References to "we," "us," "our," "our company," "the Company", GLRE or Greenlight Capital Re refer to Greenlight Capital Re, Ltd. and its wholly-owned subsidiaries, Greenlight Reinsurance, Ltd. ("Greenlight Re"), Greenlight Reinsurance Ireland, Ltd. ("GRIL") and Verdant Holding Company, Ltd. ("Verdant"), unless the context dictates otherwise. References to our "Ordinary Shares" refers collectively to our Class A Ordinary Shares and Class B Ordinary Shares.
The following is a discussion and analysis of our results of operations for the years ended December 31, 2013, 2012 and 2011 and financial condition as of December 31, 2013 and 2012. The following discussion should be read in conjunction with the audited consolidated financial statements and accompanying notes, which appear elsewhere in this filing.
We are a Cayman Islands headquartered global specialist property and casualty reinsurer with a reinsurance and investment strategy that we believe differentiates us. Our goal is to build long-term shareholder value utilizing our customer centric approach to underwriting. We selectively offer customized reinsurance solutions in markets where capacity and alternatives are limited, which we believe will yield favorable long-term returns on equity.
We believe we are currently in a gradually hardening insurance market, but due to poor economic conditions and industry over-capitalization, we do not expect rate increases to significantly exceed loss trends. Meanwhile, the reinsurance industry remains over-capitalized and competitive with many sectors continuing to operate at levels that we believe are economically irrational. The over-capitalization of the market is not uniform. There are a number of insurers and reinsurers that have suffered and continue to suffer from capacity issues. We continue to assess the possibility of partnering with companies with this profile. If the reinsurance market continues to soften, our strategy is to reduce premium writings rather than accept mispriced risk, and conserve our capital for a more opportune environment. Significant price increases could occur if financial and credit markets experience adverse shocks that result in the loss of capital of insurers and reinsurers, or if there are major catastrophic events, especially in North America. The persistent low interest rate environment has reduced the earnings of many insurance and reinsurance companies and we believe that the continuation of low interest rates, coupled with the reduction of prior years' reserve redundancies, could cause the industry to adopt overall higher pricing.
We intend to continue to monitor market conditions to position ourselves to participate in future under-served or capacity-constrained markets as they arise and intend to offer products that we believe will generate favorable returns on equity over the long term. Accordingly, our underlying results and product line concentrations in any given period may vary, perhaps significantly, and are not necessarily indicative of our future results of operations.
Our investment portfolio had a net long exposure of 53.9% as of December 31, 2013. Equity markets rose significantly in 2013 despite lackluster growth in corporate earnings. The increase in stock prices seems driven by a more stable environment and continued monetary policy stimulus. In the face of a more challenging earnings backdrop, and a continuation of emergency policies, we believe the market's continued advance is creating a potentially unstable condition, which could resolve itself in a number of ways and is difficult to predict. Our exposure increased during the fourth quarter of 2013 due to the rising markets and new investment opportunities. Our goal in 2014 remains to protect capital in an uncertain environment and to find investment opportunities on both our long and short portfolios that will generate positive returns. Given the current investment environment, we anticipate, for the foreseeable future, to continue holding a combination of a significant position in gold, macro positions in the form of options on foreign exchange rates, short positions in sovereign debt and sovereign credit default swaps.
Frequency business is generally characterized as contracts containing a potentially large number of smaller losses emanating from multiple events. Clients generally buy this protection to increase their own underwriting capacity and typically select a reinsurer based upon the reinsurer’s financial strength, service and expertise. We expect the results of frequency business to be less volatile than those of severity business from period to period due to its greater predictability. We also expect that over time the profit margins and return on equity of our frequency business will be lower than those of our severity business.
Severity business is generally characterized as contracts with the potential for significant losses emanating from one event or multiple events. Clients generally buy this protection to reduce volatility from their balance sheets, and accordingly, we expect the results of severity business to be volatile from period to period. However, over the long term, we also expect that our severity business will generate higher profit margins and return on equity than our frequency business.
Income from our investments is primarily comprised of interest income, dividends, net realized gains and losses, and changes in unrealized gains and losses on investment securities. We also derive interest income from money market funds and notes receivable.
In addition, we may from time to time derive other income from gains on deposit accounted contracts, fees generated from advisory services provided by Verdant and fees relating to early termination of contracts.
