# GREENLIGHT CAPITAL RE, LTD. (GLRE) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from GREENLIGHT CAPITAL RE, LTD.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1385613/000138561322000026/glre-20211231.htm
Accession: 0001385613-22-000026
Filing date: 2022-03-08
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/GLRE/
All MD&A years: /company/GLRE/mda/
Next year: /company/GLRE/mda/fy2022/ (FY 2022)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

References to “we,” “us,” “our,” “our company,”  or “the Company” refer to Greenlight Capital Re, Ltd. (“GLRE”) and its wholly-owned subsidiaries, Greenlight Reinsurance, Ltd, (“Greenlight Re”), Greenlight Reinsurance Ireland, Designated Activity Company (“GRIL”), Greenlight Re Marketing (UK) Limited (“Greenlight Re UK”) and Verdant Holding Company, Ltd. (“Verdant”), unless the context dictates otherwise. References to our “Ordinary Shares” refer collectively to our Class A Ordinary Shares and Class B Ordinary Shares.

The following discussion should be read in conjunction with the audited consolidated financial statements and accompanying notes, which appear elsewhere in this filing.

The following is a discussion and analysis of our results of operations for the years ended December 31, 2021 and 2020 and financial condition at December 31, 2021 and 2020.

We have omitted discussion of the earliest of the three years covered by our consolidated financial statements presented in this report because we included that disclosure in our Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 10, 2021. You are encouraged to reference Part II, Item 7, within that report, for a discussion of our financial condition and result of operations for the fiscal year ended December 31, 2020, compared to the fiscal year ended December 31, 2019.

General

We are a global specialty property and casualty reinsurer headquartered in the Cayman Islands, with a reinsurance and investment strategy that we believe differentiates us from most of our competitors. Our goal is to build long-term shareholder value by providing risk management solutions to the insurance, reinsurance, and other risk marketplaces. We focus on delivering risk solutions to clients and brokers who value our expertise, analytics, and customer service offerings.

We aim to complement our underwriting activities with a non-traditional investment approach designed to achieve higher rates of return over the long term than reinsurance companies that exclusively employ more traditional investment strategies. Our investment portfolio is managed according to a value-oriented philosophy, in which our investment advisor takes long positions in perceived undervalued securities and short positions in perceived overvalued securities. In 2018, we launched our Greenlight Re Innovations unit, which supports technology innovators in the (re)insurance market by providing investment, risk capacity, and access to a broad insurance network.

Because we seek to capitalize on favorable market conditions and opportunities, period-to-period comparisons of our underwriting results may not be meaningful. Also, our historical investment results are not necessarily indicative of future performance. Due to the nature of our reinsurance and investment strategies, our operating results will likely fluctuate from period to period.

The Company’s subsidiaries hold an A.M. Best Financial Strength Rating of A- (Excellent) with a stable outlook.

50

Link to Table of Contents

Outlook and Trends

During 2021, we saw improved rates in most of the classes of business we write, which enabled us to selectively expand our specialty book while taking advantage of improved rates. Our in-force portfolio reflects increased diversification across the classes of business we write and a lower concentration of risk to individual counterparties than at any time in our history.

After another year of significant property catastrophe losses in 2021, it is not clear to us how the reinsurance market will respond. We believe that structural problems within the “pure catastrophe” class will limit premium rate increases in the class. However, we believe that the recent property catastrophe losses will help support and extend the generally favorable market conditions in most other classes. We expect that higher inflation, resulting in higher interest rates, may dampen some support for overall pricing conditions.

Over the past four years, our underwriting portfolio has become considerably more diversified as we have shifted our underwriting away from being dominated by a small number of large accounts. This diversification has also exposed us to a wider array of global insurance events, but we believe that taking on risk that is well priced, diversified and risk-managed, is key to achieving optimal underwriting results.

We continue to be encouraged by our Innovations unit, whose central objective is to enhance our underwriting product and quality of return by establishing a range of strategic partnerships. Underwriting business derived from Innovations business represented approximately 6% of our total written premium during 2021, and we see the potential for significant growth from Innovations-derived underwriting opportunities going forward.

In January 2022, we received in-principle approval from Lloyd’s to establish an insurtech-focused syndicate (“Syndicate 3456”). We expect Syndicate 3456 to enable us to provide capacity to our growing portfolio of Innovations partners. We anticipate Syndicate 3456 to commence operations in the second quarter of 2022.

Segments

We have one operating segment, Property & Casualty reinsurance, and we analyze our business based on the following categories:

[[GREPCENT_TABLE]]
[["","\u25cf","Property"],["","\u25cf","Casualty"],["","\u25cf","Other"]]
[[/GREPCENT_TABLE]]

Property business covers automobile physical damage, personal lines, and commercial lines exposures. Property business includes both catastrophe and non-catastrophe coverage. We expect catastrophe business to make up a small proportion of our property business.

Casualty business covers general liability, motor liability, professional liability, and workers’ compensation exposures. The Company’s multi-line business relates predominantly to casualty reinsurance, and as such, the Company includes all multi-line business within the casualty category. Casualty business generally has losses reported and paid over a longer period than property business. We categorize Lloyd’s syndicate contracts, which incorporate incidental catastrophe exposure, as multi-line (and therefore casualty) business.

Other business covers accident and health, financial lines (including transactional liability, mortgage insurance, surety, and trade credit), marine, energy, and to a lesser extent, other specialty business such as aviation, crop, cyber, political, and terrorism exposures.

Revenues

We derive our revenues from two principal sources: 

[[GREPCENT_TABLE]]
[["","\u25cf","premiums from reinsurance on property and casualty business assumed; and"],["","\u25cf","income from investments."]]
[[/GREPCENT_TABLE]]

51

Link to Table of Contents

We recognize premiums written as revenues, net of any applicable underlying reinsurance coverage, over the term of the related policy or contract. Depending on the contract structure, the earnings period could be the same as the reinsurance contract or based on the terms of the underlying insurance policies.

Income from our investments is primarily composed of:

[[GREPCENT_TABLE]]
[["\u25cf","income (or loss) generated from our investment in SILP;"],["\u25cf","gains (or losses) from our other investments, including Innovations and an investment accounted for as equity method investment;"],["\u25cf","interest income from money market funds; and"],["\u25cf","interest income and gains (or losses) from promissory notes receivable."]]
[[/GREPCENT_TABLE]]

 In addition, we may from time to time derive other income from interest on deposit accounted contracts, fees generated from advisory services, and fees relating to overrides, profit commissions, and the contractual fees upon early termination of contracts.

Expenses

Our expenses consist primarily of the following: 

[[GREPCENT_TABLE]]
[["","\u25cf","underwriting losses and loss adjustment expenses;"],["","\u25cf","acquisition costs;"],["","\u25cf","general and administrative expenses;"],["","\u25cf","interest expense; and"],["","\u25cf","investment-related expenses."]]
[[/GREPCENT_TABLE]]

The extent of our loss and LAE is a function of the amount and type of reinsurance contracts we write and the loss experience of the underlying coverage. As described below, loss and loss adjustment expenses include an actuarially determined estimate of losses incurred, including losses incurred during the period and changes in estimates from prior periods. The period over which we pay loss and LAE reserves depends on the nature of the coverage provided and generally extends over a period of multiple years.

Acquisition costs consist primarily of brokerage fees, ceding commissions, premium taxes, profit commissions, letters of credit and trust fees, and federal excise taxes. We amortize deferred acquisition costs relating to successfully bound reinsurance contracts over the related contract term.

General and administrative expenses consist primarily of salaries and benefits and related costs, including costs associated with our incentive compensation plan, bonuses, and stock compensation expenses. General and administrative expenses also include professional fees, travel and entertainment, information technology, rent and other general operating costs. General and administrative expenses reported on our consolidated statements of operations include both underwriting and corporate expenses.

For stock option expenses, we calculate compensation cost using the Black-Scholes option pricing model and recognize the associated expense over the stock options’ vesting periods, which vary and have historically ranged from zero to six years. For restricted stock awards and restricted stock units with only service conditions, we calculate compensation cost using each award’s grant date fair value and recognize the associated expense of the stock awards over their vesting periods, which typically range from one to three years. For restricted stock awards that include both service and performance conditions, we recognize the associated expense when we determine that it is probable that the performance conditions will be achieved.

Interest expense consists of interest paid and accrued on senior convertible notes and the amortization of (i) issuance expenses, and (ii) the note discount. In addition, we incur interest expense on deposit accounted contracts.

Investment-related expenses primarily consist of management fees and performance compensation paid to the investment advisor. We net these expenses against investment income (loss) in our consolidated financial statements.

