Assets
 
$
346,721


4.         FINANCIAL INSTRUMENTS 
 
Investments
 
Debt instruments, trading
 
At September 30, 2018, the following investments were included in debt instruments:
 
 
Cost/amortized cost
 
Unrealized gains
 
Unrealized losses
 
Fair
 value
 
 
($ in thousands)
Corporate debt – U.S.
 
$
716

 
$

 
$
(691
)
 
$
25

Total debt instruments
 
$
716

 
$

 
$
(691
)
 
$
25


At December 31, 2017, the following investments were included in debt instruments:
 
 
Cost/amortized cost
 
Unrealized gains
 
Unrealized losses
 
Fair
 value
 
 
($ in thousands)
Corporate debt – U.S.
 
$
8,508

 
$

 
$
(7,186
)
 
$
1,322

Corporate debt – Non U.S.
 
2,109

 

 
(2,057
)
 
52

Municipal debt – U.S.
 
5,831

 

 
(25
)
 
5,806

Total debt instruments
 
$
16,448

 
$

 
$
(9,268
)
 
$
7,180



19


The maturity distribution for debt instruments held at September 30, 2018 and December 31, 2017 was as follows:
 
 
September 30, 2018
 
December 31, 2017
 
 
Cost/
 amortized
 cost
 
Fair
 value
 
Cost/
 amortized
 cost
 
Fair
 value
 
 
($ in thousands)
Within one year
 
$

 
$

 
$
7,557

 
$
441

From one to five years
 
716

 
25

 

 

From five to ten years
 

 

 
2,109

 
52

More than ten years
 

 

 
6,782

 
6,687

 
 
$
716

 
$
25

 
$
16,448

 
$
7,180

 
Equity securities, trading

At September 30, 2018, the following long positions were included in equity securities, trading: 
 
 
Cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair
value
 
 
($ in thousands)
Equities – listed
 
$
58,752

 
$
3,738

 
$
(4,714
)
 
$
57,776

Total equity securities
 
$
58,752

 
$
3,738

 
$
(4,714
)
 
$
57,776


At December 31, 2017, the following long positions were included in equity securities, trading:
 
 
Cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair
value
 
 
($ in thousands)
Equities – listed
 
$
1,014,426

 
$
208,350

 
$
(19,104
)
 
$
1,203,672

Total equity securities
 
$
1,014,426

 
$
208,350

 
$
(19,104
)
 
$
1,203,672


Other Investments
 
“Other investments” include commodities and private securities and unlisted funds. As of September 30, 2018 and December 31, 2017, all commodities were comprised of gold bullion. 

At September 30, 2018, the following securities were included in other investments:
 
 
Cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair
value
 
 
($ in thousands)
Commodities
 
$
29,493

 
$
4,971

 
$

 
$
34,464

Private investments and unlisted equity funds
 
29,964

 
7,436

 
(13
)
 
37,387

 
 
$
59,457

 
$
12,407

 
$
(13
)
 
$
71,851

Investment accounted for under the equity method
 
 
 
 
 
 
 
$
1,654

Total Other Investments
 
 
 
 
 
 
 
$
73,505


At September 30, 2018, the Company held a non-controlling interest in AccuRisk Holdings LLC (“AccuRisk”). In addition to 16.7% of the outstanding voting shares of AccuRisk, the Company also held convertible promissory notes issued by AccuRisk which are convertible into voting shares at the Company’s option at any time. When taking into account the conversion option, the Company’s interest in AccuRisk was 34.2%. The Company has determined that it has significant influence over AccuRisk and has accounted for the voting shares under the equity method. The carrying value of AccuRisk is adjusted based on the Company’s share of ownership, including share of income and expenses reported in quarterly

20


management accounts. The AccuRisk convertible promissory notes are recorded at cost plus accrued interest less any impairment and included in Notes Receivable on the condensed consolidated balance sheet. For the three and nine months ended September 30, 2018, the Company’s share of AccuRisk’s net income (loss) was $(0.1) million and $(0.1) million, respectively, which was included in net investment income on the condensed consolidated statements of income.

At December 31, 2017, the following securities were included in other investments: 
 
 
Cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair
value
 
 
($ in thousands)
Commodities
 
$
101,184

 
$
20,318

 
$

 
$
121,502

Private investments and unlisted equity funds
 
25,316

 
5,314

 

 
30,630

 
 
$
126,500

 
$
25,632

 
$

 
$
152,132


Private and unlisted equity funds include private equity securities that did not have readily determinable fair values and the Company applied the measurement alternative under ASU 2016-01 and ASU 2018-03. At September 30, 2018 the carrying value of the private equity securities without readily determinable fair value was $5.8 million (December 31, 2017: $3.9 million). The carrying values of the private equity securities are determined based on the original cost, reviewed for impairment and any subsequent changes in the valuation based on periodic third party valuations or recent observable transactions of those securities. There were no meaningful upward or downward adjustments to the carrying values of the private equity securities for the three and nine months ended September 30, 2018.

