OXBRIDGE RE HOLDINGS Ltd 10-Q for FY2021 Q3
OXBRIDGE RE HOLDINGS Ltd (OXBR)
About this 10-Q
OXBRIDGE RE HOLDINGS Ltd filed this 10-Q on November 12, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $7.03M
- up 2613.9% from $259K a year earlier
- Net income
- $6.53M
- compared with a net loss of $33K a year earlier
- Diluted EPS
- $1.14
- compared with -$0.01 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
For the transition period from __________ to __________
Commission File Number:
(Exact name of registrant as specified in its charter) |
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(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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Registrant’s telephone number, including area code: (
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| No ☐ |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
| No ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☐ | Smaller reporting company | ||
Emerging growth company | ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes |
| No ☒ |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of November 12, 2021;
OXBRIDGE RE HOLDINGS LIMITED
INDEX
PART I – FINANCIAL INFORMATION | Page | |||
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| Consolidated Balance Sheets September 30, 2021 (unaudited) and December 31, 2020 |
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| Consolidated Statements of Cash Flows Nine Months Ended September 30, 2021 and 2020 (unaudited) |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Table of Contents |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Consolidated Balance Sheets
(expressed in thousands of U.S. Dollars, except per share and share amounts)
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| At December 31, 2020 |
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Assets | ||||||||
Equity securities, at fair value (cost : $ |
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Cash and cash equivalents |
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Restricted cash and cash equivalents |
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Accrued interest and dividend receivable |
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Premiums receivable |
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Other investments |
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Due from related party |
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Deferred policy acquisition costs |
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Operating lease right-of-use assets |
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Prepayment and other assets |
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Property and equipment, net |
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Total assets |
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Liabilities and Shareholders Equity | ||||||||
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Losses payable |
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Notes payable to noteholders |
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Unearned premiums reserve |
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Operating lease liabilities |
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Accounts payable and other liabilities |
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Total liabilities |
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| Shareholders equity: |
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Ordinary share capital, (par value $ |
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Additional paid-in capital |
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Accumulated Deficit |
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Total shareholders equity |
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Total liabilities and shareholders equity |
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The accompanying Notes to Consolidated Financial Statements are an integral
part of the Consolidated Financial Statements.
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| Table of Contents |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Consolidated Statements of Income (unaudited)
(expressed in thousands of U.S. Dollars, except per share amounts)
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| Revenue |
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| Assumed premiums |
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| Change in unearned premiums reserve |
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Net premiums earned |
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Net investment and other income |
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Net realized investment (loss) gains |
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Unrealized gain on other investments |
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Change in fair value of equity securities |
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Total revenue |
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| Expenses |
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| Losses and loss adjustment expenses |
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| Policy acquisition costs and underwriting expenses |
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| General and administrative expenses |
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Total expenses |
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Income (Loss) before income attributable to noteholders |
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Income attributable to noteholders |
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| Net income (loss) |
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| Earnings (Loss) per share |
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| Basic and Diluted |
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| Weighted-average shares outstanding |
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The accompanying Notes to Consolidated Financial Statements are an integral
part of the Consolidated Financial Statements.
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| Table of Contents |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(expressed in thousands of U.S. Dollars)
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| Three Months Ended |
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| Nine Months Ended |
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| September 30, |
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| Net income (loss) |
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| Other comprehensive loss: |
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| Total other comprehensive loss |
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| Comprehensive income (loss) |
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The accompanying Notes to Consolidated Financial Statements are an integral
part of the Consolidated Financial Statements.
| 5 |
| Table of Contents |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(expressed in thousands of U.S. Dollars)
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| Nine Months Ended |
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Operating activities |
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Net income (loss) |
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Adjustments to reconcile net income (loss) to net cash used in operating activities: |
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Stock-based compensation |
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Depreciation and amortization |
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Net realized investment gains |
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Change in fair value of equity securities |
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Change in fair value of other investments |
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Change in operating assets and liabilities: |
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Accrued interest and dividend receivable |
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Premiums receivable |
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Due from related party |
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Deferred policy acquisition costs |
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Operating leases right-of-use assets and liabilities |
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Prepayment and other assets |
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Losses payable |
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Unearned premiums reserve |
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Accounts payable and other liabilities |
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Net cash used in operating activities |
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Investing activities |
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Purchase of equity securities |
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Purchase of other investments |
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Proceeds from sale of equity securities |
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Purchase of property and equipment |
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Net cash (used in) provided by investing activities |
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Financing activities |
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Proceeds on issuance of notes |
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Redemption of notes |
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Net cash used in financing activities |
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| Table of Contents |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(expressed in thousands of U.S. Dollars)
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Cash and cash equivalents, and restricted cash and cash equivalents: |
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Net change during the period |
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Balance at beginning of period |
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Balance at end of period |
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Non-cash investing activities |
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Operating lease right-of-use assets |
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Operating lease liability |
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The accompanying Notes to Consolidated Financial Statements are an integral
part of the Consolidated Financial Statements.
| 7 |
| Table of Contents |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY | |||||||||
Consolidated Statements of Changes in Shareholders' Equity | |||||||||
Nine Months Ended September 30, 2021 and 2020 (unaudited) | |||||||||
(expressed in thousands of U.S. Dollars, except number of shares ) |
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Balance at December 31, 2019 |
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Net loss for the period |
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Stock-based compensation |
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Balance at March 31, 2020 |
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Net income for the period |
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Stock-based compensation |
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Balance at June 30, 2020 |
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Net loss for the period |
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Stock-based compensation |
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Balance at September 30, 2020 |
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Balance at December 31, 2020 |
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Net income for the period |
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Stock-based compensation |
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Balance at March 31, 2021 |
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Net income for the period |
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Stock-based compensation |
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Balance at June 30, 2021 |
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Net income for the period |
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Stock-based compensation |
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Balance at September 30, 2021 |
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The accompanying Notes to Consolidated Financial Statements are an integral
part of the Consolidated Financial Statements.
| 8 |
| Table of Contents |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2021
1. ORGANIZATION AND BASIS OF PRESENTATION
(a) Organization
Oxbridge Re Holdings Limited (the “Company”) was incorporated as an exempted company on April 4, 2013 under the laws of the Cayman Islands. Oxbridge Re Holdings Limited owns
The Company’s ordinary shares and warrants are listed on The NASDAQ Capital Market under the symbols “OXBR” and “OXBRW,” respectively.
(b) Basis of Presentation and Consolidation
The accompanying unaudited, consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, and the Securities and Exchange Commission (“SEC”) rules for interim financial reporting. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying interim consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the Company’s consolidated financial position as of September 30, 2021 and the consolidated results of operations and cash flows for the periods presented. The consolidated results of operations for interim periods are not necessarily indicative of the results of operations to be expected for any subsequent interim period or for the fiscal year ended December 31, 2021. The accompanying unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2020 included in the Company’s Form 10-K, which was filed with the SEC on March 30, 2021.
In preparing the interim unaudited consolidated financial statements, management was required to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the financial reporting date and throughout the periods being reported upon. Certain of the estimates result from judgments that can be subjective and complex and consequently actual results may differ from these estimates, which would be reflected in future periods.
Material estimates that are particularly susceptible to significant change in the near-term relate to the fair value of the Company’s investment in Oxbridge Acquisition Corp. and the determination of the reserve for losses and loss adjustment expenses (if any), which may include amounts estimated for claims incurred but not yet reported. The Company uses various assumptions and actuarial data it believes to be reasonable under the circumstances to make these estimates. In addition, accounting policies specific to valuation of investments involve significant judgments and estimates material to the Company’s consolidated financial statements. Although considerable variability is likely to be inherent in these estimates, management believes that the amounts provided are reasonable. These estimates are continually reviewed and adjusted if necessary. Such adjustments are reflected in current operations.
| 9 |
| Table of Contents |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2021
The Company consolidates in these consolidated financial statements the results of operations and financial position of all voting interest entities (“VOE”) in which the Company has a controlling financial interest and all variable interest entities (“VIE”) in which the Company is considered to be the primary beneficiary. The consolidation assessment, including the determination as to whether an entity qualifies as a VIE or VOE, depends on the facts and circumstances surrounding each entity.
All significant intercompany balances and transactions have been eliminated.
2. SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents: Cash and cash equivalents are comprised of cash and short- term investments with original maturities of three months or less.
Restricted cash and cash equivalents: Restricted cash and cash equivalents represent funds held in accordance with the Company’s trust agreements with ceding insurers and trustees, which requires the Company to maintain collateral with a market value greater than or equal to the limit of liability, less unpaid premium.
Investments: The Company from time to time invests in fixed-maturity securities and equity securities, and for which its fixed-maturity securities are classified as available-for-sale. The Company’s available for sale debt investments are carried at fair value with changes in fair value included as a separate component of accumulated other comprehensive income (loss) in shareholders’ equity. For the Company’s investment in equity securities, and for the Company’s investment in the special purpose acquisition company Oxbridge Acquisition Corp. classified as “other investments”, the changes in fair value are recorded within the consolidated statements of operations.
Unrealized gains or losses are determined by comparing the fair market value of the securities with their cost or amortized cost. Realized gains and losses on investments are recorded on the trade date and are included in the consolidated statements of operations. The cost of securities sold is based on the specified identification method. Investment income is recognized as earned and discounts or premiums arising from the purchase of debt securities are recognized in investment income using the interest method over the remaining term of the security.
