The following table sets forth our selected historical consolidated statement of income data for the fiscal years ended December 31, 2011, 2010, 2009, 2008 and 2007, as well as our selected consolidated balance sheet data as of December 31, 2011, 2010, 2009, 2008, and 2007, 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 a unique and differentiated 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.
Acquisition costs consist primarily of brokerage fees, ceding commissions, premium taxes, profit commissions, letters of credit fees, Federal excise tax, and other direct expenses we incur that are directly related to underwriting reinsurance contracts. We amortize deferred acquisition costs over the related contract term.
Premium Revenues and Risk Transfer. Our property and casualty reinsurance premiums are recorded as premiums written based upon contract terms and information received from ceding companies and their brokers. For excess of loss reinsurance contracts, premiums are typically stated as a percentage of the subject premiums written by the client, subject to a minimum and deposit premium. The minimum and deposit premium is typically 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.
For each quota share or proportional property and casualty reinsurance contract we underwrite, our client estimates gross premiums written at inception of the contract. We generally account for such premiums using our best estimates and then adjust our estimates based on actual reports provided by our client and based on our expectations of the industry developments. As the contract progresses, we monitor actual premiums received in conjunction with correspondence from the client in order to refine our estimate. Variances from initial gross premiums written estimates can be greater for quota share contracts than for excess of loss contracts. All premiums on quota share contracts are earned over the coverage period. Unearned premiums consist of the unexpired portion of reinsurance provided.
At the inception of each of our reinsurance contracts, we receive premium estimates from the client, which, together with historical and industry data, we use to estimate what we believe will be the ultimate premium payable pursuant to each contract. We receive actual premiums written by each client as the client reports the actual results of the underlying insurance writings to us on a monthly or quarterly basis (depending on the terms of the contract). We book the actual premiums written when we receive them from our client. Each reporting period we estimate the amount of premiums that are written for stub periods that have not yet been reported. For example, for December 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 filed our financial statements. Typically, premium estimates are only used for unreported stub periods, which accounts for a small percentage of our reported premiums written. We believe that estimating premiums written for these stub periods is standard reinsurance industry practice.
We rely more on client and industry data than our own data to identify unusual trends requiring changes in reserve estimates. Each reinsurance contract is different and the degree to which we rely on client data versus our own data varies greatly from contract to contract. The extent to which we rely on client data for reserve setting purposes depends upon the availability of historical loss data from the client and our judgment as to how reliable we believe the client’s historic loss performance is compared to its current book of business. We may from time to time supplement client data with industry and competitor information where we deem appropriate. Where available, we also receive relevant actuarial reports from the client. We supplement this information with subjective information on each client, which may include management biographies, competitor information, meetings with the client and supplementary industry research and data.
Additionally, we contract with a third-party actuarial firm to perform a quarterly reserve review and to annually opine on the reasonableness and adequacy of our loss reserves. We provide our external actuary with our pricing models, reserving analysis and any other data they may request. Additionally, the actuarial firm may inquire as to the various assumptions and estimates that we may use in our reserving analysis. The external actuarial firm independently creates its own reserving models based on industry loss information, augmented by specific client loss information that we may be asked to provide as well as its own independent assumptions and estimates. Based on various reserving methodologies that the actuarial firm considers appropriate, it creates a reserve estimate for each contract in our portfolio and provides us with an aggregate recommended loss reserve, including IBNR. If there are material differences between our booked reserves and the actuarial firm’s recommended reserves, we review the differences and agree upon and make any necessary adjustments to the booked reserves. To date there have been no material differences resulting from the external actuary's reviews.
