OXBRIDGE RE HOLDINGS Ltd annual report, FY2014

Oxbridge Re Holdings Limited — 2014 Form 10-K Summary

Business context and reporting period. The company is a Cayman Islands holding company whose subsidiary writes fully collateralized property-casualty catastrophe reinsurance, primarily for Gulf Coast insurers with an emphasis on Florida. This annual report covers the year ended December 31, 2014. The comparison period is April 4–December 31, 2013, the company’s first, partial year of operations; year-over-year comparisons are therefore not like-for-like.

Financial performance and position

Metric	2014	Prior period
Assumed premiums	$14.293 million	$4.886 million
Net premiums earned	$4.819 million	$1.483 million
Total revenue	$5.559 million	$1.483 million
Net income	$4.000 million	$853,000
Basic and diluted EPS	$0.82	$0.88
Operating cash flow	$8.679 million	$4.217 million

• 2014 revenue included $641,000 of realized investment gains and $99,000 of net investment income. The company began investing in securities during 2014.
• No losses or loss adjustment expenses were incurred in either period. The reported loss ratio was 0%; acquisition cost ratio 8.9%; expense ratio and combined ratio 32.4% (2013: 6.5% and 32.7%, respectively). The absence of reported catastrophe losses materially supports these ratios.
• At December 31, 2014, total assets were $49.694 million, liabilities $12.986 million, and shareholders’ equity $36.708 million. The balance sheet lists $5.317 million of cash and cash equivalents and $28.178 million of restricted cash; together these totaled $33.495 million. Restricted cash is held as collateral and is not freely available for general use.
• Investments available for sale had a fair value of $11.838 million, including $3.659 million in fixed-maturity securities and $8.179 million in equity securities. The filing reports no other-than-temporary impairment at year-end.
• Premiums receivable were $4.081 million; the loss-experience refund payable was $7.133 million; and unearned premiums reserve was $5.744 million. The filing reports no reserve for losses at year-end.
• No debt or interest expense is reported. Financing cash flow was $25.242 million, primarily reflecting the March 2014 IPO; investing activities used $29.299 million. The company paid $0.48 per share in dividends during 2014, totaling approximately $1.708 million.

Material changes versus the prior period

• Net income rose to $4.0 million from $853,000, while EPS fell to $0.82 from $0.88, principally because the weighted-average share count increased following the IPO. The earlier period covered only about seven months of underwriting activity.
• Assumed premiums increased to $14.293 million, but 2014 net premiums earned were reduced by $5.766 million of change in loss-experience refund payable and $3.708 million of change in unearned premiums reserve.
• The IPO generated approximately $29.3 million gross and $26.9 million net proceeds. Shareholders’ equity increased to $36.708 million from $7.449 million, reflecting IPO proceeds and earnings, partly offset by dividends.
• Cash placed in trust as collateral increased, and the company established a $11.838 million investment portfolio; neither category existed at year-end 2013.

Outlook, commentary, risks and unusual items

• Management said the reinsurance market was overcapitalized and softening, and stated it would reduce premium writings rather than accept inadequately priced risk. It described potential for higher prices following major catastrophes or adverse financial-market shocks. No quantified earnings or premium guidance was provided.
• Most business was concentrated in risks ultimately associated with two Florida entities, including related parties. In 2014, related-party assumed premiums were $5.070 million; the filing warns this concentration can magnify the impact of a Florida catastrophe or other adverse development.
• Contracts are fully collateralized, with recourse generally limited to the assets held in the applicable trust. This structure limits contract-level exposure but ties up capital. The subsidiary has no financial-strength rating and is licensed only in the Cayman Islands.
• Contracts with retrospective provisions require premium refunds when losses are minimal or zero. The company expected approximately $8.2 million of aggregate liabilities under applicable contracts for June 2014–May 2015, assuming no losses; the year-end refund payable was $7.133 million. A covered loss can reduce this liability.
• Key risks include catastrophe severity and frequency, reserve-estimation uncertainty, dependence on cedants’ underwriting and claims decisions, competition and pricing cycles, collateral and liquidity constraints, counterparty risk, related-party conflicts, and Cayman regulatory and U.S. tax classification uncertainty.
• The company reported no litigation, no off-balance-sheet arrangements, and no contractual obligations other than $70,000 of operating lease commitments, all due within one year. Management stated it had sufficient liquidity for at least the next 12 months. The independent auditor issued an unqualified opinion; management reported effective disclosure controls, while the 10-K did not include management’s internal-control assessment or auditor attestation under the applicable transition relief.

Important facts for investors to verify

• Review the audited financial statements and notes, particularly the treatment and timing of loss-experience refunds, unearned premiums, and the absence of loss reserves.
• Check how much premium exposure remains concentrated in the two Florida-related counterparties, and assess the terms, collateral, and renewal status of those contracts.
• Evaluate the liquidity actually available outside trust accounts, the collectability and timing of the $4.081 million in premiums receivable, and collateral requirements as treaties develop.
• Assess whether the 2014 investment portfolio’s equity exposure and realized gains are consistent with the stated conservative, underwriting-focused strategy.
• Confirm dividend sustainability against subsidiary regulatory capital requirements, and consider potential dilution from 8,230,700 outstanding warrants and the 2014 incentive plan.