OXBRIDGE RE HOLDINGS LTD
10-Ks and 10-Qs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
10-K
|
☐
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For the Fiscal Year Ended December 31, 2016
OR
|
☐
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For The Transition Period From ________ To ________
Commission File Number 1-36346
OXBRIDGE
RE HOLDINGS LIMITED
(Exact name of registrant as specified in its charter)
|
Cayman Islands
|
|
98-1150254
|
|
(State or other jurisdiction of incorporation or
organization)
|
|
(I.R.S. Employer Identification No.)
|
|
|
|
|
|
Strathvale House, 2
nd
Floor
90 North Church Street
P.O. Box 469
Grand Cayman, Cayman Islands
|
|
KY1-9006
|
|
(Address of principal executive offices)
|
|
(Zip Code)
|
Registrant’s telephone number, including area code:
(345) 749-7570
Securities Registered Pursuant to Section 12(b) of the
Exchange Act:
|
Title of Each Class
|
|
Name of Each Exchange on Which Registered
|
|
Ordinary Shares, par value $0.001 (USD) per share
|
|
The NASDAQ Capital Market
|
|
Warrants
|
|
The NASDAQ Capital Market
|
Securities
Registered Pursuant to Section 12(g) of the Exchange Act:
None
Indicate by check
mark whether the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes ☐ No
☑
Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Yes ☐ No
☑
Indicate by check
mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act 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. Yes ☑
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 during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files). Yes ☑
No ☐
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ☑
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” in Rule 12b-2 of the Exchange
Act.
|
Large accelerated filer
|
|
☐
|
|
Accelerated filer
|
|
☐
|
||
|
|
|
|
|
|||||
|
Non-accelerated filer (Do not check if a smaller reporting
company)
|
|
☐
|
|
Smaller reporting company
|
|
☑
|
||
|
|
|
|||||||
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ☐ No
☑
The
aggregate market value of the voting common equity held by
non-affiliates of the registrant was $22,203,748
(based upon the quoted closing
sale price per share of the registrant’s ordinary shares on
The NASDAQ Capital Market) on the last business day of the
registrant’s most recently completed second fiscal quarter
(June 30, 2016). For purposes of this calculation, the registrant
has assumed that its directors and executive officers as of June
30, 2016 were affiliates.
As of
March 3, 2017, 5,885,923 ordinary shares, par value $0.001 (USD)
per share, were outstanding.
Documents Incorporated by Reference:
Portions
of the Company’s proxy statement to be filed with the
Securities and Exchange Commission relating to
the 2017 Annual Meeting of Shareholders will be
incorporated by reference into Part III of this Annual Report on
Form 10-K.
Index
to Annual Report on Form 10-K
Year
Ended December 31, 2016
|
|
|
Page
|
|
CAUTIONARY
STATEMENTS FOR FORWARD-LOOKING INFORMATION
|
2
|
|
|
|
||
|
PART
I.
|
||
|
|
|
|
|
ITEM 1.
|
BUSINESS
|
2
|
|
|
|
|
|
ITEM 1A.
|
RISK
FACTORS
|
11
|
|
|
|
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
28
|
|
|
|
|
|
ITEM 2.
|
PROPERTIES
|
28
|
|
|
|
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
28
|
|
|
|
|
|
ITEM 4.
|
MINE
SAFETY DISCLOSURES
|
28
|
|
|
|
|
|
|
|
|
|
PART
II.
|
||
|
|
|
|
|
ITEM 5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
29
|
|
|
|
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
32
|
|
|
|
|
|
ITEM 7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
32
|
|
|
|
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
41
|
|
|
|
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
41
|
|
|
|
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
41
|
|
|
|
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
42
|
|
|
|
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
43
|
|
|
|
|
|
PART
III.
|
||
|
|
|
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
43
|
|
|
|
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
43
|
|
|
|
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS
|
43
|
|
|
|
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
44
|
|
|
|
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
44
|
|
|
|
|
|
PART
IV.
|
||
|
|
|
|
|
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
44
|
|
|
|
|
|
|
INDEX
TO EXHIBITS
|
45
|
|
|
|
|
|
|
SIGNATURES
|
47
|
1
SPECIAL
NOTE ABOUT FORWARD-LOOKING
STATEMENTS
Unless
the context dictates otherwise, references to “we,”
“us,” “our,” “our company,” or
“the Company” in this Annual Report on Form 10-K refer
to Oxbridge Re Holdings Limited and its wholly-owned subsidiary,
Oxbridge Reinsurance Limited.