We believe the industry will ultimately need to increase pricing given that the prior years’ reserve redundancies have been reduced substantially and current interest rates on fixed maturity investments remain low. We expect to see signs of moderate price increases during 2012. Price increases could be more significant if financial and credit markets experience adverse shocks resulting in the loss of capital of insurers and reinsurers, or if there are more major catastrophic events, especially in North America. The Florida homeowners’ insurance market continues to experience significant rate increases. We have seen signs of some hardening of pricing in the global property catastrophe business as a result of the 2011 catastrophic events. In addition, changes in the widely used catastrophe risk model, Risk Management Solutions (RMS 11.0), will increase the modeled expected losses for many catastrophe programs, which could result in some hardening of property catastrophe pricing. For our January 1, 2012 renewals, we experienced rate increases compared to the January 1, 2011 renewals, of approximately 15% for our property catastrophe retrocession accounts and we expect pricing to continue to remain at this level during 2012, or increase further for loss impacted programs, or those programs with worldwide coverage. We intend to monitor trends in all lines of business to continue to assess whether pricing and terms and conditions change appreciably.
The current global economic conditions could affect various lines of business; however, we believe that opportunities could arise in a number of areas, including the lines of business:
where current market participants are experiencing financial distress or uncertainty; and
Despite an overall less attractive marketplace, we believe that we are well positioned to compete for frequency business due to our increasing market recognition, the development of our strategic relationships and the rating upgrade of Greenlight Re to "A (Excellent)" by A.M. Best on September 26, 2011. We believe that the rating upgrade should allow us to access new markets, expand our existing relationships and increase the quality and quantity of deal submissions we receive. Meanwhile, there are a number of insurers and reinsurers that have suffered and continue to suffer from capacity issues. During 2011, we saw a number of large, frequency-oriented opportunities that we believe fit well within our business strategy. We converted most of these opportunities into bound contracts and have developed relationships that could provide further opportunities in 2012. Further, there has been additional consolidation activity in the industry and we believe if such activity continues and the number of industry participants decreases, we could benefit from increased opportunities since insurers may prefer to diversify their reinsurance placements.
For the year ended December 31, 2011, we reported net income of $6.8 million as compared to net income of $90.6 million for the year ended December 31, 2010. The net income reported for 2011 included net investment income of $23.1 million, compared to $104.0 million for 2010. Our investment portfolio reported a gain of 2.1% for the year ended December 31, 2011 compared to a gain of 11.0% for the year ended December 31, 2010. The underwriting loss before general and administrative expenses for the year ended December 31, 2011 was $(0.7) million due to unfavorable loss development, compared to underwriting income of $8.0 million for the year ended December 31, 2010. General and administrative expenses decreased for the year ended December 31, 2011 to $13.9 million from $16.2 million for the year ended December 31, 2010, primarily as a result of lower employee bonuses due to a decrease in underwriting results.
For the year ended December 31, 2010, we reported net income of $90.6 million compared to net income of $209.5 million for the year ended December 31, 2009. The net income reported in 2010 principally related to a net investment income of $104.0 million. Our investment portfolio reported a gain of 11.0% for the year ended December 31, 2010 compared to a gain of 32.1% for the year ended December 31, 2009. The underwriting income before general and administrative expenses for the year ended December 31, 2010 decreased by 69.7% to $8.0 million compared to $26.4 million for the year ended December 31, 2009. In addition, we generated other income of $4.5 million for the year ended December 31, 2009 relating to penalty fees upon early termination of a reinsurance contract, net gains on deposit accounted contracts and advisory fees earned by Verdant.
Our primary financial goal is to increase the long-term value in fully diluted adjusted book value per share. During the year ended December 31, 2011, the fully diluted adjusted book value per share increased by $0.22 per share, or 1.0%, to $21.61 per share from $21.39 per share at December 31, 2010. For the year ended December 31, 2010, the fully diluted adjusted book value per share increased by $2.44 per share, or 12.9%, to $21.39 per share from $18.95 per share at December 31, 2009.
Basic adjusted book value per share is a non-GAAP measure as it excludes the non-controlling interest in joint venture from total equity. In addition, fully diluted adjusted book value per share is also a non-GAAP measure and represents basic adjusted book value per share combined with the impact from dilution of all in-the-money stock options issued and outstanding as of any period end. We believe that long-term growth in fully diluted adjusted book value per share is the most relevant measure of our financial performance. In addition, fully diluted adjusted book value per share may be of benefit to our investors, shareholders, and other interested parties to form a basis of comparison with other companies within the property and casualty reinsurance industry.