Acquisition Costs. We capitalize brokerage fees, ceding commissions, premium taxes and other direct expenses that relate directly to and vary with the writing of reinsurance contracts. Acquisition costs are deferred subject to ultimate recoverability and amortized over the related period of risk covered. Acquisition costs also include profit commissions. Certain contracts include provisions for profit commissions to be paid to the ceding insurer based upon the ultimate experience of the contracts. The methodology for calculating profit commissions is specific to the individual contracts and varies from contract to contract. Typically profit commissions are calculated and accrued based on the expected loss experience for such contracts and recorded when the expected loss experience indicates that a profit commission is probable under the contract terms. Profit commission reserves, if any, are included in reinsurance balances payable on the consolidated balance sheets.
For the year ended December 31, 2013, the basic adjusted book value per share increased by $6.00 per share, or 26.8%, to $28.39 per share from $22.39 per share at December 31, 2012. During the year ended December 31, 2012, basic adjusted book value per share increased by $0.41 per share, or 1.9%, to $22.39 per share from $21.98 per share at December 31, 2011.
For the year ended December 31, 2013, the frequency gross premiums written increased by $106.6 million, or 26.3%, primarily as a result of growth in our motor liability and personal property contracts, which increased by $75.5 million, or 42.4%, and $57.9 million, or 73.9%, respectively. The motor liability line includes both commercial motor contracts as well as private passenger automobile contracts (also referred to as non-standard automobile). The increase in motor liability line was primarily driven by an increase of $77.9 million in private passenger automobile premiums written due to an increase in the volume of underlying business written by our clients. The increase in motor liability premiums were partially offset by a decrease of $2.4 million in commercial motor premiums written as we canceled all of our remaining commercial motor related contracts during 2013.
Additionally, for the year ended December 31, 2013, our professional, financial and specialty health lines of business generated increases in frequency gross premiums written of $11.6 million, $5.5 million and $3.2 million, respectively. The increase in professional line premiums written was related to solicitors' professional indemnity contracts, which renewed in 2013 at a higher premium volume than the expiring contracts. The increase in financial lines was a result of growth in the surety business on existing contracts, while the increase in specialty health lines was due to increases in the volume of the underlying U.S. employer health stop loss premiums on existing contracts.
For the year ended December 31, 2012, the frequency gross premiums written increased by $24.4 million, or 6.4%, primarily as a result of increases in our motor liability and motor physical damage lines which increased by $91.3 million and $53.2 million, respectively. The motor liability line includes both commercial motor contracts as well as private automobile contracts. The increase in motor liability line includes an increase of $143.5 million in private automobile premiums written as a result of new non-standard automobile contracts entered into during late 2011 and early 2012, offset by a decrease of $52.3 million in commercial motor premiums written as we canceled all of our commercial motor related contracts during 2012. The increase in motor physical damage premiums written was entirely related to the new non-standard automobile contracts.
For the year ended December 31, 2012, the increase in severity gross premiums written of $5.8 million, or 35.1%, compared to the same period in 2011 was principally due to additional premiums of $3.5 million written during the fourth quarter of 2012 in order to reinstate coverage limit on a catastrophe contract that incurred a full limit loss from super-storm Sandy. Reinstatement premiums and additional premiums based on contractual terms are recognized as written premiums at the time losses are recorded, and if required, adjusted in future periods based on changes in loss estimates. There were no reinstatement or additional premiums recorded during the year ended December 31, 2011. The remainder of the increase in severity gross premiums written related to the renewal of our existing multi-line property catastrophe contracts with higher aggregate limits as well as higher pricing. During the year ended December 31, 2012, we restructured some of our property catastrophe contracts and increased our limits of coverage while also increasing the thresholds for losses entering our layers of coverage. As a result, while direct comparison of pricing is not possible, overall we obtained slightly higher prices on renewing contracts that had no claims reported during the prior year and significantly higher prices on catastrophe contracts that experienced losses during 2011.
For the years ended December 31, 2013, 2012 and 2011, retrocessional premiums ceded were $2.8 million, $(24.3) million and $46.9 million, respectively. For the year ended December 31, 2013, our ceded premiums increased by $27.1 million. The increase was primarily the result of negative ceded premiums being reported in 2012 due to retrocessional premiums being returned upon the termination of certain contracts in 2012.
from contracts that expired and were not renewed, and contracts renewed at lower premium amounts due to our participation being at lower risk exposure levels.