52

Link to Table of Contents

Critical Accounting Policies and Estimates

Our consolidated financial statements contain certain amounts that are inherently subjective and have required management to make assumptions and best estimates to determine reported values. If certain factors, including those described in “Part I. Item IA. — Risk Factors,” cause actual events or results to differ materially from our underlying assumptions or estimates, there could be a material adverse effect on our results of operations, financial condition, or liquidity. We believe that the following accounting policies affect the more significant estimates used to prepare our consolidated financial statements. We have summarized the descriptions below for clarity. We have included a more detailed description of our significant accounting policies and recently issued accounting standards in Note 2 to the consolidated financial statements. 

Premium Revenues and Risk Transfer. We record our property and casualty reinsurance premiums as premiums written based upon contract terms and information received from ceding companies and their brokers. Excess of loss reinsurance contracts typically state premiums as a percentage of the subject premiums written by the client, subject to a minimum and deposit premium. The minimum and deposit premium is generally based on an estimate of subject premiums expected to be written by the client during the contract term. The minimum and deposit premium is reported initially as premiums written and adjusted, if necessary, in subsequent periods once the actual subject premium is known.

Certain contracts provide for reinstatement premiums in the event of a loss. Reinstatement premiums are written and earned when a triggering loss event occurs.

Our clients estimate the gross premiums written at the contract’s inception for each proportional contract we underwrite. Our underwriters utilize the client’s estimate to determine our best estimate, which we use to initially account for such premiums. In subsequent periods, we adjust our estimates based on our client’s actual reports and our expectations of industry developments. As the contract progresses, we monitor actual premiums received in conjunction with the client’s correspondence to refine our estimate. Variances from initial gross premiums written estimates are generally greater for proportional contracts than for non-proportional contracts. We earn premiums on proportional contracts over the risk coverage period. Unearned premiums represent the unexpired portion of reinsurance provided.

At the inception of each of our reinsurance contracts, we receive premium estimates from the client, which we use in conjunction with historical and industry data to estimate what we believe will be the ultimate premium payable under each contract. We receive actual premiums written by each client as the client reports the actual results of the underlying insurance writings to us monthly or quarterly (depending on the contract). We book the actual premiums written when we receive them from our client. Each reporting period, we estimate the premiums written for stub periods that have not yet been reported to us by the client. For example, at year-end, we may have to estimate December premiums ceded under certain contracts since the client may not be required to report the actual results to us until after we have issued our audited consolidated financial statements. Typically, we only use premium estimates for unreported stub periods, which account for a small percentage of our total premiums written.

We confirm the accuracy and completeness of premiums reported by our clients by reviewing the client’s statutory filings or performing an audit of the client under the contract terms. Discrepancies between premiums ceded and reported under a contract are, in our experience, rare. To date, we have not had any material difference in premiums reported by a client that required a formal dispute resolution process. 

Assessing whether a reinsurance contract meets the conditions for risk transfer requires judgment. The determination of risk transfer is critical to reporting premiums written and is based, in part, on the use of actuarial and pricing models and assumptions. If we determine that a reinsurance contract does not transfer sufficient risk to merit reinsurance accounting treatment, we report the premium we receive as a deposit liability. Similarly, we report the premium we pay as a deposit asset for ceded contracts that do not transfer sufficient risk to merit reinsurance accounting. Any income and expense on deposit accounted contracts is calculated using the interest method and recorded in the consolidated statements of operations under the captions “Other income (expense)” and “Deposit interest expense,” respectively.

Investments. We carry our investment in SILP at fair value, based on the most recent net asset value obtained from SILP’s third-party administrator. The caption “Other investments” in our consolidated balance sheets includes private and unlisted equity securities that do not have readily determinable fair values. We determine these private equity securities’ carrying value based on the original cost, less impairment, plus or minus observable price changes in orderly transactions for an identical or similar investment of the same issuer. At each reporting date, we qualitatively consider whether the investment is impaired on the basis of certain impairment indicators. If we determine that the equity security is impaired on the basis of the qualitative assessment, we recognize an impairment loss in the caption “Net investment income (loss)” in the consolidated statements of operations. We determine realized gains and losses from other investments based on the specific identification

53

Link to Table of Contents

method (by reference to cost or amortized cost, as appropriate). These gains and losses are included in the captions “Net investment income (loss)” in the consolidated statements of operations.

Loss and Loss Adjustment Expense Reserves. The process of estimating our loss and LAE reserves involves a considerable degree of judgment, and our estimates as of any given date are inherently uncertain. Estimating loss and LAE reserves requires us to make assumptions regarding reporting and development patterns, frequency and severity trends, claims settlement practices, potential changes in legal environments, inflation, loss amplification, foreign exchange movements, and other factors. These estimates and judgments are based on numerous considerations and are often revised as (i) we receive changes in loss amounts reported by ceding companies and brokers; (ii) we obtain additional information, experience, or other data; (iii) we develop new or improved methodologies; or (iv) we observe changes in the legal environment.

Our loss and LAE reserves relating to short-tail property risks are typically reported to us and settled more promptly than those relating to our long-tail risks. However, the timeliness of loss reporting can be affected by such factors as the nature of the event causing the loss, the location of the loss, whether the loss is from policies in force with primary insurers or with reinsurers, and where our exposure falls within the cedent’s overall reinsurance program.

Our loss and LAE reserves are composed of case reserves (based on claims reported to us) and IBNR reserves, including the associated claims handling costs.

We determine case reserve estimates based on loss reports received. We determine our IBNR reserve estimates using standard actuarial methods as well as a combination of our own historical and current loss experience, insurance industry loss experience, assessments of pricing adequacy trends, and our professional judgment. In estimating our IBNR reserve, we estimate the total ultimate loss and LAE we expect to incur and subtract paid claims and case reserves.

The nature and extent of our judgment in the reserving process depend in part upon the type of business. Some of our property treaty reinsurance contracts represent business with a low frequency of claims occurrence and a high potential loss severity, such as claims arising from natural catastrophes. Given the nature of these events and the losses generated by them, traditional actuarial reserving methods may not prove to be reliable indicators of the final outcome. As such, for contracts or losses of this type, we estimate the ultimate cost associated with a single loss event rather than perform analysis on the historical development patterns of past losses as a means of estimating the ultimate losses for an entire accident year. We estimate our reserves for these large events on a contract-by-contract basis by reviewing policies with known or potential exposure to a particular loss event.

For non-catastrophe losses, we apply standard actuarial methodologies in setting reserves, including paid and incurred loss development, Bornheutter-Ferguson, burning cost, and frequency and severity techniques. We supplement our analysis with industry loss ratio and development pattern information in conjunction with our own experience. The weight given to a particular method will depend on many factors, including the homogeneity within the class of business, the volume of losses, the maturity of the accident year, and the length of the expected development tail. For example, the expected loss ratio method assumes that the ratio of premiums and losses remains constant. In contrast, development methods rely on observable patterns within reported losses, both historical and newly reported, to establish a view of the ultimate loss incurred. Therefore, as an accident year matures, we may migrate from an expected loss ratio method to an incurred development method.

As a predominantly broker-market reinsurer for both excess-of-loss and proportional contracts, we rely on loss information reported to brokers by primary insurers who, in turn, must estimate their losses at the policy level, often based on incomplete and changing information. The information we receive varies by cedent and may include paid losses, estimated case reserves, and an estimated provision for IBNR reserves. Reserving practices and data-reporting quality differ among ceding companies, which adds further uncertainty to our estimation of ultimate losses. The nature and extent of information received from ceding companies and brokers also vary widely depending on the type of coverage, the contractual reporting terms (which are affected by market conditions and practices), and other factors. Due to the lack of standardization of the terms and conditions of reinsurance contracts, the differences in coverage provided to individual clients, and the tendency of those coverages to change rapidly in response to market conditions, we cannot always reliably measure the ongoing economic impact of such uncertainties and inconsistencies.

Time lags are inherent in loss reporting, especially in the case of excess-of-loss reinsurance contracts. The combined characteristics of low claim frequency and high claim severity make the available data less useful for predicting ultimate losses.

In the case of proportional contracts, we rely on an analysis of a cedent’s historical experience, industry information, and the underwriters’ professional judgment in estimating reserves. We also utilize ultimate loss ratio forecasts when reported by cedents and brokers, which are ordinarily subject to three to six-month lags for proportional business. Due to the degree of reliance we place on ceding companies for claims reporting, our reserve estimates are highly dependent on ceding companies’

54

Link to Table of Contents

judgment. Furthermore, during the loss settlement period, which may last several years, additional facts regarding individual claims and trends will often become known, and case law may change, affecting ultimate expected losses.

Since we rely on ceding company data in the process of establishing our loss and LAE reserves, we maintain procedures designed to mitigate the risk that such information is incomplete or inaccurate. These procedures include: (i) comparisons of expected premiums to reported premiums, which helps us to identify delinquent client periodic reports; (ii) ceding company audits to identify inaccurate or incomplete reporting of claims and ensure that claims are actively and appropriately managed in line with agreed protocols and settlement authority limits; and (iii) underwriting reviews to ascertain that the losses ceded are covered as provided under the contract terms. Each subsequent year of loss experience with a given cedent provides additional insight into the accuracy and timeliness of previously reported information. These procedures are incorporated in our internal controls and are regularly evaluated and amended as market conditions, risk factors, and unanticipated areas of exposure develop.