We expect our annual reporting of premiums written to be volatile as our underwriting portfolio continues to develop. Additionally, the composition of premiums written between frequency and severity business may vary from year to year depending on the specific market opportunities that we pursue. For the year ended December 31, 2011, the premiums written relating to frequency business decreased by $10.8 million, or 2.8%, from the year ended December 31, 2010. The decrease in premiums written is the net impact of increases in certain lines of business being more than offset by decreases in other lines. The largest increase in frequency premiums written related to motor liability line of business which increased $31.7 million, or 57.3%, compared to the same period in 2010. The increase was primarily related to several new non-standard automobile contracts entered into during the year ended December 31, 2011. Our motor physical damage premiums also increased by $3.3 million, or 89.3%, primarily as a result of these new contracts. Our professional liability premiums increased by $13.1 million, or 170.7%, partially due to a new quota share professional indemnity contract entered into during the year ended December 31, 2011 and partially due to an existing contract which generated higher volume of premiums upon renewal compared to the prior year. Our workers’ compensation premiums for the year ended December 31, 2011, increased by $7.4 million, or 34.3%, principally due to higher volume of premiums on an existing multi-line contract that was renewed during 2011.
For the year ended December 31, 2010, the premiums written relating to frequency business increased by $165.0 million, or 72.7%, from the year ended December 31, 2009. The increase was a result of the continuing development of our underwriting activities, which resulted in a number of new and renewing frequency contracts written during the year ended December 31, 2010. The largest increase in frequency premiums written related to several new multi-year homeowners’ personal lines contracts entered into during 2010 which accounted for 87.7% of the increase. The Florida homeowners’ insurance market was a key area of our underwriting focus during 2010. We continued to generate growth in most of our other lines of business, such as health, general liability, and professional liability which contributed 10.7%, 8.8%, and 4.7%, respectively, to the increase in frequency premiums written for the year ended December 31, 2010. The growth in health, general liability, and professional liability lines was achieved through a combination of renewals and new relationships created during 2010. In addition, during 2010, we entered into financial line (surety and trade credit) which contributed 9.3% to the increase in premiums. These increases were partially offset by a decrease in our motor liability premiums of $40.1 million, as some of our commercial motor contracts were placed into run-off during 2010.
For the year ended December 31, 2011, the premiums written relating to severity contracts decreased by $6.4 million, or 27.8%, from the year ended December 31, 2010. The decrease was principally due to the continued reduction of our participation in property catastrophe contracts because of the softening market conditions at the time. In addition, we did not renew a casualty clash contract during 2011 as the terms offered to us did not meet our risk appetite and return hurdle. Subsequently, during the second and third quarters of 2011, we entered into new excess of loss natural peril contracts on terms more attractive than we had been offered at the beginning of the year, which partially offset the decrease in severity premiums.
For the year ended December 31, 2010, the premiums written relating to severity contracts decreased by $9.0 million, or 28.1%, from the year ended December 31, 2009. The decrease was principally due to our decision to reduce our participation in a property catastrophe contract early in the year which accounted for $8.3 million of the decrease. In addition, we did not renew a professional liability stop-loss contract during 2010, and also returned premiums upon commutation of a medical malpractice contract, which together contributed $6.2 million to the decrease in premiums written for the year ended December 31, 2010. The decrease was offset partially by $6.0 million of new severity premiums generated from opportunities we found during 2010, including a multi-line excess of loss catastrophe contract and a financial surety contract.
