The following table sets forth our selected historical consolidated statement of income data for the fiscal years ended December 31, 2017, 2016, 2015, 2014 and 2013, as well as our selected historical consolidated balance sheet data as of December 31, 2017, 2016, 2015, 2014 and 2013, which are derived from our audited consolidated financial statements. The audited consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been audited by BDO USA, LLP, an independent registered public accounting firm.
Because we employ an opportunistic underwriting philosophy, period-to-period comparisons of our underwriting results may not be meaningful. In addition, our historical investment results may not necessarily be 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 property and casualty reinsurance industry historically has been cyclical in nature, owing to fluctuations in the supply of capital. Much of the global property and casualty reinsurance marketplace has experienced an extended period of rate pressure and reductions, and despite some positive rate movement during the January 1, 2018 renewals, this pressure continues along with increased focus on expenses at all points in the risk placement chain. Certain participants in the industry have attempted to mitigate rate pressure and rate reductions by increasing scale, but we believe that throughout the industry there is an ongoing focus on lowering internal expenses as a source of efficiency.
The industry sustained significant natural catastrophe losses in the third quarter of 2017, and in addition, suffered losses from the historically large California wildfires in the fourth quarter of 2017. We believe that losses from these events created short term capital impacts that were offset by capital injections, particularly in the property catastrophe market. As a result, any rate impact was limited although positive. This dynamic may improve if the industry experiences increasing loss estimates from these events or another capacity shock. These property catastrophe events also highlighted some of the weak pricing conditions in certain non-catastrophe lines of business, and although limited at this stage, terms and conditions did improve for renewals, particularly on loss-impacted contracts.
Compared to most of our competitors, we are small and have low overhead expenses. We believe that our expense efficiency, agility and existing relationships give us a competitive advantage and will allow us to participate in lines of business that fit within our strategy. Although there were some rate improvements in the market as mentioned above, we do not believe that the pressure to contain and reduce internal expenses will abate, particularly as various classes of business become increasingly commoditized in the future. In addition to our existing lines of business, we have begun to establish a footprint in additional classes of business that we believe will generate favorable returns on equity over the long term, including participation where we are not the lead underwriter.
We expect that technological, analytical, product and delivery mechanism innovations in the insurance and reinsurance industries will have an increasingly significant effect on the markets in which we operate. In light of that expectation, we have established an internal effort to develop and implement product and service innovations, focusing specifically on these areas.
The composition of our reinsurance portfolio was in line with expectations for the full 2017 year. Our net premiums written during 2017 year increased by 20.9% from the same period in 2016. We will continue to monitor market conditions in
order to best position ourselves to participate where an appropriate risk reward profile exists. Our underlying results and product line concentrations may vary, perhaps significantly, from one period to the next, and thus our results to date are not necessarily indicative of future portfolio shape and performance.
Our investment portfolio had a net long exposure of 33.5% as of December 31, 2017. Our goal for 2018 is to protect capital in an uncertain environment and to find investment opportunities on both our long and short portfolios that we believe will generate adequate risk adjusted returns. Despite the recent U.S. Federal Reserve interest rate increases, we believe monetary policy remains accommodative globally. Additionally, there are many global economic, investment and political uncertainties and risks that may impact our business. The recent passage of the Tax Cuts and Jobs Act in the U.S. may have repercussions on corporate profitability, personal income and lower tax revenues, which we believe will affect economic growth and inflation. Given the uncertainties, for the foreseeable future we expect to maintain comparatively lower net equity exposures and to hold a significant position in gold and other macro positions.
Loss and loss adjustment expenses are a function of the amount and type of reinsurance contracts we write and of the loss experience of the underlying coverage. As described below, loss and loss adjustment expenses include an actuarial analysis of the estimated losses, including losses incurred during the period and changes in estimates from prior periods. Depending on the nature of the contract, loss and loss adjustment expenses may be paid over a period of years.
