The following table sets forth our selected historical consolidated statement of income data for the fiscal years ended December 31, 2013, 2012, 2011, 2010 and 2009, as well as our selected historical consolidated balance sheet data as of December 31, 2013, 2012, 2011, 2010 and 2009, 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.
We believe the reinsurance industry in general has been, and for the foreseeable future will remain, over-capitalized. Over the past year there has been an influx of new capital for peak zone catastrophe risk from alternative capital market participants such as hedge funds, pension funds and other fixed income bond managers. Additionally, we believe that the slowdown in worldwide economic activity continues to weaken the overall demand for property and casualty insurance and, accordingly, reinsurance. Notwithstanding the foregoing, the over-capitalization of the reinsurance industry may be countered by the introduction of more stringent capital requirements in the industry (particularly in Europe) and a sustained low interest rate environment. We believe that we are well positioned to compete for frequency business due to our increasing market recognition, the development of strategic relationships and Greenlight Re's "A (Excellent)" and GRIL's "A- (Excellent)" ratings by A.M. Best.
As of December 31, 2013, our reinsurance portfolio was principally concentrated in four areas: Florida homeowners; U.S. employer health stop loss; catastrophe retrocession and non-standard private passenger automobile. While each of these areas is competitive, we believe we are supporting programs with good risk adjusted returns due in part to improving loss experience or rate increases that are in excess of loss trends. In particular, the Florida homeowners' insurance market continues to experience rate increases coupled with the positive impact of state legislation addressing sinkhole fraud. U.S. employer health stop loss and non-standard private passenger automobile are stable at what we believe are profitable levels. However, we anticipate the non-catastrophe reinsurance pricing in this market will become more competitive in 2014. While we believe the property catastrophe retrocession contracts on which we participate are attractively priced, we have observed significant flexible capital from non-traditional sources being deployed mainly in peak zone catastrophe excess of loss business, which is putting downward pressure on rates in this area.
Our consolidated financial statements contain certain amounts that are inherently subjective in nature and have required management to make assumptions and best estimates to determine reported values. If certain factors, including those described in "Part I. Item IA. - Risk Factors", cause actual events or results to differ materially from our underlying assumptions or estimates, there could be a material adverse effect on our results of operations, financial condition or liquidity. We believe that the following accounting policies affect the more significant estimates used in the preparation of our consolidated financial statements. The descriptions below are summarized and have been simplified for clarity. A more detailed description of our significant accounting policies as well as recently issued accounting standards is included in Note 2 to the consolidated financial statements.
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 catastrophe contracts that contractually require the payment of a reinstatement premium equal to or greater than the original premium upon the occurrence of a full limit loss, the reinstatement premiums are earned over the original contract period. Reinstatement premiums that are contractually calculated on a pro-rata basis of the original premiums, are earned over the remaining coverage period.
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 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, are used 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 finalized our audited 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.
Loss and Loss Adjustment Expense Reserves. Our loss and loss adjustment expense reserves are comprised of:
We establish reserves for contracts based on estimates of the ultimate cost of all losses including IBNR. These estimated ultimate reserves are based on our own actuarial estimates derived from reports received from ceding companies, industry data and historical experience. These estimates are periodically reviewed by the Company on a contract by contract basis and adjusted when necessary. Since reserves are estimates, the setting of appropriate reserves is an inherently uncertain process. Our estimates are based upon actuarial and statistical projections and on our assessment of currently available data, predictions of future developments and estimates of future trends and other factors. The final settlement of losses may vary, perhaps materially, from the reserves initially established and periodically adjusted. All adjustments to the estimates are recorded in the period in which they are determined. Under U.S. GAAP, we are not permitted to establish loss reserves, which include case reserves and IBNR loss reserves, until the occurrence of an event which may give rise to a claim. As a result, only loss reserves
For natural peril exposed business we generally establish loss reserves based on loss payments and case reserves reported by our clients when, and if, received. We then add our estimates for IBNR losses to the case reserves. To establish our IBNR loss estimates, in addition to the loss information and estimates communicated by ceding companies, we use industry information, knowledge of the business written and management’s judgment.
