We currently occupy our office space in Grand Cayman, Cayman Islands under a short-term lease arrangement. Additionally, we have an operating lease agreement for office space in Dublin, Ireland which expires in 2031, but provides us an option to terminate the lease in 2021 without any penalty. We believe that for the foreseeable future the office spaces in the Cayman Islands and Ireland will be sufficient for conducting our operations.
The following is a discussion and analysis of our results of operations for the years ended December 31, 2020 and 2019 and financial condition as of December 31, 2020 and 2019.
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 exclusively employ more traditional investment strategies. Our investment portfolio is managed 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.
Because we seek to capitalize on favorable market conditions and opportunities, period-to-period comparisons of our underwriting results may not be meaningful. Also, our historical investment results are not necessarily indicative of future performance. Due to the nature of our reinsurance and investment strategies, our operating results will likely fluctuate from period to period.
COVID-19 has created an unusually high level of uncertainty in the global reinsurance market. While we believe that our aggregate exposure to the pandemic is small compared to other industry participants, the impact of the pandemic and related risks could harm our results of operations, financial position, and liquidity. For a further discussion of risks associated with COVID-19, see “Risks Relating to our Business” in “Part I - Item 1A. Risk Factors.”
Adding to the reduction in capital was the unusually high frequency of loss events in 2020. Putting aside COVID-19, 2020 was the fifth costliest year in history regarding the impact of natural and human-made catastrophes on the insurance industry. While investors have injected new capital into the industry, we believe that this new capital represents a small portion of what has been lost or encumbered.
January 1 is a key renewal date for the global reinsurance industry, and, as noted earlier, in 2021 we have seen improved rates in most of the classes of business we write. This hardening market enabled us to selectively expand our specialty book while taking advantage of improved rates. Our in-force portfolio reflects increased diversity across the classes of business we write and a lower concentration risk to individual counterparties. We are pleased with the progress we have made in growing and repositioning our underwriting book, and we expect that the newly formed Greenlight Re UK will help us secure further underwriting opportunities in the future.
Casualty business covers general liability, motor liability, professional liability and workers’ compensation exposures. The Company’s multi-line business relates predominantly 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.
Other business covers accident and health, financial lines (including transactional liability, mortgage insurance, surety and trade credit), marine, energy, and to a lesser extent, other specialty business such as aviation, crop, cyber, political and terrorism exposures.
● premiums from reinsurance on property and casualty business assumed; and
We recognize premiums written as revenues, net of any applicable underlying reinsurance coverage, over the term of the related policy or contract. Depending on the contract structure, the earnings period could be the same as the reinsurance contract, or based on the terms of the underlying insurance policies.
The extent of our loss and LAE is a function of the amount and type of reinsurance contracts we write and 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. The period over which we pay loss and LAE reserves depends on the nature of the coverage provided and generally extends over a period of multiple years.
General and administrative expenses consist primarily of salaries and benefits and related costs, including costs associated with our incentive compensation plan, bonuses and stock compensation expenses. General and administrative expenses also include professional fees, travel and entertainment, information technology, rent and other general operating costs. General and administrative expenses reported on our consolidated statements of operations include both underwriting and corporate expenses.
For stock option expenses, we calculate compensation cost using the Black-Scholes option pricing model and recognize the associated expense over the stock options’ vesting periods, which vary and have historically ranged from zero to six years. For restricted stock awards and restricted stock units with only service conditions, we calculate compensation cost using the grant date fair value of each award and recognize the associated expense of the stock awards over their vesting periods, which typically range from one to three years. For restricted stock awards that include both service and performance conditions, we recognize the associated expense when we determine that it is probable that the performance conditions will be achieved.
Our consolidated financial statements contain certain amounts that are inherently subjective 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 to prepare of our consolidated financial statements. We have summarized the descriptions below for clarity. We have included a more detailed description of our significant accounting policies and recently issued accounting standards in Note 2 to the consolidated financial statements.