We entered into retrocessional contracts with ceded premiums of $46.9 million, $12.0 million and $13.3 million for the years ended December 31, 2011, 2010 and 2009, respectively. The increase in ceded premiums for the year ended December 31, 2011, was principally due to a Florida homeowners’ contract entered into during 2011 which included a quota share contract retroceded by us to the ceding insurer’s affiliated reinsurer. The decrease in ceded premiums for the year ended December 31, 2010, was the combined result of our decision to reduce the percentage retroceded on a casualty contract upon renewal, as well as the result of a ceding insurer’s decision to directly retrocede an excess layer of coverage upon renewal in 2010, whereas we had purchased retrocession for this layer during 2009. The decrease was partially offset by higher premiums on a multi-line frequency casualty contract which in turn resulted in higher premiums ceded by us on the corresponding quota share retroceded contract.
Net premiums earned reflect the inclusion into income of net premiums written over the term of the reinsurance contracts. Details of net premiums earned for the years ended December 31, are provided in the following table:
For the year ended December 31, 2010, the increase in frequency earned premiums of $89.3 million, or 52.7%, reflected the additional quota share contracts written throughout the 2010 year. The increase primarily related to the new Florida homeowners’ property insurance contracts written during 2010 which accounted for $65.2 million of the increase. The remaining increase in earned premiums related to growth in existing general liability and health contracts, which together accounted for $40.0 million of the increase, and to a lesser extent from new relationships formed during 2010 in other lines such as financial (surety and trade credit), and professional indemnity which together accounted for $9.8 million of the increase. The increase in frequency earned premiums was partially offset by a $25.7 million decrease relating to motor liability contracts that were placed into run-off during 2010. For the year ended December 31, 2010, severity earned premiums decreased $16.3 million, or 36.2%, compared to the 2009 year. The decrease was principally due to our decision to significantly reduce our participation in a property catastrophe contract during 2010. In addition, to lesser extent, the decrease was a result of a multi-year professional liability contract written in 2007 that expired in 2010 without being renewed; and a result of commuting two contracts, one relating to medical malpractice and another relating to professional liability aggregate stop-loss. These decreases were offset by the premiums earned from the financial line.
Losses incurred include losses paid and changes in loss reserves, including reserves for IBNR losses, net of actual and estimated loss recoverables. Details of losses incurred for the years ended December 31, are provided in the following table:
For the year ended December 31, 2011, the total losses incurred on frequency contracts increased by $58.5 million, or 32.8%, primarily due to the increase in earned premiums for the reasons explained above. Losses incurred on the personal line accounted for a majority of the increase, followed by general liability, professional liability and workers’ compensation lines. For the year ended December 31, 2011, the losses incurred relating to motor liability were unchanged from the same period in 2010. However this was the net result of the decrease in losses incurred relating to the commercial motor contracts which are in run-off; wholly offset by, (i) increase in loss reserves on new non-standard automobile contracts entered during 2011, and (ii) adverse loss development on a prior year multi-line contract covering motor and general liabilities.
Losses incurred as a percentage of premiums earned (i.e. loss ratio) fluctuate based on the mix of business, and the favorable or adverse development of our larger contracts. For the year ended December 31, 2011, the loss ratio of our frequency business decreased to 65.7% from 68.9% in 2010. The decrease in frequency loss ratio was a result of net incurred losses increasing by 32.8% while the earned premiums increased by 39.2%. Since loss ratios are a function of net incurred losses divided by net earned premiums, and because the denominator increased more than the numerator, the overall ratio decreased. Additionally, although our multi-line contracts experienced adverse loss development during 2011, the overall frequency loss ratio decreased as a result of the mix of business. Our personal lines accounted for 43% of net earned premiums for the 2011 fiscal year compared to 32% for the 2010 year, and since the loss ratio of our personal lines was less than the average frequency loss ratio, it caused the overall frequency loss ratio to decrease.
The negative severity loss ratio for the year ended December 31, 2010 was primarily due to the absence of any major catastrophe losses and, to a lesser extent, due to net favorable loss development on prior year severity contracts amounting to $6.0 million. Prior year contracts with favorable development included a multi-year excess of loss professional liability contract, an excess of loss catastrophe contract, and a medical malpractice contract that was commuted during 2010 resulting in the reversal of severity loss reserves. Meanwhile, the largest severity losses incurred during 2010 related to adverse development of the 2008 California wildfires on a 2007 casualty clash contract, which increased our severity loss reserves by $3.4 million.