We monitor the development of our prior-year losses during subsequent calendar years by comparing the actual reported losses against previous estimates and current expectations. The analysis of this loss development is an essential factor in the ongoing refinement of our reserving assumptions.

Estimating loss reserves for our book of longer-tail casualty reinsurance business, which we write on both a proportional and non-proportional basis, involves further uncertainties. In addition to the uncertainties described above, casualty business can be subject to longer reporting lags than property business, and claims often take several years to settle. During this period, additional factors and trends will be revealed, and, as they become apparent, we may adjust our reserves accordingly. There is also the potential for the emergence of new types of losses within our casualty book. Therefore, any factors that extend the time until our cedents settle claims add uncertainty to the reserving process.

The uncertainties inherent in the reserving process, together with the potential for unforeseen developments, including changes in laws and the prevailing interpretation of policy terms, may result in our loss and LAE reserves being materially greater or less than the loss and LAE reserves we initially established. We reflect adjustments to our loss and LAE reserves in our financial results during the period in which they are determined. Changes to our prior year loss reserves will impact our current underwriting results by improving our results if the prior year reserves prove redundant or impairing our results if the prior year reserves prove insufficient.

We believe that our reserves for loss and LAE are sufficient to cover losses that fall within the terms of our policies and agreements with our insured and reinsured customers based on the methodologies used to estimate those reserves. However, we can provide no assurance that actual losses will not (i) be less than or (ii) exceed our total established reserves.

Please refer to Notes 2 and 7 of our consolidated financial statements for a more detailed explanation of our loss reserving methodology and the loss development tables by accident year, respectively, as required under U.S. GAAP.

Share-Based Payments. We have established a stock incentive plan for directors, employees, and consultants. We recognize share-based compensation transactions using the fair value at the award’s grant date. We calculate the compensation for restricted stock awards and restricted stock units (“RSUs”) based on the price of the Company’s common shares at the grant date. We recognize the associated expense, adjusted for estimated forfeitures, over the vesting period and incorporate the probability of meeting any performance conditions. We estimate the forfeiture rate for restricted stock awards and RSUs based on our historical experience and expectations of future forfeitures. The forfeiture rate reduces the unamortized grant date fair value of unvested outstanding restricted stock awards and RSUs and the associated stock compensation expense. As restricted shares and RSUs are forfeited, we reduce the number of outstanding restricted shares and RSUs and compare the remaining unamortized grant date fair value to the assumed forfeiture levels. We record true-up adjustments as deemed necessary. For the year ended December 31, 2021, we have assumed a forfeiture rate of 9.0% (2020: 7.0% and 2019: 7.0%) for restricted stock awards and RSUs granted.

We recognize the expense of share purchase options over the vesting period on a graded vesting basis. Determining the fair value of share option awards at the grant date requires significant estimation and judgment. We use an option-pricing model (Black-Scholes pricing model) to assist in calculating fair value. We base the estimate of expected volatility on our Class A ordinary shares’ daily historical trading data from the date these shares commenced trading (May 24, 2007) to the grant date.

If actual results differ significantly from these estimates and assumptions, particularly concerning our estimation of volatility and forfeiture rates, share-based compensation expense, primarily relating to future share-based awards, could be materially impacted.

55

Link to Table of Contents

Key Financial Measures and Non-GAAP Measures

Basic Book Value Per Share and Fully Diluted Book Value Per Share

We believe that long-term growth in fully diluted book value per share is the most relevant measure of our financial performance because it provides management and investors a yardstick to monitor the shareholder value generated. Fully diluted book value per share may also help our investors, shareholders, and other interested parties form a basis of comparison with other companies within the property and casualty reinsurance industry.

We calculate basic book value per share based on ending shareholders' equity and aggregate of Class A and Class B Ordinary shares issued and outstanding, as well as all unvested restricted shares. Fully diluted book value per share represents basic book value per share combined with any dilutive impact of in-the-money stock options, and RSUs issued and outstanding at any period end. Fully diluted book value per share also includes the dilutive effect, if any, of ordinary shares to be issued upon conversion of the convertible notes.

Our primary financial goal is to increase fully diluted book value per share over the long term.

The following table presents the calculation of basic and fully diluted book value per share for the recent periods.

[[GREPCENT_TABLE]]
[["","December 31, 2021","","December 31, 2020","","December 31, 2019"],["","($ in thousands, except per share and share amounts)"],["Numerator for basic and fully diluted book value per share:"],["Total equity (U.S. GAAP) (numerator for basic and fully diluted book value per share)","$","475,663","","","$","464,857","","","$","477,183"],["Denominator for basic and fully diluted book value per share: (1)"],["Ordinary shares issued and outstanding (denominator for basic book value per share)","33,844,446","","","34,514,790","","","36,994,110"],["Add: In-the-money stock options and RSUs issued and outstanding","154,134","","","116,722","","","63,582"],["Denominator for fully diluted book value per share","33,998,580","","","34,631,512","","","37,057,692"],["Basic book value per share","$","14.05","","","$","13.47","","","$","12.90"],["Increase (decrease) in basic book value per share ($)","$","0.58","","","$","0.57","","","$","(0.22)"],["Increase (decrease) in basic book value per share (%)","4.3","%","","4.4","%","","(1.7)","%"],["Fully diluted book value per share","$","13.99","","","$","13.42","","","$","12.88"],["Increase (decrease) in fully diluted book value per share ($)","$","0.57","","","$","0.54","","","$","(0.22)"],["Increase (decrease) in fully diluted book value per share (%)","4.2","%","","4.2","%","","(1.7)","%"]]
[[/GREPCENT_TABLE]]

(1) All unvested restricted shares, including those with performance conditions, are included in the “basic” and “fully diluted” denominators. At December 31, 2021, the number of unvested restricted shares with performance conditions was 193,149 (December 31, 2020: 193,149, December 31, 2019: 356,900).

Management also uses certain key financial measures, some of which are not prescribed under U.S. GAAP rules and standards (“non-GAAP financial measures”), to evaluate our financial performance, financial position, and the change in shareholder value. Generally, a non-GAAP financial measure, as defined in SEC Regulation G, is a numerical measure of a company’s historical or future financial performance, financial position, or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented under U.S. GAAP. We believe that these measures, which may be calculated or defined differently by other companies, provide consistent and comparable metrics of our business performance to help shareholders understand performance trends and allow for a more thorough understanding of the Company’s business. Non-GAAP financial measures should not be viewed as a substitute for those determined under U.S. GAAP.

The key non-GAAP financial measures used in this report are:

• Adjusted combined ratio; and

56

Link to Table of Contents

• Net underwriting income (loss).

These non-GAAP measures are described below.

Adjusted combined ratio

“Combined ratio” is a commonly used measure in the property and casualty insurance industry and is calculated using U.S. GAAP components. We use the combined ratio, along with an analysis of significant drivers, to evaluate our underwriting performance. During 2020, in an effort to further evaluate our underwriting performance, we introduced the “adjusted combined ratio,” a non-GAAP measure that excludes the effects of underwriting losses attributable to (i) prior accident-year reserve development, (ii) catastrophe losses, and (iii) certain significant, infrequent loss events. we have since determined that the use of this measure does not significantly enhance our or investors’ understanding of the underlying trends or variability in our underwriting results. Accordingly, we do not intend to use or disclose our adjusted combined ratio in future periods.

In calculating the adjusted combined ratio, we exclude underwriting income and losses attributable to (i) prior accident-year reserve development, (ii) catastrophe events, and (iii) other significant infrequent adjustments.

Prior accident-year reserve development, which can be favorable or unfavorable, represents changes in our estimates of losses and loss adjustment expenses associated with loss events that occurred in prior years.

By their nature, catastrophe events and other significant infrequent adjustments are not representative of the type of loss activity that we would expect to occur in every period.

The following table reconciles the combined ratio to the adjusted combined ratio:

[[GREPCENT_TABLE]]
[["","","","Year ended December 31"],["","","","","","2021","","2020","","2019"],["Combined ratio","","","","","100.9","%","","100.4","%","","106.9","%"],["Impact on combined ratio of selected items:"],["Prior-year development","","","","","(1.5)","%","","0.8","%","","6.2","%"],["Catastrophes (current year)","","","","","6.1","%","","2.0","%","","3.6","%"],["Other adjustments","","","","","2.2","%","","1.6","%","","\u2014","%"],["Adjusted combined ratio","","","","","94.1","%","","96.0","%","","97.1","%"]]
[[/GREPCENT_TABLE]]

• The caption “Other adjustments” represents, for the year ended December 31, 2021, interest income and expense on deposit-accounted contracts due to changes in the associated estimated ultimate cash flows and, for the year ended December 31, 2020, losses relating to the COVID-19 pandemic.

