Transcript
Good afternoon. Welcome to Oxbridge Re's Third Quarter 2020 Earnings Call. My name is Jamie, and I will be your conference operator this afternoon. Joining us for today's presentation is Oxbridge Re's Chairman, President and Chief Executive Officer, Jay Madhu, and Chief Financial Officer and Corporate Secretary, Wrendon Timothy. Following their remarks, we will open up the call for your questions. I would like to remind everyone that this call is also being broadcast live via webcast and will be available for replay until Wednesday, November 10, 2021, on the Investor Information section of the Oxbridge Re website at www.oxbridgere.com. Now I would like to turn the call over to Wrendon Timothy, Chief Financial Officer, who will provide the necessary cautions regarding the forward-looking statements that will be made by management during this call. Sir, please proceed.
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, intends, plans, projects 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 on this call or in any company presentation, even if the company's expectations or any related events, conditions or circumstances change. In addition, on March 11, 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic. The disruption of global commercial activities across all market sectors and the significant declines and volatility in financial markets as a result of the COVID-19 pandemic could result in a material adverse impact on our financial position, results of operations and cash flows. Possible effects may include, but are not limited to, uncertainties with respect to current and future losses, reduction in interest rates and equity market volatility, and ongoing business and financial market impacts of an economic downturn. The insurance industry is likely to experience material losses resulting from COVID-19, which will reduce available capital, and we expect will help to sustain the upward pricing trend for reinsurers that we have seen across many lines of business before COVID-19. However, the ultimate impact on current business in force as well as risks and potential opportunities on future business remains highly unpredictable. Now I would like to turn the call over to our Chairman, President and Chief Executive Officer, Jay Madhu. Jay?
Thank you, Wrendon, and welcome, everyone. Thank you for joining us today. Over the last 9 months, we experienced a world severely challenged by the COVID-19 pandemic. Our key goal during these challenging times is to ensure the health and safety of our employees and our community. The pandemic, however, has not adversely affected our business at this time. We are monitoring our markets and the insurance industry, in general, and I will keep you posted on our progress during these difficult times. We are pleased, however, to return to normal business operations during the second quarter after months of disruption. While our operations and business remain stable as we all work remotely, it is good to get back to our offices and continue the collegial working environment and culture of performance we have developed over the years. Should things change in the future, we will revert to working remotely to ensure the well-being of our team. 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 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 our licensed reinsurance sidecar, Oxbridge Re NS, we collateralize policies to cover property losses from specific catastrophes. As some of you already know, because we write fully collateralized contracts, we can compete effectively with large carriers. We specialize in underwriting low 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 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 for favorable returns when opportunities arise, which we believe will in turn drive our results through supplemental investment income. Our focus and top priority remain on profitable underwriting. In addition, we continue to make progress in the new year for our wholly owned subsidiary, Oxbridge Re NS, as our reinsurance sidecar. The contract year ended May 31, 2020. Our sidecar investors earned an attractive return of approximately 36%. This year, if loss-free, could be around the same. I will now turn the call to Wrendon to take us through our financial results. Wrendon?
Thank you, Jay. First, the point to note is our typical contract period is from June 1 to May 31 of the following year. With respect to net premiums earned, third quarter net premiums declined slightly to $247,000 from $279,000 last year due to lower capital deployed in the period compared to last year. Net premiums earned for the 9 months ended September 30, 2020, increased by $646,000 from $372,000 in the prior year. The increase is due to only 1 month of premium being recognized through the first 9 months of last year as a result of previous accelerated premium recognition when compared to normal premium recognition in 2020. For the third quarter of 2020, we experienced a small loss on net realized investments and a small negative change in the fair value of equity securities compared to gains in last year's third quarter. Net investment and other income for the first 9 months of 2020 totaled $90,000 compared to $182,000 last year. Net realized gains of $325,000 were significantly higher than $3,000 last year. However, we experienced a $343,000 decline in fair value for equity securities compared to a gain of $20,000 last year. Total expenses, including loss and loss adjustment expenses, policy acquisition costs, underwriting expenses, and general administrative expenses, reduced further in the third quarter and for the 9 months of 2020 compared to last year. The reductions in total expenses are due primarily to continued reductions in our G&A costs, which declined to $767,000 through the first 9 months of the year from $808,000 last year. With the higher revenues and reduced expenses, we generated a reduced net loss for the 9 months ended September 30, 2020, of $232,000 or $0.04 per share compared to a net loss of $366,000 or $0.06 per share through the first 9 months of last year. The third quarter 2020 loss increased slightly to $33,000 from $15,000 in last year's third quarter. With respect to financial issues, we use various measures to analyze the growth and profitability of our business operations. For our reinsurance business, we measure underwriting profitability by examining the loss ratio, 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 third quarter and first 9 months of 2020 was 0%, the same as last year, but there were no losses or loss adjustment