Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. For debtfixed maturity securities, inputs may include price information, volatility statistics, specific and broad credit data, liquidity statistics, broker quotes for similar securities and other factors. The fair value of investments in common stocks and exchange-traded funds is based on the last traded price. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company’s investment custodians. The investment custodians consider observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant markets. The categorization of a financial instrument within the hierarchy is based upon the pricing transparency of the instrument.
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARYSUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017March 31, 2020
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Property and equipment: Property and equipment are recorded at cost when acquired. Property and equipment are comprised of motor vehicles, furniture and fixtures, computer equipment and leasehold improvements and are depreciated, using the straight-line method, over their estimated useful lives, which are five years for furniture and fixtures and computer equipment and four years for motor vehicles. Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or remaining lease term. The Company periodically reviews property and equipment that have finite lives, and that are not held for sale, for impairment by comparing the carrying value of the assets to their estimated future undiscounted cash flows. For the three and nine-monththree-month periods ended September 30, 2017,March 31, 2020 and 2019, there were no impairments in property and equipment.
Allowance for uncollectible receivables: Management evaluates credit quality by evaluating the exposure to individual counterparties; where warranted management also considers the credit rating or financial position, operating results and/or payment history of the counterparty. Management establishes an allowance for amounts for which collection is considered doubtful. Adjustments to previous assessments are recognized as income in the year in which they are determined. At September 30, 2017,March 31, 2020, no receivables were determined to be overdue or impaired and, accordingly, no allowance for uncollectible receivables has been established.
Reserves for losses and loss adjustment expenses: The Company determines its reserves for losses and loss adjustment expenses on the basis of the claims reported by the Company’s ceding insurers and for losses incurred but not reported (“IBNR”), management uses the assistance of an independent actuary. The reserves for losses and loss adjustment expenses represent management’s best estimate of the ultimate settlement costs of all losses and loss adjustment expenses. Management believes that the amounts are adequate; however, the inherent impossibility of predicting future events with precision, results in uncertainty as to the amount which will ultimately be required for the settlement of losses and loss expenses, and the differences could be material. Adjustments are reflected in the consolidated statements of incomeoperations in the period in which they are determined.
Loss experience refund payable: Certain contracts include retrospective provisions that adjust premiums or result in profit commissions in the event losses are minimal or zero. In accordance with GAAP, the Company will recognize a liability in the period in which the absence of loss experience obligates the Company to pay cash or other consideration under the contracts. On the contrary, the Company will derecognize such liability in the period in which a loss experience arises. Such adjustments to the liability, which accrue throughout the contract terms, will reduce the liability should a catastrophic loss event covered by the Company occur.
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
Premiums assumed: The Company records premiums assumed, net of loss experience refunds, as earned pro-rata over the terms of the reinsurance agreements, or period of risk, where applicable, and the unearned portion at the consolidated balance sheet date is recorded as unearned premiums reserve. A reserve is made for estimated premium deficiencies to the extent that estimated losses and loss adjustment expenses exceed related unearned premiums. Investment income is not considered in determining whether or not a deficiency exists.
Subsequent adjustments of premiums assumed, based on reports of actual premium by the ceding companies, or revisions in estimates of ultimate premium, are recorded in the period in which they are determined. Such adjustments are generally determined after the associated risk periods have expired, in which case the premium adjustments are fully earned when assumedassumed.
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
March 31, 2020
.
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Certain contracts allow for reinstatement premiums in the event of a full limit loss prior to the expiration of the contract. A reinstatement premium is not due until there is a full limit loss event and therefore, in accordance with GAAP, the Company records a reinstatement premium as written only in the event that the reinsured incurs a full limit loss on the contract and the contract allows for a reinstatement of coverage upon payment of an additional premium. For catastrophe contracts which contractually require the payment of a reinstatement premium equal to or greater than the original premium upon the occurrence of a full limit loss, the reinstatement premiums are earned over the original contract period. Reinstatement premiums that are contractually calculated on a pro-rata basis of the original premiums are earned over the remaining coverage period.
Unearned Premiums Ceded: The Company reduces the risk of future losses on business assumed by reinsuring certain risks and exposures with other reinsurers (retrocessionaires). The Company remains liable to the extent that any retrocessionaire fails to meet its obligations and to the extent that the Company does not hold sufficient security for their unpaid obligations.
Ceded premiums are written during the period in which the risk incept and are expensed over the contract period in proportion to the period of protection. Unearned premiums ceded consist of the unexpired portion of the reinsurance obtained.
Uncertain income tax positions: The authoritative GAAP guidance on accounting for, and disclosure of, uncertainty in income tax positions requires the Company to determine whether an income tax position of the Company is more likely than not to be sustained upon examination by the relevant tax authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For income tax positions meeting the more likely than not threshold, the tax amount recognized in the consolidated financial statements, if any, is reduced by the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant taxing authority. The application of this authoritative guidance has had no effect on the Company’s consolidated financial statements because the Company had no uncertain tax positions at September 30, 2017.March 31, 2020.
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
Earnings per share:Loss Per Share: Basic (loss) earningsloss per share has been computed on the basis of the weighted-average number of ordinary shares outstanding during the periods presented. Diluted (loss) earningsloss per share is computed based on the weighted-average number of ordinary shares outstanding and reflects the assumed exercise or conversion of diluted securities, such as stock options and warrants, computed using the treasury stock method.
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
March 31, 2020
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-BasedShare-Based Compensation: The Company accounts for stock-basedshare-based compensation under the fair value recognition provisions of GAAP which requires the measurement and recognition of compensation for all stock-basedshare-based awards made to employees and directors, including stock options and restricted stock issuances based on estimated fair values. The Company measures compensation for restricted stock based on the price of the Company’s ordinary shares at the grant date. Determining the fair value of share purchasestock options at the grant date requires significant estimation and judgment. The Company uses an option-pricing model (Black-Scholes option pricing model) to assist in the calculation of fair value for share purchasestock options. The Company's shares have not been publicly traded for a sufficient length of time to solely use the Company's performance to reasonably estimate the expected volatility. Therefore, when estimating the expected volatility, the Company takes into consideration the historical volatility of similar entities. The Company considers factors such as an entity's industry, stage of life cycle, size and financial leverage when selecting similar entities. The Company usesmay use a sample peer group of companies in the reinsurance industry as well asand/or the Company’s own historical volatility in determining the expected volatility. Additionally, the Company uses the full life of the options, ten years, as the estimated term of the options, and has assumed no forfeitures during the life of the options.
The Company uses the straight-line attribution method for all grants that include only a service condition. Compensation expense related to all awards is included in general and administrative expenses.
Recent accounting pronouncementsPending Accounting Updates :
Accounting Standards Update No. 2016-18.2020-01. In November 2016,January 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards UpdatedUpdate ("ASU") 2016-18, “Statements of Cash Flows - Restricted CashNo. 2020-01 (“ASU 2020-01”) Investments-Equity Securities (Topic 230)” (“ASU 2016-18”). ASU 2016-18 requires restricted cash321), Investments-Equity Method and cash equivalents to be included with cashJoint Ventures (Topic 323), and cash equivalents inDerivatives and Hedging (Topic 815) Clarifying the consolidated statement of cash flowsInteractions between Topic 321, Topic 323, and discloseTopic 815. This update, among others, clarifies the natureinteraction of the restrictions on cashaccounting for equity securities under Topic 321 and cash equivalents.investments under the equity method of accounting in Topic 323 when there is a change in level of ownership or degree of influence. ASU 2016-182020-01 is effective for annual periodsthe Company beginning after December 15, 2017,with the first quarter of 2021 and interim periods within those fiscal years.will be applied prospectively. Early adoption is permitted. The Company currently separately disclosesThis guidance will not have a material impact on the restrictions on cash and cash equivalents in Note 3 of theCompany’s consolidated financial statements and expects to continue these disclosures since ASU 2016-18 does not change the requirement in Regulation S-X (Rule 5-02) to separately disclose cash and cash equivalents that have restrictions on withdrawal or use. The Company currently presents changes in restricted cash and cash equivalents under investing activities in the consolidated statements of cash flows. Upon adoption of ASU 2016-18, the Company will amend the presentation in the consolidated statements of cash flows to include the restricted cash and cash equivalents with cash and cash equivalents in the consolidated statements of cash flows and will retrospectively reclassify all periods presentedstatements..
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARYSUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017March 31, 2020
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Pending Accounting Updates (continued):
Accounting Standards Update No. 2016-13. In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurements of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 amends the guidance on reporting credits losses and affects loans, debt securities, trade receivables, reinsurance recoverablesrecoverable and other financial assets that have the contractual right to receive cash. The amendments are effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted for any organization for annual periods beginning after December 15, 20182022 (as amended), and interim periods within those annual periods. The Company is in the process of evaluating the impact of the requirements of ASU 2016-13 on the Company’s consolidated financial statements and anticipates implementing ASU 2016-13 during the first quarter of fiscal year 2020.statements.
Accounting Standards Update No. 2016-09. In March 2016, the FASB issued ASU No. 2016-09, "Compensation-Stock Compensation (Topic 718)," which affects all entities that issue share-based awards to their employees. Among the amendments affecting share-based payment transactions are their income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for all public entities for reporting periods beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted for all entities. The Company does not expect a material impact of this guidance on the Company’s consolidated financial statements.
Accounting Standards Update No. 2016-02. In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which supersedes Topic 840 and creates the new lease accounting standards for lessees and lessors, primarily related to the recognition of lease assets and liabilities by lessees for leases classified as operating leases. ASU 2016-02 is effective for all public entities for reporting periods beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted for all entities. The Company is currently evaluating the impact of this guidance on the Company’s consolidated financial statements.
Accounting Standards Update No. 2016-01. In January 2016, the FASB issued ASU 2016-01, "Financial Instruments (Subtopic 825-10)," which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. One of the changes is to require certain equity investments to be measured at fair value with changes in fair value recognized in net income. ASU 2016-01 is effective for all public entities for reporting periods beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company is currently evaluating the impact of this guidance on the Company’s consolidated financial statements.OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
Segment Information: Under GAAP, operating segments are based on the internal information that management uses for allocating resources and assessing performance as the source of the Company’s reportable segments. The Company manages its business on the basis of one operating segment, Property and Casualty Reinsurance, in accordance with the qualitative and quantitative criteria established under GAAP.
Reclassifications: CertainAny reclassifications of prior period amounts have been made to conform to the current period presentation.
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
March 31, 2020
3. CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AND CASH EQUIVALENTS
| | | | | |
| | | | | |
| | | |
| | | |
| Cash on deposit | $2,567 | $6,868 | $2,872 | $3,456 |
| Cash held with custodians | 3,181 | 5,374 | 2,196 | 2,506 |
| Restricted cash held in trust | 18,496 | 23,440 | 2,343 | 2,054 |
| | | |
| Total | $24,244 | $35,682 | $ 7,411 | $8,016 |
| | | |
Cash and cash equivalents are held by large and reputable counterparties in the United States of America and in the Cayman Islands. Restricted cash held in trust is custodied with SunTrustTruist Bank and Bank of New York Mellon and is held in accordance with the Company’s trust agreements with the ceding insurers and trustees, which require that the Company provide collateral having a market value greater than or equal to the limit of liability, less unpaid premium.