Net Underwriting Income (Loss)

One way that we evaluate the Company’s underwriting performance is by measuring net underwriting income (loss). We do not use premiums written as a measure of performance. Net underwriting income (loss) is a performance measure used by management to evaluate the fundamentals underlying the Company’s underwriting operations. We believe that the use of net underwriting income (loss) enables investors and other users of the Company’s financial information to analyze our performance in a manner similar to how management analyzes performance. Management also believes that this measure follows industry practice and allows the users of financial information to compare the Company’s performance with that of our industry peer group.

Net underwriting income (loss) is considered a non-GAAP financial measure because it excludes items used to calculate net income before taxes under U.S. GAAP. We calculate net underwriting income (loss) as net premiums earned, plus other income relating to reinsurance and deposit-accounted contracts, less deposit interest expense, less net loss and loss adjustment expenses, acquisition costs, and underwriting expenses. The measure excludes, on a recurring basis: (1) investment income (loss); (2) other income (expense) not related to underwriting, including foreign exchange gains or losses and adjustments to the allowance for expected credit losses; (3) corporate general and administrative expenses; and (4) interest expense. We exclude total investment income or loss, foreign exchange gains or losses, and expected credit losses as we believe these items are influenced by market conditions and other factors not related to underwriting decisions. We exclude corporate and interest expenses because these costs are generally fixed and not incremental to or directly related to our underwriting operations. We believe all of these amounts are largely independent of our underwriting process, and including them could hinder the analysis

57

Link to Table of Contents

of trends in our underwriting operations. Net underwriting income (loss) should not be viewed as a substitute for U.S. GAAP net income before income taxes.

The reconciliations of net underwriting income (loss) to income (loss) before income taxes (the most directly comparable U.S. GAAP financial measure) on a consolidated basis are shown below:

[[GREPCENT_TABLE]]
[["","Year ended December 31"],["","2021","","2020","","2019"],["","($ in thousands)"],["Income (loss) before income tax","$","21,324","","","$","4,290","","","$","(3,503)"],["Add (subtract):"],["Total investment (income) loss","(50,152)","","","(25,532)","","","(52,267)"],["Other non-underwriting (income) expense","880","","","(686)","","","467"],["Corporate expenses","16,489","","","14,036","","","15,560"],["Interest expense","6,263","","","6,280","","","6,263"],["Net underwriting income (loss)","$","(5,196)","","","$","(1,612)","","","$","(33,480)"]]
[[/GREPCENT_TABLE]]

58

Link to Table of Contents

Results of Operations

The table below summarizes our operating results for the years ended December 31, 2021, 2020, and 2019:

[[GREPCENT_TABLE]]
[["","","2021","","2020","","2019"],["","","(in thousands, except percentages)"],["Underwriting revenue"],["Gross premiums written","","$","565,393","","","$","479,791","","","$","523,977"],["Gross premiums ceded","","(41)","","","(2,268)","","","(48,667)"],["Net premiums written","","565,352","","","477,523","","","475,310"],["Change in net unearned premium reserves","","(26,073)","","","(22,112)","","","8,270"],["Net premiums earned","","539,279","","","455,411","","","483,580"],["Underwriting related expenses"],["Net loss and loss adjustment expenses incurred"],["Current year","","389,080","","","333,096","","","357,237"],["Prior year *","","(14,100)","","","4,737","","","31,250"],["Net loss and loss adjustment expenses incurred","","374,980","","","337,833","","","388,487"],["Acquisition costs","","144,960","","","109,288","","","117,084"],["Underwriting expenses","","12,880","","","12,365","","","14,262"],["Deposit accounting and other reinsurance expense (income)","","11,655","","","(2,463)","","","(2,773)"],["Net underwriting income (loss)","","(5,196)","","","(1,612)","","","(33,480)"],["Income (loss) from investment in related party investment fund","","18,087","","","4,431","","","46,056"],["Net investment income (loss)","","32,065","","","21,101","","","6,211"],["Total investment income (loss)","","$","50,152","","","$","25,532","","","$","52,267"],["Net underwriting and investment income (loss)","","$","44,956","","","$","23,920","","","$","18,787"],["Corporate expenses","","$","16,489","","","$","14,036","","","$","15,560"],["Other (income) expense, net","","880","","","(686)","","","467"],["Interest expense","","6,263","","","6,280","","","6,263"],["Income tax expense (benefit)","","3,746","","","424","","","483"],["Net income (loss)","","17,578","","","3,866","","","(3,986)"],["Earnings (loss) per share"],["Basic","","$","0.51","","","$","0.11","","","$","(0.11)"],["Diluted","","$","0.51","","","$","0.11","","","$","(0.11)"],["Underwriting ratios"],["Loss ratio - current year","","72.1","%","","73.1","%","","73.9","%"],["Loss ratio - prior year","","(2.6)","%","","1.1","%","","6.4","%"],["Loss ratio","","69.5","%","","74.2","%","","80.3","%"],["Acquisition cost ratio","","26.9","%","","24.0","%","","24.2","%"],["Composite ratio","","96.4","%","","98.2","%","","104.5","%"],["Underwriting expense ratio","","4.5","%","","2.2","%","","2.4","%"],["Combined ratio","","100.9","%","","100.4","%","","106.9","%"]]
[[/GREPCENT_TABLE]]

* The net financial impacts associated with changes in the estimate of losses incurred in prior years, which incorporate earned reinstatement premiums assumed and ceded, and adjustments to assumed and ceded acquisition costs, were a gain of $8.3 million in 2021, and a loss of $3.7 million and $30.1 million in 2020 and 2019, respectively.

59

Link to Table of Contents

Year ended 2021 compared to 2020

For the year ended December 31, 2021, the fully diluted book value per share increased by $0.57 per share, or 4.2%, to $13.99 per share from $13.42 per share on December 31, 2020. For the year ended December 31, 2021, the basic book value per share increased by $0.58, or 4.3%, to $14.05 per share from $13.47 per share on December 31, 2020. The increases in basic and fully diluted book value per share for the year ended December 31, 2021, were due primarily to share repurchases executed and net income earned.

For the year ended December 31, 2021, net income increased to $17.6 million, compared to $3.9 million reported for the year ended December 31, 2020.

The developments that most significantly affected our financial performance during the year ended December 31, 2021, compared to the equivalent 2020 period, are summarized below:

•Underwriting: The underwriting loss for the year ended December 31, 2021, was $5.2 million on net earned premiums of $539.3 million. By comparison, the underwriting loss for the same period in 2020 was $1.6 million on net earned premiums of $455.4 million. The underwriting loss for the year ended December 31, 2021, included $11.7 million of expense related to deposit accounted contracts that we wrote in 2017, 2018, and 2019. The expense recorded during the year ended December 31, 2021, was due to changes in the associated estimated ultimate cash flow resulting from higher than expected losses reported by the cedents.

Catastrophe events during the year ended December 31, 2021, including Hurricane Ida, winter storm Uri, the European floods and hailstorms, U.S.tornados, and the South African riots contributed $32.7 million to the underwriting loss. By comparison, the catastrophe events during the year ended December 31, 2020, including hurricanes Laura, Isaias, and Sally, the Midwest derecho storms, and North American wildfires, contributed $9.0 million to the underwriting loss. Additionally, COVID-19 contributed $7.1 million to the underwriting loss for the year ended December 31, 2020.

Our overall combined ratio was 100.9% for the year ended December 31, 2021, compared to 100.4% during the same period in 2020. The catastrophe events listed above during the year ended December 31, 2021, contributed 6.1 percentage points to our combined ratio, compared to 2.0 percentage points from catastrophe events during 2020.

•Investments: Our total investment income for the year ended December 31, 2021, was $50.2 million compared to total investment income of $25.5 million reported during 2020. Investment income for the year ended December 31, 2021, included (a) $18.1 million on our investment in SILP, (b) $19.5 million of unrealized gain on our Innovations and other strategic investments and (c) $14.2 million realized gain on the sale of our investment in AccuRisk.

Underwriting results

We analyze our business based on three categories: “property,” “casualty,” and “other.”

Gross Premiums Written

Details of gross premiums written are provided in the following table: 

[[GREPCENT_TABLE]]
[["","","Year ended December 31"],["","","2021","","2020"],["","","($ in thousands)"],["Property","","$","52,947","","","9.4","%","","$","58,463","","","12.2","%"],["Casualty","","379,113","","","67.0","","","302,237","","","63.0"],["Other","","133,333","","","23.6","","","119,091","","","24.8"],["Total","","$","565,393","","","100.0","%","","$","479,791","","","100.0","%"]]
[[/GREPCENT_TABLE]]

As a result of our underwriting philosophy, the total premiums we write and the mix of premiums between property, casualty, and other business, may vary significantly from period to period depending on the market opportunities we identify.

