Business Context and Reporting Period
Company: GREENLIGHT CAPITAL RE, LTD.
Filing Type: Form 8-K (Current Report)
Date of Report: August 31, 2010
Event: Entry into a Material Definitive Agreement (Item 1.01).
The Company, along with its subsidiaries Greenlight Reinsurance, Ltd. ("Greenlight Re") and Greenlight Reinsurance Ireland, Ltd. ("GRIL"), entered into an amended and restated agreement with DME Advisors, LP ("DME"). DME is controlled by David Einhorn, the Company's Chairman and President of Greenlight Capital, Inc. The agreement establishes a joint venture for managing jointly held assets.
Key Financial Metrics
This filing is a current report regarding a contractual agreement and does not contain audited financial statements, revenue, profit, cash flow, or balance sheet data for the reporting period.
Compensation Structure for DME:
- Management Fee: Monthly payment based on an annual rate of 1.5% of the capital account balance of each Participant.
- Performance Allocation: 20% of net profits calculated per annum.
- Loss Carry Forward: If a Participant incurs a loss, DME's performance allocation is reduced to 10% on subsequent profits until losses are recouped plus an additional 150% of the loss.
- Loss Years: DME receives no performance allocation in years where the investment portfolio incurs a loss.
Material Changes Versus Prior Period
The new agreement amends and restates the "Prior Agreement" dated January 1, 2008 (as amended February 20, 2009). Key changes include:
- Term Extension: The new term runs from August 31, 2010, through December 31, 2013. The Prior Agreement was set to expire on December 31, 2010.
- Auto-Renewal: The new agreement renews automatically for successive three-year periods unless terminated with 90 days' notice prior to the end of the term.
- Exclusivity: Participants agreed not to engage any investment advisor other than DME (or an affiliate) during the term.
- Subsidiary Inclusion: Participants agreed to use commercially reasonable efforts to cause current and future subsidiaries to become participants or enter similar agreements.
Guidance, Outlook, Risks, and Contingencies
Management Authority: DME is empowered to formulate overall trading and investment strategy and exercise full discretion in managing transactions, subject to investment guidelines adopted by the respective Boards of Directors.
Withdrawal Rights:
- Standard Withdrawal: Participants may withdraw with 90 days' notice prior to the end of the term only "for cause."
- Definition of Cause: Includes material violation of law, gross negligence, willful misconduct, reckless disregard of obligations, material breach of investment guidelines (uncured within 15 days), or failure to return assets.
- GRIL Specific Right: GRIL may withdraw prior to expiration due to unsatisfactory long-term performance of DME, as determined solely by GRIL's Board of Directors on each anniversary date.
Indemnification: Participants agreed to indemnify DME against liabilities arising from the agreement (with exceptions), and DME agreed to indemnify Participants against liabilities incurred in connection with certain actions.
GRIL Status: GRIL is a newly formed, wholly owned Irish subsidiary. It has received authorization in principle to operate as a reinsurance undertaking but cannot transact business until a Certificate of Authorization is issued.
Important Facts for Investor Verification
- Confirmation that DME Advisors, LP remains the exclusive investment advisor for the Company and its subsidiaries through December 31, 2013.
- Verification of the issuance of the Certificate of Authorization for GRIL to begin transacting reinsurance business.
- Monitoring of the "loss carry forward" provision to understand potential impacts on future performance fee calculations.
- Review of the specific investment guidelines adopted by the Boards of Directors that constrain DME's discretion.
- Assessment of the "unsatisfactory long-term performance" clause unique to GRIL's ability to terminate the agreement early.