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
4. INVESTMENTS
The Company holds investmentsfrom time to time invests in fixed-maturity securities and equity securities, that arewith its fixed-maturity securities classified as available-for-sale. At September 30, 2017March 31, 2020 and December 31, 2016,2019, the cost or amortized cost, gross unrealized gains and losses, and estimated fair value of the Company’sCompany did not hold any available-for-sale securities by security type were as follows:
| | | | | Estimated Fair Value ($000) |
| | |
| As of September 30, 2017 | | | | |
| Fixed-maturity securities | | | | |
| U.S. Treasury and agency securities | $7,015 | $- | $(18) | $6,997 |
| | | | | |
| | | | | |
| Total fixed-maturity securities | 7,015 | - | (18) | 6,997 |
| | | | | |
| Mutual funds | 400 | 17 | - | 417 |
| Preferred stocks | 205 | - | (4) | 201 |
| Common stocks | 1,255 | 15 | (40) | 1,230 |
| | | | | |
| Total equity securities | 1,860 | 32 | (44) | 1,848 |
| | | | | |
| | | | | |
| Total available for sale securities | $8,875 | $32 | $(62) | $8,845 |
| | | | | |
| | | | | |
| As of December 31, 2016 | | | | |
| Fixed-maturity securities | | | | |
| U.S. Treasury and agency securities | $6,060 | $28 | $(37) | $6,051 |
| | | | | |
| | | | | |
| Total fixed-maturity securities | 6,060 | 28 | (37) | 6,051 |
| | | | | |
| Mutual funds | 400 | 2 | (6) | 396 |
| Preferred stocks | 687 | 8 | (4) | 691 |
| Common stocks | 4,256 | 126 | (528) | 3,854 |
| | | | | |
| Total equity securities | 5,343 | 136 | (538) | 4,941 |
| | | | | |
| | | | | |
| Total available for sale securities | $11,403 | $164 | $(575) | $10,992 |
At September 30, 2017 and December 31, 2016, available-for-sale securities with fair value of $3,982,000 and $3,502,000, respectively, are held in trust accounts as collateral under reinsurance contacts with the Company’s ceding insurers.
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
4.
INVESTMENTS (continued)
Expected maturities will differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without penalties. The scheduled contractual maturities of fixed-maturity securities at September 30, 2017 and December 31, 2016 are as follows:
| | Amortized
Cost | Estimated
Fair Value |
| | |
| As of September 30, 2017 | | |
| Available for sale | | |
| Due within one year | $3,028 | 3,014 |
| Due after one year through five years | 3,987 | 3,983 |
| | | |
| | $7,015 | $6,997 |
| | | |
| | | |
| As of December 31, 2016 | | |
| Available for sale | | |
| Due within one year | $2,970 | $2,998 |
| Due after one year through five years | 3,090 | 3,053 |
| | | |
| | $6,060 | $6,051 |
Proceeds received, and the gross realized gains and losses from sales of available-for-sale fixed-maturity securities, and equity securities, for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 were as follows:
| | Gross proceeds from sales | Gross
Realized
Gains | Gross
Realized
Losses |
| | |
| | | | |
| Three Months Ended September 30, 2017 | | | |
| Fixed-maturity securities | $3,000
| $30 | $- |
| | | | |
| Equity securities | $6,470
| $380 | $ (514) |
| | | | |
| | | | |
| Nine Months Ended September 30, 2017 | | | |
| Fixed-maturity securities | $3,000 | $30
| $- |
| | | | |
| Equity securities | $16,147
| $1,112
| $(1,198) |
| | | | |
| | | | |
| Three Months Ended September 30, 2016 | | | |
| Fixed-maturity securities | $- | $- | $- |
| | | | �� |
| Equity securities | $4,099 | $368 | $(246) |
| | | | |
| | | | |
| Nine Months Ended September 30, 2016 | | | |
| Fixed-maturity securities | $119 | $8 | $- |
| | | | |
| Equity securities | $9,218 | $867 | $(619) |
| | Gross proceeds from sales | | |
| | |
| Three Months Ended March 31, 2020 | | | |
| Equity securities | $246 | $6 | $- |
| | | | |
| Three Months Ended March 31, 2019 | | | |
Available-for-sale fixed-maturity securities | $994 | $3 | $- |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARYSUBSIDIARIES
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIESNotes to Consolidated Financial Statements (unaudited)
September 30, 2017March 31, 2020
4.
INVESTMENTS (continued)
The Company regularly reviews its individual investment securities for OTTI. The Company considers various factors in determining whether each individual security is other-than-temporarily impaired, including:
●
the financial condition and near-term prospects of the issuer, including any specific events that may affect its operations or income;
●
the length of time and the extent to which the market value of the security has been below its cost or amortized cost;
●
general market conditions and industry or sector specific factors;
●
nonpayment by the issuer of its contractually obligated interest and principal payments; and
●
the Company’s intent and ability to hold the investment for a period of time sufficient to allow for the recovery of costs.
Securities with gross unrealized loss positions at September 30, 2017 and December 31, 2016, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows:
| | | |
| | | | |
| | | | | | | |
| | | | | | | |
| | | | | | |
| | | |
| | | | | | | |
| | | | | | | |
| Fixed maturity securities | | | | | | |
| U.S. Treasury and agency securities | 5 | 3,982 | 13 | 3,015 | 18 | 6,997 |
| | | | | | | |
| Total fixed-maturity securities | 5 | 3,982 | 13 | 3,015 | 18 | 6,997 |
| | | | | | | |
| Equity securities | | | | | | |
| Preferred stocks | 4 | 201 | - | - | 4 | 201 |
| All other common stocks | 6 | 396 | 34 | 417 | 40 | 813 |
| | | | | | | |
| Total equity securities | 10 | 597 | 34 | 417 | 44 | 1,014 |
| | | | | | | |
| Total available for sale securities | $15 | $4,579 | $47 | $3,432 | $62 | $8,011 |
At September 30, 2017, there were 9 securities in an unrealized loss position of which 3 of these positions had been in an unrealized loss position for 12 months or greater.
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
4.
INVESTMENTS (continued)
| | | |
| | | | |
| | | | | | | |
| | | | | | | |
| | | | | | |
| | | |
| | | | | | | |
| | | | | | | |
| Fixed maturity securities | | | | | | |
| U.S. Treasury and agency securities | 37 | 3,053 | - | - | 37 | 3,053 |
| | | | | | | |
| Total fixed-maturity securities | 37 | 3,053 | - | - | 37 | 3,053 |
| | | | | | | |
| Equity securities | | | | | | |
| Mutual funds | 6 | 193 | - | - | 6 | 193 |
| Preferred stocks | 4 | 396 | - | - | 4 | 396 |
| All other common stocks | 84 | 1,142 | 444 | 1,088 | 528 | 2,230 |
| | | | | | | |
| Total equity securities | 94 | 1,731 | 444 | 1,088 | 538 | 2,819 |
| | | | | | | |
| Total available for sale securities | $131 | $4,784 | $444 | $1,088 | $575 | $5,872 |
At December 31, 2016, there were 17 securities in an unrealized loss position of which 5 of these positions had been in an unrealized loss position for 12 months or greater.
The Company believes there were no fundamental issues such as credit losses or other factors with respect to its fixed-maturity securities. It is expected that the securities would not be settled at a price less than the par value of the investments
and because the Company has the ability and intent to hold these securities and it is probable that the Company will not be required to sell these securities until a market price recovery or maturity, the Company does not consider any of its fixed-maturity securities to be other-than-temporarily impaired at September 30, 2017 and December 31, 2016.
In determining whether equity securities are other than temporarily impaired, the Company considers its intent and ability to hold a security for a period of time sufficient to allow for the recovery of cost, along with factors including the length of time each security had been in an unrealized loss position, the extent of the decline and the near-term prospect for recovery. Based on management’s evaluation, the Company does not consider any of its equity securities to be other-than-temporarily impaired at September 30, 2017 and December 31, 2016.
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
4.
INVESTMENTS (continued)
Assets Measured at Estimated Fair Value on a Recurring Basis
The following table presents information about the Company’s financial assets measured at estimated fair value on a recurring basis that is reflected in the consolidated balance sheets at carrying value. The table indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as of September 30, 2017March 31, 2020 and December 31, 2016:2019:
| | Fair Value Measurements Using | |
| | | | | |
| As of March 31, 2020 | |
| Financial Assets: | | | | |
| Cash and cash equivalents | $5,068 | $- | $- | $5,068 |
| | | | | |
| Restricted cash and cash equivalents | $2,343 | $- | $- | $2,343 |
| | | | | |
| Total equity securities | 972 | - | - | 972 |
| | | | | |
| Total | $8,383 | $- | $- | $8,383 |
| | Fair Value Measurements Using | |
| | | | | |
| As of September 30, 2017 | |
| Financial Assets: | | | | |
| Cash and cash equivalents | $5,748 | $- | $- | $5,748 |
| | | | | |
| Restricted cash and cash equivalents | $18,496 | $- | $- | $18,496 |
| | �� | | | |
| Fixed-maturity securities: | | | | |
| U.S. Treasury and agency securities | 6,997 | - | - | 6,997 |
| | | | | |
| | | | | |
| Total fixed-maturity securities | 6,997 | - | - | 6,997 |
| | | | | |
| Mutual funds | 417 | - | - | 417 |
| Preferred stocks | 201 | - | - | 201 |
| All other common stocks | 1,230 | - | - | 1,230 |
| | | | | |
| Total equity securities | 1,848 | - | - | 1,848 |
| | | | | |
| Total available for sale securities | 8,845 | - | - | 8,845 |
| | | | | |
| Total | $33,089 | $- | $- | $33,089 |
| | Fair Value Measurements Using | |
| | | | | |
| As of December 31, 2019 | |
| Financial Assets: | | | | |
| Cash and cash equivalents | $5,962 | $- | $- | $5,962 |
| | | | | |
| Restricted cash and cash equivalents | $2,054 | $- | $- | $2,054 |
| | | | | |
| Total equity securities | 692 | - | - | 692 |
| | | | | |
| Total | $8,708 | $- | $- | $8,708 |
There were no transfers between Levels 1, 2 and 3 during the three months ended March 31, 2020 and 2019.
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARYSUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
4.
