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Edited Transcript of OXBR earnings conference call or presentation 14-Aug-18 8:30pm GMT

Q2 2018 Oxbridge Re Holdings Ltd Earnings Call

GEORGE TOWN Aug 31, 2018 (Thomson StreetEvents) -- Edited Transcript of Oxbridge Re Holdings Ltd earnings conference call or presentation Tuesday, August 14, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Sanjay Madhu

Oxbridge Re Holdings Limited - Chairman, President & CEO

* Wrendon Timothy

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

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Conference Call Participants

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* George Burmann

* Kent Engelke

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Presentation

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Operator [1]

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Good afternoon. Welcome to Oxbridge Re Holdings' Second Quarter 2018 Earnings Call. My name is Ariel, 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 September 14, 2018, on the Investor Information section of Oxbridge Re's website at www.oxbridgere.com.

Now I would 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.

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

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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 conference call, even if the company's expectation or any related events, conditions or circumstances change.

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

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

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Thank you, Wrendon, and welcome, everyone. Thank you for joining us today. 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 over 5 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 subsidiaries, Oxbridge Reinsurance Limited, and our newly formed subsidiary 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're 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 a 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.

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

With that overview now behind us and before we go into our results for the second quarter, I will now turn it over to Wrendon, to take us through our financial results for the period. Wrendon?

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

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Thank you, Jay. I will now get into our financial results for the 3 and 6 months ended June 30, 2018.

With respect to net premiums earned for the second quarter 2018, net premiums earned decreased $2.1 million to $334,000 from $2.5 million in the second quarter of 2017. For the 6 months ended June 30, 2018, net premiums earned decreased $3.5 million to $554,000 compared with $4 million for the first 6 months of 2017. The decrease in both the 3 and 6 months period, primarily 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, as well as the lower capital being deployed during the 3 and 6 months ended June 2018 when compared to the same periods of the prior fiscal year.

With respect to investment income for the second quarter of 2018, net investment income totaled $108,000, with no net realized investment gains or losses and $73,000 of unrealized investment gains. This compares with $127,000 of net investment income coupled with $46,000 of net realized investment gains for the second quarter of 2017.

For the full 6 months ended June 30, 2018, net investment income totaled $180,000, which was offset by $176,000 of net realized investment losses and $96,000 of unrealized investment losses. This compares to $213,000 of net investment income, coupled with $48,000 of net realized investment gains for the first 6 months of 2017.

With respect to total expenses, total expenses for the second quarter of 2018, including loss and loss adjustment expenses, policy acquisition cost and underwriting expenses and general and administrative expenses were $396,000 compared with $1.5 million in the second quarter of 2017. For the full 6 months ended June 30, 2018, total expenses were $722,000 compared with $1.9 million in the first 6 months of 2017. The 3- and 6-month decrease in total expenses is primarily due to the fact that neither any losses nor adverse loss development occurred during the 3- and 6-month periods ended June 30, 2018, compared with nominal loss and loss adjustment expenses during the same periods of the prior fiscal year as well as lower policy acquisition costs due to decreased capital deployed during the 2018 periods when compared with the 2017 periods.

With respect to net income for the second quarter of 2018, net income totaled $265,000 or $0.05 per basic and diluted share compared with net income of $1.1 million or $0.19 per basic and diluted share in the second quarter of 2017.

For the full 6 months ended June 30, 2018, net income totaled $54,000 or $0.01 per basic and diluted common share, compared with net income of $2.4 million or $0.41 per basic and diluted common share for the first 6 months of 2017.

The significant decrease in both the 3- and 6-months periods is primarily due to the lower net premiums earned resulted from decreased capital deployed and previous acceleration of premium recognition in prior quarters, as well as recognition of unrealized losses on equity securities due to the mandatory adoption of Accounting Standards update 2016-01. These changes are disclosed in greater detail in the consolidated Financial Statement section of the company's Form 10-Q filing.

Now turning to our financial ratios for the 3 and 6 months ended June 30, 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 earned. Our loss ratio for the second quarter 2018 was 0% compared to 42.6% for the second quarter of 2017. For the first 6 months ended June 30, 2018, the loss ratio was 0% compared to a loss ratio of 25.5% during the first 6 months of 2017. For both the 3- and 6-month periods, the decrease was due to the nominal loss and loss adjustment expenses incurred in the prior 3- and 6-month periods compared to no loss and loss adjustment expenses in the quarter and 6 months ended June 30, 2018.

