The following is a discussion and analysis of our results of operations for the years ended December 31, 2018, 2017 and 2016 and financial condition as of December 31, 2018 and 2017. The following discussion should be read in conjunction with the audited consolidated financial statements and accompanying notes, which appear elsewhere in this filing.
We aim to complement our underwriting results with a non-traditional investment approach in order to achieve higher rates of return over the long term than reinsurance companies that employ more traditional investment strategies. We manage our investment portfolio according to a value-oriented philosophy, in which our investment advisor takes long positions in perceived undervalued securities and short positions in perceived overvalued securities.
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 2018, this pressure continues along with an 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. We believe that throughout the industry there is an ongoing focus on lowering internal expenses as a source of efficiency.
From time to time we may purchase retrocessional coverage to manage our overall exposure, reduce our net liability on individual risks, to obtain additional underwriting capacity or to balance our underwriting portfolio. Historically, our retrocession activities have constituted a small part of our overall business, but recently we have increased our use of retrocessional coverage and we may continue to do so in the future.
We have successfully begun to expand the classes of business that we underwrite and the client base that we support, as we believe they will generate favorable returns on equity over the long term. In some cases, this expansion involves participation where we are not the lead underwriter.
Casualty business includes general liability, motor liability, professional liability and workers’ compensation coverage. The Company’s multi-line business predominantly relates to casualty reinsurance and as such all multi-line business is included within the casualty category. Casualty business generally has losses reported and paid over a longer period of time than property business.
Income from our investments is primarily composed of income generated by the Joint Venture and SILP, which in turn is generated by interest income, dividends, net realized gains and losses, and changes in unrealized gains and losses on investment securities. We also derive interest income from money market funds and notes receivable.
In addition, we may from time to time derive other income from gains on deposit accounted contracts, fees generated from advisory services and fees relating to overrides, profit commissions and the early termination of contracts.
The extent of our loss and loss adjustment expenses is 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 actuarially determined estimate of losses incurred, 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.
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.
Certain contracts provide for reinstatement premiums in the event of a loss. Reinstatement premiums are written and earned when a triggering loss event occurs.
Assessing whether 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 to merit reinsurance accounting treatment, the premium we receive is reported as a deposit liability. Similarly, for ceded contracts that do not transfer sufficient risk to merit reinsurance accounting, the premium we pay 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 operations as other income or expense.
The fair values of our investments in commodities are based on the commodity’s last reported price on the balance sheet date as reported by a recognized commodities exchange. Our investments in private and unlisted equity securities and limited partnerships are generally carried at fair value, based on broker or market maker quotes, or based on management’s assumptions developed from available information, using the services of our investment advisor including the most recent net asset values obtained from the managers of those underlying investments. Private and unlisted equity funds also include private equity securities that do not have readily determinable fair values. The carrying values of these private equity securities are determined based on the original cost, reviewed for impairment and any subsequent changes in the valuation based on periodic third party valuations or recent observable transactions of those securities. Investments in unlisted equity funds are valued based on unadjusted net asset values reported by the funds’ managers.
Loss and Loss Adjustment Expense Reserves. The process of estimating our loss and LAE reserves involves a considerable degree of judgment and our estimates as of any given date are inherently uncertain. Estimating loss and LAE reserves requires us to make assumptions regarding reporting and development patterns, frequency and severity trends, claims settlement practices, potential changes in legal environments, inflation, loss amplification, foreign exchange movements and other factors. These estimates and judgments are based on numerous considerations and are often revised as: (i) we receive changes in loss amounts reported by ceding companies and brokers; (ii) we obtain additional information, experience or other data; (iii) new or improved methodologies are developed; or (iv) laws change.
Time lags are inherent in loss reporting, especially in the case of excess-of-loss reinsurance contracts. The combined characteristics of low claim frequency and high claim severity make the available data more volatile and less useful for predicting ultimate losses. In the case of proportional contracts, we rely on an analysis of a contract’s historical experience, industry information and the professional judgment of underwriters in estimating reserves for these contracts. In addition, we utilize ultimate loss ratio forecasts when reported by cedents and brokers, which are normally subject to three to six month lag for proportional business. Due to the degree of reliance that we place on ceding companies for claims reporting, our reserve estimates are highly dependent on ceding companies’ management judgment. Furthermore, during the loss settlement period, which may last several years, additional facts regarding individual claims and trends often will become known and case law may change, which can affect ultimate expected losses.
