U.S. Markets closed

Edited Transcript of OXBR earnings conference call or presentation 19-Mar-19 8:30pm GMT

Q4 2018 Oxbridge Re Holdings Ltd Earnings Call

GEORGE TOWN Mar 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Oxbridge Re Holdings Ltd earnings conference call or presentation Tuesday, March 19, 2019 at 8:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Sanjay Madhu

Oxbridge Re Holdings Limited - Chairman, President & CEO

* Wrendon Timothy

Oxbridge Re Holdings Limited - CFO, Secretary & Principal Accounting Officer

================================================================================

Conference Call Participants

================================================================================

* Kent Engelke

* Steven F. Marascia

Capitol Securities Management, Inc. - Director of Research

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon. Welcome to Oxbridge Re's Fourth Quarter and Full Year 2018 Earnings Call. My name is Tom, and I will be your conference operator this afternoon. (Operator Instructions)

Joining us for today's presentation is Oxbridge Re's President and Chief Executive Officer, Jay Madhu; and Chief Financial Officer and Corporate Secretary, Wrendon Timothy. (Operator Instructions)

I would like to remind everyone that this call is being broadcast live via webcast and available via webcast replay until April 19, 2019, on the Investor Information section of the Oxbridge Re website at www.oxbridgere.com.

Now I'd like to turn the call over to Wrendon Timothy, Chief Financial Officer of Oxbridge Re, who will provide the necessary cautions regarding the forward-looking statements that will be made by management during this call. Sir, please proceed.

--------------------------------------------------------------------------------

Wrendon Timothy, Oxbridge Re Holdings Limited - CFO, Secretary & Principal Accounting Officer [2]

--------------------------------------------------------------------------------

Thank you, operator. During today's call, there will be forward-looking statements made regarding future events, including Oxbridge Re's future financial performance. These forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995. Words such as anticipates, estimates, expects, intend, plan, project and other similar words and expressions are intended to signify forward-looking statements. Forward-looking statements are not guarantees of future results and conditions but rather are subject to various risks and uncertainties. Some of these risks and uncertainties are identified in the company's filings with the SEC.

The occurrence of any of these risks and uncertainties could have a material adverse effect on the company's business, financial condition and results of operations. Any forward-looking statements made on this conference call speak only as of the date of this conference call, and except as required by law, the company undertakes no obligation to update any forward-looking statements contained on this call or in any company's presentation even if the company's expectations or any related events, conditions and circumstances change.

Now I would like to turn the call over to our Chairman, President and CEO, Jay Madhu. Jay?

--------------------------------------------------------------------------------

Sanjay Madhu, Oxbridge Re Holdings Limited - Chairman, President & CEO [3]

--------------------------------------------------------------------------------

Thank you, Wrendon, and welcome, everyone. Thank you for joining us today. As we do each quarter, before we get our results -- get into our results, I would like to take a moment to provide a brief overview of our company.

Oxbridge Re Holdings Limited was founded nearly 6 years ago with a mission to provide reinsurance solutions primarily to property and casualty insurers in the Gulf Coast region of the United States. Through our licensed reinsurance subsidiary, Oxbridge Reinsurance Limited and Oxbridge reinsurance sidecar, which is Oxbridge Re NS, we write fully collateralized policies to cover property losses from specific catastrophes. And as some of you already know, because we write fully collateralized contracts, we are able to compete effectively with large carriers. We specialize in underwriting medium-frequency, high-severity risks, where we believe sufficient data exists to effectively analyze the risk-return profile of reinsurance contracts. Our objective is to achieve long-term growth in book value per share by writing business on a selective and opportunistic basis that will generate attractive underwriting profits relative to risk.

Regarding our investment portfolio, we remain opportunistic and will deploy our capital when favorable returns -- return opportunity arise, which, we believe, in turn, drive our results through supplemental investment income. That being said, our focus and top priority remains on profitable underwriting.

With that overview now behind us and before going into our results for the fourth quarter and full year 2018, I will now turn it over to Wrendon to take us through our financial results for the period. Wrendon?

--------------------------------------------------------------------------------

Wrendon Timothy, Oxbridge Re Holdings Limited - CFO, Secretary & Principal Accounting Officer [4]

--------------------------------------------------------------------------------

Thanks again, Jay. I will now get into our financial results for the quarter and 12 months ended December 31, 2018.

Net premiums earned -- with respect to net premiums earned for the fourth quarter of 2018, net premiums earned increased $1.2 million to $1.5 million from $227,000 in the fourth quarter of 2017. The increase in the quarter was primarily due to the limit losses suffered during the third quarter of 2017 that resulted in a significantly lower deployment of capital during the fourth quarter of '17 as well as an acceleration of premium recognition due to full limit losses being incurred on all reinsurance contracts during the quarter ended December 31, 2018.

