The following table sets forth our selected historical consolidated statement of income data for the fiscal years ended December 31, 2012, 2011, 2010, 2009 and 2008, as well as our selected consolidated balance sheet data as of December 31, 2012, 2011, 2010, 2009 and 2008, 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 we are currently in a gradually hardening insurance market, but due to the poor economic conditions and industry over capitalization, rate increases will not significantly exceed loss trends. The reinsurance industry remains over capitalized and competitive with many sectors continuing to operate at levels which we believe are economically irrational. However, significant price increases could occur if financial and credit markets experience adverse shocks that result in the loss of capital of insurers and reinsurers, or if there are major catastrophic events, especially in North America.
Currently our reinsurance portfolio is principally concentrated in four areas: Florida homeowners; U.S. employer health stop loss; catastrophe retrocession and 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. However, we anticipate the reinsurance pricing in this market becoming competitive. Property catastrophe retrocession pricing remained stable during the January renewal season despite alternative reinsurance capacity continuing to increase in this part of the market limiting new business opportunities. Employer stop loss and private passenger automobile are stable at what we believe are profitable levels.
Frequency business is generally characterized as contracts containing a potentially large number of small losses emanating from multiple events. Clients generally buy this protection to increase their own underwriting capacity and typically select a reinsurer based upon the reinsurer’s financial strength, service and expertise. We expect the results of frequency business to be less volatile than those of severity business from period to period due to greater predictability. We also expect that over time the profit margins and return on equity of our frequency business will be lower than those of our severity business.
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
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 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 applicable to losses incurred up to the reporting date are established, with no allowance for the establishment of loss reserves to account for expected future loss events.
For most of the contracts we write, 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.
For all non-natural peril business, we initially reserve every individual contract to the expected loss and loss expense ratio that we calculated when we originally priced the business. In our pricing analysis, we typically utilize a significant amount of information both from the individual client and from industry data. Where practical, we compare historic reserving data that we receive from our client, if any, to publicly available financial statements of the client in an effort to identify, confirm and monitor the accuracy and completeness of the data. We require each of our clients to provide loss information for each reporting period, which, depending on the contract, could be monthly or quarterly. The loss information required depends on the terms and conditions of each contract and may include many years of history. Depending on the type of business underwritten, we are entitled to receive client and industry information on historical paid losses, incurred losses, number of open claims, number of closed claims, number of total claims, listings of individual large losses, earned premiums, policy count, policy limits underwritten, exposure information and rate change information. We may also receive information by class or subclass of business. If we do not receive reserving data from a client, we rely on industry data, as well as the judgment and experience of our underwriters and actuaries.
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.
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.
Basic adjusted book value per share is a non-GAAP measure as it excludes the non-controlling interest in a 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.
For the year ended December 31, 2012, the increase in severity premiums of $5.8 million, or 35.1%, compared to the same period in 2011 was principally due to additional premiums of $3.5 million written during the fourth quarter of 2012 in order to reinstate coverage limit on a catastrophe contract that incurred a full limit loss from super-storm Sandy. Reinstatement premiums and additional premiums based on contractual terms are recognized as written premiums at the time losses are recorded, and if required, adjusted in future periods based on changes in loss estimates. There were no reinstatement or additional premiums recorded during the year ended December 31, 2011. The remainder of the increase in severity premiums related to the renewal of our existing multi-line property catastrophe contracts with higher aggregate limits as well as higher pricing. During the year ended December 31, 2012, we restructured some of our property catastrophe contracts and increased our limits of coverage while also increasing the thresholds for losses entering our layers of coverage. As a result, while direct comparison of pricing is not possible, overall we obtained slightly higher prices on renewing contracts that had no claims reported during the prior year and significantly higher prices on catastrophe contracts that experienced losses during 2011.
For the 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 written.