Fair value measurement: GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
| 10 |
| Table of Contents |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2021
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair value measurement (continued)
The three levels of the fair value hierarchy under GAAP are as follows:
Level 1 | Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date; |
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|
Level 2 | Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active; and |
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Level 3 | Inputs that are unobservable. |
Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. For fixed maturity securities, inputs may include price information, volatility statistics, specific and broad credit data, liquidity statistics, broker quotes for similar securities and other factors. The fair value of investments in stocks and exchange-traded funds is based on the last traded price. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company’s investment custodians and management. The investment custodians consider observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant markets. The categorization of a financial instrument within the hierarchy is based upon the pricing transparency of the instrument, as well as the marketability of the instrument and the inherent risk of forfeiture of such instrument.
Deferred policy acquisition costs (“DAC”): Policy acquisition costs consist of brokerage fees, federal excise taxes and other costs related directly to the successful acquisition of new or renewal insurance contracts and are deferred and amortized over the terms of the reinsurance agreements to which they relate. The Company evaluates the recoverability of DAC by determining if the sum of future earned premiums and anticipated investment income is greater than the expected future claims and expenses. If a loss is probable on the unexpired portion of policies in force, a premium deficiency loss is recognized. At September 30, 2021, the DAC was considered fully recoverable and no premium deficiency loss was recorded.
Property and equipment: Property and equipment are recorded at cost when acquired. Property and equipment are comprised of motor vehicles, furniture and fixtures, computer equipment and leasehold improvements and are depreciated, using the straight-line method, over their estimated useful lives, which are five years for furniture and fixtures and computer equipment and four years for motor vehicles. Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or remaining lease term. The Company periodically reviews property and equipment that have finite lives, and that are not held for sale, for impairment by comparing the carrying value of the assets to their estimated future undiscounted cash flows. For the three and nine-month periods ended September 30, 2021 and 2020, there were no impairments in property and equipment.
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| Table of Contents |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2021
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for uncollectible receivables: Management evaluates credit quality by evaluating the exposure to individual counterparties; where warranted management also considers the credit rating or financial position, operating results and/or payment history of the counterparty. Management establishes an allowance for amounts for which collection is considered doubtful. Adjustments to previous assessments are recognized in operations in the year in which they are determined. At September 30, 2021, no receivables were determined to be overdue or impaired, and accordingly, no allowance for uncollectable receivables has been established.
Reserves for losses and loss adjustment expenses: The Company determines its reserves for losses and loss adjustment expenses, if any, on the basis of the claims reported by the Company’s ceding insurers and for losses incurred but not reported (“IBNR”), management uses the assistance of an independent actuary. The reserves for losses and loss adjustment expenses represent management’s best estimate of the ultimate settlement costs of all losses and loss adjustment expenses. Management believes that the amounts are adequate; however, the inherent impossibility of predicting future events with precision, results in uncertainty as to the amount which will ultimately be required for the settlement of losses and loss expenses, and the differences could be material. Adjustments are reflected in the consolidated statements of operations in the period in which they are determined.
Loss experience refund payable: Certain contracts may include retrospective provisions that adjust premiums or result in profit commissions in the event losses are minimal or zero. In accordance with GAAP, the Company will recognize a liability in the period in which the absence of loss experience obligates the Company to pay cash or other consideration under the contracts. On the contrary, the Company will derecognize such liability in the period in which a loss experience arises. Such adjustments to the liability, which accrue throughout the contract terms, will reduce the liability should a catastrophic loss event covered by the Company occur.
Premiums assumed: The Company records premiums assumed, net of loss experience refunds, as earned pro-rata over the terms of the reinsurance agreements, or period of risk, where applicable, and the unearned portion at the consolidated balance sheet date is recorded as unearned premiums reserve. A reserve is made for estimated premium deficiencies to the extent that estimated losses and loss adjustment expenses exceed related unearned premiums. Investment income is not considered in determining whether or not a deficiency exists. Subsequent adjustments of premiums assumed, based on reports of actual premium by the ceding companies, or revisions in estimates of ultimate premium, are recorded in the period in which they are determined. Such adjustments are generally determined after the associated risk periods have expired, in which case the premium adjustments are fully earned when assumed.
Certain contracts may allow for reinstatement premiums in the event of a full limit loss prior to the expiration of the contract. A reinstatement premium is not due until there is a full limit loss event and therefore, in accordance with GAAP, the Company records a reinstatement premium as written only in the event that the reinsured incurs a full limit loss on the contract and the contract allows for a reinstatement of coverage upon payment of an additional premium. For catastrophe contracts which contractually require the payment of a reinstatement premium equal to or greater than the original premium upon the occurrence of a full limit loss, the reinstatement premiums are earned over the original contract period. Reinstatement premiums that are contractually calculated on a pro-rata basis of the original premiums are earned over the remaining coverage period.
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| Table of Contents |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2021
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Unearned Premiums Ceded: The Company from time to time reduces the risk of future losses on business assumed by reinsuring certain risks and exposures with other reinsurers (retrocessionaires). The Company remains liable to the extent that any retrocessionaire fails to meet its obligations and to the extent that the Company does not hold sufficient security for their unpaid obligations.
Ceded premiums are written during the period in which the risk incept and are expensed over the contract period in proportion to the period of protection. Unearned premiums ceded consist of the unexpired portion of the reinsurance obtained.
Uncertain income tax positions: The authoritative GAAP guidance on accounting for, and disclosure of, uncertainty in income tax positions requires the Company to determine whether an income tax position of the Company is more likely than not to be sustained upon examination by the relevant tax authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For income tax positions meeting the more likely than not threshold, the tax amount recognized in the consolidated financial statements, if any, is reduced by the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant taxing authority. The application of this authoritative guidance has had no effect on the Company’s consolidated financial statements because the Company had no uncertain tax positions at September 30, 2021.
Earnings (Loss) Per Share: Basic earnings (loss) per share has been computed on the basis of the weighted-average number of ordinary shares outstanding during the periods presented. Diluted earnings (loss) per share is computed based on the weighted-average number of ordinary shares outstanding and reflects the assumed exercise or conversion of diluted securities, such as stock options and warrants, computed using the treasury stock method.
Stock-Based Compensation: The Company accounts for stock-based compensation under the fair value recognition provisions of GAAP which requires the measurement and recognition of compensation for all stock-based awards made to employees and directors, including stock options and restricted stock issuances based on estimated fair values. The Company measures compensation for restricted stock based on the price of the Company’s ordinary shares at the grant date. Determining the fair value of stock options at the grant date requires significant estimation and judgment. The Company uses an option-pricing model (Black-Scholes option pricing model) to assist in the calculation of fair value for stock options. When estimating the expected volatility, the Company takes into consideration the historical volatility of entities similar to itself. The Company considers factors such as an entity’s industry, stage of life cycle, size and financial leverage when selecting similar entities. The Company may use a sample peer group of companies in the reinsurance industry and/or the Company’s own historical volatility in determining the expected volatility. Additionally, the Company uses the guidance in the SEC’s Staff Accounting Bulletin No. 107 to determine the estimated life of options issued and has assumed no forfeitures during the life of the options.
The Company uses the straight-line attribution method for all grants that include only a service condition. Compensation expense related to all awards is included in general and administrative expenses.
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OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2021
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Pending Accounting Updates:
Accounting Standards Update No. 2016-13. In June 2016, the FASB issued ASU 2016-13, ”Financial Instruments - Credit Losses (Topic 326): Measurements of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 amends the guidance on reporting credits losses and affects loans, debt securities, trade receivables, reinsurance recoverable and other financial assets that have the contractual right to receive cash. The amendments are effective for annual periods beginning after December 15, 2022 (as amended), and interim periods within those annual periods. The Company is in the process of evaluating the impact of the requirements of ASU 2016-13 on the Company’s consolidated financial statements.
Segment Information: Under GAAP, operating segments are based on the internal information that management uses for allocating resources and assessing performance as the source of the Company’s reportable segments. The Company manages its business on the basis of one operating segment, Property and Casualty Reinsurance, in accordance with the qualitative and quantitative criteria established under GAAP.
Reclassifications: Any reclassifications of prior period amounts have been made to conform to the current period presentation.
3. CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AND CASH EQUIVALENTS
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| At September 30, |
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| At December 31, |
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| 2021 |
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| 2020 |
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| (in thousands) |
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Cash on deposit |
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| $ |
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Cash held with custodians |
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Restricted cash held in trust |
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Total |
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| $ |
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Cash and cash equivalents are held by large and reputable counterparties in the United States of America and in the Cayman Islands. Restricted cash held in trust is custodied with Truist Bank, f/k/a SunTrust Bank and is held in accordance with the Company’s trust agreements with the ceding insurers and trustees, which require that the Company provide collateral having a market value greater than or equal to the limit of liability, less unpaid premium.
| 14 |
| Table of Contents |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2021
4. INVESTMENTS
The Company from time to time invests in fixed-maturity securities and equity securities. At September 30, 2021 and December 31, 2020, the Company did not hold any available-for-sale debt securities.