INVESTMENTS (continued)
| | Fair Value Measurements Using | |
| | | | | |
| As of December 31, 2016 | |
| Financial Assets: | | | | |
| Cash and cash equivalents | $12,242 | $- | $- | $12,242 |
| | | | | |
| Restricted cash and cash equivalents | $23,440 | $- | $- | $23,440 |
| | | | | |
| Fixed-maturity securities: | | | | |
| U.S. Treasury and agency securities | 6,051 | - | - | 6,051 |
| | | | | |
| | | | | |
| Total fixed-maturity securities | 6,051 | - | - | 6,051 |
| | | | | |
| | | | | |
| Mutual funds | 396 | - | - | 396 |
| Preferred stocks | 691 | - | - | 691 |
| All other common stocks | 3,854 | - | - | 3,854 |
| | | | | |
| Total equity securities | 4,941 | - | - | 4,941 |
| | | | | |
| Total available for sale securities | 10,992 | - | - | 10,992 |
| | | | | |
| Total | $46,674 | $- | $- | $46,674 |
5. TAXATION
Under current Cayman Islands law, no corporate entity, including the Company and the Subsidiary,subsidiaries, is obligated to pay taxes in the Cayman Islands on either income or capital gains. The Company and the Subsidiaryits subsidiaries have an undertaking from the Governor-in-Cabinet of the Cayman Islands, pursuant to the provisions of the Tax Concessions Law, as amended, that, in the event that the Cayman Islands enacts any legislation that imposes tax on profits, income, gains or appreciations, or any tax in the nature of estate duty or inheritance tax, such tax will not be applicable to the Company and the Subsidiaryits subsidiaries or their operations, or to the ordinary shares or related obligations, until April 23, 2033 and May 17, 2033, respectively.
The Company and its subsidiarysubsidiaries intend to conduct substantially all of their operations in the Cayman Islands in a manner such that they will not be engaged in a trade or business in the U.S. However, because there is no definitive authority regarding activities that constitute being engaged in a trade or business in the U.S. for federal income tax purposes, the Company cannot assure that the U.S. Internal Revenue Service will not contend, perhaps successfully, that the Company or its subsidiary is engaged in a trade or business in the U.S. A foreign corporation deemed to be so engaged would be subject to U.S. federal income tax, as well as branch profits tax, on its income that is treated as effectively connected with the conduct of that trade or business unless the corporation is entitled to relief under an applicable tax treaty.
6.VARIABLE INTEREST ENTITIES
Oxbridge Re NS. On December 22, 2017, the Company established Oxbridge Re NS, a Cayman domiciled and licensed special purpose insurer, formed to provide additional collateralized capacity to support Oxbridge Reinsurance Limited’s reinsurance business. In respect of the debt issued by Oxbridge Re NS to investors, Oxbridge Re NS has entered into retrocession agreements with Oxbridge Reinsurance Limited on June 1, 2019 and June 1, 2018. Under these agreements, Oxbridge Re NS receives a quota share of Oxbridge Reinsurance Limited’s catastrophe business. Oxbridge Re NS is a non-rated insurer and the risks have been fully collateralized by way of funds held in trust for the benefit of Oxbridge Reinsurance Limited. Oxbridge Re NS is able to provide investors with access to diversified natural catastrophe risk backed by the distribution, underwriting, analysis and research expertise of Oxbridge Re.
The Company has determined that Oxbridge Re NS meets the definition of a VIE as it does not have sufficient equity capital to finance its activities. The Company concluded that it is the primary beneficiary and has consolidated the subsidiary upon its formation, as it owns 100% of the voting shares, 100% of the issued share capital and has a significant financial interest and the power to control the activities of Oxbridge Re NS that most significantly impacts its economic performance. The Company has no other obligation to provide financial support to Oxbridge Re NS. Neither the creditors nor beneficial interest holders of Oxbridge Re NS have recourse to the Company’s general credit.
Upon issuance of a series of participating notes by Oxbridge Re NS, all of the proceeds from the issuance are deposited into collateral accounts, to fund any potential obligation under the reinsurance agreements entered into with Oxbridge Reinsurance Limited underlying such series of notes. The outstanding principal amount of each series of notes generally is expected to be returned to holders of such notes upon the expiration of the risk period underlying such notes, unless an event occurs which causes a loss under the applicable series of notes, in which case the amount returned is expected to be reduced by such noteholder's pro rata share of such loss, as specified in the applicable governing documents of such notes.
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARYSUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017March 31, 2020
6.VARIABLE INTEREST ENTITIES (continued)
6.
In addition, holders of such notes are generally entitled to interest payments, payable annually, as determined by the applicable governing documents of each series of notes. Oxbridge Re Holdings Limited receives an origination and structuring fee in connection with the formation, operation and management of Oxbridge Re NS.
Notes Payable to Series 2019-1 noteholders
Oxbridge Re NS entered into a retrocession agreement with Oxbridge Reinsurance Ltd on June 1, 2019 and issued $600 thousand of participating notes which provides quota share support for Oxbridge Re’s global property catastrophe excess of loss reinsurance business. The participating notes have been assigned Series 2019-1 and are due to mature on June 1, 2022. None of the participating notes were redeemed during the period ending March 31, 2020.
The income from Oxbridge Re NS operations that are attributable to the participating notes noteholders for the three months ended March 31, 2020 was $66,000 and are included within accounts payable and other liabilities as at March 31, 2020.
Notes Payable to Series 2018-1 noteholders
Oxbridge Re NS issued $2 million of participating notes on June 1, 2018, all of which were issued to third parties and which provides quota share support for Oxbridge Re’s global property catastrophe excess of loss reinsurance business. The operations of Oxbridge Re NS commenced on June 1, 2018. The participating notes were due to mature on June 1, 2021. However, during the quarter ending December 31, 2018, the participating notes were triggered, and suffered full loss, and as a result, these notes were subsequently redeemed and cancelled.
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
March 31, 2020
7. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table summarizes the Company’s loss and loss adjustment expenses (“LAE”) and the reserve for loss and LAE reserve movements for the three and nine-monththree-month periods ending September 30, 2017March 31, 2020 and 2016:2019:
| | | |
| | | |
| | | | | |
| | | |
| | | | | |
| | | | | |
| Gross balance, beginning of period | $3,043 | 2,250 | $8,702 | - |
| Incurred, net of reinsurance, related to: | | | | |
| Current period | 38,401 | (1,248) | 38,401 | 1,030 |
| Prior period | 2,999 | - | 4,026 | - |
| Total incurred, net of reinsurance | 41,400 | (1,248) | 42,427 | 1,030 |
| Paid, net of reinsurance, related to: | | | | |
| Current period | (21,500) | (30) | (21,500) | (58) |
| Prior period | (2,185) | - | (8,871) | - |
| Total paid, net of reinsurance | (23,685) | (30) | (30,371) | (58) |
| Net balance, end of period | 20,758 | 972 | 20,758 | 972 |
| Add: reinsurance recoverable | 4,000 | - | 4,000 | - |
| Gross balance, end of period | $24,758 | 972 | $24,758 | 972 |
| | | |
| | | |
| | |
| | | |
| Balance, beginning of period | $- | $4,108 |
| Incurred related to: | | |
| Current period | - | - |
| Prior period | - | - |
| Total incurred | - | - |
| Paid related to: | | |
| Current period | - | - |
| Prior period | - | (4,001) |
| Total paid | - | (4,001) |
| Balance, end of period | $- | $107 |
The reserves for losses and LAE are comprised of case reserves (which are based on claims that have been reported) and IBNR reserves (which are based on losses that are believed to have occurred but for which claims have not yet been reported and include a provision for expected future development on existing case reserves). The Company uses the assistance of an independent actuary in the determination of IBNR and expected future development of existing case reserves.
During the three and nine months ended September 30, 2017, the Company experienced significant limit losses on all its policies due to the individual and aggregate impact of Hurricanes Harvey, Irma and Maria. During the same period, the Company experienced unfavorable loss development of $2,999 and $4,026, respectively, which pertain to claims in the 2016 loss year, primarily Hurricane Matthew.
The uncertainties inherent in the reserving process and potential delays by cedants and brokers in the reporting of loss information, together with the potential for unforeseen adverse developments, may result in the reserve for losses and LAE ultimately being significantly greater or less than the reserve provided at the end of any given reporting period. The degree of uncertainty is further increased when a significant loss event takes place near the end of a reporting period. Reserve for losses and LAE estimates are reviewed periodically on a contract by contract basis and updated as new information becomes known. Any resulting adjustments are reflected in income in the period in which they become known.
The Company’s reserving process is highly dependent on the timing of loss information received from its cedants and related brokers.
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARYSUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017March 31, 2020
7. EARNINGS8. LOSS PER SHARE
A summary of the numerator and denominator of the basic and diluted (loss) earningsloss per share is presented below (dollars in thousands except per share amounts):
| | | | |
| | | |
| | | | | | |
| | | |
| | | | |
| Numerator: | | |
| Net (loss) earnings | $(22,954) | 2,985 | $(20,568) | 4,900 | |
| Net loss | | $(364) | (147) |
| | | |
| Denominator: | | |
| Weighted average shares - basic | 5,777,119 | 6,026,172 | 5,833,621 | 6,048,163 | 5,733,587 |
| Effect of dilutive securities - Stock options | - | - |
| Shares issuable upon conversion of warrants | - | - |
| Weighted average shares - diluted | 5,777,119 | 6,026,172 | 5,833,621 | 6,048,163 | 5,733,587 |
Basic (loss) earnings per share
| $(3.97) | 0.50 | $(3.53) | 0.81 | |
| Diluted (loss) earnings per share | $(3.97) | 0.50 | $(3.53) | 0.81 | |
| Loss per share - basic | | $(0.06) | (0.03) |
| Loss per share - diluted | | $(0.06) | (0.03) |
| | | |
For the three and nine-monththree-month periods ended September 30, 2017March 31, 2020 and 2016,2019, options to purchase 250,000 and 215,000540,000 ordinary shares respectively, were anti-dilutive as the sum of the proceeds, including unrecognized compensation expense, exceeded the average market price of the Company’s ordinary sharedue to net loss during the periods presented.
For the three and nine-monththree-month periods ended September 30, 2017March 31, 2020 and 2016,2019, 8,230,700 warrants to purchase an aggregate of 8,230,700 ordinary shares were not dilutive because the exercise price of $7.50 exceeded the average market price of the Company’s ordinary shareanti-dilutive due to net loss during the periods presented.
GAAP requires the Company to use the two-class method in computing basic (loss) earningsloss per share since holders of the Company’s restricted stock have the right to share in dividends, if declared, equally with common stockholders. These participating securities effect the computation of both basic and diluted (loss) earningsloss per share during periods of net (loss) income.loss.
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARYSUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017March 31, 2020
8.9. SHAREHOLDERS’ EQUITY
On February 28, 2014, the Company’s Registration Statement on Form S-1, as amended, relating to the initial public offering of the Company’s units was declared effective by the SEC. The Registration Statement covered the offer and sale by the Company of 4,884,650 units, each consisting of one ordinary share and one warrant (“Unit”), which were sold to the public on March 26, 2014 at a price of $6.00 per Unit. The ordinary shares and warrants comprising the Units began separate trading on May 9, 2014. The ordinary shares and warrants are traded on the Nasdaq Capital Market under the symbols “OXBR” and “OXBRW,” respectively. One warrant may be exercised to acquire one ordinary share at an exercise price equal to $7.50 per share on or before March 26, 2019.2024, as amended. At any time after September 26, 2014 and before the expiration of the warrants, the Company at its option may cancel the warrants in whole or in part, provided that the closing price per ordinary share has exceeded $9.38 for at least ten trading days within any period of twenty consecutive trading days, including the last trading day of the period.
The initial public offering resulted in aggregate gross proceeds to the Company of approximately $29.3 million (of which approximately $5 million related to the fair value proceeds on the warrants issued) and net proceeds of approximately $26.9 million after deducting underwriting commissions and offering expenses.
