U.S. Markets closed

Edited Transcript of OXBR earnings conference call or presentation 14-Nov-17 9:30pm GMT

Thomson Reuters StreetEvents

Q3 2017 Oxbridge Re Holdings Ltd Earnings Call

GEORGE TOWN Nov 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Oxbridge Re Holdings Ltd earnings conference call or presentation Tuesday, November 14, 2017 at 9:30:00pm GMT

TEXT version of Transcript

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

Corporate Participants

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

* Sanjay Madhu

Oxbridge Re Holdings Limited - C.E.O, President & Director

* Wrendon Timothy

Oxbridge Re Holdings Limited - CFO, Principal Accounting Officer and Corporate Secretary

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

Conference Call Participants

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

* Kent Engelke

* Steven F. Marascia

Capitol Securities Management, Inc. - Director of Research

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

Presentation

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

Operator [1]

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

Good afternoon. Welcome to Oxbridge Holding, Re Holdings' Third Quarter 2017 Earnings Call. My name is Phil, and I will be your conference operator this afternoon. (Operator Instructions) Joining us for today's presentation is Oxbridge Re President and CEO, Jay Madhu; and CFO and Corporate Secretary, Wrendon Timothy. (Operator Instructions)

I'd like to remind everyone that this call is also being broadcast via live webcast and available via webcast replay until December 14, 2017, 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, CFO 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, Principal Accounting Officer and Corporate Secretary [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 filing 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 in this presentation even if the company's expectations or any related conditions, events or circumstances change.

Now I would like to turn the call over to our President and Chief Executive Officer, Jay Madhu. Jay?

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

Sanjay Madhu, Oxbridge Re Holdings Limited - C.E.O, President & Director [3]

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

Thank you, Wrendon, and welcome, everyone. Thank you for joining us today. Before I get into my remarks, I would like to take a moment to briefly comment on the recent events, which have been in the news and which are, obviously, directly tied to our business.

First and foremost, we would like to express our sincerest condolences to the victims as well as all those affected by the recent hurricanes and other catastrophes in Texas, Florida, Puerto Rico and the surrounding areas. Second, I'd like to extend a very large thank you to all our employees and service providers for their hard work and commitment during this very challenging period.

Now for today's call, as we do each quarter, before we 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 more than 4 years ago with a mission to provide reinsurance solutions, primarily to property and casualty insurers in the Gulf Coast region of the U.S. Through our licensed reinsurance subsidiary, Oxbridge Reinsurance Limited, 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 can compete effectively with larger carriers. We specialize in underwriting medium-frequency, high-severity risks, where we believe sufficient data exists to efficiently analyze the risk/return profile of reinsurance contracts. Our objective is to achieve long-term growth and book value per share by writing business on a selective and opportunistic basis that will generate attractive underwriting profits relative to risk, while distributing profits to shareholders in the form of regular quarterly dividends.

Additionally, as our company began to grow, we became -- we came public at the end of 2014, where we raised $26.4 million.

With that background and introduction, I will now turn it over to Wrendon to take us through our financial results for the third quarter and 9 months ended September 30, 2017. Wrendon?

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

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

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

Thank you, Jay, and good afternoon, again. Along with Jay, I would also like to extend my sympathies to those who have been impacted during this unfortunate time and as this is our first release to our business, unfortunately, in addition to causing massive amounts of destruction, our profitability was impacted.

Because Oxbridge is a provider of reinsurance, primarily to clients in the Gulf coasts of the U.S., we understand that losses are inevitable in some periods. With that being said, I will now get into our financials for the 3 and 9 months ended September 30, 2017.

Regarding net premiums earned for the third quarter of 2017. Net premiums earned increased $17.4 million to $19.3 million from $1.9 million in the third quarter of 2016. For the 9 months ended September 30, 2017, net premiums earned increased $16.7 million to $23.3 million compared with $6.6 million for the first 9 months of 2016. The 3- and 9- month increase was wholly due to the acceleration of premium recognition due to full limit losses being incurred on all of our reinsurance contracts during the 3 and 9 months ended September 30, 2017.

Regarding investment income. For the third quarter of 2017, net investment income totaled $128,000 coupled with $104,000 of net realized investment losses. This compares with $126,000 of net investment income coupled with $122,000 of net realized investment gains for the third quarter of 2016.