For the 12 months ended December 31, 2018, net premium earned decreased $20.9 million to $2.7 million compared with $23.6 million for 2017. The substantial decrease in the 12-month period was primarily due to the limit losses suffered in 2017, resulting in the significantly lower deployment of capital during 2018 and consequentially lower premiums when compared with the prior fiscal year.

With respect to net investment income, for the fourth quarter of 2018, net investment income totaled $86,000, which was offset by $40,000 relating to change in fair value of equity securities and by $18,000 of net realized investment losses. This compares with $71,000 of net investment income, which was offset by $82,000 of net realized investment losses in the fourth quarter of 2017.

For the 12 months ended December 31, 2018, net investment income totaled $356,000, which was offset by $26,000 of change in fair value of equity securities and by $255,000 of net realized investment losses. This compares with $412,000 of net investment income, which was offset by $138,000 of net realized investment losses in 2017.

With respect to total expenses, total expenses for the fourth quarter of 2018, which includes loss and loss adjustment expenses, policy acquisition costs and underwriting expenses and general and admin expenses, were $10.5 million compared with $240,000 in the fourth quarter of 2017. The increase in total expenses for the quarter was due to an increase in loss and loss adjustment expenses related to the limit losses incurred on all reinsurance contracts during the quarter ended December 31, 2018, when compared with the prior year period.

For the 12 months ended December 31, 2018, total expenses were $11.6 million compared with $44.4 million in 2017. The 12-month decrease in total expenses was primarily due to a significant decrease in the losses incurred as a result of limit losses being suffered on a smaller-sized reinsurance portfolio during the year ended December 31, 2018, when compared with the reinsurance portfolio size that suffered limit losses during the year ended December 31, 2017.

With respect to net loss for the fourth quarter of 2018, net loss totaled $6.5 million or $1.13 per basic and diluted share compared with net loss of $24,000 or 0 per basic and diluted share in the fourth quarter of 2017. The increase in net loss for the quarter was wholly due to the triggering during the fourth quarter of 2018 of limit losses on all reinsurance contracts compared with no catastrophic losses during the fourth quarter of 2017.

For the 12 months ended December 31, 2018, net loss totaled $5.7 million or $1 per basic and diluted common share compared with a net loss of $20.6 million or $3.55 per basic and diluted common share for 2017. The significant increase in net loss for the 12-month period was wholly due to limit losses being suffered on a smaller-sized reinsurance portfolio during the year ended December 31, 2018, when compared with the reinsurance portfolio size that suffered limit losses during the year ended December 31, 2017.

Now turning to our financial results for the quarter and 12 months ended December 31, 2018. We use various measures to analyze the growth and profitability of our business operations. For our reinsurance business, we measure underwriting profitability by examining our loss ratio, acquisition expense ratio, underwriting expense ratio and combined ratio.

Our loss ratio, which measures underwriting profitability, is the ratio of losses and loss adjustment expenses incurred to net premiums and ILW income earned. Our loss ratio for the fourth quarter of 2018 was 589.3% or 454.1% when taking the Series 2018 notes into consideration compared to 0% for the fourth quarter of 2017. The increase was due to the limit losses suffered during the quarter ended December 31, 2018, when compared with no losses or loss adjustment expenses in the quarter ended December 31, 2017.

For the 12 months ended December 31, 2018, the loss ratio was 268.6% or 214.9% when taking the Series 2018-1 notes into consideration compared to a loss ratio of 180% during 2017. For the 12-month period, the increase was due to the limit losses suffered during the year ended December 31, 2018, on a lower denominator in net premiums earned when compared with the prior fiscal year.

Our acquisition cost ratio measures operational efficiency, compares policy acquisition costs and other underwriting expenses to net premiums earned. The acquisition cost ratio was 11% for the fourth quarter of 2018 compared with 4% for the same year-ago period. The increase in loss ratio -- the increase in acquisition ratio was due to the overall higher weighted average acquisition costs on reinsurance contracts in force during the quarter ended December 31, 2018, compared with the quarter ended December 31, 2017.

For the 12 months ended December 31, 2018, the acquisition cost ratio was 9.6% compared with 2.9% for the same year-ago period. The increase was due to the overall higher weighted average acquisition costs on reinsurance contracts in force during the year ended December 31, 2018, when compared with the prior fiscal year.

Our expense ratio, which measures operating performance, compares policy acquisition costs and other underwriting expenses and general and admin expenses to net premiums and ILW income earned. The expense ratio totaled 27.3% during the fourth quarter of 2018 compared with 105.7% for the fourth quarter of 2017. The decrease in expense ratio was due primarily to increased denominator in net premiums earned due to the limit losses suffered during quarter ended December 31, 2018, and the corresponding acceleration of premium when compared with the quarter ended December 31, 2017.

