OXBRIDGE RE HOLDINGS LIMITED — Q2 2018 Form 10-Q
Business context and reporting period
Unaudited results for the three and six months ended June 30, 2018; balance-sheet comparisons are to December 31, 2017. Oxbridge is a Cayman Islands property and casualty reinsurer focused on fully collateralized catastrophe risks, primarily in the U.S. Gulf Coast and Florida. Its new sidecar, Oxbridge Re NS, began operations June 1, 2018. Amounts below are in U.S. dollars; financial statement amounts are in thousands unless noted.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $723 | $2,659 | $838 | $4,295 |
| Net premiums earned | $334 | $2,486 | $554 | $4,034 |
| Net income | $265 | $1,116 | $54 | $2,386 |
| EPS, basic and diluted | $0.05 | $0.19 | $0.01 | $0.41 |
| Combined ratio | 73.1% | 62.1% | 77.6% | 47.3% |
- Cash flow: Six-month operating cash use was $1.535 million, versus $2.968 million provided in 2017. Investing activities used $107,000, compared with $4.322 million in 2017; financing provided $2.0 million from Series 2018-1 notes. Cash and restricted cash totaled $11.245 million at June 30.
- Balance sheet and liquidity: Assets were $20.332 million, liabilities $6.301 million and shareholders’ equity $14.031 million. Cash and cash equivalents were $7.053 million; restricted cash was $4.192 million. Investments totaled $6.293 million. Management said available liquidity and expected operating cash flows were sufficient for operational needs.
- Debt: The consolidated balance sheet included $2.0 million of Series 2018-1 participating notes, issued by the sidecar to third parties and maturing June 1, 2021. Management reported no current plans for debt other than additional participating notes. Sidecar creditors have no recourse to the parent’s general credit.
Material changes versus the prior comparable period
- Revenue and earnings fell substantially: management attributed the decline mainly to lower capital deployed and the prior-period acceleration of premium recognition after full-limit losses on contracts in Q3 2017. Equity-security fair-value accounting also contributed to the six-month comparison.
- Net premiums earned declined to $334,000 in Q2 and $554,000 for the first half. No losses were incurred in the 2018 quarter or first half, while 2017 included loss expense.
- The loss reserve fell from $4.836 million at year-end to $167,000. The filing attributes this primarily to settlement of prior-event losses and commutation of multi-year contracts. Two cedant commutations generated an $8,000 net loss; one included $1.012 million of favorable prior-period loss development.
- Cash and cash equivalents declined $710,000, while restricted cash increased $1.068 million. Premiums receivable fell $1.460 million to $2.338 million. Investments decreased $176,000.
- Oxbridge Re NS issued $2 million in participating notes and entered a quota-share retrocession arrangement supporting the parent reinsurer’s catastrophe business.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management described underwriting as selective and opportunistic, emphasizing underwriting returns; it may reduce writings rather than accept mispriced risk if the reinsurance market softens.
- Management warns results can fluctuate significantly because catastrophe risks are low-frequency and high-severity and hurricane season runs June through November. The company said its underwriting exposure is concentrated in risks ultimately related to two entities; catastrophe losses could impair earnings, capital and future underwriting capacity.
- The 2018 inward industry-loss-warranty swap generated $1 million of fixed consideration and exposes the company to maximum payments of $4 million. Its June 30 fair-value liability was $620,000, based on Level 3 inputs; no triggering industry-loss event was known by quarter-end. The swap generated $208,000 of Q2 and $376,000 of first-half income.
- Reserve estimates, including incurred-but-not-reported claims, depend on actuarial judgment and could differ materially from ultimate settlements. The filing also identifies broker, reinsurer, counterparty and investment-market risks.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no current litigation, no material changes to previously disclosed risk factors, and no subsequent event requiring disclosure.
Important facts for investors to verify
- How much of the sharp earnings decline reflects lower ongoing underwriting capacity versus prior-period accelerated premium recognition?
- What are the remaining catastrophe exposures, contract limits and concentration by cedant, especially given the stated exposure to two entities?
- Are the $167,000 loss reserve and related commutation settlements adequate as cedant loss reports develop?
- What are the terms, collateral arrangements and potential loss allocation under the Series 2018-1 notes and sidecar quota-share agreement?
- How sensitive is the $620,000 Level 3 ILW valuation and its maximum $4 million exposure to catastrophe events and model assumptions?
- How much of reported cash is freely available, given that $4.192 million is restricted as collateral?