OXBRIDGE RE HOLDINGS LIMITED — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited consolidated results; amounts below are in U.S. dollars unless noted. The company is a Cayman Islands specialty reinsurer focused on fully collateralized property-catastrophe risks, primarily in the U.S. Gulf Coast and Florida. Its new reinsurance sidecar, Oxbridge Re NS, began operations June 1, 2018.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $1.254 million | $19.330 million | $2.092 million | $23.625 million |
| Net premiums earned | $0.700 million | $19.306 million | $1.254 million | $23.340 million |
| Net income (loss) | $0.652 million | ($22.954 million) | $0.706 million | ($20.568 million) |
| Basic and diluted EPS | $0.11 | ($3.97) | $0.12 | ($3.53) |
| Combined ratio | 33.5% | 219.0% | 53.8% | 189.3% |
| Operating cash flow | Not presented quarterly | ($2.214 million) | ($10.689 million) |
Management attributes the year-over-year earnings improvement chiefly to the absence of catastrophe losses in the 2018 periods. In 2017, Hurricanes Harvey, Irma and Maria triggered limit losses on all then-active reinsurance contracts and accelerated premium recognition. Lower capital deployed in 2018 also contributed to much lower earned premiums. The 2018 combined ratios therefore reflect no losses recorded through September 30 and a substantially smaller earned-premium base; they should not be read as evidence that catastrophe risk has diminished.
For the nine months, investing activities provided $1.475 million and financing activities provided $2.000 million, principally from Series 2018-1 participating notes. Cash, cash equivalents and restricted cash totaled $12.148 million at September 30, 2018: $8.238 million unrestricted cash and $3.910 million restricted cash held in trust. Cash and cash equivalents alone were $8.238 million.
At September 30, total assets were $19.317 million, total liabilities $4.602 million and shareholders’ equity $14.715 million. Investments were $4.769 million; premiums receivable were $2.080 million. Loss and loss-adjustment reserves were $0.167 million, down from $4.836 million at year-end 2017. Notes payable to Series 2018-1 noteholders were $2.000 million, due June 1, 2021. No interest was reported as paid during the nine-month period. The filing gives no separate operating margin; the stated underwriting ratios are the relevant reported measures.
Material changes and notable items
- Net premiums earned fell by $18.606 million in Q3 and $22.086 million for the nine months versus 2017, reflecting prior-year accelerated recognition after limit losses and lower 2018 capital deployed.
- The company entered a final commutation of multi-year retrospectively rated contracts effective June 1, 2018; it reported a net commutation loss of $8,000 for the nine months, including $1.012 million favorable prior-period loss development.
- The new sidecar issued $2 million of participating notes to third parties. Sidecar income attributable to noteholders was $234,000 for Q3 and $296,000 for the nine months.
- An inward industry loss warranty swap generated derivative gains of $397,000 in Q3 and $773,000 for the nine months. The company received a fixed $1 million payment; its maximum potential payment is $4 million. The swap’s September 30 fair value was a $0.2 million liability, valued using counterparty models and unobservable inputs.
- Adoption of ASU 2016-01 moved equity-security fair-value changes into earnings prospectively; $22,000 was reclassified from accumulated other comprehensive loss to accumulated deficit at adoption. No prior periods were restated.
- No dividends were paid in 2018; dividends were $0.12 per share in Q3 2017 and $0.36 per share for the first nine months of 2017. The share repurchase program had been discontinued in 2017.
Outlook, commentary and risks
The filing provides no numerical earnings or revenue guidance. Management says it underwrites selectively and opportunistically to pursue long-term book-value-per-share growth, and intends to reduce premium writings rather than accept mispriced risk if the reinsurance market softens further. Management considers the market overcapitalized, while noting major catastrophes or adverse financial-market shocks could drive rate increases. It said it believed cash flows were sufficient for liquidity needs and expected to fund operations through operating cash flows, investment income and underwriting activities; future equity offerings remain possible.
Subsequent event: Hurricane Michael made landfall October 10, 2018, after the reporting date. The company estimated a net loss to capital and earnings of approximately $3.1 million, or $0.54 per basic and diluted share, after its sidecar quota-share arrangement. It stated book value per share would decline from $2.57 at September 30 to $2.03. The filing separately estimates approximately $1.1 million of principal loss and $232,000 of lost income for Series 2018-1 noteholders.
Key risks include unpredictable catastrophe losses; reserve uncertainty, including IBNR and delayed cedant reporting; concentrated underwriting exposure, with a substantial portion of business ultimately relating to two entities; broker, reinsurer and other counterparty credit risk; and investment-market risk. The company also noted uncertainty over whether U.S. tax authorities could assert that it is engaged in a U.S. trade or business. Subsidiaries exceeded their $500,000 minimum and prescribed capital requirements. Management reported effective disclosure controls and no material change in internal control over financial reporting. No current litigation or arbitration was reported.
Important facts for investors to verify
- Updated Hurricane Michael ultimate-loss estimates, including the effect on the company, sidecar investors and reported book value per share.
- Whether the very low September 30 loss reserve of $167,000 adequately reflects incurred losses and subsequent development; approximately 48% of the reserve was IBNR.
- How much cash is practically available for claims and operations, given $3.910 million of restricted cash and regulatory limits on subsidiary dividends.
- The sidecar’s catastrophe exposure, noteholder loss allocation and the valuation assumptions for the Level 3 ILW swap.
- Whether underwriting volumes, earned premiums and profitability recover, particularly given management’s comments on market overcapacity and concentration of risk.