Premium Revenues and Risk Transfer. We record our property and casualty reinsurance premiums as premiums written based upon contract terms and information received from ceding companies and their brokers. Excess of loss reinsurance contracts typically state premiums as a percentage of the subject premiums written by the client, subject to a minimum and deposit premium. The minimum and deposit premium is generally 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.
Our client estimates gross premiums written at the contract’s inception for each proportional contract we underwrite. We generally account for such premiums using our best estimates and then adjust our estimates based on our client’s actual reports and based on our expectations of industry developments. As the contract progresses, we monitor actual premiums received in conjunction with the client’s correspondence to refine our estimate. Variances from initial gross premiums written estimates are generally greater for proportional contracts than for non-proportional contracts. We earn premiums on proportional contracts over the risk coverage period. Unearned premiums represent the unexpired portion of reinsurance provided.
Investments. We carry our investment in SILP at fair value, based on the most recent net asset value obtained from SILP’s third-party administrator. The caption “Other investments” in our consolidated balance sheets includes private and unlisted equity securities that do not have readily determinable fair values. We determine these private equity securities’ carrying value based on the original cost, reviewed for impairment and any subsequent changes in the valuation based on any recent observable transactions. We determine realized gains and losses from other investments based on specific identification method (by reference to cost or amortized cost, as appropriate). These gains and losses are included in the captions “Net investment income (loss)” in the consolidated statements of operations.
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) we develop new or improved methodologies; or (iv) we observe changes in the legal environment.
We determine case reserve estimates based on loss reports received. We determine our IBNR reserve estimates using various actuarial methods as well as a combination of our own historical and current loss experience, insurance industry loss experience, assessments of pricing adequacy trends and our professional judgment. In estimating our IBNR reserve, we project our estimated ultimate loss and LAE reserves and then subtract paid claims and case reserves to arrive at our IBNR reserve.
As a predominantly broker-market reinsurer for both excess-of-loss and proportional contracts, we must rely on loss information reported to brokers by primary insurers who, in turn, must estimate their losses at the policy level, often based on incomplete and changing information. The information we receive varies by cedent and may include paid losses, estimated case reserves and an estimated provision for IBNR reserves. Reserving practices and data reporting quality vary among ceding companies, which adds further uncertainty to our estimation of ultimate losses. The nature and extent of information received from ceding companies and brokers also vary widely depending on the type of coverage, the contractual reporting terms (which are affected by market conditions and practices), and other factors. Due to the lack of standardization of the terms and conditions of reinsurance contracts, the wide variability of coverage provided to individual clients, and the tendency of those coverages to change rapidly in response to market conditions, we cannot always reliably measure the ongoing economic impact of such uncertainties and inconsistencies.
Since we rely on ceding company estimates of case and IBNR reserves in the process of establishing our loss and LAE reserves, we maintain 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. Each subsequent year of loss experience with a given cedent also provides additional insight into the accuracy and timeliness of previously reported information. These procedures are incorporated in our internal controls and are regularly evaluated and amended as market conditions, risk factors, and unanticipated areas of exposure develop.
We monitor the development of our prior-year losses during subsequent calendar years by comparing the actual reported losses against previous estimates. The analysis of this loss development is an essential factor in the ongoing refinement of our reserving process’s assumptions.
current underwriting results by improving our results if the prior year reserves prove redundant or impairing our results if the prior year reserves prove insufficient.
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 award’s grant date. 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. We recognize the associated expense, adjusted for estimated forfeitures, over the vesting period and incorporate the probability of meeting any performance conditions. 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 and the associated stock compensation expense. As restricted shares and RSUs are forfeited, we reduce the number of outstanding restricted shares and RSUs and compare the remaining unamortized grant date fair value to the assumed forfeiture levels. We record true-up adjustments as deemed necessary. For the year ended December 31, 2020, we have assumed a forfeiture rate of 7.0% (2019: 7.0% and 2018: 7.0%) for restricted stock awards and RSUs granted.
