OXBRIDGE RE HOLDINGS LIMITED 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
GENERAL
The following is a discussion and analysis of our results of operations for the
three and nine-month periods ended
Overview and Trends
We are a
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. Additionally, we intend to complement our
underwriting profits with investment profits on an opportunistic basis. Our
underwriting business focus is on fully collateralized reinsurance contracts for
property catastrophes, primarily in the
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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 are 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
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.
Compared to most of our competitors, we are small and have low overhead expenses. We believe that our expense efficiency, agility and existing relationships support our competitive position and allows us to profitably participate in lines of business that fit within our strategy. Over time we expect our expense advantage to erode as the industry acts to reduce frictional costs.
Recent Developments Oxbridge Acquisition Corp.
On
The initial public offering of Oxbridge Acquisition was sponsored by
In connection with the organization of Sponsor, OXRE placed approximately 34.7%
of the risk capital and owns approximately 49.6% and 63.1% of the ordinary
shares and preferred shares, respectively, of the Sponsor (the "Sponsor Equity
Interest"). The preferred shares of Sponsor are nonvoting shares and generally
entitle the holders thereof to receive the net proceeds, if any, received by
Sponsor from the sale, exchange, or disposition of the Private Placement
Warrants or the shares issuable upon the exercise thereof, and the ordinary
shares of Sponsor (which are voting shares in Sponsor) will generally be
equivalent to the value of the Class
On
On
The preferred shares of Sponsor generally entitle the holders thereof to receive
the net proceeds, if any, received by Sponsor from the sale, exchange, or
disposition of the Private Placement Warrants or the shares issuable upon the
exercise thereof, and the ordinary shares of Sponsor are equivalent to the value
of the Class
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PRINCIPAL REVENUE AND EXPENSE ITEMS
Revenues
We derive our most significant revenues from three principal sources:
? premiums assumed from reinsurance on property and casualty business; ? income from investments and unrealized gain (loss) on other investments; ? income under our Administrative Services Agreement
Premiums Assumed
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
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.
Investment Income
Income from our investments is primarily comprised of net realized and unrealized gains (losses) interest income and dividends on investment securities. Such income is primarily from the Company's investments, which includes other investments in Oxbridge Acquisition Corp. and 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.
Administrative Services Agreement
Commencing on the effective date of the SPAC's IPO, the Sponsor agreed to pay
the Company a total of up to
30 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
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
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
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.
31 RESULTS OF OPERATIONS
The following is our consolidated statement of operations and performance ratios
for the three and nine-month periods ended
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Revenue
Assumed premiums $ - - 705 904
Premiums ceded - - (60 ) -
Change in unearned premiums
reserve 591 370 350 (149 )
Net premiums earned 591 370 995 755
Net investment and other income 53 25 128 64
Net realized investment gains - - 27 755
Unrealized (loss) gain on other
investment (1,327 ) 7,146 (986 ) 7,146
Change in fair value of equity
securities (13 ) (512 ) (355 ) (566 )
Total revenue (696 ) 7,029 (191 ) 8,154
Expenses
Losses and loss adjustment
expenses 1,073 158 1,073 158
Policy acquisition costs and
underwriting expenses 65 41 110 83
General and administrative
expenses 323 280 1,050 845
Total expenses 1,461 479 2,233 1,086
(Loss) income before income
attributable to noteholders (2,157 ) 6,550 (2,424 ) 7,068
Income attributable to
noteholders - (24 ) (43 ) (66 )
Net (loss) income $ (2,157 ) 6,526 (2,467 ) 7,002
(Loss) earnings per share
Basic and Diluted $ (0.37 ) 1.14 (0.43 ) 1.22
Weighted-average shares
outstanding
Basic and Diluted 5,781,587 5,733,587 5,771,506 5,733,587
Performance ratios to net
premiums earned:
Loss ratio 181.6 % 42.7 % 107.8 % 20.9 %
Acquisition cost ratio 11.0 % 11.1 % 11.1 % 11.0 %
Expense ratio 65.7 % 86.8 % 116.6 % 122.9 %
Combined ratio 247.2 % 129.5 % 224.4 % 143.8 %
General. Net Loss for the quarter ended
Net loss for the nine months ended
Premium Income. Net premiums earned typically reflects the pro rata inclusion into income of premiums assumed over the life of the reinsurance contracts.
Net premiums earned for the quarter ended
Net premiums earned for the nine months ended
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Losses Incurred. Losses incurred for the quarter ended
Losses incurred for the nine-month period ended
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
Policy acquisition costs and underwriting expenses for the nine months ended
General and Administrative Expenses. General and administrative expenses for the
quarter ended
General and administrative expenses for the nine months ended
33 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.
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 42.7% for the quarter end
The loss ratio increased from 20.9% for the nine-month period ended
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 marginally decreased marginally from 11.1% for the quarter ended
The acquisition cost ratio increased marginally from 11.0% for the nine-month
period ended
Expense Ratio. The expense ratio is the ratio of policy acquisition costs, and
general and administrative expenses to net premiums earned. We use the expense
ratio to measure our operating performance. The expense ratio decreased from
86.8% for the three-month period ended
The expense ratio decreased from 122.9% for the nine -month period ended
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. The combined ratio increased from 129.5% for the three-month period ended
The combined ratio increased from 143.8% for the nine-month period ended
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FINANCIAL CONDITION -
Restricted Cash and Cash Equivalents. As of
Investments. As of
Other Investments. As of
Notes Payable to Noteholders. As of
LIQUIDITY AND CAPITAL RESOURCES
General
We are organized as a holding company and provide administrative and management
services to our subsidiaries, as well as to Oxbridge Acquisition Corp., a
special purpose acquisition company Our operations are conducted through our
reinsurance subsidiaries,
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 business plan and investment guidelines. Our investment portfolio, except for our investment in OAC sponsor Ltd., 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 securities that we own to generate liquidity.
As of
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Although
Cash Flows
Our cash flows from operating, investing and financing activities for the nine
-month periods ended
Cash Flows for the Nine months ended
Net cash used in operating activities for the nine months ended
Cash Flows for the Nine months ended
Net cash used in operating activities for the nine months ended
OFF-BALANCE SHEET ARRANGEMENTS
As of
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 accounting principles generally accepted in
36 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 fair value measurements, particular with respect to our beneficial interest in Oxbridge Acquisition Corp., premium revenues and risk transfer, reserve for loss and loss adjustment expenses, and deferred acquisition costs.
Fair value measurement: GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy under GAAP are as follows:
Level 1 Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date?
Level 2 Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active?
and
Level 3 Inputs that are unobservable.
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 fixed 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 stocks and exchange-traded funds is based on the last traded price. The fair value of our indirect investment in Oxbridge Acquisition Corp. is based on the fair value calculation made by an independent valuation expert utilizing observable and unobservable inputs. 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 and management. The investment custodians and management 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, as well as the marketability of the instrument and the risk of forfeiture of such instrument.
Premium Revenue and Risk Transfer. We record premiums revenue as earned pro-rata over the terms of the reinsurance agreements 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.
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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 IBNR, we use 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 income 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.
At
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.
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