Losses incurred can be further broken down into losses paid and changes in loss reserves. Losses incurred for the years ended December 31, 2011, 2010 and 2009 were comprised as follows:
For the year ended December 31, 2011, the increase in ceded reserves of $17.6 million was primarily related to the retrocession of multi-line frequency casualty contracts which experienced adverse loss development during 2011. To a lesser extent, the increase in ceded reserves was a result of new retroceded quota share contracts written during 2011 related to the Florida homeowners’ inward contracts.
Adverse loss development of $1.6 million on Florida homeowners’ contracts based on data received from the client and a reassessment in connection with our quarterly reserve analysis;
Favorable loss development of $1.3 million relating to a specialty health contract based on data received from the client and a reassessment in connection with our quarterly reserve analysis;
Adverse loss development of $15.4 million relating to prior year motor liability contracts, as a result of higher than expected paid and incurred losses included in the data received from the client. Based on a review of the client’s actual loss data and a reassessment in connection with our quarterly reserve analysis, we increased our loss reserves accordingly.
Adverse loss development of $0.6 million on a 2007 quota share motor contract, based on data received from the client and a reassessment in connection with our quarterly reserve analysis;
Favorable loss development of $4.1 million on a multi-year professional liability excess of loss contract, based on data received from the client and a reassessment in connection with our quarterly reserve analysis;
Favorable loss development of $1.8 million in aggregate, on two catastrophe contracts based on data received from the clients and a reassessment in connection with our quarterly reserve analysis;
Favorable loss development of $1.4 million in aggregate, on two 2007 professional liability excess of loss contracts, based on data received from the clients and a reassessment in connection with our quarterly reserve analysis;
Favorable loss development of $0.4 million on a 2008 multi-line frequency quota share contract, net of retrocession, based on loss data received from the client and a reassessment in connection with our quarterly reserve analysis.
For the year ended December 31, 2009, the losses incurred included $7.6 million related to net favorable loss development on prior year contracts. During the year ended December 31, 2009, the loss development on prior year contracts primarily related to the following:
● Favorable loss development of $0.7 million on a 2008 severity medical malpractice contract based on our quarterly reserve analysis;
● Adverse loss development of $1.1 million on a 2007 health contract based on a reassessment in connection with our quarterly reserve analysis.
For the year ended December 31, 2011, the increase in the frequency acquisition cost ratio was principally due to our Florida homeowners’ contracts, which generally have high ceding commissions as a percentage of premiums compared to our other lines of business. Our Florida homeowners’ contracts generally exclude, or significantly limit, catastrophe loss coverage. As a result, ceding insurers elect to separately purchase excess catastrophe reinsurance protection. However, premiums that we receive and earn are net of the reinsurance premiums paid by ceding insurers for their excess catastrophe reinsurance coverage. The commission rates on these policies are based on the gross premiums paid by the insured homeowner, but calculating these commissions as a percentage of net premiums results in an average commission rate higher than on our other lines of business. To illustrate, where the ceding insurer collects $100 of gross premiums from the insured homeowner, pays $30 for excess catastrophe reinsurance protection and pays $28 of commissions to agents, we would report premiums of $70 and commissions of $28, resulting in an acquisition cost ratio of 40%. The increase in the frequency acquisition cost ratio was partially offset by the downward adjustment of the sliding scale ceding commissions on the multi-line contracts due to adverse loss development during the year ended December 31, 2011.
Our general and administrative expenses for the years ended December 31, 2011, 2010 and 2009 were $13.9 million, $16.2 million and $19.0 million, respectively. For the year ended December 31, 2011, the decrease in general and administrative expenses related primarily to a decrease in employee bonus accruals as a result of a decrease in underwriting results, and to a lesser extent related to lower share based compensation expense for the year ended December 31, 2011. The decrease in share based compensation expense was primarily due to a $1.1 million reversal of share based compensation expense relating to forfeited restricted shares and stock options upon retirement of our former chief executive officer. The decrease was partially offset by an increase in salaries and benefits expenses (excluding bonus) resulting from the addition of six new employees during 2011.