Acquisition costs primarily consist of brokerage fees, ceding commissions, premium taxes, profit commissions, letters of credit 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 expenses. General and administrative expenses reported on our consolidated statements of income include both underwriting expenses as well as corporate expenses. Underwriting expenses include those expenses directly related to underwriting activities which are not eligible to be capitalized, as well as an allocation of other general and administrative expenses. Corporate expenses include those costs associated with operating as a publicly listed entity as well as an allocation of other general and administrative expenses.
We account for reinsurance contracts in accordance with U.S. GAAP. Assessing whether or not 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, we use deposit accounting and the premiums are reported as a deposit liability. Similarly, for ceded contracts that do not transfer sufficient risk, deposit accounting is used and the contract is reported as a deposit asset. Any gains or losses on deposit accounted contracts are calculated using the interest method and recorded in the consolidated statements of income as other income or expense.
Investments. Our investments in debt and equity securities that are classified as “trading securities” are carried at fair value in accordance with U.S. GAAP. The fair values of the listed equities are derived based on the last reported price on the balance sheet date as reported by a recognized exchange. The fair values of listed equities that have restrictions on sale or transfer which expire within one year, are determined by adjusting the observed market price of the equity using a liquidity discount based on observable market inputs. The fair values of debt instruments are generally derived based on the average of multiple market maker or broker quotes which are considered to be binding. Where quotes are not available, debt instruments are valued using cash flow models using assumptions and estimates that may be subjective and non-observable.
Financial contracts which include total return swaps, credit default swaps, options, futures, currency forwards and other derivative instruments, are recorded at their fair value with any unrealized gains and losses included in net investment income in the consolidated statements of income. Fair values on total return swaps are based on the underlying security’s fair value which is obtained from closing prices on a recognized exchange (for equity or commodity swaps), or from market maker or broker quotes. Fair values for credit default swaps trading in an active market are based on market maker or broker quotes
taking into account credit spreads on identical contracts. Exchange traded option contracts are recorded at fair value based on quoted prices in active markets. For over the counter (“OTC”) options and exchange traded options where a quoted price in an active market is not available, we obtain multiple market maker quotes to determine the fair values. Fair values for other derivative instruments are determined based on multiple broker or market maker quotes taking into account the liquidity and the availability of an active market for the derivative.
We establish loss and loss adjustment expense reserves for contracts based on estimates of the ultimate cost of all losses including losses incurred but not reported (“IBNR”). These estimated ultimate reserves are based on our actuarial estimates derived from reports received from ceding companies, industry data and historical experience. We review these estimates quarterly and adjust the reserves based on our estimates of the ultimate losses across our portfolio.
Further, historical development of estimated reserves may not be representative of future loss development. This is due, among other things, to the fact that the ultimate loss incurred on any given year is subject to the development of both losses reported and IBNR prior to the financial statement date. Additionally, external factors can influence prior year loss development. Examples of such factors include, but are not limited to, jury decisions, legislative changes, changes in the medical conditions of claimants and social and economic conditions. For example, changes in specific tort law which may cause ultimate loss awards to increase or decrease could have a material effect on our loss reserve development. We are unable to accurately predict the magnitude or direction that such external factors may have on our estimated loss reserves.
Bonus Accruals. Under the Company’s bonus program, each employee’s target bonus consists of two components: a discretionary component based on a qualitative assessment of each employee’s performance and a quantitative component based on the return on deployed equity (“RODE”) for each underwriting year relating to reinsurance operations. The qualitative portion of an employee’s annual bonus is accrued at each employee’s target amount, which may differ significantly from the actual amount awarded. The quantitative portion of each employee’s annual bonus is accrued based on the expected RODE for each underwriting year and adjusted for changes in the expected RODE and actual investment return each quarter until all losses are settled and the underwriting year is declared closed. The quantitative bonus is calculated and paid in annual installments between three to five years from the end of the fiscal year in which the business was underwritten. Any subsequent changes to the quantitative bonus are incorporated into the following open underwriting year. The Compensation Committee of our Board of Directors approves all quantitative bonuses prior to being paid. The expected RODE calculation utilizes proprietary models which require significant estimation and judgment. Actual RODE may vary significantly from the expected RODE and any adjustments to the quantitative bonus estimates, which may be material, are recorded in the period in which they are determined.