Generally, we obtain regular updates of premium and loss related information for the current period and historical periods, which we utilize to update our initial expected loss and loss expense ratio. There may be a time lag from when claims are reported to our client and when our client reports the claims to us. This time lag may impact our loss reserve estimates from period to period. Client reports, whether due monthly or quarterly, have set reporting dates of when they are due to us (for example, fifteen days after month end). As such, the time lag in the client’s reporting depends upon the terms of the specific contract. The timing of the reporting requirements is designed so that we receive premium and loss information as soon as practicable once the client has closed its books. Accordingly, there should be a short lag in such reporting. Additionally, most of our contracts that have the potential for large single event losses have provisions that such loss notification needs to be received immediately upon the occurrence of an event. Once we receive this updated information we use a variety of standard actuarial methods in our analysis each quarter. Such methods may include:
For each contract, we utilize each reserving methodology that our actuaries deem appropriate in order to calculate a best estimate, or point estimate, of reserves. We use various actuarial methods to provide data point estimates to aid us in our estimation of reasonable and adequate loss reserves. In setting our reserves, we do not select a range of estimates that may be subject to adjustment. We analyze reserves on a contract by contract basis and do not reserve based on aggregated product lines. Whether we use one methodology, a combination of methodologies or all methodologies depends upon the contract and the judgment of the actuaries responsible for the contract. We do not have a set weighting of the various methods we use. Certain of the methods we consider are more appropriate depending on the type and structure of the contract, how mature is the contract, and the duration of the expected paid losses on the contract. For example, the data estimation for contracts that are relatively new and therefore have little paid loss development is more appropriately considered using the Bornhuetter-Ferguson method than a paid loss development method.
Our aggregate reserves are the sum of the point estimate of all contracts. We perform a quarterly loss reserve analysis on each contract regardless of the line of business. This analysis may incorporate some or all of the information described above, using some or all of the methodologies described above. We generally calculate IBNR loss reserves for each contract by estimating the ultimate incurred losses at any point in time and subtracting cumulative paid claims and case reserves, which incorporate specific exposures, loss payment and reporting patterns and other relevant factors. Each quarter, our reserving committee, which is comprised of our Chief Executive Officer, Chief Financial Officer, Chief Actuary, Assistant Controller and Reserving Actuary, meets to assess the adequacy of our loss reserves based on the reserve analysis and recommendations prepared by the Company’s actuaries. The reserving committee discusses each contract individually and approves or revises the stated reserves.
Because of the uncertainties that surround our estimates of loss and loss adjustment expense reserves, we cannot be certain that ultimate loss and loss adjustment expense payments will not exceed our estimates, or be less than our estimates. If our estimated reserves are deficient, we would be required to increase loss reserves in the period in which such deficiencies are identified, which would cause a charge to our earnings and a reduction of our capital. Similarly, if our estimated reserves are excessive, we would decrease loss reserves in such period in which the excess is identified. By way of illustration, since we started underwriting operations in 2006, the reserve re-estimation process has resulted in the following effect on the prior year reserves and the corresponding inverse effect on net income (excluding any adjustments for additional premiums, reinstatement premiums, profit commissions or ceding commissions) during each of the years ended December 31:
typically considered factors such as an entity's industry, stage of life cycle, size and financial leverage when selecting the peer group. Additionally, we used the full life of the option, ten years, as the estimated term of the option, and we have assumed that dividends will not be paid. If actual results differ significantly from these estimates and assumptions, particularly in relation to our estimation of volatility which requires significant judgment, share-based compensation expense, primarily with respect to future share-based awards, could be materially impacted.