Proceeds received, and the gross realized gains and losses from sales of equity securities, for the three and nine months ended September 30, 2021 and 2020 were as follows:
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| Gross proceeds from sales |
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| Gross Realized Gains |
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| Gross Realized Losses |
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| ($ in thousands) |
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Three Months Ended September 30, 2021 |
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Equity securities |
| $ |
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| $ |
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| $ |
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Nine Months Ended September 30, 2021 |
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Equity securities |
| $ |
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| $ |
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| $ |
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Three Months Ended September 30, 2020 |
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Equity securities |
| $ |
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| $ |
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| $ | ( | ) | ||
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Nine Months Ended September 30, 2020 |
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Equity securities |
| $ |
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| $ |
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| $ | ( | ) | ||
Other Investments
In connection with Oxbridge Acquisition Corp. (“OXAC”) initial public offering (“IPO”) in August 2021, the Company’s affiliate OAC Sponsor Ltd. (“Sponsor”) purchased an aggregate
On August 11, 2021, the Company acquired an aggregate of
| 15 |
| Table of Contents |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2021
4. INVESTMENTS (cont’d)
Other Investments (continued)
The registration statement for OXAC’s IPO was declared effective on August 11, 2021 and on August 16, 2021, OXAC consummated the IPO with the sale of
The Company’s beneficial interests in OXAC’s Class B shares and the Private Placement Warrants are recorded at fair value and are classified in “Other Investments” on the consolidated balance sheets. The fair value calculation of the Company’s beneficial interest in OXAC’s Class B shares and Private Placement Warrants is dependent on company-specific adjustments applied to the observable trading prices of OXAC Class A shares and public warrants. The Company’s management estimates that a specific discount range of 20% to 40% sufficiently captures the risk or profit that a market participant would require as compensation for assuming the inherent risk of forfeiture if a business combination doesn’t occur and the lack of marketability of the Company’s beneficial interests in the OXAC. The Company has selected a discount of 40%, and due to the unobservable nature of the company-specific adjustment, the Company classifies the Other Investment as Level 3 in the fair value hierarchy. Subsequent changes in fair value will be recorded in the consolidated statement of operations during the period of the change.
As a result of the re-measurement of our investment in OXAC, we recognize for the three and nine months ended September 30, 2021, an unrealized gain on securities of $
Other investments as of September 30, 2021 consist of the following:
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| September 30, 2021 |
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| (Unaudited) |
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Oxbridge Acquisition Corp. Private Placement Warrants |
| $ |
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Oxbridge Acquisition Corp. Class B Ordinary Shares |
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End of period |
| $ |
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| June 30, 2021 |
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| (Unaudited) |
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Beginning of year |
| $ |
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Investments in affiliate |
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Unrealized gain on investment in affiliate |
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End of period |
| $ |
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If OXAC does not complete a business combination within 15 months from the closing of the IPO (or up to 21 months from the closing of the IPO if OXAC extends the period of time to consummate a business), the proceeds from the sale of the Private Placement Warrants (after OXAC IPO transaction costs) will be used to fund the redemption of the shares sold in the OXAC IPO (subject to the requirements of applicable law), and the Private Placement Warrants will expire without value. The Sponsor holds approximately
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| Table of Contents |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2021
4. INVESTMENTS (continued)
Assets Measured at Estimated Fair Value on a Recurring Basis
The following table presents information about the Company’s financial assets measured at estimated fair value on a recurring basis that is reflected in the consolidated balance sheets at carrying value. The table indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as of September 30, 2021 and December 31, 2020:
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| Fair Value Measurements Using |
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| (Level 1) |
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| (Level 2) |
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| (Level 3) |
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| Total |
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As of September 30, 2021 |
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Financial Assets: |
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Cash and cash equivalents |
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Restricted cash and cash equivalents |
| $ |
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| $ |
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| $ |
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| $ |
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Other investments |
| $ |
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| $ |
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| $ |
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| $ |
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Total equity securities |
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Total |
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| $ |
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| $ |
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| $ |
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| Fair Value Measurements Using |
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| Total |
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As of December 31, 2020 |
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Financial Assets: |
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Cash and cash equivalents |
| $ |
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| $ |
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Restricted cash and cash equivalents |
| $ |
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| $ |
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| $ |
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Total equity securities |
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Total |
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| $ |
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| Table of Contents |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2021
5. TAXATION
Under current Cayman Islands law, no corporate entity, including the Company and the subsidiaries, is obligated to pay taxes in the Cayman Islands on either income or capital gains. The Company and its subsidiaries have an undertaking from the Governor-in-Cabinet of the Cayman Islands, pursuant to the provisions of the Tax Concessions Law, as amended, that, in the event that the Cayman Islands enacts any legislation that imposes tax on profits, income, gains or appreciations, or any tax in the nature of estate duty or inheritance tax, such tax will not be applicable to the Company and its subsidiaries or their operations, or to the ordinary shares or related obligations, until April 23, 2033 and May 17, 2033, respectively.
The Company and its subsidiaries intend to conduct substantially all of their operations in the Cayman Islands in a manner such that they will not be engaged in a trade or business in the U.S. However, because there is no definitive authority regarding activities that constitute being engaged in a trade or business in the U.S. for federal income tax purposes, the Company cannot assure that the U.S. Internal Revenue Service will not contend, perhaps successfully, that the Company or its subsidiary is engaged in a trade or business in the U.S. A foreign corporation deemed to be so engaged would be subject to U.S. federal income tax, as well as branch profits tax, on its income that is treated as effectively connected with the conduct of that trade or business unless the corporation is entitled to relief under an applicable tax treaty.
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OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2021
6. VARIABLE INTEREST ENTITIES
Oxbridge Re NS. On December 22, 2017, the Company established Oxbridge Re NS, a Cayman domiciled and licensed special purpose insurer, formed to provide additional collateralized capacity to support Oxbridge Reinsurance Limited’s reinsurance business. In respect of the debt issued by Oxbridge Re NS to investors, Oxbridge Re NS has entered into a retrocession agreement with Oxbridge Reinsurance Limited effective June 1, 2020. Under this agreement, Oxbridge Re NS receives a quota share of Oxbridge Reinsurance Limited’s catastrophe business. Oxbridge Re NS is a non-rated insurer and the risks have been fully collateralized by way of funds held in trust for the benefit of Oxbridge Reinsurance Limited. Oxbridge Re NS is able to provide investors with access to natural catastrophe risk backed by the distribution, underwriting, analysis and research expertise of Oxbridge Re.
The Company has determined that Oxbridge Re NS meets the definition of a VIE as it does not have sufficient equity capital to finance its activities. The Company concluded that it is the primary beneficiary and has consolidated the subsidiary upon its formation, as it owns
Upon issuance of a series of participating notes by Oxbridge Re NS, all of the proceeds from the issuance are deposited into collateral accounts, to fund any potential obligation under the reinsurance agreements entered into with Oxbridge Reinsurance Limited underlying such series of notes. The outstanding principal amount of each series of notes generally is expected to be returned to holders of such notes upon the expiration of the risk period underlying such notes, unless an event occurs which causes a loss under the applicable series of notes, in which case the amount returned is expected to be reduced by such noteholder’s pro rata share of such loss, as specified in the applicable governing documents of such notes.
In addition, holders of such notes are generally entitled to interest payments, payable annually, as determined by the applicable governing documents of each series of notes. Oxbridge Re Holdings Limited receives an origination and structuring fee in connection with the formation, operation and management of Oxbridge Re NS.
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| Table of Contents |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2021
6. VARIABLE INTEREST ENTITIES (continued)
Notes Payable to Series 2020-1 noteholders
Oxbridge Re NS entered into a retrocession agreement with Oxbridge Reinsurance Ltd on June 1, 2020 and issued $
The income from Oxbridge Re NS operations that are attributable to the participating notes noteholders for the three and nine months ended September 30, 2021 was $
7. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table summarizes the Company’s loss and loss adjustment expenses (“LAE”) and the reserve for loss and LAE reserve movements for the three and nine-month periods ending September 30, 2021 and 2020:
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| Three Months Ended |
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| Nine Months Ended |
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| September 30, |
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| 2020 |
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Balance, beginning of period |
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Incurred related to: |
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Total incurred |
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Paid related to: |
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Balance, end of period |
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| 20 |
| Table of Contents |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2021
7. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES (continued)
When losses occur, the reserves for losses and LAE are typically comprised of case reserves (which are based on claims that have been reported) and IBNR reserves (which are based on losses that are believed to have occurred but for which claims have not yet been reported and include a provision for expected future development on existing case reserves). The Company uses the assistance of an independent actuary in the determination of IBNR and expected future development of existing case reserves.
The uncertainties inherent in the reserving process and potential delays by cedants and brokers in the reporting of loss information, together with the potential for unforeseen adverse developments, may result in the reserve for losses and LAE ultimately being significantly greater or less than the reserve provided at the end of any given reporting period. The degree of uncertainty is further increased when a significant loss event takes place near the end of a reporting period. Reserve for losses and LAE estimates are reviewed periodically on a contract by contract basis and updated as new information becomes known. Any resulting adjustments are reflected in income in the period in which they become known.
The Company’s reserving process is highly dependent on the timing of loss information received from its cedants and related brokers.
The losses incurred during the three and nine-month period ended September 30, 2021 related to the a first limit loss suffered by the Company as a result of underwriting exposure to Hurricane Ida, which made landfall in Louisiana on August 29, 2021.
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| Table of Contents |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2021
8. EARNINGS (LOSS) PER SHARE
A summary of the numerator and denominator of the basic and diluted loss per share is presented below (dollars in thousands except per share amounts):
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| Three Months Ended |
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| Nine Months Ended |
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| September 30, |
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Numerator: |
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Net earnings (loss) |
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Denominator: |
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Weighted average shares - basic |
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Effect of dilutive securities - Stock options |
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| - |
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| - |
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| - |
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Shares issuable upon conversion of warrants |
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| - |
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| - |
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| - |
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| - |
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Weighted average shares - diluted |
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Earnings (loss) per share - basic |
| $ |
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| $ |
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Earnings (loss) per share - diluted |
| $ |
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| ( | ) |
| $ |
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For the three and nine-month periods ended September 30, 2021, options to purchase
For the three and nine-month period ended September 30, 2021,
GAAP requires the Company to use the two-class method in computing basic earnings (loss) per share since holders of the Company’s restricted stock have the right to share in dividends, if declared, equally with common stockholders. These participating securities effect the computation of both basic and diluted earnings (loss) per share during periods of net income (loss).
| 22 |
| Table of Contents |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2021
9. WARRANTS
There were
10. DIVIDENDS
As of September 30, 2021, none of the Company’s retained earnings were restricted from payment of dividends to the company’s shareholders. However, since most of the Company’s capital and retained earnings may be invested in its subsidiaries, a dividend from the subsidiaries would likely be required in order to fund a dividend to the Company’s shareholders and would require notification to the Cayman Islands Monetary Authority (“CIMA”).