60

Link to Table of Contents

For the year ended December 31, 2021, our gross premiums written increased by $85.6 million, or 17.8%, compared to the same period in 2020. The changes in gross premiums written for the year ended December 31, 2021, were attributable to the following:

[[GREPCENT_TABLE]]
[["Gross Premiums Written"],["Year ended December 31, 2021"],["","","Increase (decrease) ($ in millions)","","% change","","Explanation"],["Property","","$(5.5)","","(9.4)%","","The decrease in property gross premiums written during the year ended December 31, 2021, over the comparable 2020 period was related to: (a) motor contracts on which we elected to reduce or not renew our participation; and(b) property catastrophe quota share contracts on which we elected to reduce or not renew our participation. The decrease in property gross premiums written was partially offset by an increase in property premiums written driven by our Innovations unit."],["Casualty","","$76.9","","25.4%","","The increase in casualty gross premiums written during the year ended December 31, 2021 over the comparable 2020 period was related primarily to our expanded relationships with Lloyd\u2019s corporate members and syndicates. We also experienced an increase in general liability business during 2021. These increases were partially offset by decreases in motor liability and workers\u2019 compensation business that we did not renew or on which we reduced our participation in 2021."],["Other","","$14.2","","12.0%","","The increase in \u201cOther\u201d gross premiums written during the year ended December 31, 2021, over the comparable 2020 period was primarily attributable to transactional liability premiums which increased during 2021, reflecting an increase in M&A activity compared to 2020. New marine and energy contracts also contributed to the increase in \u201cOther\u201d gross premiums written. These increases were partially offset by decreased crop and health premiums as we lowered our participation during 2021."]]
[[/GREPCENT_TABLE]]

Premiums Ceded

The level of premiums ceded during the year ended December 31, 2021, was insignificant. The $2.3 million of ceded premium for the year ended December 31, 2020, related to the retroceded portion of our exposure to a motor contract. In general, we use retrocessional coverage to manage our net portfolio exposure, leverage areas of expertise, and improve our strategic position in meeting clients’ needs.

Net Premiums Written

Details of net premiums written are provided in the following table: 

[[GREPCENT_TABLE]]
[["","","Year ended December 31"],["","","2021","","2020"],["","","($ in thousands)"],["Property","","$","53,014","","","9.4","%","","$","58,033","","","12.2","%"],["Casualty","","379,145","","","67.0","","","300,546","","","62.9"],["Other","","133,193","","","23.6","","","118,944","","","24.9"],["Total","","$","565,352","","","100.0","%","","$","477,523","","","100.0","%"]]
[[/GREPCENT_TABLE]]

The movement in net premiums written resulted from the changes in gross premiums written and ceded during the periods.

61

Link to Table of Contents

Net Premiums Earned

Details of net premiums earned are provided in the following table: 

[[GREPCENT_TABLE]]
[["","","Year ended December 31"],["","","2021","","2020"],["","","($ in thousands)"],["Property","","$","56,075","","","10.4","%","","$","59,066","","","13.0","%"],["Casualty","","351,390","","","65.2","","","289,501","","","63.5"],["Other","","131,814","","","24.4","","","106,844","","","23.5"],["Total","","$","539,279","","","100.0","%","","$","455,411","","","100.0","%"]]
[[/GREPCENT_TABLE]]

Net premiums earned are primarily a function of the amount and timing of net premiums written during the current and prior periods.

Loss and Loss Adjustment Expenses Incurred, Net

Details of net losses incurred are provided in the following table:

[[GREPCENT_TABLE]]
[["","","Year ended December 31"],["","","2021","","2020"],["","","($ in thousands)"],["Property","","$","45,987","","","12.3","%","","$","41,156","","","12.2","%"],["Casualty","","256,830","","","68.5","","","207,572","","","61.4"],["Other","","72,163","","","19.2","","","89,105","","","26.4"],["Total","","$","374,980","","","100.0","%","","$","337,833","","","100.0","%"]]
[[/GREPCENT_TABLE]]

The below table summarizes the loss ratios for the years ended December 31, 2021, and 2020:

[[GREPCENT_TABLE]]
[["","","Year ended December 31"],["","","2021","","2020","","","Increase / (decrease) in loss ratio points"],["Property","","82.0","%","","69.7","%","","","12.3","%"],["Casualty","","73.1","%","","71.7","%","","","1.4","%"],["Other","","54.7","%","","83.4","%","","","(28.7)","%"],["Total","","69.5","%","","74.2","%","","","(4.7)","%"]]
[[/GREPCENT_TABLE]]

62

Link to Table of Contents

The changes in net losses incurred and loss ratios during the year ended December 31, 2021, compared to the year ended December 31, 2020, were attributable to the following:

[[GREPCENT_TABLE]]
[["","","Increase (decrease) ($ in millions)","","Increase / (decrease) in loss ratio points","","Explanation"],["Property","","$4.8","","12.3%","","The increase in property losses incurred during the year ended December 31, 2021, as compared to the equivalent 2020 period, related primarily to losses relating to winter storm Uri, Hurricane Ida, the 2021 European floods and hailstorms, and the U.S. tornados during the year ended December 31, 2021. The property loss ratio increased 12.3 percentage points during the year ended December 31, 2021, over the equivalent 2020 period, primarily due to the events mentioned above."],["Casualty","","$49.3","","1.4%","","The increase in casualty losses incurred during the year ended December 31, 2021, as compared to the equivalent 2020 period related primarily to: \u2022losses from the winter storm Uri and Hurricane Ida on certain multi-line contracts;\u2022increased workers' compensation, multi-line and Lloyd's syndicate losses due to increased exposure in these lines of business; and\u2022increased losses on in-force motor contracts impacted by supply-chain shortages and other inflationary pressures. These increases in casualty losses incurred were partially offset by favorable loss development on motor liability contracts written prior to 2017. The casualty loss ratio increased 1.4 percentage points during the year ended December 31, 2021, over the equivalent 2020 period, primarily due to the reasons described above."],["Other","","$(16.9)","","(28.7)%","","The decrease in \u201cother\u201d losses incurred during the year ended December 31, 2021, over the comparable 2020 period was related primarily to:\u2022favorable development on mortgage contracts as loss estimates recorded in 2020 relating to the impact of COVID-19 were reduced in 2021;\u2022decrease in losses on health contracts resulting partially from favorable development on legacy contracts, and partly from shifting some of our health exposure from a quota share basis to an excess of loss basis; and\u2022the prior year included losses on crop contracts that we elected not to renew in 2021. The decrease in losses incurred was partially offset by increases related primarily to:\u2022losses on marine and energy contracts relating to Hurricane Ida; \u2022losses relating to the South African riots on certain terrorism contracts; and\u2022an increase in the volume of marine, energy, and other specialty business. The reasons for the28.7 percentage point decrease in the \u201cother\u201d loss ratio are consistent with those driving the reduction in losses incurred."]]
[[/GREPCENT_TABLE]]

See “Part II, Item 7. Summary of Critical Accounting Estimates, Loss and Loss Adjustment Expense Reserves” and “Note 7. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES” in our Notes to the consolidated financial statements for additional discussion of our reserving techniques and prior year development of net claims and claim expenses.

63

Link to Table of Contents

Acquisition Costs, Net

Details of acquisition costs are provided in the following table. 

[[GREPCENT_TABLE]]
[["","","Year ended December 31"],["","","2021","","2020"],["","","($ in thousands)"],["Property","","$","11,936","","","8.2","%","","$","12,040","","","11.0","%"],["Casualty","","93,499","","","64.5","","","78,676","","","72.0"],["Other","","39,525","","","27.3","","","18,572","","","17.0"],["Total","","$","144,960","","","100.0","%","","$","109,288","","","100.0","%"]]
[[/GREPCENT_TABLE]]

The acquisition cost ratios for the years ended December 31, 2021, and 2020, were as follows:

[[GREPCENT_TABLE]]
[["","","","","","2021","","2020","","Increase / (decrease)"],["Property","","","","","21.3","%","","20.4","%","","0.9","%"],["Casualty","","","","","26.6","%","","27.2","%","","(0.6)","%"],["Other","","","","","30.0","%","","17.4","%","","12.6","%"],["Total","","","","","26.9","%","","24.0","%","","2.9","%"]]
[[/GREPCENT_TABLE]]

The changes in the acquisition cost ratios during the year ended December 31, 2021, compared to the year ended December 31, 2020, were attributable to the following:

[[GREPCENT_TABLE]]
[["","","Increase / (decrease) in acquisition cost ratio points","Explanation"],["Property","","0.9%","There were no significant changes in the property acquisition cost ratios during the year ended December 31, 2021, compared to 2020."],["Casualty","","(0.6)%","The casualty acquisition cost ratio decreased slightly during the year ended December 31, 2021, over the comparable 2020 period as a result of the following partially offsetting factors:a) lower acquisition cost on certain workers compensation contracts with sliding scale ceding commissions, which incurred higher losses in 2021 compared to 2020; andb) higher acquisition costs on multi-line and Lloyd's syndicate contracts, which incorporate relatively higher commission rates than other casualty businesses."],["Other","","12.6%","The increase in the \u201cother\u201d acquisition cost ratio during the year ended December 31, 2021, over the comparable 2020 period was due primarily to profit commission adjustments on mortgage contracts that had favorable loss development during 2021. The increase was partially offset by a shift in the business mix towards non-proportional specialty business during the year ended December 31, 2021. This business incorporates lower commission rates than proportional health and financial lines business."]]
[[/GREPCENT_TABLE]]