All
statements in this Annual Report on Form 10-K, including in the
section entitled “
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
” (refer
to Part I, Item 7 of this Annual Report on Form 10-K), other than
statements of historical fact, 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, as amended, 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 such as
“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 our historical results and the
forward-looking statements and you should not place undue reliance
on 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
” (refer to Part I,
Item 1A, of this Annual Report on Form 10-K). We undertake no
obligation, other than imposed by law, 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.
ITEM 1
BUSINESS
Overview
We are
a Cayman Islands specialty property and casualty reinsurer that
provides reinsurance solutions through our subsidiary, Oxbridge
Reinsurance Limited. 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 were organized
in April 2013 as an exempted company under the laws of Cayman
Islands.
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
growth opportunities in other geographic areas and risk
categories.
2
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
.
Our Business Strategy
Our
goal is to achieve attractive risk-adjusted returns for our
shareholders through the prudent management of underwriting risks
relative to our capital base. To achieve this objective, the
following are the principal elements of our business
strategy.
●
Maintain a Commitment to
Disciplined Underwriting.
We employ a disciplined and
data-driven underwriting approach to select a diversified portfolio
of risks that we believe will generate an attractive return to our
shareholders over the long term. Neither our underwriting nor our
investment strategies are designed to generate smooth or
predictable quarterly earnings, but rather to optimize growth in
book value per share over the long term.
●
Focus on Risk
Management.
We treat risk management as an integral part of
our underwriting and business management processes. All of our
reinsurance contracts contain loss limitation provisions that limit
our losses to the value of the assets collateralizing our
reinsurance contracts.
●
Partial Deployment of
Capital.
In order to eliminate
the possibility of complete losses, we intend to place only a
portion of our total capital at risk in any single year. This means
that we expect lower returns than some of our competitors in years
where there are lower than average catastrophe losses but that our
capital will be better protected in the event of large losses. We
are committed to maintaining our capitalization and financial
strength over the long term and to developing a history of paying a
consistent dividend on our ordinary shares.
●
Take Advantage of Market
Opportunities.
Although our business is initially focused on
catastrophe coverage for Gulf Coast insurers with an emphasis on
Florida, we intend to continuously evaluate various market
opportunities in which our business may be strategically or
financially expanded or enhanced in the future. Such opportunities
could take the form of further diversifying our business into other
geographic or market areas, could include quota share reinsurance
contracts, joint ventures, renewal rights transactions, corporate
acquisitions of other insurers or reinsurers, or the formation of
insurance or reinsurance platforms in new markets. We believe the
environment in the reinsurance and insurance markets will continue
to produce opportunities for us, either through organic expansion,
through acquisitions, or a combination of both.
3
The Reinsurance Industry
General
Reinsurance is an arrangement in which an insurance company,
referred to as the reinsurer, agrees to assume from another
insurance company, referred to as the ceding company or cedant, all
or a portion of the insurance risks that the ceding company has
underwritten under one or more insurance contracts. In return, the
reinsurer receives a premium for the insured risks that it assumes
from the ceding company, although reinsurance does not discharge
the ceding company from its liabilities to policyholders. It is
standard industry practice for primary insurers to reinsure
portions of their insurance risks with other insurance companies
under reinsurance agreements or contracts. This permits primary
insurers to underwrite policies in amounts larger than the risks
they are willing to retain. Reinsurance is generally designed
to:
●
Reduce the ceding company’s net liability on individual
risks, thereby assisting it in managing its risk profile and
increasing its capacity to underwrite business as well as
increasing the limit to which it can underwrite on a single
risk;
●
assist the ceding company in meeting applicable regulatory and
rating agency capital requirements;
●
assist the ceding company in reducing the short-term financial
impact of sales and other acquisition costs; and
●
enhance the ceding company’s financial strength and statutory
capital.
When reinsurance
companies purchase reinsurance to cover their own risks assumed
from ceding companies, this is known as retrocessional reinsurance.