For the year ended December 31, 2012, we reported net income of $14.6 million as compared to net income of $6.8 million for the year ended December 31, 2011. The net income reported for 2012 included net investment income of $78.9 million, compared to $23.1 million for 2011. Our investment portfolio reported a gain of 7.1% for the year ended December 31, 2012 compared to a gain of 2.1% for the year ended December 31, 2011. The underwriting loss before general and administrative expenses for the year ended December 31, 2012 increased to $42.6 million due to unfavorable loss development, compared to an underwriting loss of $0.7 million for the year ended December 31, 2011. The adverse loss development of $40.7 million on our commercial motor contracts contributed to the increase in underwriting loss during 2012. The underwriting loss also included $9.7 million of underwriting loss (net of reinstatement premiums) on a 2012 catastrophe contract relating to super-storm Sandy and $9.0 million of underwriting loss on a catastrophe contract relating to the 2010 New Zealand earthquake. General and administrative expenses increased for the year ended December 31, 2012 to $17.5 million from $13.9 million for the year ended December 31, 2011, primarily as a result of higher personnel costs due to additional staff hired during 2012.
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, 2013, the fully diluted adjusted book value per share increased by $5.90 per share, or 26.8%, to $27.91 per share from $22.01 per share at December 31, 2012. For the year ended December 31, 2012, the fully diluted adjusted book value per share increased by $0.40 per share, or 1.9%, to $22.01 per share from $21.61 per share at December 31, 2011.
The increase of $57.9 million in the frequency gross premiums written in our personal property line was entirely related to the Florida homeowners' contracts. During 2013, we added a new relationship to our existing portfolio of Florida
homeowners' business which accounted for nearly half of the increase, while the remainder of the increase resulted from higher volume of written premiums assumed from our existing relationships.
The increases in premiums written for motor liability and motor physical damage lines were offset by decreases in other lines of business. The largest decrease related to personal lines which decreased $76.3 million as we novated certain of our Florida homeowners' contracts and their corresponding retroceded contracts which resulted in a $35.4 million reversal in both gross written premiums and ceded premiums. The remainder of the decrease in gross premiums written for the Florida homeowners' contracts was principally due to contracts which were renewed during 2012, at a lower quota share percentage than the expiring contracts, and to a lesser degree due to the termination of a contract during the fourth quarter of 2011. Our workers' compensation and general liability lines decreased by $11.8 million and $10.9 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 whereby we did not assume any further new business written by the ceding insurer. In addition, the financial line premiums decreased $12.8 million due to the commutation of a surety and trade credit contract, while the health line premiums decreased by $4.8 million primarily due to a contract we did not renew in 2012, and the professional liability line premiums decreased $3.5 million due to lower volume of underlying business written by our clients.
For the year ended December 31, 2013, the frequency net premiums earned increased by $85.3 million, or 19.2%, compared to the same period in 2012 primarily as a result of our motor liability, motor physical damage and personal property contracts, which increased net premiums earned by $89.9 million, $12.7 million and $16.6 million, respectively. The increase in motor liability line includes an increase of $101.7 million in private automobile premiums earned as a result of increased premium volume on the underlying business. The increase was partially offset by a decrease of $11.8 million in commercial motor premiums earned primarily due to a multi-line contract that was commuted during 2013. The increase in motor physical damage premiums earned was entirely related to the corresponding increase in the non-standard automobile contracts. The increase in personal property premiums earned related to Florida homeowners' insurance contracts for the same reasons discussed above for increase in premiums written.