For the year ended December 31, 2011, included in investment advisor compensation was $15.2 million (2010: $13.4 million, 2009: $10.8 million) relating to management fees paid to DME Advisors and $5.4 million (2010: $12.9 million, 2009: $21.9 million) relating to performance allocation in accordance with the loss carry forward provision of the advisory agreement with DME Advisors. Given the net investment loss for the year ended December 31, 2008, no performance allocation was made to DME Advisors in 2008. In addition, based on the advisory agreement, the performance allocation for the subsequent years was reduced to 10% until all the investment losses from 2008 had been recouped and an additional investment income equal to 150% of the investment loss was earned. As of December 31, 2010, the loss carry forward balance was nil and the performance allocation rate reverted to 20% during December 2010 and remained unchanged for the year ended December 31, 2011.
For the year ended December 31, 2011, a deferred tax asset of $58,151 (2010: $79,018), resulting solely from the temporary differences in recognition of expenses for tax purposes, was included in other assets on the consolidated balance sheets. At December 31, 2011, an accrual for current taxes payable of $205,873 (2010: $333,865) 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 not that the deferred tax asset will be fully realized in the future and therefore no valuation allowance has been recorded. We have not taken any income tax positions that are subject to uncertainty or that are reasonably likely to have a material impact to the Company, GRIL or Verdant.
Our long investments (assets), comprised of debt instruments, listed and private equities, commodities and financial contracts receivable, were $1,053.8 million as of December 31, 2011 compared to $1,080.7 million as of December 31, 2010, a decrease of $26.9 million, or 2.5%. During 2011, our listed equity securities, including exchange traded funds, increased by $50.9 million, while our commodities (gold bullion) decreased by $35.0 million. The decrease in our gold holdings was partially offset by an increase in the gold miners exchange traded funds. During the year ended December 31, 2011, our financial contracts receivable decreased by $22.5 million primarily due to the decreases in sovereign debt CDS, put options and the value of our interest rate options. During the year ended December 31, 2011, our financial contracts payable decreased by $17.2 million primarily due to the disposal of CDS issued on corporate debt.
Our investment portfolio, including any derivatives, is valued at fair value and any unrealized gains or losses are reflected in net investment income in the consolidated statements of income. As of December 31, 2011, 86.3% (2010: 92.7%) of our investment portfolio (excluding restricted and unrestricted cash and cash equivalents) was comprised of investments valued based on quoted prices in actively traded markets (Level 1), 11.9% (2010: 4.8%) comprised of securities valued based on observable inputs other than quoted prices (Level 2) and 1.8% (2010: 2.5%) was comprised of securities valued based on non-observable inputs (Level 3).
In determining whether a market for a financial instrument is active or inactive, we obtain information from our investment advisor who makes the determination based on feedback from executing brokers, market makers, and in-house 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, 2011, $182.8 million (2010: $98.6 million) of our investments were valued based on broker quotes, of which $174.9 million (2010: $72.1 million) were based on observable market information and classified as Level 2 fair value measurements, and $7.9 million (2010: $26.5 million) were based on non-observable inputs and classified as Level 3 fair value measurements.
For the year ended December 31, 2011, certain of our equity securities which were previously unlisted, began trading on US exchanges and, as a result, we were able to determine fair values of these securities based on quoted prices in active markets. Therefore, we transferred securities with a fair value of $9.7 million, on the date of transfer, from Level 3 to Level 1 fair value measurements. There were no other transfers between Level 1, Level 2 or Level 3 fair value measurements during 2011.
For the year ended December 31, 2010, we transferred, from Level 1 to Level 2, an equity security for which a quoted price on an active market was not available and as a result we relied on broker quotes to determine the fair value. There were no other transfers between Level 1, Level 2 or Level 3 fair value measurements during the year ended December 31, 2010. The increase in our Level 3 investments for the year ended December 31, 2010, was primarily due to private equity investments purchased during the year.