Since we rely on ceding company estimates of case and IBNR reserves in the process of establishing our own loss and LAE reserves, we maintain certain procedures designed to mitigate the risk that such information is incomplete or inaccurate. These procedures may include: (i) comparisons of expected premiums to reported premiums, which helps us to identify delinquent client periodic reports; (ii) ceding company audits to identify inaccurate or incomplete reporting of claims and ensure that claims are actively and appropriately managed in line with agreed protocols and settlement authority limits; and (iii) underwriting reviews to ascertain that the losses ceded are covered as provided under the contract terms. In addition, each subsequent year of loss experience with a given cedent provides additional insight into the accuracy and timeliness of previously reported information. These procedures are incorporated in our internal controls process on an ongoing basis and are regularly evaluated and amended as market conditions, risk factors, and unanticipated areas of exposure develop.
Please refer to Note 8 of our consolidated financial statements for a more detailed explanation of our loss reserving methodology and the loss development tables by accident year as required under U.S. GAAP.
Bonus Accruals. Under the Company’s bonus program, most 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
Share-Based Payments. We have established a stock incentive plan for directors, employees and consultants. We 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, 2018, we have assumed a forfeiture rate of 7.0% (2017: 6.0% and 2016: 6.0%) for restricted stock awards and RSUs granted, in order to reflect the anticipated forfeitures and more accurately record the share-based compensation expense.
Basic adjusted book value per share is considered a non-GAAP financial measure because it excludes from the total equity the non-controlling interest in related party joint venture. Fully diluted adjusted book value per share is also considered a non-GAAP financial measure and represents basic adjusted book value per share combined with the impact of dilution of all in-the-money stock options and RSUs issued and outstanding as of any period end. In addition, the fully diluted adjusted book value per share includes the dilutive effect, if any, of ordinary shares to be issued upon conversion of the convertible notes. We adjust the total equity by excluding the non-controlling interest in related party joint venture because it does not reflect the equity attributable
Our primary financial goal is to increase the long-term value in fully diluted adjusted book value per share.
One way that we evaluate the Company’s underwriting performance is through the measurement of net underwriting income (loss). We do not use premiums written as a measure of performance. Net underwriting income (loss) is a performance measure used by management as it measures the underlying fundamentals of the Company’s underwriting operations. We believe that the use of net underwriting income (loss) enables investors and other users of the Company’s financial information to analyze our performance in a manner similar to how management analyzes performance. Management also believes that this measure follows industry practice and allows the users of financial information to compare the Company’s performance with its those of our industry peer group.
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 a portion of general and administrative expenses. Net underwriting income (loss) is calculated as net premiums earned, plus other income (expense) related to underwriting activities, less net loss and loss adjustment expenses, less acquisition costs, and less underwriting expenses. The measure excludes, on a recurring basis: (1) net investment income (loss); (2) foreign exchange gains or losses; (3) corporate general and administrative expenses; (4) interest expense and other income (expense) not related to underwriting, (5) income taxes and (6) income attributable to non-controlling interest. We exclude total investment related income or loss and foreign exchange gains or losses as we believe these items are influenced by market conditions and other factors not related to underwriting decisions. We exclude corporate 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 could hinder the analysis of trends in our underwriting operations. We include other
* The net financial impact of changes in the estimate of losses incurred in prior years, which incorporates earned reinstatement premiums assumed and ceded, and adjustments to assumed and ceded acquisition costs, was $7.4 million, $31.5 million, and $28.8 million in 2018, 2017 and 2016, respectively.
For the year ended December 31, 2018, the net loss attributable to the Company was $350.1 million, compared to the net loss attributable to the Company of $45.0 million reported for the year ended December 31, 2017. As a result of these losses, our fully diluted adjusted book value per share decreased by 41.0% and 5.0% during 2018 and 2017, respectively.