Share-Based Payments. We have established a stock incentive plan for directors, employees and consultants. U.S. GAAP requires us to recognize share-based compensation transactions using the fair value at the grant date of the award. 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 and recognize the expense, adjusted for estimated forfeitures, over the vesting period. We estimate the forfeiture rate for restricted stock awards and RSUs based on our historical experience and our expectations of future forfeitures. The forfeiture rate reduces the unamortized grant date fair value of unvested outstanding restricted stock awards and RSUs as well as the associated stock compensation expense. As restricted shares and RSUs are forfeited, the number of outstanding restricted shares and RSUs is reduced and the remaining unamortized grant date fair value is compared to the assumed forfeiture levels, and if deemed necessary, true-up adjustments are recorded. For the year ended December 31, 2017, we have assumed a forfeiture rate of 6% (2016: 6% and 2015: 0%) for restricted stock awards and RSUs granted, in order to reflect the anticipated forfeitures and more accurately record the share-based compensation expense.
In addition to the consolidated financial statements, management 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 and the overall growth 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 in accordance with U.S. GAAP. Management believes that these measures, which may be calculated or defined differently by other companies, provide a consistent and comparable measure of performance of its businesses to help shareholders understand performance trends and allow for a more complete understanding of the Company’s business. Non-GAAP financial measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. The key non-GAAP financial measures used in this report are:
Net underwriting income (loss) is considered a non-GAAP financial measure because it excludes items used in the calculation of net income before taxes under U.S. GAAP. The measure includes underwriting expenses which are directly related to underwriting activities as well as an allocation of other general and administrative expenses. Net underwriting income (loss) is calculated as net premiums earned, less net loss and loss adjustment expenses incurred, less acquisition costs and less underwriting expenses. The measure excludes, on a recurring basis: (1) net investment income; (2) any foreign exchange gains or losses; (3) corporate general and administrative expenses; (4) other income (expense) not related to underwriting, and (5) income taxes and income attributable to non-controlling interest. We exclude net investment income and foreign exchange gains or losses as we believe these are influenced by market conditions and other factors not related to underwriting decisions. We exclude corporate general and administrative expenses because these expenses 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 distorts the analysis of trends in our underwriting operations. Net underwriting income (loss) should not be viewed as a substitute for U.S. GAAP net income.
Our primary financial goal is to increase the long-term value in fully diluted adjusted book value per share. For the year ended December 31, 2017, the fully diluted adjusted book value per share decreased by $1.16 per share, or 5.0%, to $22.22 per share from $23.38 per share at December 31, 2016. For the year ended December 31, 2017, the basic adjusted book value per share decreased by $1.15 per share, or 4.9%, to $22.25 per share from $23.40 per share at December 31, 2016.
For the year ended December 31, 2016, the fully diluted adjusted book value per share increased by $1.21 per share, or 5.5%, to $23.38 per share from $22.17 per share at December 31, 2015. For the year ended December 31, 2016, the basic adjusted book value per share increased by $1.11 per share, or 5.0%, to $23.40 per share from $22.29 per share at December 31, 2015.
As a result of our underwriting philosophy, our reported quarterly premiums written may be volatile. Additionally, the composition of premiums written between frequency and severity business may vary from period to period depending on the specific market opportunities that we pursue.
For the year ended December 31, 2017, our gross premiums written increased by $156.6 million, or 29.2%, compared to the same period in 2016. For the year ended December 31, 2017, our frequency gross premiums written increased by $150.6 million, or 30.5%, compared to the same period in 2016. The notable changes in frequency gross premiums for the year ended December 31, 2017 were as follows:
The movement in net premiums written is the net result of the increases or decreases in gross premiums written and premiums ceded as explained in the preceding paragraphs.
For the year ended December 31, 2017, the losses incurred on severity contracts increased by $42.7 million, or 195.8%, compared to the same period in 2016. The increase in severity losses incurred was primarily due to $41.9 million of catastrophe losses incurred during 2017 relating to hurricanes Harvey, Irma and Maria, the Mexican earthquakes and California wildfires, compared to $4.4 million of catastrophe loss incurred during the comparative period in 2016 relating to Canadian wildfires and
Hurricane Matthew. In addition, the current year losses incurred included an increase of $6.1 million in reserves due to adverse loss development on prior year multi-line severity contracts.