With respect to acquisition cost ratio, our acquisition cost ratio measures operational efficiency and it compares policy acquisition cost and other underwriting expenses to net premiums earned. The acquisition cost ratio was 8.7% for the second quarter of 2018, compared with 3.8% for the same year-ago period. For the 6 months ended June 30, 2018, the acquisition cost ratio was 6.9%, compared with 3.9% for the same year-ago period. For the 3- and 6-month periods, respectively, the increase is due to the overall higher weighted average acquisition cost on reinsurance contracts in force during the 3- and 6- month periods ended June 30, 2018, compared with the 3- and 6-month periods ended June 30, 2017.

Our expense ratio, which measures operating performance, compares policy acquisition costs and other underwriting expenses as well as general and administrative expenses to net premiums earned. The expense ratio totaled 73.1% during the second quarter of 2018, compared with 19.5% for the second quarter of 2017. For the 6 months ended June 30, 2018, the expense ratio was 77.6%, compared with 21.9% for the first 6 months of 2017. For the 3- and 6-month periods, respectively, the increase was due primarily to a lower denominator in net premiums earned and net income from derivative instruments as recorded during the 3- and 6- month periods ended June 30, 2018, when compared with the same periods of 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 quarter ended June 30, 2018, the combined ratio was 73.1%, compared with 62.1% for the second quarter of 2017. For the 6 months ended June 30, 2018, the combined ratio was 77.6%, compared with 47.3% for the same year-ago period. The increase in the combined ratio is due to a lower loss ratio during the 3- and 6-month periods ended June 30, 2018, more than offset by a lower denominator in net premiums earned and net income from the derivative instruments as recorded for the 3- and 6-month periods ended June 30, 2018, when compared with the same periods of the prior fiscal year.

Now turning to the balance sheet. Total investments, which includes investments in fixed maturity and equity securities totaled $6.3 million at June 30, 2018, compared with $6.5 million at December 31, 2017. Total shareholders' equity at June 30 was $14 million up from $13.9 million at December 31, 2017. At June 30, 2018, cash and cash equivalents and restricted cash and cash equivalents totaled $11.2 million, compared with $10.9 million at December 31, 2017.

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

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

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Thank you, Wrendon. The second quarter was another move in the right direction as we continue to take the necessary steps in our return to normalcy after the events of the previous year. While our operating results still reflect the events of last hurricane season, we begin to make meaningful progress towards long-term recovery. Financially speaking, and to that end, I'm pleased to report that this quarter, we are profitable and now back to breakeven for the year as well.

As I've said in our last few calls, we and the reinsurance industry as a whole, are undoubtedly facing a new landscape. Given this understanding, we recognize the need to adapt to our new circumstances. But we also note that the conservative opportunistic strategy we've used in the past will always be the most effective long-term approach to achieve growth and book value per share and provide lasting value to our shareholders. Our successful results for the quarter, while modest in nature, were in line with our expectations and reflective of our clearly defined business strategy. At our core, Oxbridge is focused on conservative reinsurance contract underwriting to generate attractive profits relative to the overall risk we assume.

However, because we underwrite contracts on both a selective and opportunistic basis, the strategy can cause periodic fluctuations in our quarterly results. As a complement to this variance, we also employ our funds towards investment strategies designed to generate additional profits. And while this is by no means guaranteed, it does provide us with a degree of diversification to our overall strategy.

In Q2, this is exactly what we did. We successfully placed reinsurance contracts in accordance with our underwriting strategy and we generated a modest sum through investment income.

Additionally, as I mentioned earlier, with this new landscape, we also recognized the need to be particularly opportunistic should certain opportunities present themselves. For those of you who may not be aware, we were -- we recently organized a new subsidiary Oxbridge Re NS, to function as a reinsurance sidecar, which increases the underwriting capacity of Oxbridge Reinsurance Limited. Oxbridge Re NS achieved successful licensing and officially commenced operations on June 1 of 2018, subsequently issuing participating notes to a third-party investor, the proceeds of which were used to collateralize some of our reinsurance obligations.

Moving forward into the second half of 2018, we remain effectively positioned to capitalize on available opportunities, while managing a reasonable risk profile of our business. We've executed on our core strategy as well as strategically leveraged opportunities in the broader capital markets to magnify our efforts going forward.

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 our progress in the upcoming months.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Kent Engelke of Capitol Securities Management.

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Kent Engelke, [2]

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Can you comment a little more on the private placement that you did I guess at the first part of June for Oxbridge -- for your new subsidiary there?