expenses in either period. Our acquisition cost ratio, which measures operational efficiency, compared to policy acquisition cost and other underwriting expenses to net premiums earned. Our acquisition cost ratio was 10.9% and 11% for the third quarter and first 9 months of 2020, respectively, compared to 11.1% and 11% for the same periods last year. The decrease in the third quarter was due to lower weighted average acquisition costs on reinsurance contracts in force in the period compared to last year's third quarter. The acquisition cost ratio remained unchanged for the 9-month period ended September 30, 2020 and 2019. Our expense ratio, which measures operating performance compared to policy acquisition costs and general administrative expenses with net premiums earned. The expense ratio for the third quarter and first 9 months of 2020 were 107.7% and 129.7%, respectively, compared to 105.7% and 228.2% for the same periods last year. The increase in the third quarter is due primarily to a lower denominator in net premiums earned recorded during the third quarter when compared with the previous period. The decrease for the 9 months ended September 30, 2020, was due to reduced general and administrative expenses this year and a higher denominator in net premiums earned to date in 2020 when compared with the same period in 2019. Our combined ratio, which is used to measure underwriting performance, is the sum of the loss ratio and the expense ratio. The combined ratio for the 3 and 9 months ended September 30, 2020, was 107.7% and 129.7%, respectively, compared to 105.7% and 228.2% for the same periods in 2019. The increase in the third quarter was due to the lower denominator in net premiums earned compared to last year, and the decrease through the first 9 months of the year resulted from our higher denominated net premiums earned and the reduced total expenses in 2020 when compared with the prior year. Now turning to the balance sheet. Total investments, which comprises of investments in equity securities, totaled $635,000 at September 30, 2020, compared with $692,000 at December 31, 2019. The decrease is due to the sale of equity securities during the current year. At September 30, 2020, cash and cash equivalents and restricted cash and cash equivalents totaled $7.4 million compared with $8 million at December 31, 2019. Total shareholder equity at September 30, 2020, was $7.8 million compared to $8 million at December 31, 2019. At September 30, 2020, our book value per share was $1.37. Now with that, I'd like to turn the call back over to Jay. Jay?
Thank you, Wrendon. Through our reinsurance sidecar, we've been able to add a degree of diversity to our revenue stream and risk, while still having the ability to achieve attractive returns. As I mentioned, we were very pleased with the returns generated for the contract year ended May 31, 2020, where our sidecar investors earned an attractive return of 36%. Going forward, over the long term, we remain opportunistic about the prospects of not only our core business, but also our reinsurance sidecar. We continue to evaluate additional opportunities for growth as well as diversification of risk. So in closing, we continue to reduce our G&A costs. Our sidecar investors continue to earn an attractive return. We remain invested mostly in cash. We are debt-free. We have a strong balance sheet and a solid cash position. And more importantly, we have a real opportunity for growth at a stable and viable business. With that, we are ready to open the call for questions. Operator, please provide the appropriate instructions.
Our first question is from Kent Engelke, Capitol Securities.
Today, I read a story about the bond market's severe issues, how it's essentially falling apart and how yields are increasing. How does that relate to the reinsurance market?
Yes, thanks for the question, Kent. This really allows us to expand our sidecar business, as the bond market cat bonds are currently offering returns between 6% and 10%, while our sidecar is generating a much higher return. Although there are various perspectives on the investment aspects, we see considerable potential to develop that part of our business. While it represents a slightly different investment strategy in the reinsurance sector, it certainly works to our advantage.
My understanding is that the only way to be involved in reinsurance contracts is being a reinsurance company itself or investing in a sidecar. Is that a correct assumption?
Yes, that is correct.
I believe that with the yields and returns you're experiencing, the funds should be flowing in significantly due to the impressive returns you have, especially since another competitor has been removed from the market because of circumstances beyond their control.
We have a significant opportunity in the sidecar because it is accessible to almost everyone within certain limits. However, this year, as we were marketing our sidecar, the world was affected by COVID. By the time things settled, it was too late for us to invest more capital through that sidecar as the fundraising window had closed. We hope that after next year and as we prepare for the upcoming season, we will have another chance to capitalize on that. We are looking forward to taking advantage of this opportunity.
I look forward to the potential profitability coming from that and the like, and as you grow that because, again, my very limited understanding is that it operates like the old-fashioned hedge fund 2 and 20, and it's very easy to do the math on the potential profitability that is there. So hope you market it and bring in a gazillion dollars in it.
Thank you so much, Kent.
At this time, this concludes our question-and-answer session. I will now turn the call back over to Mr. Madhu for his closing remarks.
Thank you for joining us on today's call. Before we wrap up, I'd like to thank our employees, business partners and investors for their continued support. I especially want to express gratitude to our Oxbridge team, who continue to leverage their significant experience to manage and build our business during these challenging times. It is their dedication and expertise that will get us through these days. And we look forward to updating you on our next call. If you have any further questions, please reach out anytime. Thank you again for your time and attention today and your interest in Oxbridge. Operator?
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 on the Investors section of the company's website. Thank you for joining us today for our presentation. You may now disconnect.