The increases in premiums earned on motor liability and motor physical damage lines were offset by decreases in our other lines of business. For the year ended December 31, 2012, premiums earned on our Florida homeowners' contracts decreased by $38.6 million primarily due to a contract commuted during the fourth quarter of 2011. Our general liability and workers' compensation premiums earned decreased by $7.4 million and $6.4 million, respectively, because during the fourth quarter of 2012 we canceled our multi-line contracts which included coverages for commercial motor, workers' compensation and general liability. In addition, the financial line earned premiums decreased by $8.5 million due to the commutation of a surety and trade credit contract. Our health line premiums earned decreased by $13.5 million primarily due to some health contracts not renewed during 2012, as well as lower underlying business written by our existing clients.
For the year ended December 31, 2012, severity net premiums earned increased $2.7 million, or 13.9%, compared to the same period in 2011. The increase was primarily due to $2.6 million of reinstatement premiums earned on a catastrophe contract that incurred a full limit loss from super-storm Sandy. Additionally, the unearned portion of the original premium ($0.8 million) on this contract was also earned immediately upon occurrence of the full limit loss. There were no reinstatement or additional premiums recorded during the year ended December 31, 2011.
For the year ended December 31, 2013, the net losses incurred on frequency contracts increased by $3.1 million, or 0.9%. This increase is the net result of the 19.2% increase in earned premiums, partially offset by the decrease in loss reserves primarily related to commercial motor contracts currently in run off. For the year ended December 31, 2013, the incurred losses relating to commercial motor contracts were negative $2.1 million compared to $53.2 million in 2012. During 2012, we had increased the loss reserves relating to these contracts based on loss data, which had indicated adverse loss development due to several large losses and overall higher settlement amounts expected on open claims. For the year ended December 31, 2013, the incurred losses on these contracts decreased as we reversed some of the loss reserves due to favorable loss development and
due to commutation of a multi-line contract during 2013. The commuted multi-line contract also included coverage for general liability and workers' compensation which also contributed to the decrease in loss reserves.
For the year ended December 31, 2012, the net losses incurred on frequency contracts increased by $107.3 million, or 45.3%, partially due to the 23.4% increase in frequency earned premiums discussed above, and partially due to adverse loss development on contracts containing commercial motor liability coverages. During 2012, the updated loss data relating to these contracts indicated adverse loss development due to several large losses and overall higher settlement amounts expected on open claims.
For the years ended December 31, 2012 and 2011, the loss ratios for our severity business were 101.2% and 25.4%, respectively. The losses incurred on severity contracts of $22.5 million for the year ended December 31, 2012, included $15.0 million of loss reserves relating to super-storm Sandy, and an increase of $9.0 million of loss reserves relating to the 2010 New Zealand earthquake. The loss from super-storm Sandy relates to one contract and has been reserved at the full limit of $15.0 million. The loss relating to the 2010 New Zealand earthquake was increased to the full limit of $10.0 million during 2012 based on the expectation of higher insured losses due to changes in building codes and engineering requirements for rebuilding in New Zealand. Partially offsetting these increases were the elimination of loss reserves of $0.7 million and $0.8 million on a professional indemnity contract and a commercial excess of loss contract, respectively, as underlying losses are no longer expected to reach a level that would impact these contracts.
For the year ended December 31, 2012, the increase in ceded reserves of $4.9 million was primarily related to the retrocession of multi-line frequency casualty contracts, which experienced adverse loss development during 2012.
Elimination of $15.0 million of reserves relating to super-storm Sandy based on additional information received from our client which indicated that the losses would not exceed the threshold of coverage provided under our contract. As a result of the reversal of loss reserves, we also reversed reinstatement premiums earned of $2.6 million;
$4.0 million of favorable loss development relating to commercial automobile business due to better than expected loss development on open claims and settling of claims at lower amounts than expected. Loss reserves were decreased on these contracts after a detailed review of existing claims data received from the clients, audits of claim files at the third party claims administrators and actuarial analysis based on all available information;
$3.0 million favorable loss development relating to a non-standard automobile contract as a result of final settlement of losses upon commutation of the contract at an amount lower than originally reserved. However, because this contract included a sliding scale ceding commission rate, the decrease in loss reserves was offset by a $2.3 million increase in ceding commissions recorded as acquisition costs;
$2.4 million favorable loss development relating to Florida homeowners' insurance business due to better than expected development on sinkhole claims, primarily as a result of legislative changes implemented in the State of Florida during 2012;
$4.0 million of adverse loss development on a 2007 casualty clash contract based on updated claims and loss information received from the client. The new information indicated that ground up losses under the contract estimated by the client had increased resulting in additional losses attaching to our layer. As a result of this increase in loss reserves, we recorded reinstatement premiums of $1.2 million.