Under Cayman Islands law, the use of additional paid-in capital is restricted, and the Company will not be allowed to pay dividends out of additional paid-in capital if such payments result in breaches of the prescribed and minimum capital requirement.
11. SHARE-BASED COMPENSATION
The Company currently has outstanding stock-based awards granted under the 2014 Omnibus Incentive Plan (the “2014 Plan”). Under the Plan, the Company has discretion to grant equity and cash incentive awards to eligible individuals. At September 30, 2021, there were
During the nine months ended September 30, 2021, the Company’s shareholder approved the 2021 Omnibus Incentive Plan (the “2021 Plan”). Under the Plan, the Company has discretion to grant equity and cash incentive awards to eligible individuals. At September 30, 2021, there were
Stock options
Stock options granted and outstanding under the Plans vests quarterly over four years and are exercisable over the contractual term of ten years.
A summary of the stock option activity for the three and nine-month periods ended September 30, 2021 and 2020 is as follows:
| 23 |
| Table of Contents |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2021
11. SHARE-BASED COMPENSATION (cont’d)
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| Number of Options |
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| Weighted- Average Exercise Price |
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| Weighted- Average Remaining Contractual Term |
| Aggregate Intrinsic Value |
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Outstanding at January 1, 2021 |
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Granted |
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Outstanding at March 31, 2021 |
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Outstanding at June 30, 2021 |
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Forfeited |
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Outstanding at September 30, 2021 |
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Exercisable at September 30, 2021 |
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Outstanding at January 1, 2020 |
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Outstanding at March 31, 2020 |
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Outstanding at June 30, 2020 |
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Outstanding at September 30, 2020 |
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Exercisable at September 30, 2020 |
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| $ |
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Compensation expense recognized for the three-month periods ended September 30, 2021 and 2020 totaled $
During the nine-month period ended September 30, 2021 the Company granted
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| 2021 |
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Expected dividend yield |
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Expected volatility |
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Risk-free interest rate |
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Expected life (in years) |
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Per share grant date fair value of options issued |
| $ |
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| 24 |
| Table of Contents |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2021
11. SHARE-BASED COMPENSATION (continued)
At the time of the grant, the dividend yield was based on the Company’s history and expectation of dividend payouts at the time of the grant; expected volatility was based on volatility of similar companies’ common stock; the risk-free rate was based on the U.S. Treasury yield curve in effect.
The Company examined its historical pattern of option exercises in an effort to determine if there were any pattern based on certain employee populations. From this analysis, the Company could not identify any patterns in the exercise of options. As such, the Company used the guidance in the SEC’s Staff Accounting Bulletin No. 107 to determine the estimated life of options issued.
12. NET WORTH FOR REGULATORY PURPOSES
The subsidiaries are subject to a minimum and prescribed capital requirement as established by CIMA.
At September 30, 2021, the Oxbridge Reinsurance Limited’s net worth of $
At September 30, 2021, the Oxbridge Re NS’ net worth of $
The Subsidiaries are not required to prepare separate statutory financial statements for filing with CIMA, and there were no material differences between the Subsidiaries’ GAAP capital, surplus and net income, and its statutory capital, surplus and net income as of September 30, 2021 or for the period then ended.
13. FAIR VALUE AND CERTAIN RISKS AND UNCERTAINTIES
Fair values
With the exception of balances in respect of insurance contracts (which are specifically excluded from fair value disclosures under GAAP) and investment securities as disclosed in Note 4 of these consolidated financial statements, the carrying amounts of all other financial instruments, which consist of cash and cash equivalents, restricted cash and cash equivalents, accrued interest and dividends receivable, premiums receivable, and other assets, notes payable and accounts payable and other liabilities, approximate their fair values due to their short-term nature.
| 25 |
| Table of Contents |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2021
13. FAIR VALUE AND CERTAIN RISKS AND UNCERTAINTIES (continued)
Concentration of underwriting risk
A substantial portion of the Company’s current reinsurance business ultimately relates to the risks of a limited number of entities; accordingly, the Company’s underwriting risks are not significantly diversified.
Concentrations of Credit and Counterparty Risk
The Company markets retrocessional and reinsurance policies worldwide through its brokers. Credit risk exists to the extent that any of these brokers may be unable to fulfill their contractual obligations to the Company. For example, the Company is required to pay amounts owed on claims under policies to brokers, and these brokers, in the Company. In some jurisdictions, if a broker fails to make such a payment, the Company might remain liable to the ceding company for the deficiency. In addition, in certain jurisdictions, when the ceding company pays premiums for these policies to brokers, these premiums are considered to have been paid and the ceding insurer is no longer liable to the Company for those amounts, whether or not the premiums have actually been received.
The Company remains liable for losses it incurs to the extent that any third-party reinsurer is unable or unwilling to make timely payments under reinsurance agreements. The Company would also be liable in the event that its ceding companies were unable to collect amounts due from underlying third-party reinsurers.
The Company mitigates its concentrations of credit and counterparty risk by using reputable and several counterparties which decreases the likelihood of any significant concentration of credit risk with any one counterparty.
Market risk
Market risk exists to the extent that the values of the Company’s monetary assets fluctuate as a result of changes in market prices. Changes in market prices can arise from factors specific to individual securities or their respective issuers, or factors affecting all securities traded in a particular market. Relevant factors for the Company are both volatility and liquidity of specific securities and markets in which the Company holds investments. The Company has established investment guidelines that seek to mitigate significant exposure to market risk.
| 26 |
| Table of Contents |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2021
14. LEASES
Operating lease right-of-use assets and operating lease liabilities are disclosed as line in the consolidated balance sheet. We determine if a contract contains a lease at inception and recognize operating lease right-of-use assets and operating lease liabilities based on the present value of the future minimum lease payments at the commencement date. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Lease agreements that have lease and non-lease components, are accounted for as a single lease component. Lease expense is recognized on a straight-line basis over the lease term.
The Company has two operating lease obligations namely for the Company’s office facilities located at Suite 201, 42 Edward Street Grand Cayman, Cayman Islands and residential space at Turnberry Villas in Grand Cayman, Cayman Islands. The office lease has a remaining lease term of approximately twenty-nine (29) months and includes an option to extend the lease. Under the terms of the lease, the Company also has the right to terminate the lease after thirty-six (36) months upon giving appropriate notice in writing to the Lessor. The residential lease has a remaining lease term of approximately fifteen (15) months.
The components of lease expense and other lease information as of and during the nine-month periods ended September 30, 2021 and 2020 are as follows:
(in thousands) |
| For the Nine-Month Period Ended September 30, 2021 |
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| For the Nine-Month Period Ended September 30, 2020 |
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Operating Lease Cost (1) |
| $ |
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Cash paid for amounts included in the measurement of lease liabilities |
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Operating cash flows from operating leases |
| $ |
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| $ |
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(1) Includes short-term leases
(in thousands) |
| At September 30, 2021 |
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| At December 31, 2020 |
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Operating lease right-of-use assets |
| $ |
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| $ |
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Operating lease liabilities |
| $ |
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| $ |
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Weighted-average remaining lease term - operating leases |
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Weighted-average discount rate - operating leases |
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| 27 |
| Table of Contents |
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
September 30, 2021
14. LEASES (continued)
Future minimum lease payments under non-cancellable leases as of September 30, 2021 and December 31, 2020, reconciled to our discounted operating lease liability presented on the consolidated balance sheet are as follows:
(in thousands) |
| At September 30, 2021 |
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| At December 31, 2020 |
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Remainder of 2021 |
| $ |
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| $ |
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2022 |
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2023 |
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Thereafter |
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Total future minimum lease payments |
| $ |
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| $ |
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Less imputed interest |
|
| ( | ) |
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| ( | ) |
Total operating lease liability |
| $ |
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15. RELATED PARTY TRANSACTIONS
Promissory Note Agreement
During the three and nine-month period ended September 30, 2021, Oxbridge Reinsurance Limited entered into a Promissory Note Agreement (the “Note”) with OAC Sponsor Ltd. (the “Sponsor”). The Sponsor is a Cayman Islands exempted company that was the sole parent of Oxbridge Acquisition Corp., a special purpose acquisition company (the “SPAC”) prior to the SPAC initial public offering on August 11, 2021. The Company’s executive officers serve as directors and executive officers of the Sponsor and the SPAC, and Oxbridge Reinsurance Limited is the lead investor in the Sponsor. Under the terms of the promissory note, Oxbridge Reinsurance Limited was able to lend up to $
Administrative Services Agreement
Participating Notes
During the year ending December 31, 2020, Mr. Jay Madhu, a director and officer of the Company and its subsidiaries, invested a principal amount of $
16. SUBSEQUENT EVENTS
We evaluate all subsequent events and transactions for potential recognition or disclosure in our Except as disclosed in Note 4 above, there were no other events subsequent to September 30, 2021 for which disclosure was required.
| 28 |
| Table of Contents |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q, including in this Management’s Discussion and Analysis, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements generally are identified by the words “believe,” “project,” “predict,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” contained in our Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 30, 2021 and on pages 41 through 42 of this Form 10-Q. We undertake no obligation to publicly update or revise any forward -looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned not to place undue reliance on the forward -looking statements which speak only to the dates on which they were made.
