OXBRIDGE RE HOLDINGS LIMITED — Q2 2016 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2016, with comparisons to 2015. Oxbridge is a Cayman Islands specialty reinsurer focused on fully collateralized property catastrophe risks, primarily in Florida and the U.S. Gulf Coast. Financial amounts below are in U.S. dollars; unless stated otherwise, dollar amounts are in thousands.
Financial results and position
- Q2 revenue and earnings: Total revenue was $3,532, up from $2,065. Net premiums earned were $3,346 versus $1,636; net investment income was $109 versus $96; and realized investment gains were $77 versus $333. Net income fell to $872 from $1,657, and diluted EPS was $0.14 versus $0.27.
- First-half results: Total revenue was $5,063 versus $4,332. Net income was $1,915 versus $3,487, and diluted EPS was $0.32 versus $0.58. Dividends paid were $0.24 per share in both first-half periods.
- Underwriting ratios: Q2 loss, expense, and combined ratios were 66.2%, 13.3%, and 79.5%, respectively, compared with 0.0%, 24.9%, and 24.9% in Q2 2015. First-half ratios were 48.2%, 18.4%, and 66.6%, compared with 0.0%, 26.5%, and 26.5%.
- Cash flow: First-half operating cash flow was $1,183, down from $1,735. Investing activities used $3,594, versus providing $14,579 in 2015; financing used $1,515, mainly dividends and share repurchases. Cash and cash equivalents declined to $4,658 from $8,584 at year-end.
- Balance sheet and liquidity: At June 30, total assets were $59,035, liabilities $20,705, and shareholders’ equity $38,330. Restricted cash was $30,562, held as collateral under trust agreements and not freely available for general use. Premiums receivable increased to $9,606 from $4,117; unearned premiums reserve rose to $13,533 from $5,571. Available-for-sale investments totaled $13,723, up from $9,348.
- Debt: The filing reports no debt balance. Management said it had no plans to issue debt and expected to fund operations through cash flows and potentially future equity offerings.
Material changes and management commentary
- Net income declined despite higher net premiums earned, primarily because the company recorded $2,215 of Q2 losses and loss adjustment expenses, and realized lower investment gains than in Q2 2015. The first-half loss expense was $2,278; none was recorded in the comparable 2015 period.
- Management attributed about $1.8 million of higher earned premiums to derecognition of a loss-experience-refund liability after a covered loss arose under one contract. This adjustment also affects comparisons of earned premiums and underwriting ratios.
- The loss reserve was $2,250 at June 30, with IBNR representing approximately 100%. Management cautions that estimates are uncertain and could differ materially from ultimate claims.
- The board authorized repurchases of up to $2 million through December 31, 2017. The company repurchased 11,530 shares for approximately $60,000 during the first half; about $1.94 million remained available at June 30.
- On August 13, 2016, the board declared a $0.12-per-share dividend payable September 30, 2016. No quantified earnings or operating guidance was provided.
Risks, contingencies, and other notable items
- Catastrophe losses, especially hurricanes and other events during the June–November storm season, could materially affect results, capital, and cash flows. The company cannot reserve for future events before they occur.
- Underwriting is concentrated: a substantial portion of business ultimately relates to two Florida entities, one under common directorship. Related-party reinsurance arrangements include Claddaugh and HCPCI.
- Cash and investments support collateral requirements; subsidiary dividends are subject to Cayman Islands regulatory constraints. The subsidiary’s $24.4 million net worth exceeded its $500,000 minimum and prescribed capital requirement at June 30.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The company reported no current litigation, no off-balance-sheet arrangements, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Review the underlying covered loss, its contract terms, and subsequent development of the $2.25 million reserve, including the IBNR estimate.
- Assess the sustainability and timing of the $1.8 million refund-liability release and its effect on earned premiums and reported ratios.
- Check collection and settlement of the higher premiums receivable, unearned-premium obligations, and loss-experience refunds.
- Evaluate the restricted-cash collateral requirements, related-party exposure, underwriting concentration, and subsidiary dividend capacity.
- Monitor catastrophe exposure, investment portfolio volatility, cash available outside trusts, and execution of the repurchase and dividend plans.
- Note that the filing’s financial statements and MD&A contain minor presentation differences in certain line items; confirm figures against the filed statements and XBRL data.