Reinsurance or retrocessional reinsurance can benefit a ceding
company or reinsuring company, referred to herein as a
“retrocedant,” as applicable, in various ways, such as
by reducing exposure to individual risks and by providing
catastrophe protection from larger or multiple losses. Like ceding
companies, retrocedants can use retrocessional reinsurance to
manage their overall risk profile or to create additional
underwriting capacity, allowing them to accept larger risks or to
write more business than would otherwise be possible, absent an
increase in their capital or surplus
.
Reinsurance
contracts do not discharge ceding companies from their obligations
to policyholders. Ceding companies therefore generally require
their reinsurers to have, and to maintain, either a strong
financial strength rating or security, in the form of collateral,
as assurance that their claims will be paid.
Insurers generally
purchase multiple tranches of reinsurance protection above an
initial retention elected by the insurer. The amount of reinsurance
protection purchased by an insurer is typically determined by the
insurer through both quantitative and qualitative methods. In the
event of losses, the amount of loss that exceeds the amount of
reinsurance protection purchased is retained by the insurer. As a
program is constructed from the ground up, each tranche added
generally has a lower probability of loss than the prior tranche
and therefore is generally subject to a lower reinsurance premium
charged for the reinsurance protection purchased. Insurer
catastrophe programs are typically supported by multiple reinsurers
per program.
4
Reinsurance brokers
play an important role in the reinsurance market. Brokers are
intermediaries that assist the ceding company in structuring a
particular reinsurance program and in negotiating and placing risks
with third-party reinsurers. In this capacity, the broker is
selected and retained by the ceding company on a
contract-by-contract basis, rather than by the reinsurer. Though
brokers are not parties to reinsurance contracts, reinsurers
generally receive premium payments from brokers rather than ceding
companies, and reinsurers that do not provide collateralized
reinsurance are frequently required to pay amounts owed on claims
under their policies to brokers. These brokers, in turn, pay these
amounts to the ceding companies that have reinsured a portion of
their liabilities with reinsurers.
Types of Reinsurance Contracts
Property
reinsurance products are often written in the form of treaty
reinsurance contracts, which are contractual arrangements that
provide for the automatic reinsurance of a type or category of risk
underwritten. Treaty reinsurance premiums, which are typically due
in installments, are a function of the number and type of contracts
written, as well as prevailing market prices. The timing of
premiums written varies by line of business. The majority of
property catastrophe business is written at the January and June
annual renewal periods, depending on the type and location of the
risks covered. Most hurricane and wind-storm coverage, particularly
in the Gulf Coast region of the United States, is written at the
June annual renewal periods.
Property
catastrophe reinsurance contracts are typically “all
risk” in nature, providing protection to the ceding company
against losses from hurricanes and other natural and man-made
catastrophes such as floods, earthquakes, tornadoes, storms and
fires, referred to herein collectively as “perils.” The
predominant exposures covered by these contracts are losses
stemming from property damage and business interruption resulting
from a covered peril. Coverage can also vary from “all
natural” perils, which is the most expansive form, to more
limited types such as windstorm-only coverage.
Property
catastrophe reinsurance contracts are typically written on an
“excess-of-loss” basis, which provides coverage to the
ceding company when aggregate claims and claim expenses from a
single occurrence for a covered peril exceed an amount that is
specified in a particular contract. The coverage provided under
excess-of-loss reinsurance contracts may be on a worldwide basis or
may be limited in scope to specific regions or geographical areas.
Under these contracts, protection is provided to an insurer for a
portion of the total losses in excess of a specified loss amount,
up to a maximum amount per loss specified in the
contract.
Excess-of-loss
contracts are typically written on a losses-occurring basis, which
means that they cover losses that occur during the contract term,
regardless of when the underlying policies came into force.
Premiums from excess-of-loss contracts are earned ratably over the
contract term, which is ordinarily 12 months. Most excess-of-loss
contracts provide for a reinstatement of coverage following a
covered loss event in return for an additional
premium.