Investments in Securities Sold, Not Yet Purchased 

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

At September 30, 2018, there were no investments in securities sold, not yet purchased.

At December 31, 2017, the following securities were included in investments in securities sold, not yet purchased: 
 
 
Proceeds
 
Unrealized gains
 
Unrealized losses
 
 Fair value
 
 
($ in thousands)
Equities – listed
 
$
(643,148
)
 
$
17,541

 
$
(187,045
)
 
$
(812,652
)
Sovereign debt – Non U.S.
 
(96,231
)
 

 
(3,914
)
 
(100,145
)
 
 
$
(739,379
)
 
$
17,541

 
$
(190,959
)
 
$
(912,797
)
 
Financial Contracts
 
Prior to the change in the Company’s investment account structure described in Note 3 above, the Company had entered into total return equity swaps, interest rate swaps, commodity swaps, options, warrants, rights, futures and forward contracts with various financial institutions to meet certain investment objectives. Under the terms of each of these financial contracts, the Company was either entitled to receive or was obligated to make payments, which are based on the product of a formula contained within each contract that includes the change in the fair value of the underlying or reference security. As of September 30, 2018, the Company was in the process of transferring the remaining financial contracts to SILP and any financial contracts with legal title not yet transferred to SILP, have been reported on the Company’s balance sheet as financial contracts receivable and financial contracts payable.

21



At September 30, 2018, the fair values of financial contracts outstanding and awaiting transfer to SILP were as follows: 
Financial Contracts
 
Listing
currency
 (1)
 
Notional amount of
underlying instruments
 
Fair value of net assets
(obligations)
on financial
contracts
 
 
 
 
($ in thousands)
Financial contracts receivable
 
 
 
 
 
 
Commodity Swaps
 
USD
 
13,570

 
$
1,117

Forwards
 
KRW
 
28,168

 
253

Interest rate options
 
USD
 
1,783,000

 
679

Interest rate swaps
 
JPY
 
21,087

 
288

Put options
 
USD
 
143,371

 
60,352

Total return swaps – equities
 
GBP/EUR/KRW/USD
 
58,072

 
6,477

Total financial contracts receivable, at fair value
 
 
 
 
 
$
69,166

Financial contracts payable
 
 
 
 
 
 
Call options
 
USD
 
531

 
$
(42
)
Put options
 
USD
 
34,316

 
(19,597
)
Total return swaps – equities
 
EUR/RON/USD
 
35,401

 
(1,110
)
Total financial contracts payable, at fair value
 
 
 
 
 
$
(20,749
)
(1) USD = US Dollar; EUR = Euro; GBP = British Pound; JPY = Japanese Yen; KRW = Korean Won; RON = Romanian New Leu.

At December 31, 2017, the fair values of financial contracts outstanding were as follows: 
Financial Contracts
 
Listing currency (1)
 
Notional amount of
underlying instruments
 
Fair value of net assets
(obligations)
on financial
contracts
 
 
 
 
($ in thousands)
Financial contracts receivable
 
 
 
 
 
 
Call options
 
USD
 
2,656

 
$
91

Commodity Swaps
 
USD
 
17,833

 
2,142

Forwards
 
KRW
 
41,379

 
801

Futures
 
USD
 
5,874

 
12

Interest rate swaps
 
JPY
 
21,269

 
479

Put options (2)
 
USD
 
155

 
1

Total return swaps – equities
 
EUR/GBP/USD
 
34,965

 
9,357

Warrants and rights on listed equities
 
EUR/USD
 
29

 
10

Total financial contracts receivable, at fair value
 
 
 
 
 
$
12,893

Financial contracts payable
 
 
 
 
 
 
Commodity Swaps
 
USD
 
26,795

 
$
(353
)
Put options
 
USD
 
130

 
(14
)
Total return swaps – equities
 
EUR/GBP/KRW/RON/USD
 
60,663

 
(21,855
)
Total financial contracts payable, at fair value
 
 
 
 
 
$
(22,222
)
(1) USD = US Dollar; EUR = Euro; GBP = British Pound; JPY = Japanese Yen; KRW = Korean Won; RON = Romanian New Leu.
(2) Includes options on the Chinese Yuan, denominated in U.S. dollars.
  