For the 12 months ended December 31, 2018, the expense ratio was 41.5% compared with 8.5% for 2017. The increase was due to a more significant reduction in net premium than the decrease in policy acquisition costs as recorded during the year ended December 31, 2018, when compared with the prior fiscal year.

Our combined ratio, which is used to measure underwriting performance, is the sum of the loss ratio and the expense ratio. If the combined ratio is at or above 100%, underwriting is not profitable. For the fourth quarter of 2018, the combined ratio was 616.5% or 481.3% when taking the Series 2018-1 notes into consideration compared with 105% for the fourth quarter of 2017. The increase was wholly due to the higher loss ratio during the quarter ended December 31, 2018, when compared with the quarter ended December 31, 2017.

For the 12 months ended December 31, 2018, the combined ratio was 310% or 256.6% when taking the Series 2018 notes into consideration compared with 188.5% for the same year-ago period. For the 12-month period, the increase was wholly due to a significantly higher loss ratio during 2018 when compared with 2017.

Now turning to the balance sheet. Total investments, which include investments in fixed maturity and equity securities, totaled $1.2 million at December 31, 2018, compared with $6.5 million at December 31, 2017. Total shareholders' equity at December 31, 2018, was $6.3 million, down from $13.9 million at December 31, 2017. At December 31, 2018, cash and cash equivalents and restricted cash and cash equivalents totaled $11.3 million compared with $10.9 million at December 31, 2017.

Finally, during the fourth quarter of 2018, we announced an extension to the term for the exercise of our warrants, which are publicly traded on NASDAQ exchange. The warrants were issued as part of the units offered and sold in Oxbridge Re's April 2014 IPO and are exercisable for ordinary shares at an exercise price of $7.50 per share. The warrants would have expired at 5:00 p.m. on March 26, 2019. The expiration date has now been extended to 5:00 p.m. on the earlier to occur of March 26, 2024, or the date fixed for cancellation by Oxbridge following any 20-day trading period, in which our ordinary shares traded above $9.38 per share for at least 10 trading days.

Now with that, I'd like to turn the call back over to Jay. Jay?

--------------------------------------------------------------------------------

Sanjay Madhu, Oxbridge Re Holdings Limited - Chairman, President & CEO [5]

--------------------------------------------------------------------------------

Thank you, Wrendon. The significant progress we made towards rebuilding our business the past few quarters was unfortunately severely impaired by certain natural disasters occurring world over such as Typhoon Jebi, Hurricane Michael and the California wildfires. The impact on our quarterly and annual results basically had an effect of wiping out the positive incremental progress we have been making up to this point. When combined with the record amount of destruction we witnessed in 2017, it has definitely been a crying time for many. The losses from our collective exposure to these worldwide events is proportionately much less drastic than we experienced the previous year with Harvey, Irma and Maria. That said, some of this was due to the smaller amount of capital we deployed in 2018 not only as a whole but also on a percentage basis and staying well below our underwriting guidelines.

And while it certainly feels like 2 steps forward, 1 step back in some respects, the important thing to keep in mind is that these events, individually and in aggregate, are noteworthy because they are anomalies. Moreover, when you consider that these catastrophes occurred in consecutive years, the situation becomes even more implausible.

I don't want to spend a ton of time driving this point home, but I'll take a minute here to quantify just how anomalous 2017 and 2018 had been. The year ended December 31, 2018, was the fourth costliest year since 1980 in terms of insured losses due to an accumulation of several costly natural disasters, particularly in the second half of the year. Beyond that, 2018 also ranks among the 10 costliest disaster years ever recorded in terms of overall losses. When also compared to the record losses of 2017 from Hurricanes Harvey, Irma and Maria, the indications of the year 2018 were that it would be a more moderate year. However, the second half of 2018 saw an accumulation of billion-dollar losses with overall global economic impact estimated to be roughly $160 billion, of which $80 billion was insured. Over the course of the year, there were 29 events, each resulting in an overall loss of $1 billion or more. This explanation is not intended to absolve ourselves of responsibility. We have and still do our greater business under the premise that these events can and still do occur. However, over time, this could be a very profitable business. The difference this time around is that the scope and magnitude are of historical significance.

With the end of hurricane season well in the rearview and despite these near-term setbacks, we remain debt-free with a book value a share of $1.45. We are looking forward to rebuilding as we evaluate opportunities for growth and recovery.

Now before we get into questions, I'd like to take a minute to provide some specific updates as it relates to our reinsurance sidecar subsidiary. As many of you know, at the end of 2017, we organized a new subsidiary, Oxbridge Re NS, to function as a reinsurance sidecar. Our aim with the subsidiary was as it is to increase the underwriting capacity of Oxbridge Reinsurance Limited. Oxbridge Re NS achieved successful licensing and officially commenced operations on June 1, 2018. On that day, Oxbridge Re NS issued $2 million of participating notes. Due to Oxbridge Re NS's full participation in our underwriting portfolio, during the year ended December 31, 2018, the loss from Oxbridge Re NS operations that are attributed to the participating note holders was $2 million.