For the year ended December 31, 2012, our net loss reserves on prior period contracts increased by $56.9 million, which primarily related to the following:
$18.8 million of adverse loss development on a commercial motor liability contract that has been in run-off since 2010. The increase in loss reserves was based on updated loss data received from the third party claims adjuster and the client, as well as our quarterly analysis of the remaining open claims and the reserves required to settle and resolve all remaining claims and any new reported claims;
$4.6 million of adverse loss development, net of retrocession recoveries, on prior period Florida homeowners' contracts due to a combination of an increase in attritional losses as well as an increase in sinkhole losses based on updated information received from the ceding insurer during the period as well as a reassessment in connection with our quarterly reserve analysis. These contracts contain sliding scale commission adjustments which offset some of the adverse loss development. Therefore, $4.6 million of adverse loss development was offset by a reduction of $1.3 million in commission expenses.
Adverse loss development of $9.7 million, net of retrocession recoveries, on multi-line quota share contracts based on data received from the clients and a reassessment in connection with our quarterly reserve analysis which indicated higher large loss activity on the accounts than originally expected;
We expect that acquisition costs will be higher for frequency business than for severity business. For the years ended December 31, 2013, 2012 and 2011, the acquisition cost ratios for frequency business were 31.7%, 31.4% and 37.4%, respectively. The acquisition cost ratios for severity business were 20.8%, 14.0% and 20.9% for the years ended December 31, 2013, 2012 and 2011, respectively. Overall, our total acquisition cost ratios were 31.4%, 30.6%, and 36.5% for the years ended December 31, 2013, 2012 and 2011, respectively.
For the year ended December 31, 2013, the slightly higher frequency acquisition cost ratio was primarily related to higher commissions on private passenger automobile contracts that contain a sliding-scale commission structure which increases (or decreases) with loss ratio decreases (or increases). Since we commuted a contract at a lower loss ratio, the commission was adjusted higher accordingly. To a lesser extent, the acquisition cost ratio for personal lines increased due to a new Florida homeowners' contract entered into during 2013, which is recorded at the higher end of the sliding scale commission rate due to a lower loss ratio estimate than our other personal lines contracts.
For the year ended December 31, 2012, the decrease in the severity acquisition cost ratio was primarily related to lower brokerage fees on a catastrophe contract renewed during 2012, combined with the fact that the reinstatement premium earned during 2012 did not incur any brokerage or commission expenses.
Internal expenses include all general and administrative expenses except for corporate expenses. Corporate expenses include those expenses directly related to being a publicly listed entity and certain non-core operating expenses as well as non-investment related foreign exchange gains and losses.
For the year ended December 31, 2012, the increase in internal expenses was primarily related to an increase of $2.2 million in personnel costs (including share based compensation) compared to 2011. This was mainly due to the 2011 personnel costs being unusually low as a result of the reversal of employee bonus accruals due to deteriorating underwriting results related to prior underwriting years and the reversal of share based compensation expense relating to the retirement of our former chief executive officer during 2011. To a lesser extent, the higher personnel costs during 2012 were due to our Cayman Islands and Dublin offices adding five new employees.
Investment returns relating to our investment portfolio managed by DME Advisors are calculated monthly and compounded to calculate the annual returns. The resulting actual investment income may vary depending on cash flows into or out of the investment account. For the year ended December 31, 2013, investment income, net of all fees and expenses, resulted
in a gain of 19.6% on our investment portfolio. This compares to a gain of 7.1% and a gain of 2.1% reported for the years ended December 31, 2012 and 2011, respectively.
For the year ended December 31, 2013, included in the above table under interest, dividend and other expenses, was an impairment charge of $6.0 million related to a note receivable that was previously placed on non-accrual status, based on continued uncertainty surrounding the borrower's ability to repay the entire outstanding balance of the note on the maturity date.
For the year ended December 31, 2013, included in investment advisor compensation was $18.3 million (2012: $16.9 million, 2011: $15.2 million) relating to management fees paid to DME Advisors and $54.2 million (2012: $18.8 million, 2011: $5.4 million) relating to performance allocation in accordance with the prior investment advisory agreement with DME Advisors.