We entered into retrocessional contracts with ceded premiums of $(24.3) million, $46.9 million and $12.0 million for the years ended December 31, 2012, 2011 and 2010, respectively. For the year ended December 31, 2012, our ceded premiums decreased by $71.2 million, to negative $24.3 million (meaning premiums ceded to retrocessionaires were returned) from $46.9 million for the same period in 2011. The decrease in premiums ceded was principally due to the novation of the Florida homeowners' personal lines contracts as explained above. For the year ended December 31, 2011, our premiums ceded increased by $34.9 million, to $46.9 million from $12.0 million for the same period in 2011. The increase in premiums ceded 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.
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, 2012, severity net premiums earned increased $2.7 million, or 13.9%, compared to the same period in 2011. The increase was primarily due to $2.6 million of reinstatement premiums earned on a catastrophe contract that incurred a full limit loss from super-storm Sandy. Additionally, the unearned portion of the original premium ($0.8 million) on this contract was also earned immediately upon occurrence of the full limit loss. There were no reinstatement or additional premiums recorded during the year ended December 31, 2011.
For the year ended December 31, 2011, the frequency earned premiums increased $101.4 million, or 39.2% compared to the 2010 year. The personal lines contracts accounted for $72.7 million of the increase primarily related to the new Florida homeowners’ property insurance contracts written during 2010 and 2011. Since the new 2010 contracts incepted in the middle
For the year ended December 31, 2012, the total losses incurred on frequency contracts increased by $107.3 million, or 45.3%, partially due to the 23.4% increase in frequency earned premiums discussed above, and partially due to adverse loss development on contracts containing commercial motor liability coverages. During 2012, the updated loss data relating to these contracts indicated adverse loss development due to several large losses and overall higher settlement amounts expected on open claims.
For the years ended December 31, 2012 and 2011, the loss ratios for our severity business were 101.2% and 25.4%, respectively. The losses incurred on severity contracts of $22.5 million for the year ended December 31, 2012, included $15.0 million of loss reserves relating to super-storm Sandy, and an increase of $9.0 million of loss reserves relating to the 2010 New Zealand earthquake. The loss from super-storm Sandy relates to one contract and has been reserved at the full limit of $15.0 million. The loss relating to the 2010 New Zealand earthquake was increased to the full limit of $10.0 million during 2012 based on the expectation of higher insured losses due to changes in building codes and engineering requirements for rebuilding in New Zealand. Partially offsetting these increases were the elimination of loss reserves of $0.7 million and $0.8 million on a
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 commercial motor and general liabilities.
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.
$18.8 million of adverse loss development on a commercial motor liability contract that has been in run off since 2010. The increase in loss reserves was based on updated loss data received from the third party claims adjuster and the client, as well as our quarterly analysis of the remaining open claims and the reserves required to settle and resolve all remaining claims and any new reported claims;
$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;
$4.6 million of adverse loss development, net of retrocession recoveries, on prior period Florida homeowners' contracts due to a combination of an increase in attritional losses as well as an increase in sinkhole losses based on updated information received from the ceding insurer during the period as well as a reassessment in connection with our quarterly reserve analysis. These contracts contain sliding scale commission adjustments which offset some of the adverse loss development. Therefore, $4.6 million of adverse loss development, was offset by a reduction of $1.3 million in commission expenses.
There were no other significant developments of prior period reserves during the year ended December 31, 2012.
There were no other significant developments of prior period reserves during the year ended December 31, 2011.
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;
Favorable loss development of $1.3 million in aggregate, on specialty health contracts relating to 2007 and 2008 years, based on data received from the clients and a reassessment in connection with our quarterly reserve analysis;
For the year ended December 31, 2012, the decrease in the frequency acquisition cost ratio 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, 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. 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.
For the year ended December 31, 2011, the decrease in severity acquisition cost and the severity acquisition cost ratio was primarily due to a multi-year professional liability excess of loss contract which expired during 2010 and was not renewed. During the year end December 31, 2010, we recorded a profit commission on this contract due to favorable loss development, which caused the acquisition cost expense and acquisition cost ratio to increase for the 2010 year. Subsequently, for the year ended December 31, 2011, no further profit commission was accrued resulting in a decrease in acquisition cost for the 2011 year. Under the terms of the contract, we withhold the profit commission which accrues interest until it is paid. The interest on the profit commission is included in acquisition cost expense since it is an expense directly related to this contract.