GENERAL
The following is a discussion and analysis of our results of operations for the three and nine-month periods ended September 30, 2021 and 2020 and our financial condition as of September 30, 2021 and December 31, 2020. The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in our Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 30, 2021. References to “we,” “us,” “our,” “our company,” or “the Company” refer to Oxbridge Re Holdings Limited and its wholly-owned subsidiaries, Oxbridge Reinsurance Limited and Oxbridge Re NS, unless the context dictates otherwise.
Overview
We are a Cayman Islands specialty property and casualty reinsurer that provides reinsurance solutions through our reinsurance subsidiaries, Oxbridge Reinsurance Limited and Oxbridge Re NS. Oxbridge Re NS functions as a reinsurance sidecar which increases the underwriting capacity of Oxbridge Reinsurance Limited. Oxbridge Re NS issues participating notes to third party investors, the proceeds of which are utilized to collateralize Oxbridge Reinsurance Limited’s reinsurance obligations. We focus on underwriting fully-collateralized reinsurance contracts primarily for property and casualty insurance companies in the Gulf Coast region of the United States, with an emphasis on Florida. We specialize in underwriting medium frequency, high severity risks, where we believe sufficient data exists to analyze effectively the risk/return profile of reinsurance contracts.
We underwrite reinsurance contracts on a selective and opportunistic basis as opportunities arise based on our goal of achieving favorable long-term returns on equity for our shareholders. Our goal is to achieve long-term growth in book value per share by writing business that generates attractive underwriting profits relative to the risk we bear. Unlike other insurance and reinsurance companies, we do not intend to pursue an aggressive investment strategy and instead will focus our business on underwriting profits rather than investment profits. However, we intend to complement our underwriting profits with investment profits on an opportunistic basis. Our primary business focus is on fully collateralized reinsurance contracts for property catastrophes, primarily in the Gulf Coast region of the United States, with an emphasis on Florida. Within that market and risk category, we attempt to select the most economically attractive opportunities across a variety of property and casualty insurers. As our capital base grows, however, we expect that we will consider further growth opportunities in other geographic areas and risk categories.
| 29 |
| Table of Contents |
Our level of profitability is primarily determined by how adequately our premiums assumed and investment income cover our costs and expenses, which consist primarily of acquisition costs and other underwriting expenses, claim payments and general and administrative expenses. One factor leading to variation in our operational results is the timing and magnitude of any follow-on offerings we undertake (if any), as we are able to deploy new capital to collateralize new reinsurance treaties and consequently, earn additional premium revenue. In addition, our results of operations may be seasonal in that hurricanes and other tropical storms typically occur during the period from June 1 through November 30. Further, our results of operations may be subject to significant variations due to factors affecting the property and casualty insurance industry in general, which include competition, legislation, regulation, general economic conditions, judicial trends, and fluctuations in interest rates and other changes in the investment environment.
Because we employ an opportunistic underwriting and investment philosophy, period-to-period comparisons of our underwriting results may not be meaningful. In addition, our historical investment results may not necessarily be indicative of future performance. Due to the nature of our reinsurance and investment strategies, our operating results will likely fluctuate from period to period.
Recent Developments
Oxbridge Acquisition Corp.
On August 16, 2021, Oxbridge Acquisition Corp. (“Oxbridge Acquisition” or “the SPAC”), a Cayman Islands special purpose acquisition company in which the Company has an indirect investment through its wholly-owned licensed reinsurance subsidiary Oxbridge Reinsurance Limited (“OXRE”), announced the closing of an initial public offering of units (“Units”). In the initial public offering, Oxbridge Acquisition sold an aggregate of 11,500,000 Units at a price of $10.00 per unit, resulting in total gross proceeds of $115,000,000. Each Unit consisted of one Class A ordinary share and one redeemable warrant, with each warrant entitling the holder thereof to purchase one Class A ordinary share of Oxbridge Acquisition at a price of $11.50 per share.
The initial public offering of Oxbridge Acquisition was sponsored by OAC Sponsor Ltd. (“Sponsor”). In connection with Oxbridge Acquisition’s initial public offering, Sponsor purchased from Oxbridge Acquisition, simultaneous with the closing of the initial public offering, an aggregate of 4,897,500 warrants at a price of $1.00 per warrant ($4,897,500 in the aggregate) in a private placement (the “Private Placement Warrants”). Each Private Placement Warrant is exercisable to purchase one Class A ordinary share of Oxbridge Acquisition at $11.50 per share. In addition, Sponsor holds 2,875,000 shares of the Class B ordinary shares of Oxbridge Acquisition, representing 20% of the outstanding shares of Oxbridge Acquisition (the “Class B Shares”).
In connection with the organization of Sponsor, OXRE placed approximately 34.7% of the risk capital and owns approximately 49.6% and 63.1% of the ordinary shares and preferred shares, respectively, of the Sponsor (the “Sponsor Equity Interest”). The preferred shares of Sponsor are nonvoting shares and entitle the holders thereof to receive the net proceeds, if any, received by Sponsor from the sale, exchange, or disposition of the Private Placement Warrants or the shares issuable upon the exercise thereof, and the ordinary shares of Sponsor (which are voting shares in Sponsor) are equivalent to the value of the Class B Shares of Oxbridge Acquisition held by Sponsor.
| 30 |
| Table of Contents |
On August 11, 2021, OXRE entered into a Share Purchase Agreement with Sponsor (the “Share Purchase Agreement”) under which OXRE purchased the Sponsor Equity Interest for an aggregate purchase price of $2,000,000 (the “Share Purchase Agreement”). Under the Share Purchase Agreement, OXRE acquired an aggregate of 1,500,000 ordinary shares and 3,094,999 preferred shares of Sponsor. The preferred shares of Sponsor entitle the holders thereof to receive the net proceeds, if any, received by Sponsor from the sale, exchange, or disposition of the Private Placement Warrants or the shares issuable upon the exercise thereof, and the ordinary shares of Sponsor are equivalent to the value of the Class B Shares of Oxbridge Acquisition held by Sponsor. In addition to the foregoing, the Share Purchase Agreement contains customary representations, warranties, and covenants.
Business outlook
The novel coronavirus (“COVID-19”) pandemic has had and is expected to continue to have a significant effect on the reinsurance industry. The industry is currently being impacted by a number of factors including: uncertainties with respect to current and future losses, reduction in interest rates, 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 were seeing 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 uncertain.
Impact of COVID-19 on Business Operations
We reacted quickly and decisively to the COVID-19 crisis when we became aware of the potential impact on our business operations. We have continued to monitor and adjust our operations as the global pandemic unfolds. As local directives had required us to transition our operations to remote working arrangements, all functions remained fully operational with all employees having remote access to the Company’s network and IT systems. Each employee was equipped with a computer and related equipment at their home to ensure access to our network and efficiency. Prior to the COVID-19 crisis we had general remote, work-from-home capabilities and had previously tested those systems. We have experienced no material disruption in our business operations. As of September 30, 2021, our operations are back to normal. However, should the situation change for the worse, we will revert to working remotely.
PRINCIPAL REVENUE AND EXPENSE ITEMS
Revenues
We derive our most significant revenues from three principal sources:
| · | premiums assumed from reinsurance on property and casualty business; |
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| · | income from investments; and |
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| · | income under Administrative Services Agreement |
Premiums Assumed
Premiums assumed include all premiums received by a reinsurance company during a specified accounting period, even if the policy provides coverage beyond the end of the period. Premiums are earned over the term of the related policies. At the end of each accounting period, the portion of the premiums that are not yet earned are included in the unearned premiums reserve and are realized as revenue in subsequent periods over the remaining term of the policy. Our policies typically have a term of twelve months. Thus, for example, for a policy that is written on July 1, 2021, typically one-half of the premiums will be earned in 2021 and the other half will be earned during 2022. However, in the event of limit losses on our policies, premium recognition will be accelerated to match losses incurred in the period, when there is no possibility of any future treaty-year losses under the contracts.
| 31 |
| Table of Contents |
Premiums from reinsurance on property and casualty business assumed are directly related to the number, type and pricing of contracts we write.
Premiums assumed are recorded net of change in loss experience refund, which consists of changes in amounts due to the cedants under two of our reinsurance contracts. These contracts contain retrospective provisions that adjust premiums in the event losses are minimal or zero. We recognize a liability pro-rata over the period in which the absence of loss experience obligates us to refund premiums under the contracts, and we will derecognize such liability in the period in which a loss experience arises. The change in loss experience refund is negatively correlated to loss and loss adjustment expenses described below.
Investment Income
Income from our investments is primarily comprised of interest income, dividends and net realized and unrealized gains (losses) on investment securities. Such income is primarily from the Company’s investments, which includes other investments in Oxbridge Acquisition Corp. and investments held in trust accounts that collateralize the reinsurance policies that we write. The investment parameters for trust accounts are generally be established by the cedant for the relevant policy.
Administrative Services Agreement
Commencing on the effective date of the SPAC’s IPO, the Sponsor agreed to pay the Company a total of up to $10,000 per month, for up to 15 months, for office space, utilities, secretarial and administrative support to the Sponsor and the SPAC. Upon completion of the SPAC’s initial Business Combination or the SPAC’s liquidation, the Sponsor will cease paying these monthly fees. For the quarter and nine-month period ended September 30, 2021, the Company received $20,000 from the Sponsor under the Administrative Services Agreement, which is included in “net investment and other income” in the consolidated statements of operations, and within “due from related party” on the consolidated balance sheets.