Premiums written relating to severity contracts are earned over the contract period in proportion to the period of protection. For the year ended December 31, 2013, severity net premiums earned decreased $4.1 million, or 18.6%, compared to the same period in 2012. The decrease was primarily due to the reversal of $2.9 million of reinstatement premiums earned in conjunction with the elimination of loss reserves relating to super-storm Sandy. During 2013, we entered into new severity contracts which contributed $11.5 million in earned premiums, which was partially offset by reductions in earned premiums
For the year ended December 31, 2012, the frequency net premiums earned increased $84.2 million, or 23.4%, compared to 2011 primarily as a result of our motor liability and motor physical damage contracts which increased net premiums earned by $101.3 million and $47.1 million, respectively. The increase in motor liability line includes an increase of $132.6 million in private automobile premiums earned as a result of new non-standard automobile contracts entered into during late 2011 and early 2012, offset by a decrease of $31.3 million in commercial motor premiums earned as we canceled the multi-line contracts with commercial motor coverages during 2012. The increase in motor physical damage premiums earned was entirely related to the new non-standard automobile contracts. Our professional liability line reported a $6.9 million increase in premiums earned for the year ended December 31, 2012 as the premiums for the contracts written in late 2011 were fully earned during 2012.
Net losses incurred as a percentage of net 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 years ended December 31, 2013 and 2012, the overall loss ratios for our frequency business were 65.5% and 77.4%, respectively. The decrease in loss ratio was primarily due to the absence of any further adverse loss development on commercial motor liability contracts during 2013. The commercial motor liability contracts, in aggregate, reported favorable loss development during 2013. By comparison, the loss ratio had spiked in 2012 due to the increase in loss reserves booked during 2012 relating to the commercial motor liability contracts. The decrease in commercial motor liability loss ratios for the year ended December 31, 2013 were partially offset by adverse loss development relating to general liability contracts that are currently in run off.
For the years ended December 31, 2012 and 2011, the overall loss ratios for our frequency business were 77.4% and 65.7%, respectively. The increase in loss ratio was primarily attributable to an increase in loss reserves relating to the commercial motor liability contracts discussed above. Excluding the commercial motor liability contracts, the frequency loss ratios were 67.0% and 56.9% for the years ended December 31, 2012 and 2011, respectively. Notwithstanding the commercial motor liability contracts, our frequency loss ratios were negatively impacted by the change in mix of business as the Florida homeowners' earned premiums became a smaller portion of our overall business while non-standard automobile earned premiums accounted for a significantly greater portion of our business. Since the non-standard automobile line of business normally has a higher loss ratio than the Florida homeowners' contracts, our overall frequency loss ratio increased accordingly. Another factor contributing to the increase in the frequency loss ratio for the year ended December 31, 2012 was the higher loss ratios for some of our Florida homeowners' contracts impacted by sinkhole losses and damage caused by hurricane Isaac and tropical storm Debby during 2012.
For the year ended December 31, 2013, the decrease in ceded reserves of $17.6 million was primarily related to a commuted multi-line frequency contract and its related retroceded contract, which was also commuted simultaneously.
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.
For the year ended December 31, 2013, our net loss reserves on prior period contracts decreased by $6.1 million, which primarily related to the following:
$17.7 million of adverse loss development, net of retrocesssion recoveries, relating to general liability business. Loss reserves were increased 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; and
There were no other significant developments of prior period loss reserves during the year ended December 31, 2013.
$21.9 million of adverse loss development, net of retrocession recoveries, relating to commercial motor liability exposures that are currently in run-off on two multi-line quota share contracts. Since these contracts are less mature than our other commercial motor liability contract, there is more uncertainty as to the ultimate losses to be paid. As a result we have recorded loss reserves for the commercial motor portion of these contracts consistent with the loss ratio recorded for the more mature commercial motor contract. Loss reserves were increased on these contracts after extensive review of existing claims data, our previous experience with commercial motor liability business and actuarial analysis based on data received from third party claims handlers and the client;
$9.0 million of adverse loss development on a 2010 natural peril contract relating to the 2010 New Zealand earthquake. This adverse loss development resulted from revised estimated losses expected on the underlying policies by the ceding insurer, primarily due to complex engineering and structural requirements as well as building-code changes being implemented in New Zealand. The updated loss reserves resulted in a full limit loss of $10.0 million under this contract; and
There were no other significant developments of prior period loss reserves during the year ended December 31, 2012.
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.
There were no other significant developments of prior period loss reserves during the year ended December 31, 2011.