Investment returns are calculated monthly and compounded to calculate the annual returns. The resulting actual investment income may vary depending on cash flows into or out of the investment account. For the year ended December 31, 2012, investment income, net of all fees and expenses, resulted in a gain of 7.1% on our investment portfolio. This compares to a gain of 2.1% and a gain of 11.0% reported for the years ended December 31, 2011 and 2010, respectively. We expect our investment income (including realized and unrealized gains / losses) to fluctuate from period to period. Fluctuations in realized and unrealized gains / losses are a function of both the market performance of the securities held in our investment portfolio, and the timing of additions to and dispositions of securities in our investment portfolio. Our investment advisor uses its discretion over when a gain (or loss) is realized on a particular investment.
We believe that net investment income (which includes both realized and unrealized gains / losses) is the best way to assess our investment performance, rather than analyzing the realized gains / losses and unrealized gains / losses separately.
Our investment advisor, DME Advisors, and its affiliates manage and expect to manage other client accounts besides ours, some of which have investment objectives similar to ours. To comply with Regulation FD, our investment returns are posted on our website on a monthly basis. Additionally, our website (www.greenlightre.ky) provides the names of the largest disclosed long positions in our investment portfolio as of the last business day of the month of the relevant posting, as well as information on our long and short exposures. DME Advisors may choose not to disclose certain positions to its clients in order to protect its investment strategy. Therefore, we present on our website the largest long positions and exposure information as disclosed by DME Advisors or its affiliates to us and their other clients.
We 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.
The acquisition cost ratio is calculated by dividing acquisition costs by net premiums earned. This ratio demonstrates the higher acquisition costs incurred for our frequency business than for our severity business.
The internal expense ratio is the ratio of all general and administrative expenses to net premiums earned.
Our long investments (including financial contracts receivable) reported in the consolidated balance sheets as of December 31, 2012, were $1,200.7 million compared to $1,053.8 million as of December 31, 2011, an increase of $146.9 million, or 13.9%, primarily due to an increase in the market values of our long equities and to a lesser extent due to additional purchases of long investments during the year ended December 31, 2012. As of December 31, 2012, our exposure to long investments increased to 102.5%, compared to 89% as of December 31, 2011, while our exposure to short investments increased to 64%, compared to 52% as of December 31, 2011, as we increased the number and size of long and short positions in our portfolio. This exposure analysis is conducted on a notional basis and does not include gold, CDS, sovereign debt, cash, foreign currency positions, interest rate options and other macro positions.
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, 2012, we had borrowed $73.7 million (2011: $4.3 million) from our prime brokers in order to purchase investment securities. In accordance with our investment guidelines, DME Advisors may use margin leverage up to 5% for extended time periods and an aggregate of 20% for periods not exceeding 30 days. At December 31, 2012, 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, 2012. In addition, as of December 31, 2012, we had borrowed $252.7 million (2011: $256.1 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.
In determining whether a market for a financial instrument is active or inactive, we obtain information from DME Advisors, based on feedback they receive from executing brokers, market makers, analysts and traders to assess the level of market activity and available liquidity for any given financial instrument. Where a financial instrument is valued based on broker quotes, DME Advisors requests multiple quotes. The ultimate value is based on an average of the quotes obtained. Broker quoted prices are generally not adjusted in determining the ultimate values and are obtained with the expectation of the quotes being binding. As of December 31, 2012, $258.5 million (2011: $182.8 million) of our investments (longs, shorts and derivatives) were valued based on broker quotes, of which $254.9 million (2011: $174.9 million) were based on broker quotes that utilized observable market information and classified as Level 2 fair value measurements, and $3.6 million (2011: $7.9 million) were based on broker quotes that utilized non-observable inputs and classified as Level 3 fair value measurements.