The increase in loss reserves is partially due to the frequency underwriting portfolio continuing to mature, resulting in an increase in case reserves as losses are reported by our clients, and partially due to unfavorable loss development on certain contracts as discussed above (see Losses Incurred). For most of the contracts written as of December 31, 2011, our risk exposure is limited by defined limits of liability on these contracts. Once the loss limit for a contract has been reached, we have no further exposure to additional losses from that contract. However, certain contracts, particularly quota share contracts which relate to first dollar exposure, may not contain aggregate limits.
Our natural peril loss exposure presented above excludes the impact of any potential recoveries from retrocessionaires or swap counterparties relating to natural peril events. We have currently entered into a weather derivative swap contract whereby upon the occurrence of certain specified earthquake events in the United States we would recover a maximum amount of $10.0 million.
We are organized as a holding company with no operations of our own. As a holding company, we have minimal continuing cash needs, most of which are principally related to the payment of administrative expenses. All of our underwriting operations are conducted through our wholly-owned reinsurance subsidiaries, Greenlight Re and GRIL, which underwrite risks associated with our property and casualty reinsurance programs. There are restrictions on each of Greenlight Re’s and GRIL’s ability to pay dividends which are 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.
For the year ended December 31, 2011, we used $26.4 million in cash from operations relating to our underwriting activities including claim payments on quota share contracts on our maturing book of business. We generated $23.2 million of cash from investing activities as a result of the net sale of investments and financial contracts. We generated no significant cash from financing activities during the year ended December 31, 2011. For the year ended December 31, 2010, we generated $38.5 million in cash from operations mainly as a result of increased underwriting activities, used $24.7 million for net purchase of investments, and generated no significant cash from financing activities.
As of December 31, 2011, 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 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, 2011, we had four letter of credit facilities (2010: three) totaling $760.0 million (2010: $560.0 million) with various financial institutions. See Note 14 of the accompanying consolidated financial statements for details on each of these facilities. As of December 31, 2011, an aggregate amount of $382.8 million (December 31, 2010: $339.9 million) in letters of credit was issued from these facilities. Under the letter of credit facilities, we provide collateral that may consist of equity securities, restricted cash, and cash equivalents. As of December 31, 2011, total equity securities, restricted cash, and cash equivalents with a fair value in the aggregate of $410.5 million (December 31, 2010: $349.6 million) were pledged as security against the letters of credit issued.
The Board has adopted a share repurchase plan authorizing management to repurchase up to 2.0 million Class A ordinary shares. We may from time to time repurchase shares to optimize our capital structure. Shares may be purchased in the open market or through privately negotiated transactions. The timing of such repurchases and actual number of shares repurchased will depend on a variety of factors including price, market conditions and applicable regulatory and corporate requirements. The plan, which expires on June 30, 2012, does not require us to repurchase any specific number of shares and may be modified, suspended or terminated at any time without prior notice. During the year ended December 31, 2011, we did not purchase any Class A ordinary shares, and as of December 31, 2011, we had repurchased 228,900 shares under the share repurchase plan.
On September 26, 2011, A.M. Best upgraded the rating for our reinsurance subsidiary, Greenlight Re from "A- (Excellent)" to "A (Excellent)" and reaffirmed the "A− (Excellent)" rating for GRIL. These ratings reflect the rating agency’s opinion of our reinsurance subsidiaries’ financial strength, operating performance and ability to meet obligations. If an independent rating agency 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. Insurer financial strength ratings are based upon factors relevant to policyholders and are not directed toward the protection of investors. Our A.M. Best ratings may be revised or revoked at the sole discretion of the rating agency.
Reflects our contractual obligations pursuant to the lease agreements as described below.
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 agreement is automatically renewed on an annual basis until terminated by us or DME Advisors for any reason with 30 days prior written notice to the other party.
Information with respect to this Item is set forth under Item 15.