Our Reinsurance Contracts and Products
We
write primarily property catastrophe reinsurance. We currently
expect that substantially all of the reinsurance products we write
in the foreseeable future will be in the form of treaty reinsurance
contracts. When we write treaty reinsurance contracts, we do not
evaluate separately each of the individual risks assumed under the
contracts and are therefore largely dependent on the individual
underwriting decisions made by the cedant. Accordingly, as part of
our initial review and renewal process, we carefully review and
analyze the cedant’s risk management and underwriting
practices in evaluating whether to provide treaty reinsurance and
in appropriately pricing the treaty.
5
Our
portfolio of business continues to be characterized by relatively
large transactions with a relatively few number of cedants. As of
December 31, 2016, we had reinsurance contracts with five (5)
cedants, although we do not consider any of those contracts to be
singly material to our company, and our largest contract
represented approximately 35% of our collateral at risk of all such
contracts.
We do
not consider any single contract to be material to our business as
the loss of any single contract can easily be supplemented by
contributing the additional capacity across one or more of our
other contracts. We anticipate that our business will continue to
be characterized by a relatively small number of reinsurance
contracts for the foreseeable future.
Our
contracts are written on an excess-of-loss basis, generally with a
per-event cap. We generally receive the premium for the risk
assumed and indemnify the cedant against all or a specified portion
of losses and expenses in excess of a specified dollar or
percentage amount. Our contracts are generally both single-year or
multi-year contracts and our policy years generally commence on
June 1 of each year and end on May 31 of the following
year.
The
bulk of our portfolio of risks is assumed pursuant to traditional
reinsurance contracts. However, we may also from time to time take
underwriting risk by purchasing a catastrophe-linked bond, or via a
transaction booked as an industry loss warranty (as described
below) or an indemnity swap. An indemnity swap is an agreement
which provides for the exchange between two parties of different
portfolios of catastrophe exposure with similar expected loss
characteristics (for example, U.S. earthquake exposure for Asian
earthquake exposure).
We
believe our most attractive near-term opportunity is in property
catastrophe reinsurance coverage for insurance companies. In
addition to seeking profitable pricing, we manage our risks with
contractual limits on our exposure. Property catastrophe
reinsurance contracts are typically “all risk” in
nature, meaning that they protect against losses from earthquakes
and hurricanes, as well as other natural and man-made catastrophes
such as tornados, fires, winter storms, and floods (where the
contract specifically provides for such coverage). Losses on these
contracts typically stem from direct property damage and business
interruption. We generally write property catastrophe reinsurance
on an excess-of-loss basis. These contracts typically cover only
specific regions or geographical areas.
We are
not licensed or admitted as an insurer in any jurisdiction other
than the Cayman Islands. In addition, we do not have a financial
rating and do not expect to have one in the near future. Many
jurisdictions such as the United States do not permit clients to
take credit for reinsurance on their statutory financial statements
if such reinsurance is obtained from unlicensed or non-admitted
insurers without appropriate collateral. As a result, we anticipate
that all of our clients will require us to fully collateralize the
reinsurance contracts we bind with them. Each of our contracts are
fully collateralized and separately structured, with our liability
being limited to the value of the assets held in the trust. We are
generally not required to top-up the value of the assets held as
collateral in respect of a particular reinsurance agreement, unless
such collateral is subject to market risk. For each reinsurance
agreement, a reinsurance trust is established in favor of the
cedant, and the trustee of the reinsurance trust is a large bank
that is agreed upon by our company and the cedant. The premium for
the contract is ordinarily deposited into the trust, together with
additional capital from our company, up to the coverage limit. Each
reinsurance contract contains express limited recourse language to
the effect that the liabilities of the relevant reinsurance
contract are limited to the realizable value of the collateral held
in respect of that contract. Upon the expiration of the reinsurance
contract, the assets of the trust net of insured losses and other
expenses are transferred to our company.
Underwriting and Retrocessional Coverage
Most of
our reinsurance contracts have other reinsurers participating as
lead underwriters, and these lead underwriters generally set the
premium for the risk. We follow the premium pricing of the lead
underwriters in most cases subject to the guidance of the
Underwriting Committee of our Board of Directors. Each quarter, our
Board of Directors will set parameters for the maximum level of
capital to be deployed for the quarter and the expected premium and
risk profile that each of our contracts must meet.