There were 8,230,700 warrants outstanding at September 30, 2017March 31, 2020 and 2016.2019. No warrants were exercised during the three and nine-monththree-month periods ended September 30, 2017March 31, 2020 and 2016.
On January 24, 2017, our Board of Directors declared a quarterly cash dividend of $0.12 per share payable on March 30, 2017 to shareholders of record on March 17, 2017.
On May 12, 2017, our Board of Directors declared a quarterly cash dividend of $0.12 per share payable on September 30, 2017 to shareholders of record on June 23, 2017.
On August 12, 2017, our Board of Directors declared a quarterly cash dividend of $0.12 per share payable on September 30, 2017 to shareholders of record on September 23, 2017.
In May 2016, the Company’s Board of Directors authorized a plan to repurchase up to $2,000,000 of the Company’s common shares, inclusive of commissions and fees. During the three and nine months ended September 30, 2017, the Company repurchased and retired a total of 72,747 and 182,562 shares, respectively, at a weighted-average price per share of $5.33 and $5.77, respectively, under this authorized repurchase plan. The total cost of shares repurchased, inclusive of fees and commissions, during the three and nine months ended September 30, 2017 were $390,000, or $5.37 per share, and $1,061,000, or $5.81 per share, respectively.
The stock repurchase program has been discontinued effective September 30, 2017. Through September 28, 2017, the Company had repurchased an aggregate of 326,413 shares for an aggregate cost of $1,803,568 under the Share Repurchase Program.
2019.
As of September 30, 2017,March 31, 2020, none of the Company’s retained earnings were restricted from payment of dividends to the Company’scompany’s shareholders. However, since most of the Company’s capital and retained earnings may be invested in the Subsidiary,its subsidiaries, a dividend from the Subsidiarysubsidiaries would likely be required in order to fund a dividend to the Company’s shareholders and would require notification to the Cayman Islands Monetary Authority (“CIMA”).
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
8. SHAREHOLDERS’ EQUITY(continued)
Under Cayman Islands law, the use of additional paid-in capital is restricted, and the Company will not be allowed to pay dividends out of additional paid-in capital if such payments result in breaches of the prescribed and minimum capital requirement. See also Note 10.
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
March 31, 2020
9.10.
SHARE-BASEDSTOCK-BASED COMPENSATION
The Company currently has outstanding stock-based awards granted under the 2014 Omnibus Incentive Plan (the “Plan”). Under the Plan, the Company has discretion to grant equity and cash incentive awards to eligible individuals, including the issuance of up to 1,000,000 of the Company’s ordinary shares. At September 30, 2017,March 31, 2020, there were 690,000400,000 shares available for grant under the Plan.
Stock options
The Company accounts for share-based compensation under the fair value recognition provisions of ASC Topic 718 – “Compensation – Stock Compensation.” Stock options granted and outstanding under the Plan vests quarterly over four years and are exercisable over the contractual term of ten years.
A summary of the stock option activity for the three and nine-monththree-month periods ended September 30, 2017March 31, 2020 and 20162019 is as follows:
| | Weighted-Average Exercise Price
| Weighted-Average Remaining Contractual Term
| Aggregate Intrinsic Value ($000)
|
| Outstanding at January 1, 2017 | 215,000 | | | |
| Granted | 35,000 | | | |
| Outstanding at March 31, 2017 | 250,000 | $6.01 | 8.2 years | $137,500 |
| Outstanding at June 30, 2017 | 250,000 | $6.01 | 7.9 years | $- |
| Outstanding at September 30, 2017 | 250,000 | $6.01 | 7.7 years | $- |
| Exercisable at September 30, 2017 | 145,625 | $6.01 | 7.7 years | $- |
| | | | | |
| | | | | |
| Outstanding at January 1, 2016 | 180,000 | | | |
| Granted | 35,000 | | | |
| Outstanding at March 31, 2016 | 215,000 | $6 | 8.9 years | $- |
| Outstanding at June 30, 2016 | 215,000 | $6 | 8.7 years | $- |
| Outstanding at September 30, 2016 | 215,000 | $6 | 8.4 years | $- |
| Exercisable at September 30, 2016 | 85,312 | $6 | 8.4 years | $- |
| | | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value |
| Outstanding at January 1, 2020 | 540,000 | | | |
| Outstanding at March 31, 2020 | 540,000 | $3.86 | 7.1 years | $- |
| Exercisable at March 31, 2020 | 334,063 | $4.92 | 6.2 years | $- |
| Outstanding at January 1, 2019 | 250,000 | | | |
| Granted | 290,000 | $2.00 | | |
| Outstanding at March 31, 2019 | 540,000 | $3.86 | 8.1 years | $- |
| Exercisable at March 31, 2019 | 246,250 | $5.71 | 6.4 years | $- |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
9.
SHARE-BASED COMPENSATION (continued)
Compensation expense recognized for the three-month periods ended September 30, 2017March 31, 2020 and 20162019 totaled $10,000$8,000 and $8,000,$9,000 respectively and for the nine-month periods ended September 30, 2017 and 2016 totaled $30,000 and $24,000, respectively. Compensation expense is included in general and administrative expenses. At September 30, 2017March 31, 2020 and 2016,2019, there was approximately $63,000$78,000 and $75,000,$112,000, respectively, of total unrecognized compensation expense related to non-vested stock options granted under the Plan. The Company expects to recognize the remaining compensation expense over a weighted-average period of twenty (20)twenty-seven (27) months.
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
March 31, 2020
10.
SHARE-BASED COMPENSATION (continued)
No options were granted during the three-month periodsperiod ended September 30, 2017 and 2016.March 31, 2020. During the nine-month periodsthree-month period ended September 30, 2017 and 2016, 35,000March 31, 2019 the Company granted 290,000 options in each period, were granted with fair value estimated on the date of grant using the following assumptions and the Black-Scholes option pricing model:
| | | |
| | | |
| Expected dividend yield | 8% | 9.6% |
| Expected volatility | 35% | 35% |
| Risk-free interest rate | 2.48% | 2.03% |
| Expected life (in years) | 10 | 10 |
| Per share grant date fair value of options issued | $0.73 | $0.34 |
| |
| |
| Expected dividend yield | 0% |
| Expected volatility | 31% |
| Risk-free interest rate | 2.59% |
| Expected life (in years) | 10 |
| Per share grant date fair value of options issued | $0.36 |
At the time of the grant, the dividend yield was based on the Company’s history and expectation of dividend payouts at the time of the grant; expected volatility was based on volatility of similar companies’ common stock; the risk-free rate was based on the U.S. Treasury yield curve in effect and the expected life was based on the contractual life of the options.
Restricted Stock Awards
The Company has granted and may grant restricted stock awards to eligible individuals in connection with their service to the Company. The terms of the Company’s outstanding restricted stock grants may include service, performance and market-based conditions. The fair value of theany awards with market-based conditions is determined using a Monte Carlo simulation method, which calculates many potential outcomes for an award and then establishes fair value based on the most likely outcome. The determination of fair value with respect to the awards with only performance or service-based conditions is based on the value of the Company’s stock on the grant date.
During the three-month periods ended March 31, 2020 and 2019, the Company did not grant any restricted stock. At March 31, 2020, there were no unvested restricted stock.
27
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARYSUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
9.
SHARE-BASED COMPENSATION (continued)
Information with respect to the activity of unvested restricted stock awards during the three and nine-month periods ended September 30, 2017 and 2016 is as follows:
| | Weighted- Number of Restricted
Stock
Awards | |
| | | |
| Nonvested at January 1, 2017 | 30,000 | $5.86 |
| Vested | (3,750) | |
| Nonvested at March 31, 2017 | 26,250 | $5.86 |
| | | |
| Vested | (3,750) | |
| Nonvested at June 30, 2017 | 22,500 | $5.86 |
| | | |
| Vested | (3,750) | |
| Nonvested at September 30, 2017 | 18,750 | $5.86 |
| | | |
| Nonvested at January 1, 2016 | 45,000 | $5.86 |
| Vested | (3,750) | |
| Nonvested at March 31, 2016 | 41,250 | $5.86 |
| | | |
| Vested | (3,750) | |
| Nonvested at June 30, 2016 | 37,500 | $5.86 |
| | | |
| Vested | (3,750) | |
| Nonvested at September 30, 2016 | 33,750 | $5.86 |
Compensation expense recognized for the three-month periods ended September 30, 2017 and 2016 totaled $22,000, and for the nine-month periods ended September 30, 2017 and 2016 totaled $65,000, and is included in general and administrative expenses. At September 30, 2017 and 2016, there was approximately $110,000 and $198,000, respectively, of total unrecognized compensation expense related to non-vested restricted stock granted under the Plan. The Company expects to recognize the remaining compensation expense over a weighted-average period of fifteen (15) months.
10.11. NET WORTH FOR REGULATORY PURPOSES
The Subsidiary issubsidiaries are subject to a minimum and prescribed capital requirement as established by CIMA. Under the terms of its license, the Subsidiary istheir respective licenses, Oxbridge Reinsurance Limited and Oxbridge Re NS are required to maintain a minimum and prescribed capital requirement of $500 in accordance with the Subsidiary’srelevant subsidiary’s approved business plan filed with CIMA.
At September 30, 2017,March 31, 2020, the Subsidiary’sOxbridge Reinsurance Limited’s net worth of $1.8$1.3 million exceeded the minimum and prescribed capital requirement. For the three and nine-monththree-month periods ended September 30, 2017,March 31, 2020 and 2019, the Subsidiary’s net loss was approximately $22.9 million$151 thousand and $20.9 million,$320 thousand respectively.
At March 31, 2020, the Oxbridge Re NS’ net worth of $129 thousand exceeded the minimum and prescribed capital requirement. For the three-month periods ended March 31, 2020 and 2019, the Subsidiary’s net income was approximately $24 thousand and $12 thousand respectively.
28
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
The Subsidiary isSubsidiaries are not required to prepare separate statutory financial statements for filing with CIMA, and there were no material differences between the Subsidiary’sSubsidiaries' GAAP capital, surplus and net income, and its statutory capital, surplus and net income as of September 30, 2017March 31, 2020 or for the period then ended.
11.12. FAIR VALUE AND CERTAIN RISKS AND UNCERTAINTIES
Fair values
With the exception of balances in respect of insurance contracts (which are specifically excluded from fair value disclosures under GAAP) and investment securities as disclosed in Note 4 of these consolidated financial statements, the carrying amounts of all other financial instruments, which consist of cash and cash equivalents, restricted cash and cash equivalents, accrued interest and dividends receivable, premiums receivable and other receivablesassets and accounts payable and accruals,other liabilities, approximate their fair values due to their short-term nature.
Concentration of underwriting risk
A substantial portion of the Company’s current reinsurance business ultimately relates to the risks of two entities domiciled in Florida in the United States, one of which is under common directorship;entities; accordingly, the Company’s underwriting risks are not significantly diversified.
Concentrations of Credit riskand Counterparty Risk
The Company’s derivative instruments are subject to counterparty risk. The Company routinely monitor this risk.