Expenses
Our expenses consist primarily of the following:
| · | losses and loss adjustment expenses; |
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| · | policy acquisition costs and underwriting expenses; and |
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| · | general and administrative expenses. |
Loss and Loss Adjustment Expenses
Loss and loss adjustment expenses are a function of the amount and type of reinsurance contracts we write and of the loss experience of the underlying coverage. As described below, loss and loss adjustment expenses are based on the claims reported by our Company’s ceding insurers, and may include an actuarial analysis of the estimated losses, including losses incurred during the period and changes in estimates from prior periods. Depending on the nature of the contract, loss and loss adjustment expenses may be paid over a period of years.
Policy Acquisition Costs and Underwriting Expenses
Policy acquisition costs and underwriting expenses consist primarily of brokerage fees, ceding commissions, premium taxes and other direct expenses that relate to our writing of reinsurance contracts. We amortize deferred acquisition costs over the related contract term.
General and Administrative Expenses
General and administrative expenses consist of salaries and benefits and related costs, including costs associated with our professional fees, rent and other general operating expenses consistent with operating as a public company.
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| Table of Contents |
RESULTS OF OPERATIONS
The following is our consolidated statement of operations and performance ratios for the three and nine-month periods ended September 30, 2021 and 2020 (dollars in thousands, except per share amounts):
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
|
| 2021 |
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| 2020 |
|
| 2021 |
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| 2020 |
| ||||
|
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| ||||
| Revenue |
|
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|
|
|
|
|
|
|
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| ||||
| Assumed premiums |
| $ | - |
|
|
| - |
|
|
| 904 |
|
|
| 864 |
|
| Change in unearned premiums reserve |
|
| 370 |
|
|
| 247 |
|
|
| (149 | ) |
|
| (218 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
| 370 |
|
|
| 247 |
|
|
| 755 |
|
|
| 646 |
|
Net investment and other income |
|
| 25 |
|
|
| 32 |
|
|
| 64 |
|
|
| 90 |
|
Net realized investment gains |
|
| - |
|
|
| (2 | ) |
|
| 755 |
|
|
| 325 |
|
Unrealized gain on other investments |
|
| 7,146 |
|
|
| - |
|
|
| 7,146 |
|
|
| - |
|
Change in fair value of equity securities |
|
| (512 | ) |
|
| (18 | ) |
|
| (566 | ) |
|
| (343 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
| 7,029 |
|
|
| 259 |
|
|
| 8,154 |
|
|
| 718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Losses and loss adjustment expenses |
|
| 158 |
|
|
| - |
|
|
| 158 |
|
|
| - |
|
| Policy acquisition costs and underwriting expenses |
|
| 41 |
|
|
| 27 |
|
|
| 83 |
|
|
| 71 |
|
| General and administrative expenses |
|
| 280 |
|
|
| 239 |
|
|
| 845 |
|
|
| 767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
| 479 |
|
|
| 266 |
|
|
| 1,086 |
|
|
| 838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before income attributable to noteholders |
|
| 6,550 |
|
|
| (7 | ) |
|
| 7,068 |
|
|
| (120 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to noteholders |
|
| (24 | ) |
|
| (26 | ) |
|
| (66 | ) |
|
| (112 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) |
| $ | 6,526 |
|
|
| (33 | ) |
|
| 7,002 |
|
|
| (232 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings (Loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic and Diluted |
| $ | 1.14 |
|
|
| (0.01 | ) |
|
| 1.22 |
|
|
| (0.04 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted-average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic and Diluted |
|
| 5,733,587 |
|
|
| 5,733,587 |
|
|
| 5,733,587 |
|
|
| 5,733,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Performance ratios to net premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss ratio |
|
| 42.7 | % |
|
| 0.0 | % |
|
| 20.9 | % |
|
| 0.0 | % |
| Acquisition cost ratio |
|
| 11.1 | % |
|
| 10.9 | % |
|
| 11.0 | % |
|
| 11.0 | % |
| Expense ratio |
|
| 86.8 | % |
|
| 107.7 | % |
|
| 122.9 | % |
|
| 129.7 | % |
| Combined ratio |
|
| 129.5 | % |
|
| 107.7 | % |
|
| 143.8 | % |
|
| 129.7 | % |
General. Net income for the quarter ended September 30, 2021 was $6.5 million, or $1.14 per basic and diluted earnings per share compared to a net loss of $33 thousand, or $0.01 per basic and diluted loss per share, for the quarter ended September 30, 2020. The increase is mainly due to significant unrealized gains on the Company’s investment in Oxbridge Acquisition Corp. during the quarter ended September 30, 2021 when compared with prior period quarter.
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Net income for the nine months ended September 30, 2021 was $7 million, or $1.22 per basic and diluted earnings per share compared to a net loss of $232 thousand, or ($0.04) per basic and diluted loss per share, for the nine months ended September 30, 2020. The increase is mainly due to significant unrealized gains on the Company’s investment in Oxbridge Acquisition Corp. during the quarter ended September 30, 2021 when compared with prior period.
Premium Income. Net premiums earned typically reflects the pro rata inclusion into income of premiums assumed (net of loss experience refund) over the life of the reinsurance contracts.
Net premiums earned for the quarter ended September 30, 2021 increased to $370 thousand from $247 thousand for the quarter ended September 30, 2020. The increase is due to the acceleration of premium recognition on one of the Company’s reinsurance contract due to a limit loss suffered during the quarter, as well as higher rates on reinsurance contracts during the quarter ended September 30, 2021, when compared to the prior period.
Net premiums earned for the nine ended September 30, 2021 increased to $755 thousand from $646 thousand for the nine months ended September 30, 2020. The increase is due to the acceleration of premium recognition on one of the Company’s reinsurance contract due to a limit loss suffered during the quarter, as well as higher rates on reinsurance contracts during the nine-month period ended September 30, 2021, when compared to the prior period.
Losses Incurred. Losses incurred for the quarter ended September 30, 2021 increased to $158 thousand from $0, for the quarter ended September 30, 2020. The increase during the quarter is wholly due to the triggering of a limit loss on one of the Company’s reinsurance contracts, due to the impact of Hurricane Ida on our book of business.
Losses incurred for the nine-month period ended September 30, 2021 increased to $158 thousand from $0, for the nine-month period ended September 30, 2020. The increase during nine month period ended September 30, 2020 is wholly due to the triggering of a limit loss on one of the Company’s reinsurance contracts, due to the impact of Hurricane Ida on our book of business.
Policy Acquisition Costs. Acquisition costs represent the amortization of the brokerage fees and federal excise taxes incurred on reinsurance contracts placed. Policy acquisition costs for the quarter ended September 30, 2021 increased to $41 thousand from $27 thousand for the quarter ended September 30, 2020. The increase is due wholly due to the acceleration of premium recognition as mentioned above, and the resulting acceleration of policy acquisition costs, as well as higher rates on reinsurance contracts during the quarter ended September 30, 2021, when compared to the prior quarter.
Policy acquisition costs and underwriting expenses for the nine months ended September 30, 2021 increased to $83 thousand from $71 thousand for the nine months ended September 30, 2020. The increase is due wholly due to the acceleration of premium recognition as mentioned above, and the resulting acceleration of policy acquisition costs, as well as higher rates on reinsurance contracts during the nine-month period ended September 30, 2021, when compared to the prior period.
General and Administrative Expenses. General and administrative expenses for the quarter ended September 30, 2021 increased to $280 thousand, from $239 thousand for the quarter ended September 30, 2020. The increase is due to expense fluctuations during the quarter.
General and administrative expenses for the nine months ended September 30, 2021 increased to $845 thousand, from $767 thousand for the quarter ended September 30, 2020. The increase is due to expense fluctuations during the nine-month period ending September 30, 2021.
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MEASUREMENT OF RESULTS
We use various measures to analyze the growth and profitability of business operations. For our reinsurance business, we measure growth in terms of premiums assumed and we measure underwriting profitability by examining our loss, underwriting expense and combined ratios. We analyze and measure profitability in terms of net income and return on average equity.
Premiums Assumed. We use gross premiums assumed to measure our sales of reinsurance products. Gross premiums assumed also correlates to our ability to generate net premiums earned.
Loss Ratio. The loss ratio is the ratio of losses and loss adjustment expenses incurred to premiums earned and measures the underwriting profitability of our reinsurance business. The loss ratio increased from 0% for the quarter ended September 30, 2020 to 42.7% for the quarter ended September 30, 2021. The increase during the quarter ended September 30, 2021 is wholly due to the limit losses suffered on one of our reinsurance contract as a result of Hurricane Ida, partially offset by a higher denominator in net premiums earned, compared with the previous quarter.
The loss ratio increased from 0% for the nine-month period ended September 30, 2020 to 20.9% for the nine-month period ended September 30, 2021. The increase during the nine-month period ended September 30, 2021 is wholly due to the limit losses suffered on one of our reinsurance contract as a result of Hurricane Ida, partially offset by a higher denominator in net premiums earned, compared with the previous period.
Acquisition Cost Ratio. The acquisition cost ratio is the ratio of policy acquisition costs and other underwriting expenses to net premiums earned. The acquisition cost ratio measures our operational efficiency in producing, underwriting and administering our reinsurance business. The acquisition cost ratio increased marginally from 10.9% for the quarter ended September 30, 2020 to 11.1% for the quarter ended September 30, 2021. The increase is not considered material.
The acquisition cost ratio for the nine-month period ended September 30, 2021 and 2020 were both 11%.