We recognize the expense of share purchase options over the vesting period on a graded vesting basis. Determining the fair value of share option awards at the grant date requires significant estimation and judgment. We use an option-pricing model (Black-Scholes pricing model) to assist in calculating of fair value. We base the estimate of expected volatility on our Class A ordinary shares’ daily historical trading data from the date that these shares commenced trading (May 24, 2007) to the grant date.
Management uses certain key financial measures, some of which are not prescribed under U.S. GAAP rules and standards (“non-GAAP financial measures”), to evaluate our financial performance, financial position and the change in shareholder value. Generally, a non-GAAP financial measure, as defined in SEC Regulation G, is a numerical measure of a company’s historical or future financial performance, financial position, or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented under U.S. GAAP. We believe that these measures, which may be calculated or defined differently by other companies, provide consistent and comparable metrics of our business performance to help shareholders understand performance trends and allow for a more thorough understanding of the Company’s business. Non-GAAP financial measures should not be viewed as a substitute for those determined under U.S. GAAP. The key non-GAAP financial measures used in this report are:
Basic Book Value Per Share and Fully Diluted Book Value Per Share
We believe that long-term growth in fully diluted book value per share is the most relevant measure of our financial performance because it provides management and investors a yardstick to monitor the shareholder value generated. Fully diluted book value per share may also help our investors, shareholders and other interested parties form a basis of comparison with other companies within the property and casualty reinsurance industry.
We calculate basic book value per share based on ending shareholders' equity and aggregate of Class A and Class B Ordinary shares issued and outstanding, as well as all unvested restricted shares. Fully diluted book value per share represents basic book value per share combined with any dilutive impact of in-the-money stock options and RSUs issued and outstanding as of any period end. Fully diluted book value per share also includes the dilutive effect, if any, of ordinary shares to be issued upon conversion of the convertible notes. Basic book value per share and fully diluted book value per share should not be viewed as substitutes for the comparable U.S. GAAP measures.
Our primary financial goal is to increase fully diluted book value per share over the long term.
•Prior accident-year reserve development, which can be favorable or unfavorable, represents changes in our estimates of losses and loss adjustment expenses associated with loss events that occurred in prior years. We believe a discussion of current accident-year performance, which excludes prior accident-year reserve development, is helpful since it provides more insight into current underwriting performance.
•By their nature, catastrophe losses and other significant, infrequent loss events are not representative of the type of loss activity that we would expect to occur in every period. For example, the COVID-19 pandemic has certain characteristics that are unlike those of any other event in recent history.
We believe an adjusted combined ratio that excludes the effects of items such as these aids in understanding the underlying trends and variability in our underwriting results that may be obscured by these items.
Net underwriting income (loss) is considered a non-GAAP financial measure because it excludes items used to calculate net income before taxes under U.S. GAAP. We calculate net underwriting income (loss) as net premiums earned, plus other income (expense) relating to reinsurance and deposit-accounted contracts, less net loss and loss adjustment expenses, acquisition costs, and underwriting expenses. The measure excludes, on a recurring basis: (1) investment income (loss); (2) other income (expense) not related to underwriting, including foreign exchange gains or losses and adjustments to the allowance for expected credit losses; (3) corporate general and administrative expenses; (4) interest expense and (5) income taxes. We exclude total investment 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. Net underwriting income (loss) should not be viewed as a substitute for U.S. GAAP net income.
The table below summarizes our operating results for the years ended December 31, 2020, 2019, and 2018:
For the year ended December 31, 2020, the net income was $3.9 million, compared to a net loss attributable to the Company of $4.0 million reported for the year ended December 31, 2019.
The developments that most significantly affected our financial performance during the year ended December 31, 2020, compared to the equivalent 2019 period, are summarized below:
•Underwriting: The underwriting loss for the year ended December 31, 2020, was $1.6 million on net earned premiums of $455.4 million. By comparison, the underwriting loss for the same period in 2019 was $33.5 million on net earned premiums of $483.6 million, primarily resulting from adverse loss development on our private passenger automobile business.