The Company is exposedmarkets retrocessional and reinsurance policies worldwide through its brokers. Credit risk exists to credit risk in relationthe extent that any of these brokers may be unable to counterparties that may default onfulfill their contractual obligations to the Company. For example, the Company is required to pay amounts owed on claims under policies to brokers, and these brokers, in the Company. In some jurisdictions, if a broker fails to make such a payment, the Company might remain liable to the ceding company for the deficiency. In addition, in certain jurisdictions, when the ceding company pays premiums for these policies to brokers, these premiums are considered to have been paid and the ceding insurer is no longer liable to the Company for those amounts, whether or not the premiums have actually been received.
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
March 31, 2020
12. FAIR VALUE AND CERTAIN RISKS AND UNCERTAINTIES (cont’d)
The amount of counterparty credit risk predominantly relatesCompany remains liable for losses it incurs to premiums receivable,the extent that any third-party reinsurer is unable or unwilling to make timely payments under reinsurance recoverable and assets held with counterparties. agreements. The Company would also be liable in the event that its ceding companies were unable to collect amounts due from underlying third-party reinsurers.
The Company mitigates its concentrations of credit and counterparty credit risk by using reputable and several counterparties which decreases the likelihood of any significant concentration of credit risk with any one counterparty. In addition,Additionally, the Company is exposed to credit risk on fixed-maturity debt instruments to the extentinvests in fixed maturity securities that the debtors may default on their debt obligations.are investment grade or higher.
Market risk
Market risk exists to the extent that the values of the Company’s monetary assets fluctuate as a result of changes in market prices. Changes in market prices can arise from factors specific to individual securities or their respective issuers, or factors affecting all securities traded in a particular market. Relevant factors for the Company are both volatility and liquidity of specific securities and markets in which the Company holds investments. The Company has established investment guidelines that seek to mitigate significant exposure to market risk.
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARYSUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
12. COMMITMENTS AND CONTINGENCIES |
March 31, 2020
13. LEASES
We adopted ASU 2016-02, Leases on January 1, 2019, which resulted in the recognition of operating leases on the consolidated balance sheet in 2019 and forward. See Note 2 – Significant Accounting Policies for more information on the adoption of the ASU. Right-of-use assets and lease liabilities are disclosed as line in the consolidated balance sheet. We determine if a contract contains a lease at inception and recognize operating lease right-of-use assets and operating lease liabilities based on the present value of the future minimum lease payments at the commencement date. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Lease agreements that have lease and non-lease components, are accounted for as a single lease component. Lease expense is recognized on a straight-line basis over the lease term.
The Company has antwo operating lease obligations namely for the Company’s office spacefacilities located at Strathvale House,2nd Floor, 90 North ChurchSuite 201, 42 Edward Street Grand Cayman, Cayman Islands and residential space at Turnberry Villas in Grand Cayman, Cayman Islands. The office lease has a remaining lease term of approximately 47 months and includes an option to extend the lease. Under the terms of the lease, is thirty-eightthe Company also has the right to terminate the lease after thirty-six (36) months and commenced on April 17, 2015. Rent expense under thisupon giving appropriate notice in writing to the Lessor. The residential lease for the three and nine-month periods ended September 30, 2017 was $14,700 and $44,100, respectively, andhas a remaining lease commitments at September 30, 2017 were $47,000.term of approximately 33 months.
The Company also has ancomponents of lease expense and other lease information as of and during the three-month periods ended March 31, 2020 and 2019 are as follows:
| | For the Three- Month Period | For the Three- Month Period |
| | |
Operating Lease Cost (1) | $24 | $19 |
| | | |
| Cash paid for amounts included in the measurement of lease liabilities | | |
| Operating cash flows from operating leases | $24 | $33 |
| | | |
(1) Includes short-term leases | | |
| | |
| Operating lease right-of-use assets | $284 | $155 |
| | | |
| Operating lease liabilities | $284 | $149 |
| | | |
| Weighted-average remaining lease term - operating leases | 3.30 years | 4.92 years |
| | | |
| Weighted-average discount rate - operating leases | 5.25% | 6.5% |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
March 31, 2020
13. LEASES (continued)
Future minimum lease payments under non-cancellable leases as of March 31, 2020, reconciled to our discounted operating lease for residential space at Britannia Villas #616, Grand Cayman, Cayman Islands that runs through October 31, 2017. Rent expense under this lease forliability presented on the three and nine-month periods ended September 30, 2017 was $12,900 and $38,700 respectively, and lease commitments at September 30, 2017 were $4,300.consolidated balance sheet are as follows:
13.| (in thousands) | | |
| Remainder of 2020 | $72 | $36 |
| 2021 | 96 | 36 |
| 2022 | 97 | 37 |
| 2023 | 40 | 37 |
| Thereafter | 6 | 6 |
| Total future minimum lease payments | $311 | $152 |
| | | |
| Less imputed interest | (27) | (19) |
| Total operating lease liability | $284 | 133 |
14. RELATED PARTY TRANSACTIONS
The Company hashad entered into reinsurance agreements with Claddaugh, which is a related entity through common directorship.directorships. At September 30, 2017March 31, 2020 and December 31, 2016,2019, there were no related-party amounts included within loss experience refund payable and unearned premiums reserve on the consolidated balance sheets are the following related-party amounts:
| | | |
| | |
| | | |
| Loss experience refund payable | $- | $1,470 |
| Unearned premiums reserve | $2,367 | $1,417 |
During the three and nine-monththree-month periods ended September 30, 2017March 31, 2020 and 2016,2019, there were no related-party amounts included within assumed premiums, change in loss experience refund payable and change in unearned premiums reserve on the consolidated statements of income are the following related-party amounts:operations.
| | | |
| | | |
| | | | | |
| | | | |
| | | | | |
| Revenue | | | | |
| Assumed premiums | - | - | 3,400 | 3,400 |
| Change in loss experience refund payable | 2,730 | (630) | 1,470 | (1,890) |
| Change in unearned premiums reserve | 4,150 | 850 | 2,450 | (875) |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
14.15. SUBSEQUENT EVENTS
We evaluate all subsequent events and transactions for potential recognition or disclosure in our consolidated financial statements. There were no other events subsequent to March 31, 2020 for which disclosure was required.
On November 12, 2017, the Company’s board of directors decided to suspend the Company’s regular $0.12 quarterly cash dividend, with the suspension to commence with the dividend that would have otherwise been payable for the third quarter of 2017. The board of directors intends to reconsider in the future the payment of a quarterly cash dividend, but the timing of such reconsideration has not been determined, and there is no intention to resume dividend payments in the foreseeable future, if at all. Any decision to resume dividend payments will be dependent upon a variety of factors, including the state of the Company’s business as well as general market conditions at the time of reconsideration, and there is no assurance that dividend payments will recommence. Additionally, and in recognition of its dividend suspension, the Company has also decided to suspend the payment of non-employee director fees, effective October 1, 2017, which had been $30,000 per director per annum.
ItemItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q, including in this Management’s Discussion and Analysis, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements generally are identified by the words “believe,” “project,” “predict,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” contained in our Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 13, 201723, 2020. We undertake no obligation to publicly update or revise any forward -looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned not to place undue reliance on the forward -looking statements which speak only to the dates on which they were made.
GENERAL
The following is a discussion and analysis of our results of operations for the three and nine-monththree-month periods ended September 30, 2017March 31, 2020 and 20162019 and our financial condition as of September 30, 2017March 31, 2020 and December 31, 2016.2019. The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in our Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 13, 201723, 2020. References to “we,” “us,” “our,” “our company,” or “the Company” refer to Oxbridge Re Holdings Limited and its wholly-owned subsidiary,subsidiaries, Oxbridge Reinsurance Limited and Oxbridge Re NS, unless the context dictates otherwise.
Overview
We are a Cayman Islands specialty property and casualty reinsurer that provides reinsurance solutions through our reinsurance subsidiary, Oxbridge Reinsurance Limited. We organized a new subsidiary, Oxbridge Re NS, which was incorporated on December 22, 2017 to function as a reinsurance sidecar which increases the underwriting capacity of Oxbridge Reinsurance Limited. Oxbridge Re NS commenced operations on June 1, 2018 and issued participating notes to third party investors, the proceeds of which was utilized to collateralize Oxbridge Reinsurance Limited’s reinsurance obligations. We focus on underwriting fully-collateralized reinsurance contracts primarily for property and casualty insurance companies in the Gulf Coast region of the United States, with an emphasis on Florida. We specialize in underwriting medium frequency, high severity risks, where we believe sufficient data exists to analyze effectively the risk/return profile of reinsurance contracts.
We underwrite reinsurance contracts on a selective and opportunistic basis as opportunities arise based on our goal of achieving favorable long-term returns on equity for our shareholders. Our goal is to achieve long-term growth in book value per share by writing business that generates attractive underwriting profits relative to the risk we bear. Unlike other insurance and reinsurance companies, we do not intend to pursue an aggressive investment strategy and instead will focus our business on underwriting profits rather than investment profits. However, we intend to complement our underwriting profits with investment profits on an opportunistic basis. Our primary business focus is on fully collateralized reinsurance contracts for property catastrophes, primarily in the Gulf Coast region of the United States, with an emphasis on Florida. Within that market and risk category, we attempt to select the most economically attractive opportunities across a variety of property and casualty insurers. As our capital base grows, however, we expect that we will consider further growth opportunities in other geographic areas and risk categories.
Our level of profitability is primarily determined by how adequately our premiums assumed and investment income cover our costs and expenses, which consist primarily of acquisition costs and other underwriting expenses, claim payments and general and administrative expenses. One factor leading to variation in our operational results is the timing and magnitude of any follow-on offerings we undertake (if any), as we would beare able to deploy new capital to collateralize new reinsurance treaties and consequently, earn additional premium revenue. In addition, our results of operations may be seasonal in that hurricanes and other tropical storms typically occur during the period from June 1 through November 30. Further, our results of operations may be subject to significant variations due to factors affecting the property and casualty insurance industry in general, which include competition, legislation, regulation, general economic conditions, judicial trends, and fluctuations in interest rates and other changes in the investment environment.
Because we employ an opportunistic underwriting and investment philosophy, period-to-period comparisons of our underwriting results may not be meaningful. In addition, our historical investment results may not necessarily be indicative of future performance. Due to the nature of our reinsurance and investment strategies, our operating results will likely fluctuate from period to period.