Our investment advisor, DME Advisors, and its affiliates manage and expect to manage other client accounts besides ours, some of which have investment objectives similar to ours. To comply with Regulation FD, our investment returns are posted on our website on a monthly basis. Additionally, our website (www.greenlightre.ky) provides the names of the largest disclosed long positions in our investment portfolio as of the last business day of the month of the relevant posting, as well as information on our long and short exposures. Although DME Advisors discloses all investment positions to us, it may choose not to disclose certain positions to its clients in order to protect its investment strategy. Therefore, we present on our website the largest long positions and exposure information as disclosed by DME Advisors or its affiliates to their other clients.
Verdant is incorporated in Delaware and, therefore, is subject to taxes in accordance with the U.S. federal rates and regulations prescribed by the IRS. Verdant’s taxable income is expected to be taxed at a rate of 35%.
As of December 31, 2013, a deferred tax asset of $0.05 million (2012: $0.05 million) resulting solely from the temporary differences in recognition of expenses for tax purposes was included in other assets on the consolidated balance sheets. As of December 31, 2013, an accrual for current taxes payable of $0.3 million (2012: $0.3 million) was recorded in other liabilities on the consolidated balance sheets. Based on the timing of the reversal of the temporary differences and likelihood of generating sufficient taxable income to realize the future tax benefit, management believes it is more likely than
The corporate expense ratio is the ratio of corporate expenses to net premiums earned. Corporate expenses include expenses relating to GLRE being a publicly listed entity and certain non-core operating expenses as well as non-investment related foreign exchange gains or losses.
Our long investments (including financial contracts receivable) reported in the consolidated balance sheets as of December 31, 2013, were $1,497.7 million compared to $1,200.7 million as of December 31, 2012, an increase of $297.0 million, or 24.7%, primarily due to additional purchases of investments during the year ended December 31, 2013, and to a lesser extent due to an increase in the market values of our long equities. As of December 31, 2013, our exposure to long investments increased to 123.7%, compared to 102.5% as of December 31, 2012, while our exposure to short investments increased to 69.8%, compared to 64.0% as of December 31, 2012, as we increased the number and size of long and short positions in our portfolio. This exposure analysis is conducted on a notional basis and does not include gold, CDS, sovereign debt, cash, foreign currency positions, interest rate options and other macro positions.
In determining whether a market for a financial instrument is active or inactive, we obtain information from DME Advisors, based on feedback it receives from executing brokers, market makers, analysts and traders to assess the level of market activity and available liquidity for any given financial instrument. Where a financial instrument is valued based on broker quotes, DME Advisors requests multiple quotes. The ultimate value is based on an average of the quotes obtained. Broker quoted prices are generally not adjusted in determining the ultimate values and are obtained with the expectation of the quotes being binding. As of December 31, 2013, $222.6 million (2012: $258.5 million) of our investments (longs, shorts and derivatives) were valued based on broker quotes, of which $218.8 million (2012: $254.9 million) were based on broker quotes that utilized observable market information and classified as Level 2 fair value measurements, and $3.8 million (2012: $3.6 million) were based on broker quotes that utilized non-observable inputs and classified as Level 3 fair value measurements.
Non-observable inputs used by our investment advisor include discounted cash flow models for valuing certain corporate debt instruments. In addition, other non-observable inputs include the use of investment manager statements and management estimates based on third party appraisals of underlying assets for valuing private equity investments.
As of December 31, 2013, our securities sold, not yet purchased increased by $203.3 million, or 22.4%, to $1,111.7 million from $908.4 million at December 31, 2012, as we increased the number and size of short positions and increased the short exposure in our portfolio from 64.0% to 69.8%. As of December 31, 2013, the restricted cash included $1,111.7 million relating to collateral for securities sold, not yet purchased compared to $910.0 million as of December 31, 2012. Overall our restricted cash increased by $127.3 million, or 10.5%, from $1,206.8 million to $1,334.1 million, primarily as a result of needing more collateral to support the overall increase in securities sold, not yet purchased. This increase was partially offset by
a decrease in restricted cash relating to our letters of credit outstanding which decreased as a result of a contract commuted during 2013.