Catastrophe events during the year ended December 31, 2020, including Hurricane Laura, Isaias, and Sally, the Midwest derecho storms, and North American wildfires contributed $9.0 million to the underwriting loss. Additionally, COVID-19 contributed $7.1 million to the underwriting loss for the year ended December 31, 2020. By comparison, the catastrophe events during 2019, including Hurricane Dorian and Typhoons Faxai and Hagibis, contributed $17.4 million to the underwriting loss for the year ended December 31, 2019.
Net premiums earned are primarily a function of the amount and timing of net premiums written during the current and prior periods.
The changes in the acquisition cost ratios during the year ended December 31, 2020, compared to the year ended December 31, 2019 were attributable to the following:
For the year ended December 31, 2020, general and administrative expenses decreased by $3.4 million, or 11.5%, compared to the same period in 2019. The decrease was due primarily to lower personnel costs, including bonus and stock compensation expenses, and lower corporate expenses including legal and other professional fees compared to the year ended December 31, 2019. Higher directors and officers insurance premiums partially offset the decrease in corporate expenses. For the years ended December 31, 2020, and 2019, the general and administrative expenses included $2.5 million and $3.9 million, respectively, of expenses related to stock compensation granted to employees and directors.
Total investment income (loss) incorporates (i) changes in the net asset value of our investment in SILP managed by DME Advisors, (ii) interest income earned on the restricted cash and cash equivalents pledged as collateral to our clients, and (iii) gains (or losses) and interest on our portfolio of strategic and Innovations investments, notes receivable and investments accounted for under the equity method. We expect our total investment income, including any change in the net asset value of our investment in SILP, to fluctuate from period to period.
The caption “Income (loss) from investment in related party investment fund” in the above table is net of management fees paid by SILP to DME Advisors and performance compensation, if any, allocated from the Company’s investment in SILP to DME II. No performance compensation is allocated in periods of loss reported by SILP. For detailed breakdowns of management fees and performance compensation for the years ended December 31, 2020, and 2019, please refer to Note 3 of the consolidated financial statements.
For the year ended December 31, 2020, investment income, net of fees and expenses, resulted in a gain of 1.4% on the Investment Portfolio managed by DME Advisors, compared to a gain of 9.3% for the year ended December 31, 2019. The short portfolio lost 13.5%, while the long portfolio and macro positions gained 15.3% and 0.4%, respectively, during the year ended December 31, 2020. For the year ended December 31, 2020, the largest contributors to SILP’s investment income were long positions in Green Brick Partners (GRBK), FuboTV (FUBO), and AerCap Holdings (AER). The largest detractor was a short position in Tesla (TSLA), and a basket of short positions in companies whose finances are believed to have been significantly affected by the COVID-19 pandemic.
During the year ended December 31, 2020, we recorded net unrealized gains of $10.2 million on our portfolio of Innovations related investments. During the year ended December 31, 2020, we also recognized the following realized gains and losses:
•a $5.8 million gain on a note receivable settled above its carrying value; and
For the years ended December 31, 2020, and 2019, the gross investment return (loss) on our investments managed by DME Advisors (excluding investment advisor performance allocation) were composed of the following:
We post our investment returns on investments managed by DME Advisors monthly on our website (www.greenlightre.com).
GRIL is incorporated in Ireland and is subject to the Irish corporation tax. We expect GRIL to be taxed at a 12.5% rate on its taxable trading income, and 25% on its non-trading income, if any.
Verdant is incorporated in Delaware and is subject to taxes under the U.S. federal rates and regulations prescribed by the Internal Revenue Service. We expect Verdant’s future taxable income to be taxed at a rate of 21%.