General and Administrative Expenses

Details of general and administrative expenses are provided in the following table:

[[GREPCENT_TABLE]]
[["","Year ended December 31"],["","2021","","2020"],["","($ in thousands)"],["Underwriting expenses","$","12,880","","","$","12,365"],["Corporate expenses","16,489","","","14,036"],["General and administrative expenses","$","29,369","","","$","26,401"]]
[[/GREPCENT_TABLE]]

64

Link to Table of Contents

For the year ended December 31, 2021, general and administrative expenses increased by $3.0 million, or 11.2%, compared to the same period in 2020. The increase was due primarily to (i) our Innovations unit, (ii) directors’ and officers’ insurance premiums, (iii) personnel costs, and (iv) information system and technology. The increase was partially offset by lower legal and other professional fees compared to the year ended December 31, 2020. For the years ended December 31, 2021, and 2020, the general and administrative expenses included $3.2 million and $2.5 million, respectively, of expenses related to stock compensation granted to employees and directors.

Total Investment Income (Loss)

Total investment income (loss) incorporates (i) changes in the net asset value of our investment in SILP managed by DME Advisors, (ii) interest income earned on the restricted cash and cash equivalents pledged as collateral to our clients, and (iii) gains (or losses) and interest on our portfolio of strategic and Innovations investments, notes receivable and investments accounted for under the equity method. We expect our total investment income, including any change in the net asset value of our investment in SILP, to fluctuate from period to period.

A summary of our total investment income (loss) is as follows:

[[GREPCENT_TABLE]]
[["","","Year ended December 31"],["","","2021","","2020"],["","","($ in thousands)"],["Realized gains (losses)","","$","14,210","","","$","(9,234)"],["Change in unrealized gains and losses","","19,560","","","25,909"],["Investment-related foreign exchange gains (losses)","","(45)","","","39"],["Interest and dividend income, net of withholding taxes","","200","","","5,419"],["Interest, dividend, and other expenses","","(1,860)","","","(1,875)"],["Income (loss) from equity method investment","","\u2014","","","843"],["Net investment-related income (loss)","","$","32,065","","","$","21,101"],["Income (loss) from investments in related party investment fund","","18,087","","","4,431"],["Total investment income (loss)","","$","50,152","","","$","25,532"]]
[[/GREPCENT_TABLE]]

The caption “Income (loss) from investment in related party investment fund” in the above table is net of management fees paid by SILP to DME Advisors and performance compensation, if any, allocated from the Company’s investment in SILP to DME II. No performance compensation is allocated in periods of loss reported by SILP. For detailed breakdowns of management fees and performance compensation for the years ended December 31, 2021, and 2020, please refer to Note 3 of the consolidated financial statements.

For the year ended December 31, 2021, investment income, net of fees and expenses, resulted in a gain of 7.5% on the Investment Portfolio managed by DME Advisors, compared to a gain of 1.4% for the year ended December 31, 2020. The long portfolio gained 24.3% while the short portfolio and macro positions lost 7.9% and 6.0%, respectively, during the year ended December 31, 2021. For the year ended December 31, 2021, the largest contributors to SILP’s investment income were long positions in Atlas Air Worldwide (AAWW), Brighthouse Financial (BHF), CONSOL Energy (CEIX), Green Brick Partners (GRBK), and Teck Resources (TECK). The largest detractors were various short positions composed of single names and indexes.

For the year ended December 31, 2021, the decrease in interest and dividend income compared to the equivalent period in 2020 resulted from lower interest rates offered by financial institutions on the restricted cash and cash equivalents pledged as collateral to our clients.

During the year ended December 31, 2021, we recorded net unrealized gains of $19.5 million on our Innovations-related investment portfolio. During the year ended December 31, 2021, we also realized a $14.2 million gain (pre-tax) from the sale of our investment in AccuRisk.

65

Link to Table of Contents

For the years ended December 31, 2021, and 2020, the gross investment return (loss) on our investments managed by DME Advisors (excluding investment advisor performance allocation) was composed of the following:

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Long portfolio gains (losses)","24.3","%","","15.3","%"],["Short portfolio gains (losses)","(7.9)","%","","(13.5)","%"],["Macro gains (losses)","(6.0)","%","","0.4","%"],["Other income and expenses 1","(2.1)","%","","(0.7)","%"],["Gross investment return","8.3","%","","1.5","%"],["Net investment return 1","7.5","%","","1.4","%"]]
[[/GREPCENT_TABLE]]

1 “Other income and expenses” excludes performance compensation but includes management fees. “Net investment return” incorporates both of these amounts.

Effective January 1, 2021, the Investment Portfolio is calculated based on 50% of GLRE Surplus, or the Company's shareholders' equity, as reported in the Company’s then most recent quarterly U.S. GAAP financial statements. It is adjusted monthly for our share of the net profits and net losses reported by SILP during any intervening period. Prior to January 1, 2021, the Investment Portfolio was calculated based on several factors, including our share of SILP’s net asset value and our posted collateral and net reserves.

Each month, we post on our website (www.greenlightre.com) the returns from our investment in SILP.

Income Taxes

We are not obligated to pay taxes in the Cayman Islands on either income or capital gains. The Governor-In-Cabinet has granted us an exemption from any income taxes that may be imposed in the Cayman Islands for the 20 years expiring February 1, 2025.

GRIL is incorporated in Ireland and is subject to the Irish corporation tax. We expect GRIL to be taxed at 12.5% on its taxable trading income and 25% on its non-trading income if any.

Verdant is incorporated in Delaware and is subject to taxes under the U.S. federal rates and regulations prescribed by the Internal Revenue Service. We expect Verdant’s future taxable income to be taxed at 21%. For the year ended December 31, 2021, the income tax expense of $3.7 million was due primarily to the gain on the sale of our investment in AccuRisk.

At December 31, 2021, we have included a gross deferred tax asset of $3.2 million (December 31, 2020: $3.5 million) in the caption “Other assets” in the Company’s consolidated balance sheets. At December 31, 2021, a valuation allowance of $2.7 million (December 31, 2020: $3.0 million) partially offset this gross deferred tax asset. We have concluded that it is more likely than not that the Company will fully realize the recorded deferred tax asset (net of the valuation allowance) in the future. We have based this conclusion on the expected timing of the reversal of the temporary differences and the likelihood of generating sufficient taxable income to realize the future tax benefit. We have not taken any other tax positions that we believe are subject to uncertainty or reasonably likely to have a material impact on the Company.

Ratio Analysis

The following table provides our underwriting ratios by line of business:

[[GREPCENT_TABLE]]
[["","Year ended December 31","","Year ended December 31"],["","2021","","2020"],["","Property","","Casualty","","Other","","Total","","Property","","Casualty","","Other","","Total"],["Loss ratio","82.0","%","","73.1","%","","54.7","%","","69.5","%","","69.7","%","","71.7","%","","83.4","%","","74.2","%"],["Acquisition cost ratio","21.3","","","26.6","","","30.0","","","26.9","","","20.4","","","27.2","","","17.4","","","24.0"],["Composite ratio","103.3","%","","99.7","%","","84.7","%","","96.4","%","","90.1","%","","98.9","%","","100.8","%","","98.2","%"],["Underwriting expense ratio","","","","","","","4.5","","","","","","","","","2.2"],["Combined ratio","","","","","","","100.9","%","","","","","","","","100.4","%"]]
[[/GREPCENT_TABLE]]

66

Link to Table of Contents

Financial Condition

Total investments

The total investments reported in the consolidated balance sheets at December 31, 2021, was $231.0 million, compared to $196.2 million at December 31, 2020, an increase of $34.8 million, or 17.7%. The increase was primarily related to income from our Innovations investments and our investment in SILP.

At December 31, 2021, 94.1% of SILP’s portfolio was valued based on quoted prices in actively traded markets (Level 1), 2.9% was composed of instruments valued based on observable inputs other than quoted prices (Level 2), and 0.6% was composed of instruments valued based on non-observable inputs (Level 3). At December 31, 2021, 2.4% of SILP’s portfolio consisted of private equity funds valued using the funds’ net asset values as a practical expedient. At December 31, 2021, our Innovations investments did not have readily determinable fair values and were carried at their original cost minus impairment plus changes resulting from observable price changes.

Other than our investment in SILP (see Notes 3 and 4 of the accompanying consolidated financial statements), we have not participated in transactions that created relationships with unconsolidated entities or financial partnerships, including VIEs, established to facilitate off-balance sheet arrangements. 