The developments that most significantly affected our financial performance during 2018, on a comparative basis to 2017, are provided below:
•Underwriting loss - The underwriting loss for the 2018 fiscal year was $14.4 million, and reflected the combined financial impact of hurricanes Florence and Michael, California wildfires and typhoon Jebi totaling $18.9 million. By comparison, the underwriting loss for the year ended December 31, 2017 was $53.6 million. The net financial impact of the 2017 catastrophe events, which included hurricanes Harvey, Irma and Maria, earthquakes in Mexico and California wildfires, was $42.9 million. Additionally, the net financial impact of prior year loss reserve development amounted to $7.4 million of underwriting loss during 2018, as compared to $31.5 million of net financial impact from adverse reserve development recognized during 2017.
For the year ended December 31, 2017 the net loss attributable to the Company was $45.0 million, compared to net income attributable to the Company of $44.9 million reported for the year ended December 31, 2016. The fully diluted adjusted book value per share (decreased) increased by (5.0)% and 5.5% during 2017 and 2016, respectively.
The developments that most significantly affected our financial performance during 2017, on a comparative basis to 2016, are provided below:
Effective from 2018, we have modified how we present the discussion and analysis of our reinsurance business. Instead of using the previous categories of “frequency” and “severity”, we now analyze our reinsurance business based on “property”, “casualty” and “other” (please also refer to “Segments” above, for further details). We believe the new categories will provide more meaningful information to our shareholders and investors and will be more relevant as our underwriting portfolio continues to develop and evolve.
As a result of our underwriting philosophy, our premiums written may vary significantly from one period to the next. Additionally, the mix of premiums written between property, casualty and other business may vary from period to period depending on the specific market opportunities that we pursue.
For the years ended December 31, 2018, 2017 and 2016, retrocessional premiums ceded were $102.8 million, $56.6 million and $10.0 million, respectively. For the year ended December 31, 2018, the increase in ceded premiums compared to the same period in 2017 was primarily due to quota share retrocession contracts entered into during 2017 and renewed in 2018 in order to cede a portion of our private passenger automobile exposure. Similarly, for the year ended December 31, 2017, the increase in ceded premiums compared to the same period in 2016 was primarily due to the retrocession contracts relating to managing our automobile exposure.
The movement in net premiums written was the net result of the increases or decreases in gross premiums written and premiums ceded as explained in the preceding paragraphs.
Our loss ratio fluctuates based on the mix of business, and any favorable or adverse loss development in our portfolio. The below table summarizes the loss ratios for the years ended December 31, 2018, 2017 and 2016:
See “Part II, Item 7. Summary of Critical Accounting Estimates, Loss and Loss Adjustment Expense Reserves.” and “Note 8. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES in our Notes to the consolidated financial statements” for additional discussion of our reserving techniques and prior year development of net claims and claim expenses.
The changes in the acquisition cost ratios were attributable to the following:
For the year ended December 31, 2018, included in “investment advisor compensation on joint venture” in the above table was $11.2 million (2017: $17.8 million, 2016: $16.3 million) relating to management fees paid to DME Advisors in accordance with the advisory agreement with DME Advisors. For the year ended December 31, 2018, the investment loss from SILP included management fees paid by SILP to DME Advisors of $3.1 million, and is included in the caption, “Income (loss) from investments in related party investment fund” in the Company’s consolidated statements of operations.
Investment advisor compensation on joint venture also includes performance compensation. For the year ended December 31, 2018, no performance compensation was recorded for the period due to the negative investment return (2017: $2.1 million, 2016: $8.2 million).
Due to the investment loss for the year ended December 31, 2018, the performance compensation to DME II for subsequent years is reduced to 10% of net profits until all losses have been recouped and an additional amount equal to 150% of
the loss is earned. As of December 31, 2018, the reduced performance allocation of 10% is expected to be applied to 198.1% of future net investment returns before reverting to 20%.
the valuation allowance) will be fully realized in the future. The Company has not taken any other tax positions that management believes are subject to uncertainty or that are reasonably likely to have a material impact to the Company, GRIL or Verdant.
The following table provides the ratios categorized as Property, Casualty and Other:
The combined ratio measures the total profitability of our underwriting operations and does not take into account corporate expenses, interest expense, total investment related income or loss and any foreign exchange gain or loss. Given the nature of our unique underwriting strategy, we expect that our combined ratio may also be volatile from period to period.