Business Outlook
Recent Developments
On November 12, 2017,The novel coronavirus ("COVID-19") pandemic has had and is expected to continue to have a significant effect on the Company’s board of directors decided to suspend the Company’s regular $0.12 quarterly cash dividend, with the suspension to commence with the dividend that would have otherwise been payable for the third quarter of 2017.reinsurance industry. The board of directors intends to reconsider in the future the payment ofindustry is currently being impacted by a quarterly cash dividend, but the timing of such reconsideration has not been determined, and there is no intention to resume dividend payments in the foreseeable future, if at all. Any decision to resume dividend payments will be dependent upon a varietynumber of factors includingincluding: uncertainties with respect to current and future losses, reduction in interest rates, equity market volatility and ongoing business and financial market impacts of an economic downturn. The insurance industry is likely to experience material losses resulting from COVID-19, which will reduce available capital and we expect will help to sustain the stateupward pricing trend for reinsurers that we were seeing across many lines of business before COVID-19. However, the Company’sultimate impact on current business in force as well as general market conditions at the time of reconsideration,risks and there is no assurance that dividend payments will recommence. Additionally, and in recognition of its dividend suspension, the Company has also decided to suspend the payment of non-employee director fees, effective October 1, 2017, which had been $30,000 per director per annum.
potential opportunities on future business remains highly uncertain
Impact of COVID-19 on Business Operations
We reacted quickly and decisively to the COVID-19 crisis when we became aware of the potential impact on our business operations. We have continued to monitor and adjust our operations as the global pandemic unfolds. As local directives required us to transition our operations to remote working arrangements, all functions remain fully operational with all employees having remote access to the Company's network and IT systems. Each employee is equipped with a computer and related equipment at their home to ensure access to our network and efficiency. Prior to the COVID-19 crisis we had general remote, work-from-home capabilities and had previously tested those systems. We have experienced no material disruption in our business operations
PRINCIPAL REVENUE AND EXPENSE ITEMS
Revenues
We derive our most significant revenues from two principal sources:
● premiums assumed from reinsurance on property and casualty business; and
● income from investments.investments, including Industry Loss Warranties
Premiums assumed include all premiums received by a reinsurance company during a specified accounting period, even if the policy provides coverage beyond the end of the period. Premiums are earned over the term of the related policies. At the end of each accounting period, the portion of the premiums that are not yet earned are included in the unearned premiums reserve and are realized as revenue in subsequent periods over the remaining term of the policy. Our policies typically have a term of twelve months. Thus, for example, for a policy that is written on July 1, 2017,2019, typically one-half of the premiums will be earned in 20162019 and the other half will be earned during 2017.2020. However, in the event of limit losses on our policies, as we have experienced during the quarter ended September 30, 2017, premium recognition has beenwill be accelerated to match losses incurred in the period, aswhen there is no possibility of any future treaty-year losses under the contracts.
Premiums from reinsurance on property and casualty business assumed are directly related to the number, type and pricing of contracts we write.
Premiums assumed are recorded net of change in loss experience refund, which consists of changes in amounts due to the cedants under two of our reinsurance contracts. These contracts contain retrospective provisions that adjust premiums in the event losses are minimal or zero. We recognize a liability pro-rata over the period in which the absence of loss experience obligates us to refund premiums under the contracts, and we will derecognize such liability in the period in which a loss experience arises. The change in loss experience refund is negatively correlated to loss and loss adjustment expenses described below.
Income from our investments is primarily comprised of interest income, dividends and net realized and unrealized gains (losses) on investment securities. Such income is primarily from the Company’s investments, which includes investments held in trust accounts that collateralize the reinsurance policies that we write. The investment parameters for trust accounts are generally be established by the cedant for the relevant policy.
Industry Loss Warranties
The Company may buy and sell industry loss warranties as a way to access certain risks. An industry loss warranty is a financial instrument designed to protect insurers or reinsurers from severe losses due to natural and man-made catastrophes and can take the form of either an insurance contract or a swap agreement. Under both forms, a premium is paid at the inception of the contract and, in return, a payout is made if a catastrophic event causes loss to the insurance industry in excess of a predetermined trigger amount.
Industry loss warranties may also be triggered by other parametric measurements defined in the contract such as observed wind speeds, measured seismic activity or other factors. Industry loss warranties in the form of an insurance contract (also referred to as the "indemnity form") are typically dual-trigger instruments and, in addition to requiring a loss to the industry, require that the buyer of the protection actually suffer a loss from the triggering event. The Company may buy and sell industry loss warranties in the form of an insurance contract or in the form of a derivative contract.
Expenses
Our expenses consist primarily of the following:
● losses and loss adjustment expenses;
● policy acquisition costs and underwriting expenses; and
● general and administrative expenses.
Loss and loss adjustment expenses are a function of the amount and type of reinsurance contracts we write and of the loss experience of the underlying coverage. As described below, loss and loss adjustment expenses are based on the claims reported by our Company’s ceding insurers, and may include an actuarial analysis of the estimated losses, including losses incurred during the period and changes in estimates from prior periods. Depending on the nature of the contract, loss and loss adjustment expenses may be paid over a period of years.
Policy acquisition costs and underwriting expenses consist primarily of brokerage fees, ceding commissions, premium taxes and other direct expenses that relate to our writing of reinsurance contracts. We amortize deferred acquisition costs over the related contract term.
General and administrative expenses consist of salaries and benefits and related costs, including costs associated with our professional fees, rent and other general operating expenses consistent with operating as a public company.
RESULTS OF OPERATIONS
The following table summarizes our results of operations for the three and nine-monththree-month periods ended September 30, 2017March 31, 2020 and 20162019 (dollars in thousands, except per share amounts):
| | |
| | |
| | | |
| Revenue | | |
| | | |
| Net premiums earned | 264 | - |
| Net investment income | 33 | 63 |
| Net realized investment gains | 6 | 3 |
| Change in fair value of equity securities | (326) | 51 |
| | | |
| Total revenue | (23) | 117 |
| | | |
| Expenses | | |
| Policy acquisition costs and underwriting expenses | 29 | - |
| General and administrative expenses | 246 | 264 |
| | | |
| Total expenses | 275 | 264 |
| | | |
| Loss before income loss attributable to noteholders | $(298) | (147) |
| | | |
| Income attributable to noteholders | (66) | - |
| | | |
| Net loss | $(364) | (147) |
| | | |
| Basic loss per share | $(0.06) | (0.03) |
| | | |
| Diluted loss per share | $(0.06) | (0.03) |
| | | |
| Weighted-average shares outstanding | | |
| Basic and Diluted | 5,733,587 | 5,733,587 |
| | | |
| Dividends paid per share | $- | - |
| | | |
| Performance ratios to net premiums earned: | | |
| Loss ratio | 0.0% | 0%* |
| Acquisition cost ratio | 11.0% | 0%* |
| Expense ratio | 104.2% | 0%* |
| Combined ratio | 104.2% | 0%* |
| *Ratios reflected as 0.0% due to no "net premiums earned" during the period. | | |
| | | |
| | | |
| | | | | |
| | | |
| | | | | |
| Revenue | | | | |
Assumed premiums
| $- | - | $18,256 | 15,065 |
| Premiums ceded | (733) | - | (880) | - |
| Change in loss experience refund payable | 2,730 | (2,089) | 1,470 | (4,465) |
| Change in unearned premiums reserve | 17,309 | 4,007 | 4,494 | (3,955) |
| | | | | |
| Net premiums earned | 19,306 | 1,918 | 23,340 | 6,645 |
| Net realized investment(losses) gains | (104) | 122 | (56) | 256 |
| Net investment income | 128 | 126 | 341 | 327 |
| | | | | |
| Total revenue | 19,330 | 2,166 | 23,625 | 7,228 |
| | | | | |
| Expenses | | | | |
| Losses and loss adjustment expenses | 41,400 | (1,248) | 42,427 | 1,030 |
| Policy acquisition costs and underwriting expenses | 514 | 83 | 672 | 211 |
| General and administrative expenses | 370 | 346 | 1,094 | 1,087 |
| | | | | |
| Total expenses | 42,284 | (819) | 44,193 | 2,328 |
| | | | | |
| Net (loss) income | $(22,954) | 2,985 | $(20,568) | 4,900 |
| | | | | |
| | | | | |
| | | | |
Basic (loss) earnings per share
| $(3.97) | 0.50 | $(3.53) | 0.81
|
Diluted (loss) earnings per share | (3.97)
| 0.50
| (3.53) | 0.81
|
| | | | | |
| Dividends paid per share | $0.12 | 0.12 | $0.36 | 0.36 |
| | | | | |
| | | | | |
| Performance ratios to net premiums earned: | | | | |
| Loss ratio | 214.4% | -65.1% | 181.8% | 15.5% |
| Acquisition cost ratio | 2.7% | 4.3% | 2.9% | 3.2% |
| Expense ratio | 4.6% | 22.4% | 7.6% | 19.5% |
| Combined ratio | 219.0% | -42.7% | 189.3% | 35.0% |
General. Net loss for the quarter ended September 30, 2017March 31, 2020 was $23 million,$364 thousand, or $3.97 per($0.06) basic and diluted loss per share compared to a net incomeloss of $3 million,$147 thousand, or $0.50 per($0.03) basic and diluted loss per share, for the quarter ended September 30, 2016.March 31, 2019. The significant decreaseincrease in loss is wholly due primarily to the triggeringunrealized losses incurred during the third quarter of 2017 of limit losses on all our reinsurance contracts, due to the individual and collective impact of Hurricane Harvey, Hurricane Irma and Hurricane Maria on our book of business, compared with no catastrophic losses during the same quarteras a result of the prior fiscal year.depressed financial markets created by COVID-19 pandemic.
Net loss for the nine months ended September 30, 2017 was $20.6 million, or $3.53 per basic and diluted share, compared to a net income of $4.9 million, or $0.81 per basic and diluted share, for the nine months ended September 30, 2016. The significant decrease is wholly due to the triggering during the third quarter of 2017 of limit losses on all our reinsurance contracts, due to the individual and collective impact of Hurricane Harvey, Hurricane Irma and Hurricane Maria on our book of business, compared with nominal losses during the previous nine-month period.
Premium Income. Net premiums earned typically reflects the pro rata inclusion into income of premiums assumed (net of loss experience refund) over the life of the reinsurance contracts. However, given the limit losses experienced on all our reinsurance contracts during the third quarter of 2017, premiums recognition have not been deferred through the remaining lives of those contracts and have been accelerated into the third quarter, as there is no possibility of any future treaty-year losses under such contracts.
Net premiums earned for the quarter ended September 30, 2017March 31, 2020 increased $17.4 million, to $19.3 million,$264 thousand from $1.9 million$0 for the quarter ended September 30, 2016.March 31, 2019. The increase is wholly due to the previous acceleration of premium recognition due to full limit losses being incurred on all of our reinsurance contracts during the quarter ended September 30, 2017.
Net premiums earned for the nine months ended September 30, 2017 increased $16.7 million, to $23.3 million, from $6.6 million for the nine months ended September 30, 2016. The increase is wholly dueMarch 31, 2019, when compared to the accelerationnormal recognition of premium recognition due to full limit losses being incurred on all of our reinsurance contracts during the nine months ended September 30, 2017.current period.
Losses Incurred. There were no lLossesosses incurred for the quarter ended September 30, 2017 increased $42.6 million, to $41.4 million, from ($1.2 million), for the quarter ended September 30, 2016. The increase during the quarterthree-month periods ending September 30, 2017 is wholly due to the triggering of limit losses on all of our reinsurance contracts, due to the individualMarch 31, 2020 and collective impact of Hurricane Harvey, Hurricane Irma and Hurricane Maria on our book of business, as well as adverse development on prior year claims, compared with no catastrophic losses during the same quarter of the prior fiscal year.2019.