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:
For the year ended December 31, 2013, the higher severity acquisition cost ratio was related to acquisition costs on new severity contracts written during 2013. Additionally, the 2012 acquisition cost ratio was lower as a result of the reinstatement premiums earned relating to super-storm Sandy which incurred no corresponding incremental commissions or brokerage expense.
For the year ended December 31, 2012, the decrease in the frequency acquisition cost ratio was primarily related to the change in mix of business. The non-standard automobile contracts which carry lower ceding commissions than our other frequency contracts, accounted for approximately 46% of frequency earned premiums for the year ended December 31, 2012, compared to 6% for the same period in 2011. Likewise, the Florida homeowners' contracts which carry higher ceding commissions than our other frequency contracts, accounted for approximately 27% of our frequency earned premiums in 2012 compared to 44% in 2011. Therefore, the increase in the volume of personal automobile business combined with the decrease in Florida homeowners' business, resulted in a decrease in the overall frequency acquisition cost ratio. Additionally, due to the adverse loss development on a Florida homeowners' contract, the sliding scale ceding commissions were adjusted downward which also contributed to the decrease in acquisition costs.
For the year ended December 31, 2013, the increase in internal expenses was primarily related to an increase of $3.9 million in personnel costs (including share based compensation) due to higher accruals for underwriting related bonuses and an increase in head-count from the comparative period.
For the years ended December 31, 2013, 2012 and 2011, the gross investment return on our investment portfolio managed by DME Advisors (excluding investment advisor performance allocation) were 24.6%, 9.0% and 2.7%, respectively, and were comprised of the following:
Greenlight Re and Greenlight Capital Re are not obligated to pay any taxes in the Cayman Islands on either income or capital gains. We have been granted an exemption by the Governor-In-Cabinet from any taxes that may be imposed in the Cayman Islands for a period of 20 years, expiring on February 1, 2025.
From time to time, we incur indebtedness to our prime brokers to implement our investment strategy in accordance with our investment guidelines. As of December 31, 2013, we had borrowed $112.5 million (2012: $73.7 million) from our prime brokers in order to purchase investment securities. In accordance with our current investment guidelines, DME Advisors may use margin leverage up to 15% for Greenlight Re and up to 5% for GRIL for extended time periods and an aggregate of 30% for Greenlight Re and 20% for GRIL for periods not exceeding 30 days. At December 31, 2013, the margin borrowing from prime brokers for our investment portfolio was within these guidelines. The increase in amounts borrowed from prime brokers for investing was due to the increase in our exposure to long and short investments during the year ended December 31, 2013. In addition, as of December 31, 2013, we had borrowed $202.2 million (2012: $252.7 million) under term margin agreements from prime brokers to provide collateral for some of our letters of credit outstanding whereby we pledge certain investment securities to borrow cash from the prime brokers.
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, 2013, 85.9% (2012: 85.3%) 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), 12.3% (2012: 12.9%) was comprised of securities valued based on observable inputs other than quoted prices (Level 2) and 1.8% (2012: 1.8%) was comprised of securities valued based on non-observable inputs (Level 3).
At December 31, 2013, reinsurance balances receivable were $167.3 million compared to $173.2 million as of December 31, 2012, a decrease of $5.9 million, or 3.4%. The decrease in the reinsurance balances receivable was primarily attributable to a private passenger automobile contract which terminated on December 31, 2013. Since this contract ended on a cut-off basis, any uncollected and unearned premiums were reversed at December 31, 2013 resulting in a decrease in reinsurance balances receivable. The decrease was partially offset by the increase in premiums written during the year ended December 31, 2013.
At December 31, 2013, deferred acquisition costs (net of retrocession) decreased by $7.4 million, or 12.5%, compared to December 31, 2012. The decrease was primarily due to the corresponding decrease in unearned premium reserves which decreased $15.1 million, or 8.0% during the same period. The decrease in unearned premium reserves was principally due to the termination of a private passenger automobile contract on December 31, 2013. We evaluate the recoverability of deferred acquisition costs by determining if the sum of future earned premiums and anticipated investment income is greater than the expected future claims and expenses. If a loss is probable on the unexpired portion of policies in force, a premium deficiency loss is recognized. As of December 31, 2013, we believe that the deferred acquisition costs were fully recoverable and no premium deficiency loss was recorded.