Expense Ratio. The expense ratio is the ratio of policy acquisition cost and general and administrative expenses to net premiums earned. We use the expense ratio to measure our operating performance. The expense ratio decreased from 107.7% for the three-month period ended September 30, 2020 to 86.8% for the three-month period ended September 30, 2021. The decrease is due to a higher denominator in net premiums earned due to premium acceleration, partially offset by increased policy acquisition costs and general and administrative expenses as recorded during the three-month period ended September 30, 2021, when compared with the three-month period ended September 30, 2020.
The expense ratio decreased from 129.7% for the nine-month period ended September 30, 2020 to 122.9% for the nine-month period ended September 30, 2021. The decrease is due to a higher denominator in net premiums earned due to premium acceleration, partially offset by increased policy acquisition costs and general and administrative expenses as recorded during the nine-month period ended September 30, 2021, when compared with the nine-month period ended September 30, 2020.
Combined Ratio. We use the combined ratio to measure our underwriting performance. The combined ratio is the sum of the loss ratio and the expense ratio. The combined ratio increased from 107.7% for the three-month period ended September 30, 2020 to 129.5% for the three-month period ended September 30, 2021. The increase is primarily due to the increase in loss ratio during the quarter ending September 30, 2021 as a result of limit loss suffered under one of our reinsurance contracts, when compared with the prior quarter.
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The combined ratio increased from 129.7% for the nine-month period ended September 30, 2020 to 143.8% for the nine-month period ended September 30, 2021. The increase is primarily due to the increase in loss ratio during the nine-month period ending September 30, 2021 as a result of limit loss suffered under one of our reinsurance contracts, when compared with the prior period.
FINANCIAL CONDITION – SEPTEMBER 30, 2021 COMPARED TO DECEMBER 31, 2020
Restricted Cash and Cash Equivalents. As of September 30, 2021, our restricted cash and cash equivalents decreased by $98 thousand, to $1.8 million from $1.9 million as of December 31, 2020. The decrease is the net result of the withdrawal of collateral on expiry of contract, and the deposit of collateral for new treaty period during the nine months ended September 30, 2021.
Investments. As of September 30, 2021, our investments decreased marginally by $9 thousand or to $778 thousand, from $787 thousand as of December 31, 2020. The decrease is primarily a result of the net sales of equity securities and the fluctuation in the prices of equity securities during the nine-month period ended September 30, 2021.
Other investments As of September 30, 2021, our other investments increased to $9.1 million from $0 at December 31, 2020. The increase is due to the successful launch of Oxbridge Acquisition Corp., a special purpose acquisition company in which the Company has an equity investment measured at fair value.
Losses payable. As of September 30, 2021, our losses payable increased to $158 thousand from $0 at December 31, 2020. The increase is due to the limit loss on one of our reinsurance contracts impacting our book of business as a result of Hurricane Ida.
Notes Payable to Noteholders. As of September 30, 2021, our notes payable remained the same at $216 thousand. These notes relate to Series 2020-1 participating notes issued by our reinsurance sidecar subsidiary, Oxbridge Re NS during the quarter ending September 30, 2020.
LIQUIDITY AND CAPITAL RESOURCES
General
We are organized as a holding company and provide administrative and management services to our subsidiaries, as well as to Oxbridge Acquisition Corp., a special purpose acquisition company. Our operations are conducted through our reinsurance subsidiaries, Oxbridge Reinsurance Limited and Oxbridge Re NS, which underwrites risks associated with our property and casualty reinsurance programs. We have minimal continuing cash needs at the holding company level, with such needs principally being related to the payment of administrative expenses and shareholder dividends, if any. There are restrictions on Oxbridge Reinsurance Limited’s and Oxbridge Re NS’ ability to pay dividends which are described in more detail below.
Sources and Uses of Funds
Our sources of funds primarily consist of premium receipts (net of brokerage fees and federal excise taxes, where applicable) and investment income, including interest, dividends and realized gains, and administrative services income from OAC Sponsor Ltd. We use cash to pay losses and loss adjustment expenses, other underwriting expenses, dividends, and general and administrative expenses. Substantially all of our surplus funds, net of funds required for cash liquidity purposes, are invested in accordance with our business plan and investment guidelines. Our investment portfolio is primarily comprised of cash and highly liquid securities, which can be liquidated, if necessary, to meet current liabilities. We believe that we have sufficient flexibility to liquidate any securities that we own to generate liquidity.
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As of September 30, 2021, we believe we had sufficient cash flows from operations to meet our liquidity requirements. We expect that our operational needs for liquidity will be met by cash, investment income and funds generated from underwriting activities. We have no current plans to issue further debt, other than through additional participating notes and we expect to fund our operations for the foreseeable future from operating cash flows, as well as from potential future equity offerings. However, we cannot provide assurances that in the future we will not incur indebtedness to implement our business strategy, pay claims or make acquisitions.
Although Oxbridge Re Holdings Limited is not subject to any significant legal prohibitions on the payment of dividends, its subsidiaries Oxbridge Reinsurance Limited and Oxbridge Re NS are subject to Cayman Islands regulatory constraints that affect its ability to pay dividends to us and include a minimum net worth requirement. Currently, the minimum net worth requirement for each subsidiary is $500. As of September 30, 2021, each subsidiary exceeded the minimum required. By law, each subsidiary is restricted from paying a dividend if such a dividend would cause its net worth to drop to less than the required minimum.
Cash Flows
Our cash flows from operating, investing and financing activities for the nine-month periods ended September 30, 2021 and 2020 are summarized below.
Cash Flows for the Nine months ended September 30, 2021 (in thousands)
Net cash used in operating activities for the nine months ended September 30, 2021 totaled $110, which consisted primarily of cash received from net written premiums less cash disbursed for operating expenses. Net cash used in investing activities of $1,802 was primarily due to other investments and the net purchase of equity securities. There was no cash used in or provided by financing activities.
Cash Flows for the Nine months ended September 30, 2020 (in thousands)
Net cash used in operating activities for the nine months ended September 30, 2020 totaled $278, which consisted primarily of cash received from investments and net written premiums less cash disbursed for operating expenses. Net cash provided by investing activities of $25 was primarily due to the net proceeds from sale of equity securities. Net cash used in financing activities totaled $384, which is the net result of redemption of Series 2019-1 participating notes and proceeds on issuance of Series 2020-1 participating notes.
OFF-BALANCE SHEET ARRANGEMENTS
As of September 30, 2021, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
Exposure to Catastrophes
As with other reinsurers, our operating results and financial condition could be adversely affected by volatile and unpredictable natural and man-made disasters, such as hurricanes, windstorms, earthquakes, floods, fires, riots and explosions. Although we attempt to limit our exposure to levels we believe are acceptable, it is possible that an actual catastrophic event or multiple catastrophic events could have a material adverse effect on our financial condition, results of operations and cash flows. As described under “CRITICAL ACCOUNTING POLICIES—Reserves for Losses and Loss Adjustment Expenses” below, under GAAP, we are not permitted to establish loss reserves with respect to losses that may be incurred under reinsurance contracts until the occurrence of an event which may give rise to a claim. As a result, only loss reserves applicable to losses incurred up to the reporting date may be established, with no provision for a contingency reserve to account for expected future losses.
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| Table of Contents |
CRITICAL ACCOUNTING POLICIES
We are required to make estimates and assumptions in certain circumstances that affect amounts reported in our consolidated financial statements and related footnotes. We evaluate these estimates and assumptions on an on-going basis based on historical developments, market conditions, industry trends and other information that we believe to be reasonable under the circumstances. These accounting policies pertain to fair value measurements, particular with respect to our beneficial interest in Oxbridge Acquisition Corp., premium revenues and risk transfer, reserve for loss and loss adjustment expenses, deferred acquisition costs and stock-based compensation.
Fair value measurement: GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy under GAAP are as follows:
Level 1 | Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date; |
|
|
Level 2 | Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active; and |
|
|
Level 3 | Inputs that are unobservable. |
Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. For fixed maturity securities, inputs may include price information, volatility statistics, specific and broad credit data, liquidity statistics, broker quotes for similar securities and other factors. The fair value of investments in stocks and exchange-traded funds is based on the last traded price. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company’s investment custodians and management. The investment custodians and management consider observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant markets. The categorization of a financial instrument within the hierarchy is based upon the pricing transparency of the instrument, as well as the marketability of the instrument and the risk of forfeiture of such instrument.
Premium Revenue and Risk Transfer. We record premium revenue as earned pro-rata over the terms of the reinsurance agreements, or period of risk, where applicable, and the unearned portion at the balance sheet date is recorded as unearned premiums reserve. A reserve is made for estimated premium deficiencies to the extent that estimated losses and loss adjustment expenses exceed related unearned premiums. Investment income is not considered in determining whether or not a deficiency exists.
We account for reinsurance contracts in accordance with ASC 944, ‘‘Financial Services – Insurance.” Assessing whether or not a reinsurance contract meets the conditions for risk transfer requires judgment. The determination of risk transfer is critical to reporting premiums written. If we determine that a reinsurance contract does not transfer sufficient risk, we must account for the contract as a deposit liability.
Reserves for Losses and Loss Adjustment Expenses. We determine our reserves for losses and loss adjustment expenses on the basis of the claims reported by our ceding insurers and for losses incurred but not reported, we utilize the assistance of an independent actuary. The reserves for losses and loss adjustment expenses represent management’s best estimate of the ultimate settlement costs of all losses and loss adjustment expenses.
We believe that the amounts are adequate; however, the inherent impossibility of predicting future events with precision, results in uncertainty as to the amount which will ultimately be required for the settlement of losses and loss expenses, and the differences could be material. Adjustments are reflected in the consolidated statements of operations in the period in which they are determined.