Losses incurred for the nine months ended September 30, 2017 increased $41.4 million, to $42.4 million, from $1.0 million, for the nine months ended September 30, 2016. The increase during the nine months ended September 30, 2017 is wholly due to the triggering of limit losses on all of our reinsurance contracts, due to the individual and collective impact of Hurricane Harvey, Hurricane Irma and Hurricane Maria on our book of business, as well as adverse development on prior year claims, , compared with nominal loss and loss adjustment expenses during the nine-month period of the prior fiscal year.
Policy Acquisition Costs and Underwriting Expenses. Acquisition costs represent the amortization of the brokerage fees and federal excise taxes incurred on reinsurance contracts placed. Policy acquisition costs and underwriting expenses for the quarter ended September 30, 2017March 31, 2020 increased $431 thousand, to $514$29 thousand from $83 thousand$0 for the quarter ended September 30, 2016.March 31, 2019. The increase is due wholly due to the acceleration of premiumnormal recognition as mentioned above, and the resulting acceleration of policy acquisition costs.
Policy acquisition costs and underwriting expenses forduring the nine months ended September 30, 2017 increased $461 thousand, to $672 thousand from $211 thousand forcurrent period, when compared with no recognition in the nine months ended September 30, 2016. The increase is due whollyprior year period due to the previous acceleration of premium recognition as mentioned above, and the resulting acceleration of policy acquisition costs.such costs upon suffering limit losses on reinsurance contracts.
General and Administrative Expenses. General and administrative expenses for the quarter ended September 30, 2017 increased $24March 31, 2020 decreased $18 thousand, to $370$246 thousand, from $346$264 thousand for the quarter ended September 30, 2016.March 31, 2019. The increasedecrease is not considered material and represents fluctuation in general and administrative expenses betweendue to further cost savings initiatives implemented by the quarters represented.Company.
General and administrative expenses for the nine months ended September 30, 2017 decreased $7 thousand, to $1,094 thousand, from $1,087 thousand for the nine-month period ended September 30, 2016. The increase is not considered material and representsfluctuation in general and administrative expenses between the period represented.
MEASUREMENT OF RESULTS
We use various measures to analyze the growth and profitability of business operations. For our reinsurance business, we measure growth in terms of premiums assumed and we measure underwriting profitability by examining our loss, underwriting expense and combined ratios. We analyze and measure profitability in terms of net income and return on average equity.
Premiums Assumed. We use gross premiums assumed to measure our sales of reinsurance products. Gross premiums assumed also correlates to our ability to generate net premiums earned. See also the analysis above relating to the growth in net premiums earned.
Loss Ratio. The loss ratio is the ratio of losses and loss adjustment expenses incurred to premiums earned and measures the underwriting profitability of our reinsurance business. The loss ratio increased from (65.1%) for the quarter ended September 30, 2016March 31, 2020 was 0%. This is due to 214.4% forno loss and loss adjustment expenses incurred in the quarter ended September 30, 2017. The increase is primarily due to the multiple limit losses suffered during the quarter ended September 30, 2017, partially offset by a higher denominator in net premiums earned, compared with the previous quarter.March 31, 2020.
The loss ratio increased from 15.5% for the nine months ended September 30, 2016 to 181.8% for the nine months ended September 30, 2017. The increase is primarily due to the multiple limit losses suffered during the nine months ended September 30, 2017, partially offset by a higher denominator in net premiums earned, compared with the previous period.
Acquisition Cost Ratio. The acquisition cost ratio is the ratio of policy acquisition costs and other underwriting expenses to net premiums earned. The acquisition cost ratio measures our operational efficiency in producing, underwriting and administering our reinsurance business. The acquisition cost ratio decreasedincreased from 4.3%0% for the quarter ended September 30, 2016March 31, 2019 to 2.7%11% for the quarter ended September 30, 2017.March 31, 2020. The decreaseincrease is due wholly to the acceleration offact that there were no acquisition costs recognition mentioned earlier, more than offset by a larger denominator in net premiums earned,incurred during three-month period ended March 31, 2019, when compared with the three-month period ended September 30, 2016.current quarter.
The acquisition cost ratio decreased from 3.2% for the nine months ended September 30, 2016 to 2.9% for the nine months ended September 30, 2017. The decrease is due wholly to the acceleration of acquisition costs recognition mentioned earlier, more than offset by a larger denominator in net premiums earned, when compared with the nine-month period ended September 30, 2016.
Expense Ratio. The expense ratio is the ratio of policy acquisition costs, other underwriting expenses and other administrative expenses to net premiums earned. We use the expense ratio to measure our operating performance. The expense ratio decreasedincreased from 22.4%0% for the three-month period ended September 30, 2016March 31, 2019 to 4.6%104.2% for the three-month period ended September 30, 2017.March 31, 2020. The decreaseincrease is due wholly primarily to a significant increasedenominator of $0 in net premiums earned partially offset by increased policy acquisition costs as recorded during the three-month period ended September 30, 2017,March 31, 2019, when compared with the three-month period ended September 30, 2016.March 31, 2020.
The expense ratio decreased from 19.5% for the nine-month period ended September 30, 2016 to 7.6% for the nine-month period ended September 30, 2017. The decrease is due wholly to a significant increase in net premiums earned partially offset by increased policy acquisition costs as recorded during the nine-month period ended September 30, 2017, when compared with the nine-month period ended September 30, 2016.
Combined Ratio. We use the combined ratio to measure our underwriting performance. The combined ratio is the sum of the loss ratio and the expense ratio. If the combined ratio is at or above 100%, we are not underwriting profitably and may not be profitable. The combined ratio increased from (42.7%)0% for the three-month period ended September 30, 2016March 31, 2019 to 219%104.2% for the three-month period ended September 30, 2017.March 31, 2020. The increase in the combined ratio is wholly due to a significantly higher loss ratiodenominator of $0 in net premiums earned as recorded during the three-month period ended September 30, 2017 as mentioned above,March 31, 2019, when compared with the previous quarter.three-month period ended March 31, 2020.
The combined ratio increased from 35% for the nine-month period ended September 30, 2016 to 189.3% for the nine-month period ended September 30, 2017. The increase in the combined ratio is due to a significantly higher loss ratio during the nine-month period ended September 30, 2017 as mentioned above, when compared with the previous period.
FINANCIAL CONDITION – SEPTEMBER 30, 2017MARCH 31, 2020 COMPARED TO DECEMBER 31, 20162019
Restricted Cash and Cash Equivalents. As of September 30, 2017,March 31, 2020, our restricted cash and cash equivalents decreasedincreased by $11.4 million,$289 thousand, or 32%14%, to $24.2$2.3 million, from $35.7$2 million as of December 31, 2016.2019. The decreaseincrease is the net result of premium receipts and collateral deposits, more than offset by collateral returned on the expiration of reinsurance contracts, coupled with withdrawals by the cedants for settlement of losses under the reinsurance contractsnet written premiums received during the nine-month periodthree months ended September 30, 2017.March 31, 2020.
Investments. As of September 30, 2017,March 31, 2020, our available-for-saleequity securities decreasedincreased by $2.1 million,$280 thousand or 20%,40% to $8.8 million,$972 thousand, from $11 million$692 thousand as of December 31, 2016.2019. The decreaseincrease is primarily a result of net salespurchase of fixed-maturity and equity securities, partially offset by the unrealized loss of $326 thousandduring the nine-monththree-month period ended September 30, 2017.March 31, 2020.
Premiums ReceivableReserve for losses and loss adjustment expenses. As of September 30, 2017, our premiums receivable decreased by approximately $150 thousand, or 4%, to $3.9 million,March 31, 2020, there was no change in reserve for losses and loss adjustment expenses from $4 million as of December 31, 2016.2019. The decrease isreserve remained at $0 due to the premiums assumed under new reinsurance contracts effective June 1, 2017, more than offset by the receipt of premium installments during the nine-month period ended September 30, 2017.
Loss Experience Refund Payable.As of September 30, 2017, our loss experience refund payable decreased by $1.5 million, or 100%, to $0, from $1.5 million at December 31, 2016. The decrease is wholly due to the derecognition of the liability as a result of the limit losses incurred under two of reinsurance contracts, which obligates us to refund premiums in the eventfact that there were no significant losses duringevents and no reported claims in the nine-monththree-month period ended September 30, 2017. Given the limit losses, no refund premiums are due, and as such, the loss experience refund payable liability was derecognized.
Unearned Premiums Reserve.As of September 30, 2017, our unearned premiums reserve decreased by $1 million, or 32%, to $2.4 million, from $3.4 million at December 31, 2016. The decrease is due primarily to the successful placement of reinsurance contracts for the treaty year effective June 1, 2017 more than offset by the acceleration of recognition of premiums due to the full limit losses on all of our contracts.necessitate a reserve.
LIQUIDITY AND CAPITAL RESOURCES
General
We are organized as a holding company with substantially no operations at the holding company level. Our operations are conducted through our sole reinsurance subsidiary,subsidiaries, Oxbridge Reinsurance Limited and Oxbridge Re NS, which underwrites risks associated with our property and casualty reinsurance programs. We have minimal continuing cash needs at the holding company level, with such expensesneeds principally being related to the payment of administrative expenses and shareholder dividends. There are restrictions on Oxbridge Reinsurance Limited’s and Oxbridge Re NS’ ability to pay dividends which are described in more detail below.
Sources and Uses of Funds
Our sources of funds primarily consist of premium receipts (net of brokerage fees and federal excise taxes, where applicable) and investment income, including interest, dividends and realized gains. We use cash to pay losses and loss adjustment expenses, other underwriting expenses, dividends, and general and administrative expenses. Substantially all of our surplus funds, net of funds required for cash liquidity purposes, are invested in accordance with our investment guidelines. Our investment portfolio is primarily comprised of cash and highly liquid securities, which can be liquidated, if necessary, to meet current liabilities. We believe that we have sufficient flexibility to liquidate any long-term securities that we own in a rising market to generate liquidity.
As of September 30, 2017,March 31, 2020, we believe we had sufficient cash flows from operations to meet our liquidity requirements. We expect that our operational needs for liquidity will be met by cash, investment income and funds generated from underwriting activities. We have no plans to issue debt and expect to fund our operations for the foreseeable future from operating cash flows, as well as from potential future equity offerings. However, we cannot provide assurances that in the future we will not incur indebtedness to implement our business strategy, pay claims or make acquisitions.
Although Oxbridge Re Holdings Limited is not subject to any significant legal prohibitions on the payment of dividends, its subsidiaries Oxbridge Reinsurance Limited isand Oxbridge Re NS are subject to Cayman Islands regulatory constraints that affect its ability to pay dividends to us and include a minimum net worth requirement. Currently, the minimum net worth requirement for Oxbridge Reinsurance Limitedeach subsidiary is $500. As of September 30, 2017, Oxbridge Reinsurance LimitedMarch 31, 2020, each subsidiary exceeded the minimum required. By law, Oxbridge Reinsurance Limitedeach subsidiary is restricted from paying a dividend if such a dividend would cause its net worth to drop to less than the required minimum.
Our reinsurance operations exposed us to claims arising out of unpredictable catastrophic events during the third quarter of 2017. The incidence and severity of catastrophes are inherently unpredictable but the loss experience of property catastrophe reinsurers has been generally characterized as low frequency and high severity. Claims from catastrophic events have reduced our earnings and caused substantial volatility in our results of operations, and adversely affected our financial condition. The corresponding reduction in our surplus level will impact our ability to write new reinsurance policies at future renewal periods.