6
We have
not yet and have no current plans to purchase retrocessional
coverage. We may, however, decide to do so in the future to manage
our overall exposure and to balance our portfolio and, if we do, we
expect that we will only purchase uncollateralized retrocessional
coverage from a reinsurer with a minimum financial strength rating
of A- from either A.M. Best or Standard & Poors.
Marketing and Distribution
We
expect that, in the future, the majority of our business will be
sourced through reinsurance brokers. Brokerage distribution
channels provide us with access to an efficient, variable
distribution system without the significant time and expense that
would be incurred in creating an in-house marketing and
distribution network. Reinsurance brokers receive a brokerage
commission that is usually a percentage of gross premiums
written.
We
intend to build relationships with global reinsurance brokers and
captive insurance companies located in the Cayman Islands. Our
management team has significant relationships with most of the
primary and specialty broker intermediaries in the reinsurance
marketplace in our target market. We believe that maintaining close
relationships with brokers will give us access to a broad range of
reinsurance clients and opportunities.
Brokers
do not have the authority to bind us to any reinsurance contract.
We review and approve all contract submissions in our corporate
offices located in the Cayman Islands. From time to time, we may
also enter into relationships with managing general agents who
could bind us to reinsurance contracts based on narrowly defined
underwriting guidelines.
Investment Strategy
Our
company’s business focus is primarily on underwriting profit.
However, we remain opportunistic with respect to investment income,
and intend to increase shareholder value through supplemental
investment income when favorable opportunities are available. Most
of our company’s capital is held in trust accounts that
collateralize the reinsurance policies that we write. The
investment parameters for capital held in such trust accounts is
generally established by the cedant for the relevant policy. Our
investments are held in cash, fixed-maturity securities and equity
securities.
Funds
that are not held in collateralized trust accounts are generally
invested in a relatively conservative manner, with a focus on
generating income while equally being liquid.
Our
Board of Directors periodically reviews our investment policy and
returns.
Claims Management
Claims
are managed internally by the company’s management team.
Management reviews and responds to initial loss reports,
administers claims databases, determines whether further
investigation is required and where appropriate, retains outside
claims counsel, establishes case reserves and approves claims for
payment. In addition, we may conduct audits of any significant
client throughout the year, and in the process, evaluate our
clients’ claims handling abilities, reserving philosophies,
loss notification processes and the overall quality of our clients'
performance.
7
Upon
receipt, claims notices are recorded within our underwriting,
financial and claims systems. When we are notified of insured
losses or discover potential losses as part of our claims audits,
we record a case reserve as appropriate for the estimated amount of
the exposure at that time. The estimate reflects the judgment of
management based on general reserving practices, the experience and
knowledge of the Manager regarding the nature of the specific claim
and, where appropriate, advice of outside counsel. Reserves are
also established to provide for the estimated expense of settling
claims, including legal and other fees and the general expenses of
administering the claims adjustment process.
Loss Reserves
Loss
reserves represent estimates, including actuarial and statistical
projections at a given point in time, of the ultimate settlement
and administration costs of claims incurred (including claims
incurred but not reported (IBNR)). Estimates are not precise in
that, among other things, they are based on predictions of future
developments and estimates of future trends in claims severity and
frequency and other variable factors such as inflation. It is
likely that the ultimate liability will be greater or less than
such estimates and that, at times, this variance will be
material.
For our
property and other catastrophe policies, we initially establish our
loss reserves based on loss payments and case reserves reported by
ceding companies. As we are not the only reinsurer on a contract,
the lead reinsurer will set the loss amount estimates for the
contract and the cedant will have the ability to pay for case
losses consistent with that amount on our pro-rata share of the
contract.
We then
add to these case reserves our estimates for IBNR. To establish our
IBNR estimates, in addition to the loss information and estimates
communicated by cedants, we also use the services of an independent
actuary. We may also use our computer-based vendor and proprietary
modeling systems to measure and estimate loss exposure under the
actual event scenario, if available. Although the loss modeling
systems assist with the analysis of the underlying loss, and
provide us with information and the ability to perform an enhanced
analysis, the estimation of claims resulting from catastrophic
events is inherently difficult because of the variability and
uncertainty of property catastrophe claims and the unique
characteristics of each loss.
If IBNR
estimates are made, we assess the validity of the assumptions we
use in the reserving process on a quarterly basis during an
internal review process. During this process actuaries verify that
the assumptions we have made continue to form what they consider to
be a sound basis for projection of future liabilities.