For the 9 months ended September 30, 2017, net investment income totaled $341,000 coupled with net realized investment losses of $56,000. This compares with $327,000 of net investment income compared -- coupled with $256,000 of net realized investment gains for the first 9 months of 2016.

We initiated our investment income strategy in August of 2014, where we began to deploy some of our investment capital in the fixed maturity and equity securities. As such, we periodically realized losses and other than temporary impairment losses that impact our investment performance. Unfortunately, during the third quarter, we did experience some net realized losses, which were more than offset by our net investment income in Q3.

Overall, we are still pleased with the performance of the investment portfolio. And as we look ahead, we maintain the position that we are very well situated to capitalize on the present and future market environments.

With respect to total expenses, total expenses for the third quarter of 2017 including loss and loss adjustment expenses, policy acquisition costs and underwriting expenses and general and administrative expenses were $42.3 million compared with $819,000 in the third quarter of 2016. The increase in total expenses was due to the triggering of limit losses in all of the company's reinsurance contracts due to the individual and collective impact of Hurricane Harvey, Hurricane Irma and Hurricane Maria, as well as adverse development on prior year claims compared to no-catastrophe losses during the same quarter of the prior fiscal year.

The increase in total expenses was also due to the acceleration of premium recognition under resulting acceleration of policy acquisition costs.

For the 9 months ended September 30, 2017, total expenses included losses and loss adjustment expenses, policy acquisition costs and underwriting expenses and general and administrative expenses were $44.2 million compared with $2.3 million in the first 9 months of 2016. Similar to Q3, the increase in total expenses was due to the triggering of limit losses and all of the company's reinsurance contracts as well as adverse development on prior year losses, but compared with nominal losses and loss adjustment expenses during the same period of the prior fiscal year. Additionally, the increase in total expenses was also due to acceleration of premium recognition and the resulting acceleration of policy acquisition costs.

With respect to net income for the third quarter of 2017, net loss totaled $23.0 million or $3.97 per basic and diluted share compared with net income of $3 million or $0.50 per basic and diluted share in the third quarter of 2016. The significant decrease in net income was, again, wholly due to the triggering during the third quarter of 2017 of limit losses on all of our reinsurance contracts compared with no catastrophic losses during the same quarter of the prior fiscal year.

For the 9 months ended September 30, 2017, net loss totaled $20.6 million or negative $3.53 per basic and diluted common share compared with net income of $4.9 million or $0.81 per basic and diluted common share for the first 9 months of 2016. As in the third quarter, the significant decrease in net income was wholly due to the triggering during the third quarter of limit losses and all of our reinsurance contracts compared with nominal loss and loss adjustment expenses during the 9 months period of the prior fiscal year.

With respect to dividends paid during the third quarter of 2017, we paid dividends of $0.12 per share, which was consistent with the comparable year-ago period. For the 9-month period ended September 30, 2017, dividends paid per share were $0.36, which were also unchanged from the same year-ago period.

Subsequent to the year-end, the company's Board of Directors has decided to halt its regular $0.12 quarterly cash dividend, beginning with the third quarter of 2017. Going forward, the Board of Directors intends to revisit reinstatement of a quarterly cash dividend, but at some point in the indeterminate future. The decision will not be immediate and will be dependent upon a variety of factors, including the current state of the business as well as general market conditions at that time. Additionally and in recognition of dividend halt, the company has also decided to cancel the payment of director fees, which had been $30,000 per annum, effective October 1, 2017.

Regarding our share repurchases. During the third quarter of 2017, we repurchased 72,747 common shares under the $2 million share repurchase program approved by our board in May of last year. These shares were repurchased at an average price of $5.33 per share. I would also like to point out, as noted in this afternoon's earnings release that the share repurchase program has now been discontinued, effective September 30, 2017. Through September 20, 2017, we had repurchased an aggregate of 326,413 common shares for an aggregate cost of $1,803,568 under the program.

Now turning to our financial results for the 3 and 9 months ended September 30, 2017. We use these 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 the combined ratio. Our loss ratio, which measures underwriting profitability, is the ratio of losses and loss adjustment expenses incurred to net premiums earned.