Restricted cash and cash equivalents

We use our restricted cash and cash equivalents for funding trusts and letters of credit issued to our ceding insurers. Our restricted cash decreased by $110.6 million, or 14.8%, from $745.4 million at December 31, 2020, to $634.8 million, at December 31, 2021, primarily due to collateral released by some of our ceding insurers.

Reinsurance balances receivable

During the year ended December 31, 2021, reinsurance balances receivable increased by $75.1 million, or 22.8%, to $405.4 million from $330.2 million at December 31, 2020. This increase was related primarily to increases in our funds at Lloyd’s and funds withheld on reinsurance contracts with Lloyd’s syndicates. A decrease in premiums receivable partially offset the increase during the year ended December 31, 2021.

Loss and Loss Adjustment Expense Reserves; Loss and Loss Adjustment Expenses Recoverable

The COVID-19 pandemic is unprecedented, and we do not have previous loss experience on which to base our estimates for the associated loss and loss adjustment expense reserves. See Note 7 of the accompanying consolidated financial statements for assumptions used in our loss estimates relating to the COVID-19 pandemic.

Reserves for loss and loss adjustment expenses were composed of the following: 

[[GREPCENT_TABLE]]
[["","December 31, 2021","","December 31, 2020"],["","Case Reserves","","IBNR","","Total","","Case Reserves","","IBNR","","Total"],["","($ in thousands)"],["Property","$","21,357","","","$","49,486","","","$","70,843","","","$","25,833","","","$","45,680","","","$","71,513"],["Casualty","151,734","","","219,949","","","371,683","","","138,432","","","206,152","","","344,584"],["Other","17,129","","","64,355","","","81,484","","","12,540","","","65,542","","","78,082"],["Total","$","190,220","","","$","333,790","","","$","524,010","","","$","176,805","","","$","317,374","","","$","494,179"]]
[[/GREPCENT_TABLE]]

During the year ended December 31, 2021, the total gross loss and loss adjustment expense reserves increased by $29.8 million, or 6.0%, to $524.0 million from $494.2 million at December 31, 2020. See Note 7 of the accompanying consolidated financial statements for a summary of changes in outstanding loss and loss adjustment expense reserves and a description of prior period loss developments.

During the year ended December 31, 2021, the total loss and loss adjustment expenses recoverable decreased by $5.8 million, or 34.1%, to $11.1 million from $16.9 million at December 31, 2020. See Note 8 of the accompanying consolidated financial statements for a description of the credit risk associated with our retrocessionaires.

67

Link to Table of Contents

For most of the contracts we write, defined limits of liability limit our risk exposure. Once each contract’s limit of liability has been reached, we have no further exposure to additional losses from that contract. However, certain contracts, particularly quota share contracts covering first-dollar exposure, may not contain aggregate limits.

Our property and Lloyd’s business, and to a lesser extent our casualty and other business, incorporate contracts that contain natural peril loss exposure. We currently monitor our catastrophe loss exposure in terms of our PML (probable maximum loss).

We anticipate that our PMLs will vary from period to period depending upon the modeled simulated losses and the composition of our in-force book of business.

We monitor our natural peril PMLs on a worldwide basis, with a particular focus on our peak peril regions. When these perils consist of a large geographic area, we split them into sub-regions, where the underlying geographic components can also be considered individual peril zones.

For our natural catastrophe PMLs, we utilize the output of catastrophe models at the 1-in-250 year return period. The 1-in-250 year return period PML means that we believe there is a 0.4% probability that in any given year, an occurrence of a natural catastrophe will lead to losses exceeding the stated estimate.

It is important to note that PMLs are best estimates based on the modeled data available for each underlying risk. As a result, we cannot provide assurance that any actual event will align with the modeled event or that actual losses from events similar to the modeled events will not vary materially from the modeled event PML.

Our PML estimates incorporate all significant exposure from our reinsurance operations, including coverage for property, marine and energy, motor, and catastrophe workers’ compensation.

At January 1, 2022, our estimated largest PML (net of retrocession and reinstatement premiums) at a 1-in-250 year return period for a single event and in aggregate was $87.6 million and $95.9 million, respectively, both relating to the peril of North Atlantic Hurricane.

The below table contains the expected modeled loss for each of our peak peril regions and sub-regions, for both a single event loss and aggregate loss measures at the 1-in-250 year return period.

[[GREPCENT_TABLE]]
[["","","January 1, 2022"],["","","Net 1-in-250 Year Return Period"],["Peril","","Single Event Loss","","Aggregate Loss"],["","","($ in thousands)"],["North Atlantic Hurricane","","$","87,558","","","$","95,876"],["Southeast Hurricane","","66,237","","","71,541"],["Gulf of Mexico Hurricane","","58,736","","","64,145"],["Northeast Hurricane","","60,540","","","61,924"],["North America Earthquake","","60,733","","","65,126"],["California Earthquake","","54,407","","","57,088"],["Other N.A. Earthquake","","34,533","","","36,329"],["Japan Earthquake","","34,357","","","37,094"],["Japan Windstorm","","36,216","","","38,443"],["Europe Windstorm","","30,041","","","36,550"]]
[[/GREPCENT_TABLE]]

Total shareholders’ equity

Total equity reported on the consolidated balance sheet increased by $10.8 million to $475.7 million at December 31, 2021, compared to $464.9 million at December 31, 2020. The increase in shareholders’ equity during the year ended December 31, 2021, was due to the net income of $17.6 million reported for the year and was partially offset by share repurchases. For details of other movements in shareholders’ equity, see the “Consolidated Statements of Shareholders’ Equity.”

68

Link to Table of Contents

Liquidity and Capital Resources

General

Greenlight Capital Re is a holding company with no operations of its own. As a holding company, Greenlight Capital Re has minimal continuing cash needs, most of which are related to the payment of corporate and general administrative expenses and interest expenses. We conduct all our underwriting operations through our wholly-owned reinsurance subsidiaries, Greenlight Re and GRIL, which underwrite property and casualty reinsurance. There are restrictions on Greenlight Re’s and GRIL’s ability to pay dividends described in more detail below. It is our current policy to retain earnings to support the growth of our business. We currently do not expect to pay dividends on our ordinary shares.

At December 31, 2021, Greenlight Re and GRIL were each rated “A- (Excellent)” with a stable outlook by A.M. Best. The ratings reflect A.M. Best’s opinion of our reinsurance subsidiaries’ financial strength, operating performance, and ability to meet obligations. They are not evaluations directed toward the protection of investors or a recommendation to buy, sell or hold our Class A ordinary shares. If A.M. Best downgrades our ratings below “A- (Excellent)” or withdraws our rating, we could be severely limited or prevented from writing any new reinsurance contracts, which would significantly and negatively affect our business. Our A.M. Best ratings may be revised or revoked at the sole discretion of the rating agency. 

Some of our assumed reinsurance contracts contain provisions that permit our clients to cancel the contract or require additional collateral in the event of a downgrade in our A.M. Best ratings below A- (Excellent) or a reduction of our capital or surplus below specified levels over the course of the agreement. In the periods presented, there were no such cancellations or other adjustments relating to novations, commutations, or similar actions that had a material impact on our premiums written, net income, or liquidity position, either individually or in the aggregate.

Contracts containing such cancellation rights represented approximately 15% of gross premiums written during 2021. Further, we believe, in the event that all additional collateral requirements had been triggered at December 31, 2021, additional required collateral would equal approximately $75 million.

Sources and Uses of Funds

Our sources of funds consist primarily of premium receipts (net of brokerage and ceding commissions), investment income, and other income. We use cash from our operations to pay losses and loss adjustment expenses, profit commissions, interest, and general and administrative expenses. At December 31, 2021, all of our investable assets, excluding strategic and Innovations investments and funds required for business operations and capital risk management, are invested by DME Advisors in SILP, subject to our investment guidelines. We can redeem funds from SILP at any time for operational purposes by providing three days’ notice to the general partner. At December 31, 2021, the majority of SILP’s long investments were composed of cash and cash equivalents and publicly traded equity securities, which can be readily liquidated to meet our redemption requests. We record all investment income (loss), including any changes in the net asset value of SILP, and any unrealized gains and losses, in our consolidated statements of operations for each reporting period.    

For the years ended December 31, 2021 and 2020, the net cash used in operating activities was $56.3 million and $91.3 million, respectively. The net cash used in operating activities was used primarily for our underwriting activities and for payment of corporate and general administrative expenses for the years ended December 31, 2021 and 2020. Generally, if the premiums collected exceed claim payments within a given period, we generate cash from our underwriting activities. Our underwriting activities represented a net use of cash for the years ended December 31, 2021 and 2020, as the losses we paid exceeded the premiums we collected. The cash used in, and generated from, underwriting activities may vary significantly from period to period depending on the underwriting opportunities available and claims submitted to us by our cedents.