22


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

As of September 30, 2018, the Company held $60.4 million OTC put options (long) (December 31, 2017: nil) and $19.6 million OTC put options (short) (December 31, 2017: nil).

During the three and nine months ended September 30, 2018 and 2017, the Company reported gains and losses on derivatives as follows:
Derivatives not designated as hedging instruments
 
Location of gains and losses on derivatives recognized in income
 
Gain (loss) on derivatives recognized in income
 
 
 
 
Three months ended September 30
 
Nine months ended September 30
 
 
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
($ in thousands)
Forwards
 
Net investment income (loss)
 
$
(76
)
 
$
(28
)
 
$
(2,983
)
 
$
306

Futures
 
Net investment income (loss)
 
(5,387
)
 
(77
)
 
(13,339
)
 
(480
)
Interest rate options
 
Net investment income (loss)
 
(617
)
 

 
(1,771
)
 

Interest rate swaps
 
Net investment income (loss)
 
194

 
113

 
(255
)
 
20

Options, warrants, and rights
 
Net investment income (loss)
 
(785
)
 
(6,467
)
 
(14,627
)
 
(18,579
)
Commodity swaps
 
Net investment income (loss)
 
246

 
1,794

 
4,402

 
(8,911
)
Total return swaps – equities
 
Net investment income (loss)
 
(1,743
)
 
12,635

 
(10,981
)
 
12,353

Total
 
 
 
$
(8,168
)
 
$
7,970

 
$
(39,554
)
 
$
(15,291
)

The Company generally does not enter into derivatives for risk management or hedging purposes. The volume of derivative activities varies from period to period depending on potential investment opportunities.

For the three and nine months ended September 30, 2018, the Company’s volume of derivative activities (based on notional amounts) was as follows:
2018
 
Three months ended September 30
 
Nine months ended September 30
Derivatives not designated as hedging instruments (notional amounts)
 
  Entered
 
Exited
 
  Entered
 
Exited
 
 
($ in thousands)
Commodity swaps
 
$

 
$
21,059

 
$
34,792

 
$
70,982

Forwards
 
2,291

 
28,830

 
65,819

 
76,596

Futures
 

 
127,882

 
423,374

 
440,594

Interest rate options (1)
 

 

 
1,783,000

 

Options, warrants and rights (1)
 
52,844

 
20,279

 
298,830

 
46,925

Total return swaps
 
8,630

 
31,537

 
25,480

 
63,676

Total
 
$
63,765

 
$
229,587

 
$
2,631,295

 
$
698,773

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


23


For the three and nine months ended September 30, 2017, the Company’s volume of derivative activities (based on notional amounts) was as follows:
2017
 
Three months ended September 30
 
Nine months ended September 30
Derivatives not designated as hedging instruments (notional amounts)
 
  Entered
 
Exited
 
  Entered
 
Exited
 
 
($ in thousands)
Commodity swaps
 
$

 
$
17,729

 
$
2,025

 
$
34,317

Forwards
 
1,781

 

 
5,421

 

Futures
 
5,807

 
2,650

 
38,207

 
32,537

Options, warrants and rights (1)
 
372,894

 
15,840

 
950,811

 
125,942

Total return swaps
 

 
20,147

 
243,495

 
316,560

Total
 
$
380,482

 
$
56,366

 
$
1,239,959

 
$
509,356

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

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

As of September 30, 2018, the gross and net amounts of derivative instruments and the cash collateral applicable to derivative instruments were as follows:
September 30, 2018
 
(i)
 
(ii)
 
(iii) = (i) - (ii)
 
(iv) Gross amounts not offset in the balance sheet
 
(v) = (iii) + (iv)
Description
 
Gross amounts of recognized assets (liabilities)
 
Gross amounts offset in the balance sheet
 
Net amounts of assets (liabilities) presented in the balance sheet
 
Financial instruments available for offset
 
Cash collateral (received) pledged
 
Net amount of asset (liability)
 
 
($ in thousands)
Financial contracts receivable
 
$
69,166

 
$

 
$
69,166

 
$
(20,749
)
 
$
(25,544
)
 
$
22,873

Financial contracts payable
 
(20,749
)
 

 
(20,749
)
 
20,749

 

 


As of December 31, 2017, the gross and net amounts of derivative instruments and the cash collateral applicable to derivative instruments were as follows:
December 31, 2017
 
(i)
 
(ii)
 
(iii) = (i) - (ii)
 
(iv) Gross amounts not offset in the balance sheet
 
(v) = (iii) + (iv)
Description
 
Gross amounts of recognized assets (liabilities)
 
