OXBRIDGE RE HOLDINGS LIMITED — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The company is a Cayman Islands property and casualty reinsurer focused on fully collateralized catastrophe reinsurance, principally in the U.S. Gulf Coast and Florida. Unless otherwise stated, dollar amounts below are in thousands.
Financial performance and condition
- Q2 revenue: $482, versus $109 in Q2 2019. Net premiums earned were $135 (prior year $93); net realized investment gains were $320 (prior year zero). Net investment and other income was $25, and the change in fair value of equity securities was a $2 gain.
- Q2 earnings: Net income of $165, or $0.03 per diluted share, versus a net loss of $205, or $0.04 per share, in Q2 2019. Management attributed the improvement primarily to realized investment gains.
- First-half revenue and earnings: Revenue was $459 versus $227 in 2019. Net loss narrowed to $199, or $0.03 per share, from $351, or $0.06 per share. First-half results included $326 in realized gains but a $324 loss from changes in equity-security fair value.
- Underwriting: No losses were incurred in either comparative period, and loss reserves were zero at June 30. The Q2 combined ratio was 220.0% versus 311.8%; the six-month ratio was 143.0% versus 595.7%. Both remained above 100%, which the company says indicates unprofitable underwriting. Ratios were affected by low earned premiums and general and administrative costs.
- Cash flow: First-half operating cash use was $324, compared with $4,466 in 2019. Investing cash use was $268; financing cash use was $384. Cash and restricted cash together declined $976 to $7,040. Cash and cash equivalents were $5,567 and restricted cash was $1,473 at quarter-end.
- Balance sheet and liquidity: Total assets were $9,403, liabilities $1,543, and shareholders’ equity $7,860. Management said available cash, investment income and underwriting cash flows were sufficient for expected liquidity needs. Restricted funds serve as collateral and are not freely available for general use.
- Debt and leases: Notes payable were $216, down from $600 at year-end, after redeeming Series 2019-1 notes and issuing $216 of Series 2020-1 participating notes, due June 2023. Operating lease liabilities were $263. No dividends were paid.
Changes, outlook and risks
- Compared with Q2 2019, the company moved from a loss to profit, chiefly due to investment-sale gains; earned premiums also increased. First-half losses narrowed year over year, with higher earned premiums and realized gains partly offset by equity-market valuation losses.
- The company reported no material operational disruption from COVID-19 and said operations were back to normal by June 30. It nevertheless warned that pandemic-related claims, reduced interest rates, equity-market volatility and economic disruption could affect results; the ultimate effects on current and future business remained uncertain. Management expected pandemic losses and reduced industry capital could support higher reinsurance pricing, but provided no numerical guidance.
- Catastrophe losses are a central risk, and the company cautioned that one or more events could materially affect financial condition, results and cash flows. Underwriting exposure is concentrated among a limited number of entities. Loss-reserve estimates depend on cedant reporting and actuarial assumptions; no contingency reserve is recorded for future events before a loss occurs.
- Other disclosed exposures include broker, reinsurer and counterparty credit risk; equity-market volatility; and possible U.S. tax exposure if authorities determine the company is engaged in U.S. trade or business. The filing reported no litigation, no off-balance-sheet arrangements and no subsequent events requiring disclosure. Management concluded disclosure controls were effective.
- The company operates through regulated subsidiaries, each subject to a $500 minimum and prescribed capital requirement; each exceeded that minimum at June 30. Subsidiary dividend capacity is constrained by regulatory capital requirements.
Important facts for investors to verify
- How much of reported profitability depends on realized investment gains, and how volatile could equity-security valuations be?
- What catastrophe exposures and contract renewals are in force, given the zero recorded loss reserve and concentrated underwriting risk?
- How much of reported cash is restricted collateral, and what liquidity would remain after potential claims or collateral needs?
- What are the terms, collateral arrangements and related-party participation in Series 2020-1 notes? A director and officer invested $68 in that series.
- How do COVID-19 claims, market conditions and potential reinsurance pricing changes affect future underwriting results? The filing provides no quantified forecast.