Reserves for loss and loss adjustment expenses were comprised of the following table:
The decrease in frequency loss reserves as of December 31, 2013, is partially due to the commutation of a multi-line quota share contract during 2013, partially offset by the estimated losses incurred associated with the increase in premiums earned during the year ended December 31, 2013. See "Note 7. Loss and Loss Adjustment Expense Reserves" for a summary of changes in outstanding loss and loss adjustment expense reserves. The decrease in severity loss reserves as of December 31, 2013, is principally a result of reversal of IBNR loss reserves relating to super-storm Sandy. For most of the contracts written as of December 31, 2013, our risk exposure is limited by the fact that the contracts have defined limits of liability. 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 that relate to first dollar exposure, may not contain aggregate limits.
As of December 31, 2013, Greenlight Re was rated “A (Excellent)” with a stable outlook, while GRIL was rated "A- (Excellent)" with a stable outlook, each 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 or withdraws either of our ratings, we could be severely limited or prevented from writing new reinsurance contracts, which would significantly and negatively affect our ability to implement our business strategy. 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.
Our sources of funds consist primarily of premium receipts (net of brokerage and ceding commissions), investment income (net of advisory compensation and investment expenses), including realized gains, and other income. We use cash from our operations to pay losses and loss adjustment expenses, profit commissions and general and administrative expenses. Substantially all of our funds, including shareholders’ capital, net of funds required for cash liquidity purposes, are invested by DME Advisors in accordance with our investment guidelines. As of December 31, 2013, approximately 89% of our long investments were comprised of publicly-traded equity securities and gold bullion which can be readily liquidated to meet current and future liabilities. As of December 31, 2013, the majority of our investments were valued based on quoted prices in active markets for identical assets (Level 1). Given our value-oriented long and short investment strategy, if markets are distressed we would expect the liability of the short portfolio to decline. Any reduction in the liability would cause our need for restricted cash to decrease and thereby free up cash to be used for any purpose. Additionally, since the majority of our invested assets are liquid, even in distressed markets, we believe securities can be sold or covered to generate cash to pay claims. Since we classify our investments as "trading," we book all gains and losses (including unrealized gains and losses) on all our investments (including derivatives) as net investment income in our consolidated statements of income for each reporting period.
For the years ended December 31, 2013, 2012 and 2011, the net cash used in operating activities was $92.7 million, $50.6 million and $25.9 million, respectively. Included in the net cash used in operating activities were investment related expenses (such as investment advisor compensation, and net interest and dividend expenses) of $97.9 million, $53.1 million, $34.0 million for the years ended December 31, 2013, 2012 and 2011, respectively. Therefore, excluding the investment related expenses, the net cash provided by our operating activities was $5.2 million, $2.5 million and $8.1 million for the years ended December 31, 2013, 2012 and 2011, respectively. During 2013, we increased the net cash provided by our operating activities (excluding investment related expenses) compared to the prior year as a result of cash generated from our underwriting activities. However, compared to 2011, our net cash from operating activities (excluding investment related expenses) has decreased for each of the last two years primarily as a result of claims being paid on our older underwriting contracts that have matured or are currently in run off. Additionally, the decrease has been in part due to the growth in private passenger automobile contracts for which claims are typically paid over a shorter period than our other contracts. For the years ended December 31, 2013 and 2012, the private passenger automobile contracts (including motor physical damage) made up a larger portion of our business (58.4% and 55.3% of gross written premiums, respectively, compared to 9.9% for 2011). As a result more claims were paid over a shorter period, therefore, decreasing the amount of cash generated from operating activities. Generally, in a given period if the premiums collected are sufficient to cover claim payments, we would generate cash from our underwriting activities. Due to the inherent nature of our underwriting portfolio, claims are often paid several months or even years after the premiums are collected. The cash generated from underwriting activities, however, may be volatile from period to period depending on the underwriting opportunities available.