We expect our severity loss ratio to vary, sometimes significantly, based on catastrophe events and changes in the mix of business between catastrophe and non-catastrophe business and quota share and excess of loss contracts.
For the year ended December 31, 2016, the losses incurred on severity contracts increased by $19.2 million, or 727.4%, compared to the same period in 2015. The severity losses incurred included $4.4 million of loss reserves relating to the 2016 Canadian wildfires and Hurricane Matthew. These loss reserves were estimated based on information received from cedents and are subject to change in future periods. In addition, the severity losses for the year ended December 31, 2016 included $4.5 million of losses paid on an excess of loss contract relating to the U.S. sub-prime crisis. The economic loss on this contract was partially offset by $1.4 million of additional premiums received under the terms of the contract which was recorded as earned premium during the period. Additionally. the losses incurred for the comparative year ended December 31, 2015 included the reversal of $5.1 million of loss reserves relating to favorable loss development on an excess of loss contract.
For the year ended December 31, 2017, the change in loss reserves included losses relating to catastrophe events during 2017. In addition, for the year ended December 31, 2017, our net loss reserves on prior period contracts increased by $36.2 million primarily related to adverse loss development across a number of contracts. After adjustments for sliding scale ceding commissions, profit commissions and additional premiums, the impact on net underwriting income for the year ended December 31, 2017 was $31.5 million.
For further details on prior period loss developments, please refer to Note 7 “Loss and loss adjustment expense reserves” of the consolidated financial statements.
Acquisition costs represent the amortization of commission and brokerage expenses incurred on contracts written as well as profit commissions and other underwriting expenses which are expensed when incurred. Deferred acquisition costs are limited to the amount of commission and brokerage expenses that are expected to be recovered from future earned premiums and anticipated investment income. Details of acquisition costs are provided in the following table.
The changes in the frequency and severity acquisition cost ratios for the year ended December 31, 2017, compared to the same period in 2016, were primarily due to the following:
The changes in the frequency and severity acquisition cost ratios for the year ended December 31, 2016, compared to the same period in 2015, were primarily due to the following:
Our total general and administrative expenses for the years ended December 31, 2017, 2016 and 2015, were $26.4 million, $25.8 million, and $23.4 million, respectively. General and administrative expenses for the years ended December 31, 2017, 2016 and 2015 included $4.9 million, $4.0 million and $4.3 million, respectively, for the expensing of the fair value of stock options, RSUs and restricted stock granted to employees and directors, net of forfeitures.
For the year ended December 31, 2017, underwriting expenses decreased primarily due to the reversal of bonus accruals driven by the deterioration of results for prior underwriting years. The increase in corporate expenses for the year ended December 31, 2017, compared to the same period in 2016, was mainly due to non-recurring consulting and professional fees.
A summary of our net investment income (loss) is as follows:
For the year ended December 31, 2017, investment income, net of fees and expenses, resulted in a gain of 1.5% on our investments managed by DME Advisors, compared to a gain of 7.2% and a loss of (20.2)% for the years ended December 31, 2016 and 2015, respectively. The investment gain for the year ended December 31, 2017 was primarily driven by our long portfolio, which reported an investment gain of 19.5%. The short portfolio reported a loss of 15.1% for the year ended December 31, 2017. Additionally, macro positions reported a loss of 1.0% relating to losses from currency and oil derivatives, partially offset by gains in gold.
The most significant contributors to the investment gains for the year ended December 31, 2017 were long positions in AerCap (AER), Apple (AAPL), Chemours (CC), General Motors (GM), Uniper (Germany: UN01) and gold. The most significant detractors for the year ended December 31, 2017 were short positions in Caterpillar (CAT), Netflix (NFLX), Tesla (TSLA) and a group of perceived overpriced momentum driven positions which we refer to, collectively, as the “bubble basket” and long position in Rite Aid (RAD).