As of December 31, 2020, we have included a gross deferred tax asset of $3.5 million (2019: $3.6 million) in the caption “Other assets” in the Company’s consolidated balance sheets. As of December 31, 2020, a valuation allowance of $3.0 million (2019: $2.6 million) partially offset this gross deferred tax asset. Based on the timing of the reversal of the temporary differences and the likelihood of generating sufficient taxable income to realize the future tax benefit, we believe it is more likely than not that we will realize the recorded deferred tax asset (net of the valuation allowance). The Company has not taken any other tax positions that we believe are subject to uncertainty or reasonably likely to have a material impact on the Company, GRIL or Verdant.
The following table provides our underwriting ratios by line of business:
The total investments reported in the consolidated balance sheets as of December 31, 2020, was $196.2 million, compared to $256.4 million as of December 31, 2019, a decrease of $60.2 million, or 23.5%. The decrease was primarily related to withdrawals from SILP for claim payments, funding collateral for our cedents and posting Funds at Lloyd’s to support the reinsurance contracts with Lloyd’s syndicates. We include the Funds at Lloyd’s in the caption “Reinsurance balances receivable” on our consolidated balance sheets. The decrease was partially offset by investment income from our investment in SILP and an increase in the valuation of investments related to Innovations.
As of December 31, 2020, 94.0% of SILP’s investments were valued based on quoted prices in actively traded markets (Level 1), 2.2% was composed of instruments valued based on observable inputs other than quoted prices (Level 2), and 0.8% was composed of instruments valued based on non-observable inputs (Level 3). As of December 31, 2020, 3.0% of SILP’s investments were private equity funds valued using the funds’ net asset values as a practical expedient.
The COVID-19 pandemic is unprecedented and we do not have previous loss experience on which to base estimates for loss and loss adjustment expense reserves related to this pandemic. See Note 7 of the accompanying consolidated financial statements for assumptions used in our loss estimates relating to the COVID-19 pandemic. Losses in respect of the COVID-19 pandemic subsequent to December 31, 2020 will be reflected in the periods in which those losses are incurred.
During the year ended December 31, 2020, the total gross loss and loss adjustment expense reserves increased by $23.6 million, or 5.0% to $494.2 million from $470.6 million as of December 31, 2019. See Note 7 of the accompanying consolidated financial statements for a summary of changes in outstanding loss and loss adjustment expense reserves and for a description of prior period loss developments.
During the year ended December 31, 2020, the total loss and loss adjustment expenses recoverable decreased by $10.7 million, or 38.8%, to $16.9 million from $27.5 million as of December 31, 2019. The decrease primarily related to losses recovered relating to retroceded private passenger automobile contracts that were not renewed during 2019. See Note 8 of the accompanying consolidated financial statements for a description of the credit risk associated with our retrocessionaires.
For most of the contracts we write, our risk exposure is limited by defined limits of liability. Once each contract’s limit of liability 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.
PMLs are estimates and as a result, we cannot provide any assurance that any actual event will align with the modeled event or that actual losses from events similar to the modeled events will not vary materially from the modeled event PML. The PML estimate incorporates all significant exposure from our reinsurance operations, including coverage for property, marine and energy, motor and catastrophe workers’ compensation.
As of January 1, 2021, our estimated PML exposure (net of retrocession and reinstatement premiums) at a 1-in-250 year return period for a single event and in aggregate was $86.8 million and $109.6 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, 2021:
Total equity reported on the consolidated balance sheet decreased by $12.3 million to $464.9 million as of December 31, 2020, compared to $477.2 million as of December 31, 2019. Retained earnings increased primarily due to a net income of $3.9 million reported for the year ended December 31, 2020. The Company repurchased 2.5 million Class A ordinary shares during the year ended December 31, 2020 resulting in a $17.8 million decrease in shareholders’ equity. For details of other movements in shareholders’ equity see “Consolidated Statements of Shareholders’ Equity.”
As of December 31, 2020, Greenlight Re and GRIL were each rated “A- (Excellent)” with a negative outlook, by A.M. Best. On July 22, 2020, A.M. Best affirmed the “A- (Excellent)” ratings. 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.