We generated $74.0 million from investing activities for the year ended December 31, 2013, partially as a result of a decrease in cash collateral posted relating to the letters of credit issued and partially from the disposition of financial contracts.There were no significant cash flows related to financing activities during the year ended December 31, 2013.
As of December 31, 2013, we believe we have sufficient cash flow from operations to meet our foreseeable liquidity requirements. We expect that our operational needs for liquidity will be met by cash, funds generated from underwriting activities and investment income, including realized gains. As of December 31, 2013, we had no plans to issue debt and expect to fund our operations for the next twelve months from operating cash flow. However, we cannot provide assurances that in the future we will not incur indebtedness to implement our business strategy, pay claims or make acquisitions.
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, 2013, Greenlight Re and GRIL both exceeded the regulatory minimum capital requirements.
As of December 31, 2013, 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 premium unless appropriate measures are in place from 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, 2013, we had four letter of credit facilities with an aggregate capacity of $760.0 million (2012: $760.0 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, 2013, an aggregate amount of $379.1 million (2012: $416.5 million) in letters of credit was issued under these facilities. Under these facilities, we provide collateral that may consist of equity securities or cash and cash equivalents. At December 31, 2013, total equity securities and cash and cash equivalents with a fair value in the aggregate of $410.3 million (2012: $441.7 million) were pledged as security against the letters of credit issued.
Each of the 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 for the year ended December 31, 2013.
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. 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. In order to provide us with additional flexibility and timely access to public capital markets should we require additional capital for working capital, capital expenditures, acquisitions and other general corporate purposes, in June 2012, we renewed our Form S-3 registration statement, which expires in June 2015 unless renewed. We did not make any significant commitments for capital expenditures during the year ended December 31, 2013.
On April 28, 2010, our shareholders approved an amendment to our stock incentive plan to increase the number of Class A ordinary shares available for issuance from 2.0 million to 3.5 million. As of December 31, 2013, there were 961,587 Class A ordinary shares available for future issuance.
As of December 31, 2013, $1,111.7 million of securities sold, not yet purchased, were secured by $1,111.7 million of restricted cash held by prime brokers to cover obligations relating to securities sold, not yet purchased. These amounts are not included in the contractual obligations table above because there is no maturity date for securities sold, not yet purchased, and their maturities are not set by any contract and as such their due dates cannot be estimated.
On January 1, 2008, we entered into an agreement wherein the Company and DME Advisors agreed to create a joint venture for the purposes of managing certain jointly-held assets. This agreement was amended effective August 31, 2010 to include GRIL as a participant to the agreement. Effective January 1, 2014, the agreement was amended and restated to replace DME Advisors with DME Advisors, LLC ("DME") as the participant to the joint venture (the "venture agreement"). Simultaneously, the Company, its reinsurance subsidiaries and DME entered into a separate investment advisory agreement with DME Advisors (the "advisory agreement"). The term of the venture agreement and the advisory agreement is January 1, 2014 through December 31, 2016, with automatic three-year renewals unless 90 days prior to the end of the then current term, either DME notifies the other participants of its desire to terminate the venture agreement or any other participant notifies DME of its desire to withdraw from the venture agreement.
Pursuant to the venture agreement, we pay DME Advisors a monthly management fee of 0.125% on our share of the assets managed by DME Advisors and we pay DME a performance allocation equal to 20% of the net profit, calculated per annum, of the Company’s share of the capital account managed by DME Advisors, subject to a loss carry forward provision. The loss carry forward provision allows DME to earn a reduced performance allocation of 10% of profits in any year 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, 2013, $54.2 million of performance allocation was calculated at the 20% rate and included in net investment income.