Total Investments; Financial Contracts Receivable; Financial Contracts Payable; Due to Related Party Investment Fund; Due to Prime Brokers and Other Financial Institutions
Prior to September 1, 2018, through the Joint Venture, we held various financial instruments, which included listed and unlisted equities, corporate and sovereign debt, commodities and derivatives. Effective September 1, 2018, we transferred a majority of our investments into SILP (see Note 3 of the consolidated financial statements). SILP issued limited partner interests proportionate to and based on the net asset value transferred. At December 31, 2018, certain investments which had not transferred legal ownership to SILP remained in the Joint Venture and were included in our consolidated balance sheet. Pursuant to the Participation Agreement, these assets had transferred the economic rights to SILP and we had a binding obligation to transfer the legal title of these assets to SILP. This obligation was $9.6 million as of December 31, 2018 and is reflected on the consolidated balance sheet under the caption “Due to related party investment fund”. Substantially all of the remaining investments were transferred from the Joint Venture to SILP on January 2, 2019.
Our investment in SILP has been presented on the consolidated balance sheets as an investment in a related party investment fund and included in total investments. The total investments reported in the consolidated balance sheets as of December 31, 2018, was $283.9 million, compared to $1,363.0 million as of December 31, 2017, a decrease of $1,079.1 million, or 79.2%. The decrease was primarily related to restructuring of our investments, including optimizing our collateral and de-leveraging the investment portfolio by an amount approximating our net loss reserves.
As of December 31, 2018, there were no financial contracts receivable and financial contracts payable since all derivatives were transferred to SILP. Similarly, as a result of the investment restructuring, we had no amounts due to prime brokers and other financial institutions as of December 31, 2018.
Our restricted cash decreased by $818.8 million, or 54.4%, from $1,503.8 million at December 31, 2017 to $685.0 million, as of December 31, 2018, primarily due to the transfer of derivatives and short investments from the Joint Venture to SILP as discussed above. As of December 31, 2018, the restricted cash and cash equivalents are solely related to trusts and letters of credits issued to our ceding insurers of $685.0 million (December 31, 2017: $551.7 million).
Reserves for loss and loss adjustment expenses were composed of the following:
During the year ended December 31, 2018, the total loss and loss adjustment expense reserves increased by $18.3 million, or 3.9% to $482.7 million from $464.4 million as of December 31, 2017. The change in property reserves was primarily due to reserves set up relating to 2018 catastrophes and additional reserves from increased private passenger automobile premiums earned, partially offset by favorable loss development relating to the 2017 hurricanes and favorable loss development on prior period property contracts. The increase in casualty reserves was primarily related to an increase in motor liability and multi-line business and partially offset by the restructuring of a professional liability contract. The decrease in other reserves was partially due to favorable loss development on mortgage insurance contracts, as well as a mortgage insurance contract commuted during the period.
During the year ended December 31, 2018, the total loss and loss adjustment expenses recoverable increased by $14.2 million, or 48.4%, to $43.7 million from $29.5 million as of December 31, 2017. The increase primarily related to retroceded private passenger automobile contracts. See Note 9 of the accompanying consolidated financial statements for details on the credit risk of the retrocessionaires.
For most of our contracts written as of December 31, 2018, 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 property business, and to a lesser extent our casualty and other business, include certain contracts that contain or may contain natural peril loss exposure.
We estimate catastrophe loss exposure 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
As of January 1, 2019, our estimated net PML exposure (net of retrocession and reinstatement premiums) at a 1-in-250 year return period for a single event and in aggregate was $91.5 million and $117.5 million, respectively. The following table provides the PML for single event loss exposure and aggregate loss exposure to natural peril losses for each of the peak zones as of January 1, 2019:
The additional paid-in capital decreased by $3.6 million due to share repurchases for the year ended December 31, 2018, partially offset by an increase related to the issuance of senior unsecured convertible notes and share-based compensation for the period.
As of December 31, 2018, 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.
As of December 31, 2018, we believe we have sufficient cash flow from operating and investing activities 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 withdrawals from SILP, realized gains and the disposition of other investment securities. As of December 31, 2018, we expect to fund our operations for the next twelve months from operating cash flow. However, we may explore various financing alternatives, including capital raising alternatives, to fund our business strategy, improve our capital structure, increase surplus, pay claims or make acquisitions. We can provide no assurances that transactions will occur or, if so, as to the terms of such transactions.