For the year ended December 31, 2017, included in “investment advisor compensation” was $17.8 million (2016: $16.3 million, 2015: $19.2 million) relating to management fees paid to DME Advisors. For the year ended December 31, 2017, $2.1 million of performance compensation was recorded on investment returns for this period (2016: $8.2 million, 2015: $0.0 million). Due to the investment loss for the year ended December 31, 2015, based on the advisory agreement, the performance compensation for subsequent years is reduced to 10% of investment income until all the investment losses have been recouped and an additional amount equal to 150% of the investment loss is earned. As of December 31, 2017, the reduced performance allocation of 10% would be applied to $588.5 million of future net investment income before reverting to 20%.
GRIL is incorporated in Ireland and, therefore, is subject to the Irish corporation tax. GRIL is expected to be taxed at a rate of 12.5% on its taxable trading income, and 25% on its non-trading income, if any.
Due to the opportunistic and customized nature of our underwriting operations, we expect to report different loss and expense ratios in both our frequency and severity businesses from period to period.
Given the various scenarios under which a loss may occur on a short sale, it is not possible to quantify the risk and uncertainty of loss relating to short sales. However, DME Advisors typically performs a detailed analysis prior to entering into a short sale. Thereafter, the investment is routinely monitored by DME Advisors. As of December 31, 2017, Greenlight Re’s investment guidelines limit any single investment from constituting more than 20% of the portfolio (10% for GRIL’s portfolio) at any given time, which limits the potential adverse impact on our results of operations and financial position from any one position.
As of December 31, 2017, restricted cash included $912.8 million relating to collateral for securities sold, not yet purchased, compared to $859.9 million as of December 31, 2016.
At December 31, 2017, reinsurance balances receivable were $301.8 million, compared to $219.1 million as of December 31, 2016, an increase of $82.6 million, or 37.7%. The increase in reinsurance balances receivable was primarily attributable to an increase in premiums on contracts currently in force including net premiums held by ceding insurers on certain deals that allow for funds to be withheld by the ceding insurer. The reinsurance balances receivable are fully collectible and no allowance for bad debt was considered necessary at December 31, 2017. To a lesser extent the increase in reinsurance balances receivable related to deposit assets on a retroceded contract that was deposit accounted.
During the year ended December 31, 2017, the frequency loss reserves increased by $99.8 million, or 37.7%, to $364.6 million from $264.8 million as of December 31, 2016. The increases in both case reserves and IBNR were primarily related to the increase in premiums earned during the period on active frequency contracts, and to a lesser extent, related to prior year development on loss reserves.
During the year ended December 31, 2017, the severity loss reserves increased by $57.9 million, or 138.5%, primarily relating to case reserves on catastrophe contracts. Approximately $45.9 million of severity case reserves related to loss reserves
For most of our contracts written as of December 31, 2017, our risk exposure is limited by defined limits of liability. Once the loss limit has been reached, we have no further exposure to additional losses from that contract outside of contract failure. However, certain contracts, particularly quota share contracts that relate to first dollar exposure, may not contain aggregate limits. Our severity business, and to a lesser extent our frequency business, include certain contracts that contain or may contain natural peril loss exposure. As of January 1, 2018, our net annual aggregate loss exposure to any series of natural peril events was $232.2 million. The estimate of our net annual loss exposure:
includes property, marine and energy, motor and catastrophe workers’ compensation exposures, but not other casualty exposures;
uses the maximum single underwriting year exposure for renewed risks-attaching contracts; and
Since our loss exposures are based on contract limits, these limits may be significantly higher than modeled loss estimates which are commonly used in the insurance industry. Therefore, we also estimate catastrophe losses in terms of the probable maximum loss (“PML”). We define PML as the anticipated loss, taking into account contract terms and limits, caused by a catastrophe affecting a broad geographic area, such as that caused by an earthquake or hurricane. We anticipate that the PML will vary depending upon the modeled simulated losses and the composition of the in-force book of business. The projected severity levels are described in terms of a 1-in-250 year return period. The 1-in-250 year return period PML means that there is a 0.4% chance in any given year that an occurrence of a natural catastrophe will lead to losses exceeding the stated estimate. In other words, it corresponds to a 99.6% probability that the loss from an event will fall below the indicated PML.