Our loss ratio for the third quarter of 2017 was 214.4% compared to negative 65.1% for the third quarter of 2016. For the 9 months ended September 30, 2017, the loss ratio was 181.8% compared to a loss ratio of 15.5% during the first 9 months of 2016. The increase in both periods was due to the multiple limit losses suffered during the first 9 months of 2017, partially offset by a higher denominator in net premiums earned when compared with the previous period.

Our acquisition cost ratio, which measures operational efficiency compares policy acquisition costs and as underwriting expenses to net premiums earned. The acquisition cost ratio was 2.7% for the third quarter of 2017 compared to 4.3% for the same year-ago period. For the 9 months ended September 30, 2017, the acquisition cost ratio was 2.9% compared with 3.2% for the same year-ago period. The decrease in both periods was due wholly to the acceleration of acquisition costs recognition, which is more than offset by a larger denominator in net premiums earned when compared with the respective prior-year periods.

Our expense ratio, which measures operating performance, compares policy acquisition costs, other underwriting expenses and general and administrative expenses to net premiums earned.

The expense ratio totaled 4.6% during the third quarter of 2017 compared with 22.4% for the third quarter of 2016. For the 9 months ended September 30, 2017, the expense ratio was 7.6% compared with 19.5% for the first 9 months of 2016. The decrease in both periods was due wholly to a significant increase in net premiums earned, partially offset by increased policy acquisition costs as recorded during the respective periods in 2017 when compared with the same -- the related same year-ago periods.

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 third quarter of 2017, the combined ratio was 219% compared with negative 42.7% for the third quarter of 2016. For the 9 months ended September 30, 2017, the combined ratio was 189.3% compared with 35% for the same year-ago period.

The increase in combined ratio for both the 3- and 9-month periods was due to a significantly higher loss ratio when compared with the respective prior-year periods.

Now turning to the balance sheet. Total investments, which include investments in fixed maturity and equity securities, totaled $8.8 million at September 30, 2017 compared with $11 million at December 31, 2016. Total shareholders' equity at September 30, 2017, was $13.9 million, down from $37.2 million at December 31, 2016.

At September 30, 2017, cash and cash equivalents and restricted cash and cash equivalents totaled $24.2 million compared with $35.7 million as of December 31, 2016.

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

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

Sanjay Madhu, Oxbridge Re Holdings Limited - C.E.O, President & Director [5]

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

Thank you, Wrendon. As many of you know, this quarter was not without its challenges, to say the least. With the recent hurricanes in the Gulf Coast region and elsewhere, we unfortunately did not have an opportunity for a third quarter consecutive profitable quarter. To put it more bluntly, the third quarter was, unfortunately, the worst-case scenario for our company with all our contracts suffering limit losses. As I mentioned in my opening remarks, at Oxbridge Re, we specialize in underwriting medium-frequency, high-severity risks, where we believe sufficient data exists to efficiently analyze the risk/return profile of reinsurance contracts. Ultimately, our objective is to achieve long-term growth and book value per share by writing business on a selective and opportunistic basis that will generate attractive underwriting profits relative to risk. And while that is generally the case, our results of operations may be seasonal and that hurricanes and other tropical storms typically occurred during the period from June 1 through November 30. It's unfortunately the cost of doing business. And even despite that disclaimer, the events that have transpired during this period, which included 3 Category 4+ hurricanes, are not only highly anomalous even for our line of business, but are also, by no means, an indication of any future conditions we may have to endure.

Let me put it another way. It's much easier to tout the strengths of a company's business model, while doing -- model during favorable market environments. The true litmus test comes in response to how you handle those inevitable road bumps and that dictum is especially true when put up against inherent risk associated with the reinsurance business. As it relates to Oxbridge Re specifically, we have seen now, over the course of several years that our approach and underwriting process provides an effective, efficient, and more importantly, reliable foundation to whether that -- to weather what storms may come, while also providing sustained value to our shareholder base.

We understand that this and other conditions are subject to change and have built this business to handle significant storms as we only deploy a portion of our capital at a given time into fully collateralized reinsurance contracts. And it's because of this approach that we've been able to mitigate losses to the level that we have. Through all the events of the quarter, we were still able to remain solid with approximately $14 million in capital.

As to our current situation, Harvey, Irma and Maria have no doubt changed the landscape of homeowners insurance markets, and with it, the reinsurance market as well. And while many companies, and people for that matter, have suffered, it's in situations like these that the greatest opportunity from growth arrives. There is no denying the massive size and strength of Irma as well as the others.