Our sources of funds consist primarily of premium receipts (net of brokerage and ceding commissions), investment income and other income. We use cash from our operations to pay losses and loss adjustment expenses, profit commissions, interest and general and administrative expenses. As of December 31, 2020, all of our investable assets, excluding strategic investments and funds required for business operations and for capital risk management, are invested by DME Advisors in SILP, subject to our investment guidelines. We have the ability to redeem funds from SILP at any time for operational purposes by providing three days’ notice to the general partner. As of December 31, 2020, the majority of SILP’s long investments were composed of cash and cash equivalents, and publicly-traded equity securities, which can be readily liquidated to meet our redemption requests. We record all investment income (loss), including any changes in the net asset value of SILP, and any unrealized gains and losses, in our consolidated statements of operations for each reporting period.
For the years ended December 31, 2020, and 2019, the net cash provided by (used in) operating activities was $(91.3) million and $1.6 million, respectively. The net cash provided by (used in) our underwriting activities and for payment of corporate expenses was $(94.9) million and $(9.6) million for the years ended December 31, 2020, and 2019, respectively. Generally, if the premiums collected exceed claim payments within a given period, we generate cash from our underwriting activities. Our underwriting activities represented a net use of cash for the year ended December 31, 2020, as the losses we paid exceeded the premiums we collected. The cash used in, and generated from underwriting activities may vary significantly from period to period depending on the underwriting opportunities available and claims submitted to us by our cedents.
For the year ended December 31, 2020, our investing activities provided cash of $95.6 million. The source of cash was primarily net withdrawals from SILP which were used to pay losses, provide support for the Lloyds syndicated business, and fund collateral required by our ceding insurers. By comparison, for the same period in 2019, our investing activities provided cash of $63.3 million.
As of December 31, 2020, 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 not be materially impacted by the COVID-19 pandemic and will be met by cash, funds generated from underwriting activities and investment income, including withdrawals from SILP, if necessary. As of December 31, 2020, we expect to fund our operations for the next twelve months from operating and investing cash flows. Additionally, during 2021, we expect the release of collateral held by certain cedents as the exposure relating to those contracts has decreased.
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 any such transactions will occur or, if so, as to the terms of such transactions.
As of December 31, 2020, 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.
The letter of credit facility contains 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 facility, Greenlight Re would be prohibited from paying dividends to its parent company. The Company was in compliance with all the covenants of this facility as of December 31, 2020.
Our capital structure currently consists of senior convertible notes and equity issued in two 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. 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, 2020.
On October 29, 2020, our shareholders approved an amendment to our stock incentive plan to increase the number of Class A ordinary shares available for issuance by 3.0 million shares from 5.0 million to 8.0 million shares. As of December 31, 2020, there were 3,474,888 Class A ordinary shares available for future issuance under the Company’s stock incentive plan. The Compensation Committee of the Board of Directors administers the stock incentive plan.
GRIL has entered into a lease agreement for office space in Dublin, Ireland. Under the terms of this lease agreement, GRIL is committed to minimum annual rent payments denominated in Euros approximating €0.1 million until May 2021, and adjusted to the prevailing market rates for the subsequent ten-year term. GRIL has the option to terminate the lease agreement in 2021. The minimum lease payment obligations are included in the above table under operating lease obligations and in Note 15 to the accompanying consolidated financial statements.
The Company has $100.0 million of senior convertible notes payable which mature on August 1, 2023. The Company is obligated to make semi-annual interest payments of $2.0 million at an interest rate of 4.0% per annum. The Company has received regulatory approval to declare dividends from Greenlight Re in order to meet the interest payments obligation.
The Company has entered into a service agreement with DME Advisors pursuant to which DME Advisors will provide investor relations services to us for compensation of $5,000 per month plus expenses. The service agreement had an initial term of one year, and continues for sequential one-year periods until terminated by us or DME Advisors. Either party may terminate the service agreement for any reason with 30 days prior written notice to the other party.