Although we believe
that we are prudent in our assumptions and methodologies, we cannot
be certain that our ultimate payments will not vary, perhaps
materially, from the estimates we have made. If we determine that
adjustments to an earlier estimate are appropriate, such
adjustments are recorded in the quarter in which they are
identified. The establishment of new reserves, or the adjustment of
reserves for reported claims, could result in significant upward or
downward changes to our financial condition or results of
operations in any particular period. We regularly review and update
these estimates, using the most current information available to
us.
Our
estimates are reviewed annually by an independent actuary in order
to provide additional insight into the reasonableness of our loss
reserves.
8
Competition
The
reinsurance industry is highly competitive. We expect to compete
with major reinsurers, most of which are well established with
significant operating histories, strong financial strength ratings,
long-standing client relationships.
Our
competitors include Third Point Reinsurance Ltd., Blue Capital
Reinsurance Holdings Ltd., ACE Ltd., Everest Re, General Re
Corporation, Hannover Re Group, Munich Reinsurance Company, Partner
Re Ltd., Swiss Reinsurance Company, Transatlantic Reinsurance
Company, Berkshire Hathaway, PartnerRe Ltd, Aeolus, and Nephila, as
well as smaller companies and other niche reinsurers. Although we
seek to provide coverage where capacity and alternatives are
limited, we directly compete with these larger companies due to the
breadth of their coverage across the property and casualty market
in substantially all lines of business. We also compete with
smaller companies and other niche reinsurers from time to
time.
While
we have a limited operating history, we believe that our unique
approach to multi-year underwriting will allow us to be successful
in underwriting transactions against more established
competitors.
Employees
As of
February 15, 2017, we had two employees, both of whom were full
time employees, and we are in the process of hiring additional
resources. We believe that our relations with our employees are
good. None of our employees are subject to collective bargaining
agreements, and we are not aware of any current efforts to
implement such agreements. We believe that we will continue to have
relatively few employees and intend to outsource some functions to
specialist firms in the Cayman Islands if and when we determine
that such functions are necessary. We intend to use the expertise
of our Board of Directors and where necessary, external consultants
to provide any other service we may require from time to
time.
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.
Regulation and Capital Requirements
Our
wholly-owned subsidiary, Oxbridge Reinsurance Limited, holds a
Class C Insurer’s License issued in accordance with the terms
of the Insurance Law (as revised) of the Cayman Islands (the
“Law”), and is subject to regulation by the Cayman
Islands Monetary Authority (“CIMA”), in terms of the
Law. As the holder of a Class C Insurer’s License, Oxbridge
Reinsurance Limited is permitted to undertake insurance business
approved by CIMA.
Oxbridge
Reinsurance Limited is subject to minimum capital and surplus
requirements, and our failure to meet these requirements could
subject us to regulatory action. Pursuant to The Insurance (Capital
and Solvency) (Classes B, C and D Insurers) Regulations, 2012 (the
“Capital and Solvency Regulations”) published under the
Law, Oxbridge Reinsurance Limited is required to maintain the
statutory minimum capital requirement (as defined under the Capital
and Solvency Regulations) of $500 and prescribed capital
requirement (as defined under the Capital and Solvency Regulations)
of $500, and a minimum margin of solvency equal to or in excess of
the total prescribed capital requirement. Any failure to meet the
applicable requirements or minimum statutory capital requirements
could subject us to further examination or corrective action by
CIMA, including restrictions on dividend payments, limitations on
our writing of additional business or engaging in finance
activities, supervision or liquidation.
9
CIMA
may at any time direct Oxbridge Reinsurance Limited, in relation to
a policy, a line of business or the entire business, to cease or
refrain from committing an act or pursing a course of conduct and
to perform such acts as in the opinion of CIMA are necessary to
remedy or ameliorate the situation. See the discussion in
“
Risk Factors
”
under the heading “
Any
suspension or revocation of our reinsurance license would
materially impact our ability to do business and implement our
business strategy”
for more information.