For the year ended December 31, 2021, our investing activities provided $1.2 million of cash from redemptions from SILP (net of contributions into SILP) and $5.0 million for new Innovations investments. Investing activities also provided $26.9 million of cash from the sale of our AccuRisk investment and the collection of a note receivable from AccuRisk. By comparison, for the same period in 2020, our investing activities provided cash of $95.6 million as a result of net redemptions from SILP.

For the year ended December 31, 2021, our financing activities included the repurchase of $10.0 million of our Class A ordinary shares, compared to $17.8 million of repurchases during the equivalent 2020 period.

At December 31, 2021, we believe we have sufficient cash flow from operating and investing activities to meet our foreseeable liquidity requirements. We do not expect that the recent catastrophic events, including Hurricane Ida, the European floods and hailstorm, U.S. tornados, and the COVID-19 pandemic, will materially impact our operational liquidity needs, which

69

Link to Table of Contents

will be met by cash, funds generated from underwriting activities, and investment income, including withdrawals from SILP if necessary. At December 31, 2021, we expect to fund our operations for the next twelve months from operating and investing cash flow. However, we may explore various financing options, including capital raising alternatives, to fund our business strategy, improve our capital structure, increase surplus, pay claims or make acquisitions. We can provide no assurances regarding the terms of such transactions or that any such transactions will occur.

Although GLRE is not subject to any significant legal prohibitions on the payment of dividends, Greenlight Re and GRIL are each subject to regulatory minimum capital requirements and regulatory constraints that affect their ability to pay dividends to us. In addition, any dividend payment would have to be approved by the relevant regulatory authorities prior to payment. At December 31, 2021, Greenlight Re and GRIL exceeded their regulatory minimum capital requirements. 

Letters of Credit and Trust Arrangements

At December 31, 2021, neither Greenlight Re nor GRIL was licensed or admitted as a reinsurer in any jurisdiction other than the Cayman Islands and the European Economic Area, respectively. Many jurisdictions do not permit domestic insurance companies to take credit on their statutory financial statements for loss recoveries or ceded unearned premiums unless appropriate measures are in place for reinsurance obtained from unlicensed or non-admitted insurers. As a result, we anticipate that all of our U.S. clients and some non-U.S. clients will require us to provide collateral through funds withheld, trust arrangements, letters of credit, or a combination thereof.

At December 31, 2021, we had one (2020: one) letter of credit facility available with an aggregate capacity of $275.0 million (2020: $275.0 million). See Note 15 of the accompanying consolidated financial statements for details on the letter of credit facility. We provide collateral to cedents in the form of letters of credit and trust arrangements. At December 31, 2021, the aggregate amount of collateral provided to cedents under such arrangements was $633.9 million (2020: $743.0 million). At December 31, 2021, the letters of credit and trust accounts were secured by restricted cash and cash equivalents with a total fair value of $634.8 million (2020: $745.4 million).

The letter of credit facility contains customary events of default and restrictive covenants, including but not limited to, limitations on liens on collateral, transactions with affiliates, mergers and sales of assets, as well as solvency and maintenance of certain minimum pledged equity requirements, and restricts issuance of any debt without the consent of the letter of credit provider. Additionally, if an event of default exists, as defined in the letter of credit facility, Greenlight Re would be prohibited from paying dividends to its parent company. The Company was in compliance with all the covenants of this facility at December 31, 2021.

Capital

Our capital structure currently consists of senior convertible notes and equity issued in two classes of ordinary shares. We expect that the existing capital base and internally generated funds will be sufficient to implement our business strategy for the foreseeable future. Consequently, we do not presently anticipate that we will incur any additional material indebtedness in the ordinary course of our business. However, to provide us with flexibility and timely access to public capital markets should we require additional capital for working capital, capital expenditures, acquisitions, or other general corporate purposes, we have filed a Form S-3 registration statement, which expires in July 2024. In addition, as noted above, we may explore various financing alternatives, although there can be no assurance that additional financing will be available on acceptable terms when needed or desired. We did not make any significant commitments for capital expenditures during the year ended December 31, 2021.

Our Board of Directors had previously extended the share repurchase plan to June 30, 2021, and authorized the repurchase of up to 5.0 million Class A ordinary shares or securities convertible into Class A ordinary shares in the open market through privately negotiated transactions or Rule 10b5-1 stock trading plans. In addition, the Board of Directors had also authorized the Company to repurchase up to $25.0 million aggregate face amount of the Company’s 4.00% Convertible Senior Notes due 2023 (the “Notes”) in privately negotiated transactions, in open market repurchases, or pursuant to one or more tender offers. No Notes were repurchased during the year ended December 31, 2021.

On May 4, 2021, the Board of Directors approved a share repurchase plan effective from July 1, 2021, until June 30, 2022, authorizing the Company to repurchase up to $25.0 million of Class A ordinary shares or securities convertible into Class A ordinary shares in the open market, through privately negotiated transactions or Rule 10b5-1 stock trading plans.

70

Link to Table of Contents

The Company is not required to repurchase any Class A ordinary shares, and the repurchase plan may be modified, suspended, or terminated at the election of our Board of Directors at any time without prior notice. During the year ended December 31, 2021, the Company repurchased 1,079,544 Class A ordinary shares.

Under the Company’s stock incentive plan, the number of Class A ordinary shares authorized for issuance is 8.0 million shares. At December 31, 2021, 3,128,276 Class A ordinary shares were available for future issuance under the Company’s stock incentive plan. The Compensation Committee of the Board of Directors administers the stock incentive plan. 

Contractual Obligations and Commitments

Due to the nature of our reinsurance operations, the amount and timing of the cash flows associated with our reinsurance contractual liabilities will fluctuate, perhaps materially, and, therefore, are highly uncertain. At December 31, 2021, we estimate that we will pay the loss and loss adjustment expense reserves as follows: 

[[GREPCENT_TABLE]]
[["","Less than 1 year","","1-3 years","","3-5 years","","More than 5 years","","Total"],["","($ in thousands)"],["Loss and loss adjustment expense reserves (1)","269,865","","","152,487","","","47,685","","","53,973","","","524,010"]]
[[/GREPCENT_TABLE]]

 (1)      Due to the nature of our reinsurance operations, the amount and timing of the cash flows associated with our reinsurance contractual liabilities will fluctuate, perhaps materially, and, therefore, are highly uncertain.

Greenlight Re has entered into a lease agreement for office space in the Cayman Islands commencing from July 1, 2021. The lease expires on June 30, 2026, unless Greenlight Re exercises its right to renew the lease for another five-year period. GRIL has entered into a lease agreement for office space in Dublin, Ireland commencing from October 1, 2021. This lease expires on September 30, 2031, unless GRIL exercises the break clause by providing a notice of termination at least nine months prior to September 30, 2026. The aggregate annual lease obligation ranges from $0.5 million to $0.6 million.

The Company has $100.0 million of senior convertible notes payable, which mature on August 1, 2023. The Company is obligated to make semi-annual interest payments of $2.0 million at an interest rate of 4.0% per annum. The Company has received regulatory approval to declare dividends from Greenlight Re to meet the interest payments obligation.

Pursuant to the IAA between SILP and DME Advisors, DME Advisors is entitled to a monthly management fee equal to 0.125% (1.5% on an annual basis) of each limited partner’s Investment Portfolio, as provided in the SILP LPA. The IAA has an initial term ending on August 31, 2023, subject to automatic extension for successive three-year terms. Pursuant to the SILP LPA, DME II is entitled to a performance allocation equal to 20% of the net profit, calculated per annum, of each limited partner’s share of the capital account managed by DME Advisors, subject to a loss carry-forward provision. DME II is not entitled to earn a performance allocation in a year in which SILP incurs a loss. The loss carry-forward provision contained in the SILP LPA allows DME II to earn reduced performance allocation of 10% of net profits in years subsequent to the year in which the capital accounts of the limited partners incur a loss until all losses are recouped and an additional amount equal to 150% of the loss is earned. At December 31, 2021, we estimate the reduced performance allocation of 10% to continue to be applied until SILP achieves additional investment returns of 171%, at which point the performance allocation will revert to 20%. For detailed breakdowns of management fees and performance compensation for the year ended December 31, 2021 and 2020, please refer to Note 3 of the consolidated financial statements.

The Company has entered into a service agreement with DME Advisors pursuant to which DME Advisors will provide investor relations services to us for compensation of $5,000 per month plus expenses. The service agreement had an initial term of one year and continues for sequential one-year periods until terminated by us or DME Advisors. Either party may terminate the service agreement for any reason with 30 days prior written notice to the other party.

Our related party transactions are presented in Note 14 to the accompanying consolidated financial statements.

Effects of Inflation

Inflation generally affects the cost of claims and claim expenses, as well as asset values in our investment portfolio. Our pricing and reserving models incorporate the anticipated effects of inflation on our claim costs. However, we cannot predict or estimate the onset, duration, and severity of an inflationary period with precision. The actual effect of inflation may differ significantly from our estimate.

71

Link to Table of Contents