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
As of December 31, 2018, 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, 2018, we had two letter of credit facilities available with an aggregate capacity of $414.9 million (2017: $600.0 million). See Note 16 of the accompanying consolidated financial statements for details on the available facilities. We provide collateral to cedents in the form of letters of credit and trust arrangements. As of December 31, 2018, the aggregate amount of collateral provided to cedents under such arrangements was $671.6 million (2017: $566.4 million). As of December 31, 2018, the letters of credit and trust accounts were secured by restricted cash and cash equivalents with a total fair value of $685.0 million (2017: secured by equity and debt securities as well as restricted cash and cash equivalents totaling $578.3 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, 2018.
Our capital structure currently consists of senior convertible notes and 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 additional material indebtedness in the ordinary course of our business. 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 July 2021, unless renewed. In addition, as noted above, we may explore various financing alternatives, although there can be no assurance that additional financing will be available on acceptable terms when needed or desired. We did not make any significant commitments for capital expenditures during the year ended December 31, 2018.
On April 25, 2018 the Board of Directors adopted a new share repurchase plan for a one year period, effective July 1, 2018, which expires on June 30, 2019 unless renewed by the Board of Directors. The renewed plan increased the number of shares that may be repurchased to 2.5 million Class A ordinary shares or securities convertible into Class A ordinary shares in the open market, through privately negotiated transactions or Rule 10b5-1 stock trading plans. The Company is not required to repurchase any of the Class A ordinary shares and the repurchase plan may be modified, suspended or terminated at the election of our Board of Directors at any time without prior notice. During the year ended December 31, 2018, 1,180,000 Class A ordinary shares were repurchased by the Company at an average price of $13.98 per share.
The following table shows our aggregate contractual obligations as of December 31, 2018 by time period remaining:
(4) Due to the nature of our reinsurance operations, the amount and timing of the cash flows associated with our reinsurance contractual liabilities will fluctuate, perhaps materially, and, therefore, are highly uncertain.
Greenlight Re has entered into lease agreements for office space in the Cayman Islands. The leases expired on June 30, 2018 and Greenlight Re has the option to renew the leases for a further five year term. The Company is in negotiations with the lessor for renewal of the lease and meanwhile has agreed to a monthly lease until June 30, 2019.
On September 1, 2018, SILP entered into a IAA with DME Advisors that entitles DME Advisors to a monthly management fee equal to 0.125% (1.5% on an annual basis) of each limited partner’s Investment Portfolio, as provided in the SILP LPA. The IAA has an initial term ending on August 31, 2023 subject to automatic extension for successive three-year terms. For the year ended December 31, 2018, our investment loss from SILP included management fees paid by SILP to DME Advisors of $3.1 million. Pursuant to the SILP LPA, DME II is entitled to a performance allocation equal to 20% of the net profit, calculated per annum, of each limited partner’s share of the capital account managed by DME Advisors, subject to a loss carry forward provision. DME II is not entitled to earn a performance allocation in a year in which SILP incurs a loss. The loss carry forward provision contained in the SILP LPA allows DME II to earn reduced performance allocation of 10% of net profits in any year subsequent to the year in which the capital accounts of the limited partners incur a loss, until all losses are recouped and an additional amount equal to 150% of the loss is earned. During the year ended December 31, 2018, the loss carry forward amount from the Joint Venture, adjusted for withdrawals relating to our loss reserves, was transferred to SILP.
Pursuant to the venture agreement, we were obligated to pay DME Advisors a monthly management fee of 0.125% on our share of the assets managed by DME Advisors and we provided 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 allowed DME to earn a reduced performance allocation of 10% of profits in any year subsequent to the year in which the investment account incurred a loss, until all the losses are recouped and an additional amount equal to 150% of the aggregate investment loss is earned. DME was not entitled to earn a performance allocation in a year in which the investment portfolio incurred a loss. For the year ended December 31, 2018, performance allocation of nil and management fees of $11.2 million were included in net investment loss. The venture agreement was terminated on January 2, 2019.
We have no obligations, assets or liabilities, other than those derivatives in our investment portfolio that are disclosed in the consolidated financial statements, which would be considered off-balance sheet arrangements. Other than our investments in SILP and AccuRisk Holdings LLC (see Note 4 of the consolidated financial statements), we do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.