Under GAAP, we are not permitted to establish loss reserves until the occurrence of an actual loss event. As a result, only loss reserves applicable to losses incurred up to the reporting date may be recorded, with no allowance for the provision of a contingency reserve to account for expected future losses. Losses arising from future events, which could be substantial, are estimated and recognized at the time the loss is incurred.
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As of September 30, 2021, we had no reserves for loss and loss adjustment expenses. See Note 7 to the consolidated financial statements.
Our reserving methodology does not lend itself well to a statistical calculation of a range of estimates surrounding the best point estimate of our reserve for loss and loss adjustment expense. Due to the low frequency and high severity nature of claims within much of our business, our reserving methodology principally involves arriving at a specific point estimate for the ultimate expected loss on a contract by contract basis, and our aggregate loss reserves are the sum of the individual loss reserves established.
Deferred Acquisition Costs. We defer certain expenses that are directly related to and vary with producing reinsurance business, including brokerage fees on gross premiums assumed, premium taxes and certain other costs related to the acquisition of reinsurance contracts. These costs are capitalized and the resulting asset, deferred acquisition costs, is amortized and charged to expense in future periods as premiums assumed are earned. The method followed in computing deferred acquisition costs limits the amount of such deferral to its estimated realizable value. The ultimate recoverability of deferred acquisition costs is dependent on the continued profitability of our reinsurance underwriting. If our underwriting ceases to be profitable, we may have to write off a portion of our deferred acquisition costs, resulting in a further charge to income in the period in which the underwriting losses are recognized.
Stock-Based Compensation: The Company accounts for stock-based compensation under the fair value recognition provisions of GAAP which requires the measurement and recognition of compensation for all stock-based awards made to employees and directors, including stock options and restricted stock issuances based on estimated fair values. The Company measures compensation for restricted stock based on the price of the Company’s ordinary shares at the grant date. Determining the fair value of share purchase options at the grant date requires significant estimation and judgment. The Company uses an option-pricing model (Black-Scholes option pricing model) to assist in the calculation of fair value for share purchase options. The Company’s shares have not been publicly traded for a sufficient length of time to solely use the Company’s performance to reasonably estimate the expected volatility.
Therefore, when estimating the expected volatility, the Company takes into consideration the historical volatility of similar entities. The Company considers factors such as an entity’s industry, stage of life cycle, size and financial leverage when selecting similar entities. The Company uses a sample peer group of companies in the reinsurance industry as well as the Company’s own historical volatility in determining the expected volatility. Additionally, the Company uses the full life of the options, ten years, as the estimated term of the options, and has assumed no forfeitures during the life of the options.
The Company uses the straight-line attribution method for all grants that include only a service condition. Compensation expense related to all awards is included in general and administrative expenses.
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| Table of Contents |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Because we are a smaller reporting company, we are not required to provide this information.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), we have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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| Table of Contents |
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently involved in any litigation or arbitration. We anticipate that, similar to the rest of the insurance and reinsurance industry, we will be subject to litigation and arbitration in the ordinary course of business.
Item 1A. Risk Factors
With the exception of the items described below, there have been no material changes from the risk factors previously disclosed in the section entitled “Risk Factors” in our Form 10-K, which was filed with the SEC on March 30, 2021.
We have made a significant investment in the sponsor of a blank check company commonly referred to as a special purpose acquisition company (“SPAC”), and will suffer the loss of all of our investment if the SPAC does not complete an acquisition within 15 months (subject to an extension of up to 21 months).
In August 2021, we made an investment of $2,000,000 in OAC Sponsor Ltd (“Sponsor”), that served as the sponsor of Oxbridge Acquisition Corp., a special purpose acquisition company (“Oxbridge Acquisition”). The investment was made to fund, in part, Sponsor’s purchase of private placement warrants of Oxbridge Acquisition as a part of the sponsorship of Oxbridge Acquisition. Prior to a business combination by Oxbridge Acquisition, Sponsor holds 100% of the shares of Class B ordinary shares and 4,897,500 Private Placement Warrants of Oxbridge Acquisition. The Class B shares equal approximately 20% of the outstanding common stock of Oxbridge Acquisition.
The Company owns approximately 49.6% and 63.1% of the ordinary shares and preferred shares, respectively, of the Sponsor (the “Sponsor Equity Interest”). The preferred shares of Sponsor are nonvoting shares and entitle the holders thereof to receive the net proceeds, if any, received by Sponsor from the sale, exchange, or disposition of the Private Placement Warrants or the shares issuable upon the exercise thereof, and the ordinary shares of Sponsor (which are voting shares in Sponsor) are equivalent to the value of the Class B Shares of Oxbridge Acquisition held by Sponsor. Upon the successful completion of a business combination by Oxbridge Acquisition, the proforma ownership of the new company will vary depending on the business combination terms.
There is no assurance that Oxbridge Acquisition will be successful in completing a business combination or that any business combination will be successful. The Company can lose its entire investment in Sponsor if a business combination is not completed within 15 months (subject to potential extension to up to 21 months) or if the business combination is not successful, which may materially adversely impact our shareholder value.
Our use of fair value accounting of our indirect investment in Oxbridge Acquisition could result in income statement volatility, which in turn, could cause significant market price and trading volume fluctuations for our securities.
Our beneficial interests in Oxbridge Acquisition’s Class B shares and Private Placement Warrants are recorded at fair value with changes in fair value being recorded in the consolidated statement of operations during the period of change. The Company’s management makes a significant judgment and assumption that a business combination is more than likely to occur, on the premise that historical statistical data indicates approximately 98% of special purpose acquisition companies accomplishes a business combination. The fair value calculation of the Company’s beneficial interest in OXAC’s Class B shares and Private Placement Warrants is dependent on company-specific adjustments applied to the observable trading prices of OXAC Class A shares and public warrants. The Company estimates that a specific discount range of 20% to 40% sufficiently captures the risk or profit that a market participant would require as compensation for assuming the inherent risk of forfeiture if a business combination doesn’t occur and the lack of marketability of the Company’s beneficial interests in the OXAC. The Company classifies the investment in Oxbridge Acquisition as Level 3 in the fair value hierarchy due to the unobservable input of the company-specific adjustment. However, the Company can lose its entire investment if a business combination is not completed within 15 months (subject to potential extension to up to 21 months) or if the business combination is not successful. Additionally, the fair value of the investment must be remeasured quarterly. Because of this, our earnings may experience greater volatility in the future as a decline in the fair value of our investment in Oxbridge Acquisition could significantly reduce both our earnings and shareholders’ equity, which in turn, could cause significant market price and trading volume fluctuations for our securities.
We are subject to the risk of possibly becoming an investment company under U.S. federal securities law.
In the United States, the Investment Company Act of 1940, as amended (the “Investment Company Act”), regulates certain companies that invest in or trade securities. We run the risk of inadvertently being deemed to be an investment company that is required to register under the Investment Company because a significant portion of our assets may be deemed to consist of, or may be deemed to have consisted of, investment securities, including potentially Oxbridge Reinsurance Limited’s interest in Oxbridge Acquisition Corp. However, we rely on an exemption under the Investment Company Act for an entity organized and regulated as a foreign insurance company which is engaged primarily and predominantly in the reinsurance of risks on insurance agreements. The law in this area is subjective and there is a lack of guidance as to the meaning of ‘‘primarily and predominantly’’ under the relevant exemption to the Investment Company Act. For example, there is no standard for the amount of premiums that need to be written relative to the level of an entity’s capital in order to qualify for the exemption. If this exception were deemed inapplicable, we would have to seek to register under the Investment Company Act as an investment company, which, under the Investment Company Act, would require an order from the SEC. Our inability to obtain such an order could have a significant adverse impact on our business, as we might have to cease certain operations or risk substantial penalties for violating the Investment Company Act.
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Registered investment companies are subject to extensive, restrictive and potentially adverse regulation relating to, among other things, capital structure, leverage, management, dividends and transactions with affiliates. Registered investment companies are not permitted to operate their business in the manner in which we operate (and intend to operate) our business. Specifically, if we were required to register under the Investment Company Act, provisions of the Investment Company Act would limit (and in some cases even prohibit) our ability to raise additional debt and equity securities or issue options or warrants (which could impact our ability to compensate key employees), limit our ability to use financial leverage, limit our ability to incur indebtedness, and require changes to the composition of our Board of Directors. Provisions of the Investment Company Act would also prohibit (subject to certain exceptions) transactions with affiliates.
Accordingly, if we were required to register as an investment company, we would not be permitted to have many of the relationships that we have or expect that we may have with affiliated companies.
If at any time it were established that we had been operating as an investment company in violation of the registration requirements of the Investment Company Act, there would be a risk, among other material adverse consequences, that we could become subject to monetary penalties or injunctive relief, or both, or that we would be unable to enforce contracts with third parties or that third parties could seek to obtain rescission of transactions with us undertaken during the period in which it was established that we were an unregistered investment company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Sales of Unregistered Securities
None.
(b) Repurchases of Equity Securities
None.
(c) Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
The following exhibits are filed herewith:
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| The following materials from Oxbridge Re Holdings Limited’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 are filed herewith, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Changes in Shareholders’ Equity and (vi) the Notes to Consolidated Financial Statements. |
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| Table of Contents |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| OXBRIDGE RE HOLDINGS LIMITED |
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Date: November 12, 2021 | By: | /s/ JAY MADHU |
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| Jay Madhu |
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Date: November 12, 2021 | By: | /s/ WRENDON TIMOTHY |
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| Wrendon Timothy |
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