Reinsurance balances receivable also includes ceding commissions recoverable from ceding insurers as well as amounts collectible from retrocessionaires for reimbursement of losses paid. At December 31, 2013, uncollateralized loss reserves recoverable of $12.8 million related to an unrated retrocessionaire that is contractually obligated to post collateral but failed to do so. During 2013, an arbitration panel ruled in favor of the Company. The retrocessionaire has challenged the arbitration award, seeking to set it aside. A judge in the Grand Court in Grand Cayman subsequently ordered the retrocessionaire to post security in the amount of the arbitration award pending a hearing on the merits. Additionally, at December 31, 2013 the parent entity of the retrocessionaire was also delinquent in its payment to the Company of $12.0 million relating to ceding commission adjustments included in reinsurance balances receivable. The Company has initiated legal proceedings in order to enforce its contractual rights. The Company believes it will be successful in its pending legal actions. The entire reinsurance balance receivable is considered collectible and, therefore, no provision for uncollectible balances was recorded at December 31, 2013.
Our severity business includes contracts that contain or may contain natural peril loss exposure. As of January 1, 2014, our maximum aggregate loss exposure to any series of natural peril events was $177.4 million. For purposes of the preceding sentence, aggregate loss exposure is net of any retrocession and is equal to the difference between the aggregate limits available in the contracts that contain natural peril exposure minus estimated reinstatement or additional premiums, if any, for the same contracts. We categorize peak zones as: United States, Europe, Japan and the rest of the world. The following table provides any single event loss exposure and aggregate loss exposure information for the peak zones of our natural peril coverage as of the date of this filing:
For the year ended December 31, 2013, loss and loss adjustment expenses recoverable decreased by $17.6 million, or 51.2%, principally due to the commutation of a multi-line retroceded contract.
For the year ended December 31, 2013, funds withheld decreased by $7.3 million, or 41.9%, principally due to the commutation of a multi-line retroceded contract. As part of the commutation agreement, we returned the funds that we were withholding as collateral against the retrocessionaire's future obligations.
Total equity reported on the balance sheet, which includes non-controlling interest, increased by $225.9 million to $1,086.3 million as of December 31, 2013, compared to $860.4 million as of December 31, 2012. Retained earnings increased due to net income of $225.7 million reported for the year ended December 31, 2013, while the non-controlling interest decreased by $4.0 million primarily due to withdrawal of funds by DME Advisors from the joint venture during the year ended December 31, 2013. The increase in additional paid-in capital of $4.2 million related to stock compensation expense and from stock options exercised during the year ended December 31, 2013.
On August 5, 2008, our Board of Directors adopted a share repurchase plan authorizing the Company to repurchase up to 2.0 million Class A ordinary shares. From time to time, the repurchase plan has been modified at the election of our Board of Directors. On April 30, 2013, our Board of Directors amended the share repurchase plan to extend the duration of the repurchase plan to June 30, 2014 and reinstated the authorization for the Company to purchase up to 2.0 million Class A ordinary shares or securities convertible into Class A ordinary shares in the open market or through privately negotiated transactions. The Company is not required to repurchase any of the Class A ordinary shares and the repurchase plan may be modified, suspended or terminated at any time without prior notice. As of December 31, 2013, the Company was authorized to purchase up to 2.0 million Class A ordinary shares or securities convertible into Class A ordinary shares in the open market or through privately negotiated transactions. No Class A ordinary shares were repurchased by the Company during the year ended December 31, 2013.
(2) As of December 31, 2013, we had made total commitments of $18.7 million in private investments of which we have invested $12.4 million, and our remaining commitments to these investments total $6.3 million. Given the nature of the private equity investments, we are unable to determine with any degree of accuracy as to when the commitments will be called. As such, for the purposes of the above table, we have assumed that all commitments with no fixed payment schedule will be made within one year. Under our investment guidelines, in effect as of the date hereof, no more than 10% of the assets in Greenlight Re's and GRIL's investment portfolio may be held in private equity securities without specific approval from their respective Boards of Directors.
In February 2007, we 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.
We have no obligations, assets or liabilities, other than those derivatives in our investment portfolio that are disclosed in the consolidated financial statements, which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
We consider the effects of inflation in our pricing and when estimating loss and loss adjustment expense reserves. The actual effects of inflation on our results of operations cannot be accurately known until claims are ultimately settled. For the years ended December 31, 2013, 2012 and 2011, inflation had no significant impact on our revenues or net income. We do not believe that inflation has had or will have a material effect on our combined results of operations, except insofar as inflation may affect interest rates and the asset values in our investment portfolio.