Hurricane Michael, the most powerful storm to hit Florida on record, made landfall on October 10, 2018. The effect of Hurricane Michael caused losses of -- loss of principal of approximately $1 million for the note holders. And due to other global catastrophes, in particular, Hurricane Florence, Typhoon Jebi and the deadly California wildfires, all of which were covered by an aggregate industry loss warranty contract, the note holders suffered additional loss of principal of approximately $900,000.

In a more common, loss-free year, the sidecar is intended to give us the ability to diversify our revenue stream as well as risk while being able to receive attractive returns. While this past quarter was unfortunate from an overall industry perspective, we still maintain that the opportunities presented to Oxbridge Re NS should be accretive to shareholder value over time as well as provide an opportunity to accredited investors looking to take reinsurance risk on contracts that they individually would not be able to procure or participate in.

Moving forward, we are continuing to maintain a conservative approach with respect to underwriting new business, which has historically led to successful outcomes for Oxbridge. We will act decisively when presented with opportunities that meet our criteria and diversifying revenue streams in the meantime. Overall, we're maintaining a conservative but positive near-term outlook. We remain very appreciative of our patient and loyal shareholders, who have supported us over the years and continue to support us now. We look forward to updating you on the progress in the upcoming months.

With that, we are ready to open the call for questions. Operator, please provide the appropriate instructions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

.

(Operator Instructions) We'll take your first question from Steve Marascia with Capitol Securities.

--------------------------------------------------------------------------------

Steven F. Marascia, Capitol Securities Management, Inc. - Director of Research [2]

--------------------------------------------------------------------------------

Quick question. Given the depletion of your shareholder equity from where it once was to where it is now, how do you intend to increase that? And can you do it in a large fashion in a relatively short period of time?

--------------------------------------------------------------------------------

Sanjay Madhu, Oxbridge Re Holdings Limited - Chairman, President & CEO [3]

--------------------------------------------------------------------------------

Yes. The answer is yes, but it's somewhat complicated. So we have a couple different ways. We have a few different ways to do that. We can do that in the holdco, or we can do that through Oxbridge Re NS. And that's one of the reasons we did Oxbridge Re NS, which was a sidecar, which, in other words, would act like a managed -- like an asset manager, if you would. So there is a possibility of moving forward in either direction. We haven't made the decision at this time in which direction we're going to do that.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

(Operator Instructions) We'll go next to Kent Engelke with Capitol Securities.

--------------------------------------------------------------------------------

Kent Engelke, [5]

--------------------------------------------------------------------------------

Two questions. A short-term and long-term question. We talked about the massive losses that have taken place in 2017, 2018. We're all -- we're hoping that your reinsurance market on the premium side was going to start hardening. It really did not per se. Do you see markets hardening up for reinsurance contracts? And secondly, and this is more of a longer term, do you see any sort of recovery coming back -- coming from the fires in California from the PG&E bankruptcy?

--------------------------------------------------------------------------------

Sanjay Madhu, Oxbridge Re Holdings Limited - Chairman, President & CEO [6]

--------------------------------------------------------------------------------

Yes. We don't see any recovery coming from that because the contracts that we were actually in, they would not see any recovery over there but -- which is unfortunate, but that's the business we're in, right? In terms of -- I'm sorry, what was your first question?

--------------------------------------------------------------------------------

Kent Engelke, [7]

--------------------------------------------------------------------------------

In regards of hardening of premiums. Are you seeing premiums hardening up? Or are they still soft?

--------------------------------------------------------------------------------

Sanjay Madhu, Oxbridge Re Holdings Limited - Chairman, President & CEO [8]

--------------------------------------------------------------------------------

Yes. So premiums, the premiums, what we are seeing or what we are hearing currently is on layers that have been affected, the premiums have -- the premiums appear to be improving, but it's a little too early in the season for us to have gotten any indications thus far. But what we are hearing is premiums will harden a little bit on the affected layers. So hopefully, one thing would lead to -- the affected layers would help us in increasing our premiums and bring back some of the losses we've suffered.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

(Operator Instructions) And there are no further questions at this time. Mr. Madhu, I'll turn the call back over to you for closing remarks.

--------------------------------------------------------------------------------

Sanjay Madhu, Oxbridge Re Holdings Limited - Chairman, President & CEO [10]

--------------------------------------------------------------------------------

Yes, thank you. Thank you for joining us on today's call. I especially want to thank our employees, business partners and investors for their continuing support. We look forward to updating you on our next call. Thank you.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

And thank you, ladies and gentlemen. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time and have a great day.