Cash Flows
Our cash flows from operating, investing and financing activities for the nine-monththree-month periods ended September 30, 2017March 31, 2020 and 20162019 are summarized below.
Cash Flows for the NineThree months ended September 30, 2017March 31, 2020 (in thousands)
Net cash used in operating activities for the ninethree months ended September 30, 2017March 31, 2020 totaled $10,689, which consisted primarily of cash received from net written premiums less cash disbursed for operating expenses and net loss payments. Net cash provided by investing activities of $7,347 was primarily due to the net sales of available-for-sale securities and the addition of collateral upon renewal or underwriting of new reinsurance contracts. Net cash used in financing activities totaled $3,152 representing net cash dividend payments and cash used to repurchase ordinary shares under the Company’s share repurchase plan.
Cash Flows for the Nine months ended September 30, 2016 (in thousands)
Net cash provided by operating activities for the nine months ended September 30, 2016 totaled $1,210,$4, which consisted primarily of cash received from net written premiums less cash disbursed for operating expenses. Net cash used in investing activities of $601 was primarily due to the net purchases of equity securities. There was no cash used in or provided by financing activities.
Cash Flows for the Three months ended March 31, 2019 (in thousands)
Net cash used in operating activities for the three months ended March 31, 2019 totaled $4,251, which consisted primarily of cash received from investments less cash disbursed for operating expenses and net loss payments. Net cash provided by investing activities of $2,257$994 was primarily due to the releasenet proceeds from sale of collateral renewal or underwriting of new reinsurance contracts, offset by the net purchases of available for salefixed-maturity securities. NetThere was no cash used in or provided by financing activities totaled $2,573 representing net cash dividend payments and cash used to repurchase ordinary shares under the Company’s share repurchase plan.
Share Repurchase Program
On May 12, 2016, the Board of Directors of Oxbridge Re Holdings Limited (the “Company”) authorized a share repurchase program (the “Share Repurchase Program”), pursuant to which the Company may, from time to time, purchase shares of its common stock for an aggregate repurchase price not to exceed $2 million. The plan expires on December 31, 2017. Share repurchases may be executed through various means, including, without limitation, open market transactions, privately negotiated transactions or tender offers. The repurchases will be funded from cash on hand or other capital markets sources. The stock repurchase program has been discontinued effective September 30, 2017.
The Company has adopted a Rule 10b5-1 share repurchase plan under the Securities Exchange Act of 1934 (the “Plan”) in connection with the Share Repurchase Program. The Plan allows the Company to repurchase its shares at times when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. Because repurchases under the Plan are subject to certain pricing parameters, there is no guarantee as to the exact number of shares that will be repurchased under the Plan or that there will be any repurchases pursuant to the Plan. Subject to applicable regulations. On September 28, 2017, the Company cancelled the Plan. Through September 28, 2017, the Company had repurchased an aggregate of 326,413 shares for an aggregate cost of $1,803,568 under the Share Repurchase Program.
OFF-BALANCE SHEET ARRANGEMENTS
As of September 30, 2017,March 31, 2020, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
EXPOSURE TO CATASTROPHES
As with other reinsurers, our operating results and financial condition could be adversely affected by volatile and unpredictable natural and man-made disasters, such as hurricanes, windstorms, earthquakes, floods, fires, riots and explosions. Although we attempt to limit our exposure to levels we believe are acceptable, it is possible that an actual catastrophic event or multiple catastrophic events could have a material adverse effect on our financial condition, results of operations and cash flows. As described under “CRITICAL ACCOUNTING POLICIES—Reserves for Losses and Loss Adjustment Expenses” below, under GAAP, we are not permitted to establish loss reserves with respect to losses that may be incurred under reinsurance contracts until the occurrence of an event which may give rise to a claim. As a result, only loss reserves applicable to losses incurred up to the reporting date may be established, with no provision for a contingency reserve to account for expected future losses.
CRITICAL ACCOUNTING POLICIES
We are required to make estimates and assumptions in certain circumstances that affect amounts reported in our consolidated financial statements and related footnotes. We evaluate these estimates and assumptions on an on-going basis based on historical developments, market conditions, industry trends and other information that we believe to be reasonable under the circumstances. These accounting policies pertain to premium revenues and risk transfer, reserve for loss and loss adjustment expenses and the reporting of deferred acquisition costs.
Premium Revenue and Risk Transfer. We record premiums revenue as earned pro-rata over the terms of the reinsurance agreements, or period of risk, where applicable, and the unearned portion at the balance sheet date is recorded as unearned premiums reserve. A reserve is made for estimated premium deficiencies to the extent that estimated losses and loss adjustment expenses exceed related unearned premiums. Investment income is not considered in determining whether or not a deficiency exists.
We account for reinsurance contracts in accordance with ASC 944, ‘‘Financial Services – Insurance.” Assessing whether or not a reinsurance contract meets the conditions for risk transfer requires judgment. The determination of risk transfer is critical to reporting premiums written. If we determine that a reinsurance contract does not transfer sufficient risk, we must account for the contract as a deposit liability.
Loss experience refund payable. Certain contracts include retrospective provisions that adjust premiums or result in profit commissions in the event losses are minimal or zero. Under such contracts, the Company expects to recognize aggregate liabilities payable to the ceding insurers assuming no losses occur during the contract period. In accordance with GAAP, the Company will recognize a liability in the period in which the absence of loss experience obligates the Company to pay cash or other consideration under the contract. On the contrary, the Company will derecognize such liability in the period in which a loss experience arises. Such adjustments to the liability, which accrue throughout the contract term, will reduce the liability should a catastrophic loss event covered by the Company occur.
Reserves for Losses and Loss Adjustment Expenses. We determine our reserves for losses and loss adjustment expenses on the basis of the claims reported by our ceding insurers and for losses incurred but not reported, we utilize the assistance of an independent actuary. The reserves for losses and loss adjustment expenses represent management’s best estimate of the ultimate settlement costs of all losses and loss adjustment expenses.
We believe that the amounts are adequate; however, the inherent impossibility of predicting future events with precision, results in uncertainty as to the amount which will ultimately be required for the settlement of losses and loss expenses, and the differences could be material. Adjustments are reflected in the consolidated statements of incomeoperations in the period in which they are determined.
Under GAAP, we are not permitted to establish loss reserves until the occurrence of an actual loss event. As a result, only loss reserves applicable to losses incurred up to the reporting date may be recorded, with no allowance for the provision of a contingency reserve to account for expected future losses. Losses arising from future events, which could be substantial, are estimated and recognized at the time the loss is incurred.
As of September 30, 2017, our best estimate forMarch 31, 2020, we had no reserves for loss and loss adjustment expenses was $24.8 million, with IBNR representing approximately 8% of such reserves.due to no significant events occurring during the period and no reported claims on contract in force. See Note 7 to the consolidated financial statements.
Our reserving methodology does not lend itself well to a statistical calculation of a range of estimates surrounding the best point estimate of our reserve for loss and loss adjustment expense. Due to the low frequency and high severity nature of claims within much of our business, our reserving methodology principally involves arriving at a specific point estimate for the ultimate expected loss on a contract by contract basis, and our aggregate loss reserves are the sum of the individual loss reserves established.
Deferred Acquisition Costs. We defer certain expenses that are directly related to and vary with producing reinsurance business, including brokerage fees on gross premiums assumed, premium taxes and certain other costs related to the acquisition of reinsurance contracts. These costs are capitalized and the resulting asset, deferred acquisition costs, is amortized and charged to expense in future periods as premiums assumed are earned. The method followed in computing deferred acquisition costs limits the amount of such deferral to its estimated realizable value. The ultimate recoverability of deferred acquisition costs is dependent on the continued profitability of our reinsurance underwriting. If our underwriting ceases to be profitable, we may have to write off a portion of our deferred acquisition costs, resulting in a further charge to income in the period in which the underwriting losses are recognized.
Stock-Based Compensation: The Company accounts for stock-based compensation under the fair value recognition provisions of GAAP which requires the measurement and recognition of compensation for all stock-based awards made to employees and directors, including stock options and restricted stock issuances based on estimated fair values. The Company measures compensation for restricted stock based on the price of the Company’s ordinary shares at the grant date. Determining the fair value of share purchase options at the grant date requires significant estimation and judgment. The Company uses an option-pricing model (Black-Scholes option pricing model) to assist in the calculation of fair value for share purchase options. The Company's shares have not been publicly traded for a sufficient length of time to solely use the Company's performance to reasonably estimate the expected volatility.
Therefore, when estimating the expected volatility, the Company takes into consideration the historical volatility of similar entities. The Company considers factors such as an entity's industry, stage of life cycle, size and financial leverage when selecting similar entities. The Company uses a sample peer group of companies in the reinsurance industry as well as the Company’s own historical volatility in determining the expected volatility. Additionally, the Company uses the full life of the options, ten years, as the estimated term of the options, and has assumed no forfeitures during the life of the options.
The Company uses the straight-line attribution method for all grants that include only a service condition. Compensation expense related to all awards is included in general and administrative expenses.
Quantitative and Qualitative Disclosures About Market Risk
Because we are a smaller reporting company, we are not required to provide this information.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), we have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2017March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
We are not currently involved in any litigation or arbitration. We anticipate that, similar to the rest of the insurance and reinsurance industry, we will be subject to litigation and arbitration in the ordinary course of business.
There With the exception of the item described below, there have been no material changes tofrom the risk factors previously disclosed in the section entitled “Risk Factors” in our Form 10-K, which was filed with the Securities and Exchange CommissionSEC on March 13, 2017.23, 2020.Our operations could be materially and adversely affected by measures implemented by the Cayman Islands' government, as well as international federal, state and local governments to cope with public health issues such as the outbreak of COVID-19, resulting in a material impact to our financial position and results of operations.
The measures undertaken by governmental authorities to combat a serious public health issue could significantly disrupt or prevent us from operating our business in the ordinary course for an extended period and could materially affect our financial position and operating results.
On March 11, 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic. On March 25, 2020, the Cayman Islands' government implemented strict curfew restrictions to control the spread of COVID-19. Wide-ranging actions undertaken by local and international government authorities include full lockdowns, airport shutdowns, travel restrictions, quarantines and stay-at-home orders. As a result, people are forced to substantially restrict daily activities resulting in businesses having to curtail or cease normal operations and furlough or terminate employees. Such measures cause concerns over the stability of global markets and threaten prospects for economic growth.
ItemIn response to the pandemic, we temporarily closed our offices and asked our employees to work from home until further notice. Since then the Cayman Islands government have issued stay at home orders for non-essential workers. When we reopen our offices and when government orders will be rescinded is uncertain and will depend upon the severity and duration of the COVID-19 outbreak.
Furthermore, the disruption of global commercial activities across all market sectors and the significant declines and volatility in financial markets could result in a material adverse impact on our financial position, results of operations and cash flows. Possible effects may include, but are not limited to a decline the value of equity securities held by us, and disruption to cash inflows from our reinsurance business.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
None.
None.
Not applicable.
None.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.