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

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Ken, we issued participating notes and those notes partook in reinsurance contracts. It was a very small amount that was issued. It was a toe in the water. But what we wanted to make sure was get all our licensing, our proof-of-concept and so on, everything in order, and then roll it out in a meaningful manner in the future. So we started out with the first sidecar in the Cayman Islands. We got licensed, we raised the capital and we've put it to work. And the net result of that is we are taking -- now we are taking less risk with Oxbridge Re capital. We are moving some of that risk into the sidecar and being more of an asset manager, if you would, in the reinsurance space.

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Kent Engelke, [4]

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Do you see that growing or this is more of like a test run -- do you see that growing more into -- in the coming years and the like?

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

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Yes. That is the direction.

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Operator [6]

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(Operator Instructions) Our next question comes from [Lee Cory] of [Cory Partners].

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Unidentified Analyst, [7]

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Congratulations on getting back to normal and to the edge of profitability for the year and the year to date. You mentioned the new environment, the new change, the new difficult type of environment, maybe, that the PC industry is in now, particularly down in your area and how that's required some changes in things. Please elaborate that -- on that a little bit in -- on how it specifically affects you all?

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

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Lee, what -- initially what the expectation was the rates would raise substantially, and that didn't come through as much as we'd have hoped to, but nonetheless, several companies took some hits including ours. And what we are looking at doing is saying, where does Oxbridge go from here? So at this moment, what we're looking at is we're looking at increasing our visibility in the sidecar business and that might not be a meaningful number at this time. But as we go forward, we'll expand on that and duck, bob and weave as we go forward.

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Operator [9]

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(Operator Instructions) Our next question comes from George Burmann of ISS Securities.

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George Burmann, [10]

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On the sidecars, what is the incentive for the investors there? What kind of returns can they look at? And what is the advantage to us? I guess, we're laying over some risk to those private partners there?

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Sanjay Madhu, Oxbridge Re Holdings Limited - Chairman, President & CEO [11]

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Yes. So in treaty years gone by, we talked about taking of the risks that we were taking was all through Oxbridge Re dollars. With the sidecar, what we're doing is we're putting some of -- we're putting the sidecar money -- we're raising money in the sidecar through participating notes and those dollars get moved into reinsurance contracts. So in effect what happens, is we take less reinsurance risk with our own capital, but the moneys that come in through the sidecar, we make a small management fee plus we also take part in a successful year on those contracts. So as time goes on, if that business is increased in a meaningful way, it would be more of an asset manager, if you would, in the reinsurance space.

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George Burmann, [12]

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Okay. And at the moment, the assumed premiums are premiums that you have earned. Obviously, we had no losses this quarter. What kind of premium level have you underwritten or are we exposed to at this time with hurricane season starting?

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Wrendon Timothy, Oxbridge Re Holdings Limited - CFO, Secretary & Principal Accounting Officer [13]

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George, this is Wrendon here. We don't put out that level of information in terms of percentages or the like. What you can see from the income statement, it tells you what is the level of assumed premiums and that is based on whatever capital that we would have deployed during the period.

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George Burmann, [14]

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Okay. And with some 5 million shares outstanding trading at around $2 per share, obviously, one avenue to raise the new capital is through those sidecar arrangements, other ones would be through a public offering. What are your plans there or do you have any at this point in time?

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Sanjay Madhu, Oxbridge Re Holdings Limited - Chairman, President & CEO [15]

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Yes, that's always -- we always look at various different ways in raising either capital or share count or what have you. But at this moment in time we don't have anything concrete that's working. We are focusing our efforts on the sidecar business. And for the short term, that's how we view that.

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George Burmann, [16]

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Okay. And we -- the company does have some exposure to insurance losses there, but by no means, the full exposure, as we unfortunately incurred last year and at the same time the returns will be then also less, because part of it goes to the sidecar investors?

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Sanjay Madhu, Oxbridge Re Holdings Limited - Chairman, President & CEO [17]

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Yes, that is correct. But what we have done is, in years gone by, we have stated that we would look at deploying close to 50%, not exactly, but plus or minus 50% of our capital in reinsurance contracts. This year, we have -- because we have our new sidecar that is up and running, we have reduced that mark, if you would, to significantly less than the 50%. However, we are still in the market with our own capital. But we are also in the market with the sidecar dollars.

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Operator [18]

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

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Sanjay Madhu, Oxbridge Re Holdings Limited - Chairman, President & CEO [19]

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Before we conclude on today's call, I would like to remind everyone that a recording of -- pardon me, excuse me, that was the operator, I apologize. Thank you for joining us on today's call. I especially want to thank our employees, business partners and investors for their continued support. We look forward to updating you on our next call. Operator?

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Operator [20]

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