Gross amounts offset in the balance sheet
 
Net amounts of assets (liabilities) presented in the balance sheet
 
Financial instruments available for offset
 
Cash collateral (received) pledged
 
Net amount of asset (liability)
 
 
($ in thousands)
Financial contracts receivable
 
$
12,893

 
$

 
$
12,893

 
$
(5,128
)
 
$
(1,336
)
 
$
6,429

Financial contracts payable
 
(22,222
)
 

 
(22,222
)
 
5,128

 
17,094

 


 
   Fair Value Hierarchy

The Company’s financial instruments are carried at fair value, and the net unrealized gains or losses are included in net investment income (loss) in the condensed consolidated statements of income.
 

24


The following table presents the Company’s investments, categorized by the level of the fair value hierarchy as of September 30, 2018:
 
 
Fair value measurements as of September 30, 2018
 
 
Description
 
Quoted prices in
active markets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
 
 
($ in thousands)
Assets: 
 
 
 
 
 
 
 
 
Debt instruments
 
$

 
$
25

 
$

 
$
25

Listed equity securities
 
57,776

 

 

 
57,776

Commodities
 
34,464

 

 

 
34,464

Private and unlisted equity securities
 

 

 
1,424

 
1,424

 
 
$
92,240

 
$
25

 
$
1,424

 
$
93,689

Unlisted equity funds measured at net asset value (1)
 
 
 
 
 
 
 
30,212

Investment in related party investment fund measured at net asset value (1) (2)
 
 
 
 
 
 
 
346,721

Equities without readily determinable fair values for which measurement alternative is applied
 
 
 
 
 
 
 
5,751

Investment accounted for under the equity method
 
 
 
 
 
 
 
1,654

Total investments
 
 
 
 
 
 
 
$
478,027

Financial contracts receivable
 
$

 
$
69,166

 
$

 
$
69,166

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Financial contracts payable
 
$

 
$
(20,749
)
 
$

 
$
(20,749
)
(1) Investments measured at fair value using the net asset value practical expedient have not been classified in the fair value hierarchy. The fair value amounts are presented in the above table to facilitate reconciliation to the condensed consolidated balance sheets.
(2) See Note 3 “Investment in related party investment fund”.


25


The following table presents the Company’s investments, categorized by the level of the fair value hierarchy as of December 31, 2017:
 
 
Fair value measurements as of December 31, 2017
 
 
Description
 
Quoted prices in
active markets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
 
 
($ in thousands)
Assets: 
 
 
 
 
 
 
 
 
Debt instruments
 
$

 
$
6,300

 
$
880

 
$
7,180

Listed equity securities
 
1,181,150

 
22,522

 

 
1,203,672

Commodities
 
121,502

 

 

 
121,502

Private and unlisted equity securities
 

 

 
6,108

 
6,108

 
 
$
1,302,652

 
$
28,822

 
$
6,988

 
$
1,338,462

Unlisted equity funds measured at net asset value (1)
 
 
 
 
 
 
 
24,522

Total investments
 
 
 
 
 
 
 
$
1,362,984

Financial contracts receivable
 
$
22

 
$
12,871

 
$

 
$
12,893

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Listed equity securities, sold not yet purchased
 
$
(812,652
)
 
$

 
$

 
$
(812,652
)
Debt instruments, sold not yet purchased
 

 
(100,145
)
 

 
(100,145
)
Total securities sold, not yet purchased
 
$
(812,652
)
 
$
(100,145
)
 
$

 
$
(912,797
)
Financial contracts payable
 
$

 
$
(22,222
)
 
$

 
$
(22,222
)
(1) Investments measured at fair value using the net asset value practical expedient have not been classified in the fair value hierarchy. The fair value amounts are presented in the above table to facilitate reconciliation to the condensed consolidated balance sheets.


26


 The following tables present the reconciliation of the balances for all investments measured at fair value using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2018

 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Three months ended September 30, 2018
 
 
Debt instruments
 
 Private and unlisted equity securities
 
 Total
 
 
 ($ in thousands)
Beginning balance
 
$
932

 
$
6,909

 
$
7,841

Sales
 
(916
)
 
(1,224
)
 
(2,140
)
Total realized and unrealized gains (losses) and amortization included in earnings, net
 
(16
)
 
(211
)
 
(227
)
Transfers into Level 3
 

 

 

Transfers out of Level 3
 

 
(4,050
)
 
(4,050
)
Ending balance
 
$

 
$
1,424

 
$
1,424

 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Nine months ended September 30, 2018
 