Total equity reported on the consolidated balance sheet, which includes non-controlling interest, decreased by $41.5 million to $844.3 million as of December 31, 2017, compared to $885.8 million as of December 31, 2016. Retained earnings decreased primarily due to net loss of $45.0 million reported for the year ended December 31, 2017. The non-controlling interest increased by $1.4 million during the year ended December 31, 2017. See Note 13 for additional information regarding non-controlling interests in related party joint venture. The increase in additional paid-in capital for the year ended December 31, 2017 of $3.0 million was primarily related to share-based compensation for the year ended December 31, 2017.
As of December 31, 2017, 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 and it is not an evaluation 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.
For the year ended December 31, 2017, our investing activities used cash of $106.5 million (2016: used cash of $30.4 million, 2015: provided cash of $177.7 million), driven primarily by an increase in restricted cash and cash equivalents compared to the same period in 2016. Cash used for, or provided by, investing activities is net of any contributions into or (withdrawals from) the joint venture by DME ($2.1 million for 2017, $7.8 million for 2016 and $0.0 million for 2015).
We used $2.8 million in financing activities relating to the repurchase of Class A ordinary shares during the year ended December 31, 2017 (2016: nil and 2015: $17.7 million).
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. As of December 31, 2017, Greenlight Re and GRIL both exceeded the regulatory minimum capital requirements.
As of December 31, 2017, 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. Because 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, we anticipate that all of our U.S. clients and some of our non-U.S. clients will require us to provide collateral through funds withheld, trust arrangements, letters of credit or a combination thereof.
As of December 31, 2017, we had three letter of credit facilities available with an aggregate capacity of $600.0 million (2016: $600.0 million) with various financial institutions. On September 26, 2017, we provided a notice of cancellation to JP Morgan Chase Bank N.A. to terminate the letter of credit facility of $100.0 million when the facility expires on January 27, 2018. See Note 14 of the accompanying consolidated financial statements for details on each of the available facilities. We provide collateral to cedents in the form of letters of credit and trust arrangements. As of December 31, 2017, the aggregate amount of collateral provided to cedents under such arrangements was $566.4 million (2016: $341.7 million). The letters of credit and trust accounts are secured by equity and debt securities as well as cash and cash equivalents with a total fair value of $578.3 million as of December 31, 2017 (2016: $397.2 million).
Each of the letter of credit facilities contain 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 facilities, Greenlight Re would be prohibited from paying dividends to its parent company. The Company was in compliance with all the covenants of each of these facilities as of December 31, 2017.
Our capital structure currently consists entirely of equity issued in two separate 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 material indebtedness in the ordinary course of our business other than temporary borrowing directly related to the management of our investment portfolio. However, in order 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 June 2018 unless renewed. We did not make any significant commitments for capital expenditures during the year ended December 31, 2017.
(2) As of December 31, 2017, we had made total commitments of $25.3 million in private investments of which we had invested $18.8 million, and our remaining commitments to these investments total $6.5 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 the investment portfolio may be held in private equity securities without specific approval from the Board of Directors.
The Company has entered into a secured revolving credit facility to provide funding for its investment activities (see Note 14 for further details on the revolving credit facility). The Company has the ability to borrow $50.0 million (the “commitment”) under the credit facility and had borrowed $25.0 million as of December 31, 2017. The credit facility matures on November 8, 2018 and can be extended for one year by the Company upon providing 120 days’ notice to the lender. The repayment of the borrowed amount including estimated interest expense has been included in the above table based on the assumption that the credit facility expires and is not renewed.
subsequent to the year in which the investment account incurs a loss, until all the losses are recouped and an additional amount equal to 150% of the aggregate investment loss is earned. DME is not entitled to earn a performance allocation in a year in which the investment portfolio incurs a loss. For the year ended December 31, 2017, performance allocation of $2.1 million and management fees of $17.8 million were included in net investment income.
Our related party transactions are presented in Note 13 to the accompanying consolidated financial statements.