At December 31, 2012, reinsurance balances receivable were $173.2 million compared to $141.3 million as of December 31, 2011, an increase of $31.9 million, or 22.6%. The increase in the reinsurance balances receivable primarily related to increases in premiums on non-standard automobile quota share contracts. Additionally, reinsurance balances receivable includes amounts held by our clients for claim payments (claims fund). At December 31, 2012, the claims fund balances increased by $8.3 million as our contracts started to mature and claim payments started to accelerate. Reinsurance balances receivable also includes amounts collectible from retrocessionaires for reimbursement of losses paid. At December 31, 2012, the amounts collectible from retrocessionaires increased by $7.5 million due to adverse loss development on the assumed contracts. The entire reinsurance balance receivable is considered current and collectible and therefore no provision for uncollectible balances was recorded at December 31, 2012.
For the year ended December 31, 2012, loss and loss expenses recoverable increased by $4.7 million, or 15.8%, principally due to the increase in loss reserves on the multi-line retroceded contracts as a result of adverse loss development on the corresponding assumed multi-line quota share contracts. This increase was partially offset by the decrease in loss reserves resulting from the novation of the Florida homeowners' contracts during the year ended December 31, 2012.
For the year ended December 31, 2012, funds withheld decreased by $20.6 million, or 54.2%, principally due to the novation of certain Florida homeowners' contracts and their corresponding retroceded contracts. As part of the novation agreement, we returned the funds that we were withholding as collateral against the retrocessionaire's future obligations.
Total equity reported on the balance sheet, which includes non-controlling interest, increased by $14.7 million to $860.4 million as of December 31, 2012, compared to $845.7 million as of December 31, 2011. Retained earnings increased due to net income of $14.6 million reported for the year ended December 31, 2012, while the non-controlling interest decreased by $3.9 million primarily due to withdrawal of funds by DME Advisors from the joint venture during the year ended December 31, 2012. The increase in additional paid-in capital of $4.0 million related to stock compensation expense and from stock options exercised during the year ended December 31, 2012.
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, 2012, approximately 95% 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, 2012, 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, 2012, 2011 and 2010, the net cash provided by (used in) operating activities was $(50.6) million, $(25.9) million and $38.5 million, respectively. Included in the net cash provided by (used in) operating activities were investment related expenses (such as investment advisor compensation, net interest and dividend expenses) of $53.1 million, $34.0 million, $30.3 million for the years ended December 31, 2012, 2011 and 2010, respectively. Therefore excluding the investment related expenses, the net cash provided by our operating activities was $2.5 million, $8.1 million and $68.7 million for the years ended December 31, 2012, 2011 and 2010, respectively. The decrease in cash from operating activities since 2010 was primarily a result of claims being paid on our older underwriting contracts that have matured or are currently in run off. Additionally, the decrease was also due to the growth in non-standard automobile contracts for which claims are paid over a shorter period than our other contracts. For the years ended December 31, 2012 and 2011, as non-standard automobile contracts made up a larger portion of our business (41.3% and 8.4% of gross written premiums, respectively) the amount of cash generated from operating activities decreased. 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 $29.9 million from investing activities for the year ended December 31, 2012, mainly from the net sale of investments. There were no significant cash flows related to financing activities during the year ended December 31, 2012.
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, 2012.
through privately negotiated transactions. No Class A ordinary shares were repurchased by the Company during the year ended December 31, 2012.
As of December 31, 2012, $908.4 million of securities sold, not yet purchased, were secured by $910.0 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.
Greenlight Re has entered into a ten year lease agreement for office space in the Cayman Islands with the option to renew for an additional five year term. The lease term is effective from July 1, 2008 and ends on June 30, 2018. Under the terms of the lease agreement, our minimum annual rent payments are $253,539 for the first three years, increasing by 3% thereafter each year to reach $311,821 by the tenth year. The minimum lease payment obligations are included in the above table under operating lease obligations and in Note 14 to the accompanying consolidated financial statements.
We consider the effects of inflation in our pricing and estimating loss and loss adjustment expense reserves. The actual effects of inflation on our results of operations cannot be accurately known until claims are ultimately settled. For the years ended December 31, 2012, 2011 and 2010, inflation had no significant impact on our revenues or net income. We do not believe that inflation has had or will have a material effect on our combined results of operations, except insofar as inflation may affect interest rates and the asset values in our investment portfolio.