 
Assets
 
 
Debt instruments
 
 Private and unlisted equity securities
 
 Total
 
 
 ($ in thousands)
Beginning balance
 
$
880

 
$
6,108

 
$
6,988

Sales
 
(916
)
 
(1,224
)
 
(2,140
)
Total realized and unrealized gains (losses) and amortization included in earnings, net
 
36

 
(210
)
 
(174
)
Transfers into Level 3
 

 

 

Transfers out of Level 3
 

 
(3,250
)
 
(3,250
)
Ending balance
 
$

 
$
1,424

 
$
1,424


For the three and nine months ended September 30, 2018, the sales of debt instruments and private and unlisted equities measured at fair value using Level 3 inputs were the result of the LP transaction as discussed above. For the three and nine months ended September 30, 2018, the private and unlisted equity securities without readily determinable fair values, for which measurement alternative is applied, were transferred out of Level 3 fair value hierarchy. There were no other transfers between Level 1, Level 2 or Level 3 during the three and nine months ended September 30, 2018.
 

27


The following tables present the reconciliation of the balances for all investments measured at fair value using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2017:
 
 
  Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Three months ended September 30, 2017
 
 
Assets
 
 
Debt instruments
 
 Private and unlisted equity securities
 
 Total
 
 
 ($ in thousands)
Beginning balance
 
$
776

 
$
6,085

 
$
6,861

Total realized and unrealized gains (losses) and amortization included in earnings, net
 
58

 
42

 
100

Transfers into Level 3
 

 

 

Transfers out of Level 3
 

 

 

Ending balance
 
$
834

 
$
6,127

 
$
6,961

 
 
  Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Nine months ended September 30, 2017
 
 
Assets
 
 
Debt instruments
 
 Private and unlisted equity securities
 
Total
 
 
 ($ in thousands)
Beginning balance
 
$
654

 
$
6,109

 
$
6,763

Purchases
 

 
1,750

 
1,750

Total realized and unrealized gains (losses) and amortization included in earnings, net
 
180

 
36

 
216

Transfers into Level 3
 

 

 

Transfers out of Level 3
 

 
(1,768
)
 
(1,768
)
Ending balance
 
$
834

 
$
6,127

 
$
6,961


During the nine months ended September 30, 2017, $1.8 million of the private equity securities were transferred from Level 3 as these securities commenced trading on a listed exchange. However, due to lock-up period restrictions on those securities, they were classified as Level 2. During the three months ended September 30, 2017, the lock-up period expired and these securities were transferred from Level 2 to Level 1 with the fair value based on the last traded price on an active market. 

There were no other transfers between Level 1, Level 2 or Level 3 during the three and nine months ended September 30, 2017.

For the three and nine months ended September 30, 2018, there were $0.1 million and $0.1 million, respectively, net realized losses included in net investment loss in the condensed consolidated statements of income relating to Level 3 securities.

For Level 3 securities still held as of the reporting date, the change in net unrealized gains (losses) for the three and nine months ended September 30, 2018 of $(0.3) million and $(0.2) million, respectively (three and nine months ended September 30, 2017: net unrealized gains $0.1 million and $0.2 million, respectively), were included in net investment income (loss) in the condensed consolidated statements of income.



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5.        DUE TO PRIME BROKERS AND OTHER FINANCIAL INSTITUTIONS
 
As of September 30, 2018, the amount due to prime brokers is comprised of margin-borrowing from prime brokers and custodians relating to investments purchased on margin. In addition, prior to September 1, 2018, under term margin agreements with prime brokers and revolving credit facilities with custodians and a letter of credit facility agreement, the Company pledged certain investment securities to borrow cash. The cash borrowed under a letter of credit facility agreement was placed in a custodial account in the name of the Company and this custodial account provided collateral for any letters of credit issued. Similarly for the trust accounts, the Company borrowed cash from prime brokers or custodians which was placed in a trust account for the benefit of the cedent. Since there was no legal right of offset, the Company’s liability for the cash borrowed from the prime brokers and custodians was included on the condensed consolidated balance sheets as due to prime brokers and other financial institutions while the cash held in the custodial account and trust accounts were included on the condensed consolidated balance sheets as restricted cash and cash equivalents. As of September 30, 2018, no investments were pledged for borrowing cash from prime brokers or custodians to fund the letters of credit and trust accounts.

 
 
September 30, 2018
 
December 31, 2017
 
 
($ in thousands)
Due to Prime Brokers
 
$
13,687

 
$
647,700

Due to Other Financial Institutions
 
30,000

 
25,000

 
 
$
43,687