Subsequent to quarter-end, our Board of Directors has decided to suspend the company's regular $0.12 quarterly cash dividend. 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 payment will recommence. Additionally, in recognition of its dividend suspension, the company has also decided to suspend the payment of all directors' fees, effective August -- October 1, 2017, which has been $30,000 per director per annum.

This hurricane season was a meteorological anomaly and a test for us, and we are happy to have survived it. We are currently evaluating opportunities for recovery in growth as we remain focused on the most inherent element of our business, which is to provide long-term value to our shareholders.

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

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions) And our first question will come from Kent Engelke with Capitol Securities Management.

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

Kent Engelke, [2]

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

I was just wondering, how do you think the reinsurance market in regard -- do you think is hardening up? Do you think it's going to be a hard market? Any thoughts on that.

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

Sanjay Madhu, Oxbridge Re Holdings Limited - C.E.O, President & Director [3]

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

Yes, Kent. Opinions vary, and they've been various different things that have been put out by some very credible sources. They expect the reinsurance market, they expect rates to definitely go up. There are being calls anywhere from 10% all the way up to 25%. However, time will tell.

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

Kent Engelke, [4]

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

And so is that -- obviously, you restore getting more of input on that really starting on or about January 1 is when I -- what I think I'm hearing you say?

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

Sanjay Madhu, Oxbridge Re Holdings Limited - C.E.O, President & Director [5]

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

Yes, exactly. Some of that will start pouring in. This season has been unbelievable. The estimates of this season being in excess of $100 billion. And as we go forward, the losses still continue to mount. So probably, closer to January 1, there will be an indication. But it might take a little bit longer.

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

Kent Engelke, [6]

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

Do you anticipate your losses to increase? Or is this the worst-case scenario?

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

Sanjay Madhu, Oxbridge Re Holdings Limited - C.E.O, President & Director [7]

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

No, this is worst-case scenario. We have losses that we have suffered from this year. And there's also some developed losses from the previous year, including a little bit of IBNR on those.

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

Operator [8]

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

The next question comes from Steve Marascia with Capitol Securities Management.

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

Steven F. Marascia, Capitol Securities Management, Inc. - Director of Research [9]

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

Did Wrendon say that your shareholder record was down to $13.9 million?

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

Sanjay Madhu, Oxbridge Re Holdings Limited - C.E.O, President & Director [10]

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

Yes.

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

Wrendon Timothy, Oxbridge Re Holdings Limited - CFO, Principal Accounting Officer and Corporate Secretary [11]

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

That's correct.

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

Steven F. Marascia, Capitol Securities Management, Inc. - Director of Research [12]

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

Does that potentially mean that you may be doing a capital raise in the future to get shareholder equity back up, so you could write more business?

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

Sanjay Madhu, Oxbridge Re Holdings Limited - C.E.O, President & Director [13]

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

That's -- that is possible. That's, of course, that's a board decision, and we'll continue to evaluate that, Steve. But that is entirely possible. The timing of which we don't know yet.

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

Steven F. Marascia, Capitol Securities Management, Inc. - Director of Research [14]

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

Short term, does your lower shareholder equity base mean you're going to have a -- be handcuffed from writing increased business going forward over the next 3 or 6 months?

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

Sanjay Madhu, Oxbridge Re Holdings Limited - C.E.O, President & Director [15]

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

Yes, it will. However, taking the steps that we have with cutting the dividend and other cost-cutting measures, we expect numbers to be fairly, fairly decent.

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

Operator [16]

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

(Operator Instructions) At this time, this concludes our question-and-answer session. I'd like to turn the call back over to Mr. Jay Madhu for his closing remarks.

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

Sanjay Madhu, Oxbridge Re Holdings Limited - C.E.O, President & Director [17]

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

Thank you all that have been on this call. And thanks you for our shareholders. It's been an unprecedented season. We -- the board has -- the board is evaluating various different steps as to how we work through this. This will handcuff us, as Steve put it, to a certain extent. But we have taken certain measures that we hope will offset a little bit of this. So with that, again, I'd like to say thank you for your continued thoughts in Oxbridge.

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

Operator [18]

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

Before we conclude today's call, I would like to remind everyone that a recording of the call will be available for replay via a link available on the Investors section of the company's website. Thank you for joining us today for our presentation. You may now disconnect.