In
addition, as a Cayman Islands exempted company, we may not carry on
business or trade locally in the Cayman Islands except in
furtherance of our business outside the Cayman Islands, and we are
prohibited from soliciting the public of the Cayman Islands to
subscribe for any of our securities or debt. We are further
required to file a return with the Registrar of Companies in
January of each year and to pay an annual registration fee at that
time.
The
Cayman Islands has no exchange controls restricting dealings in
currencies or securities.
Available Information
Our
website is located at
www.oxbridgere.com
.
Copies of our Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and amendments to these
reports filed or furnished pursuant to Section 13(a) or 15(d) of
the Exchange Act are available, free of change, on our website as
soon as reasonably practicable after we file such material
electronically with or furnish it to the Securities and Exchange
Commission (the “SEC”). The SEC also maintains a
website that contains our SEC filings. The address of the
SEC’s website is
www.sec.gov
.
10
ITEM 1A
RISK FACTORS
Risks Relating to Our Business
We will need additional capital in the future in order to grow and
operate our business. Such capital may not be available to us or
may not be available to us on favorable terms. Furthermore, our
raising additional capital could dilute your ownership interest in
our company.
We
expect that we will need to raise additional capital in the future
through public or private equity or debt offerings or otherwise in
order to:
●
further capitalize
our reinsurance subsidiary and implement our growth
strategy;
●
fund liquidity
needs caused by underwriting or investment losses;
●
replace capital
lost in the event of significant reinsurance losses or adverse
reserve developments;
●
meet applicable
statutory jurisdiction requirements; and/or
●
respond to
competitive pressures.
Additional
capital may not be available on terms favorable to us, or at all.
Further, any additional capital raised through the sale of equity
could dilute your ownership interest in our company and may cause
the market price of our ordinary shares and warrants to decline.
Additional capital raised through the issuance of debt may result
in creditors having rights, preferences and privileges senior or
otherwise superior to those of our ordinary shares and
warrants.
Our results of operations will fluctuate from period to period and
may not be indicative of our long-term prospects.
We
anticipate that the performance of our reinsurance operations and
our investment portfolio will fluctuate from period to period.
Fluctuations will result from a variety of factors,
including:
●
reinsurance
contract pricing;
●
our assessment of
the quality of available reinsurance opportunities;
●
the volume and mix
of reinsurance products we underwrite;
●
loss experience on
our reinsurance liabilities;
●
our ability to
assess and integrate our risk management strategy properly;
and
●
the performance of
our investment portfolio.
11
In
particular, we plan to underwrite products and make investments to
achieve favorable return on equity over the long term. In addition,
our opportunistic nature and focus on long-term growth in book
value will result in fluctuations in total premiums written from
period to period as we concentrate on underwriting contracts that
we believe will generate better long-term, rather than short-term,
results. Accordingly, our short-term results of operations may not
be indicative of our long-term prospects.
The positions held by Paresh Patel and Sanjay (Jay) Madhu may
present, and make us vulnerable to, difficult conflicts of interest
and related legal challenges.
Jay
Madhu, our President and Chief Executive Officer, is also a member
of the Board of Directors of HCI Group. In addition, Paresh Patel,
the non-executive Chairman of our Board of Directors, also holds
the positions of Chairman of the Board, President and Chief
Executive Officer at HCI Group, a company whose subsidiaries
primarily operate in the property and casualty insurance and
reinsurance markets. Mr. Patel is not an employee of our company
and, as such, does not serve our company on a full-time
basis.
Because
both of Mr. Madhu and Mr. Patel serve on the board of directors at
both HCI Group and our company, potential conflicts of interest may
arise should the interests of HCI Group and our company diverge.
These relationships and potential conflicts could also result in
contracts between us and HCI Group and/or its subsidiaries that are
less favorable to us than contracts that could be negotiated with
other third parties.
Mr.
Madhu’s service as President and Chief Executive Officer of
Oxbridge Re Holdings Limited and as a director of HCI Group, as
well as Mr. Patel’s service on the board of directors of our
company and HCI Group, could also raise a potential challenge under
anti-trust laws. Section 8 of the Clayton Antitrust Act, or the
Clayton Act, prohibits a person from serving as a director or
officer in any two competing corporations under certain
circumstances. If HCI Group and Oxbridge Re Holdings Limited are in
the future deemed to be competitors within the meaning of the
Clayton Act, certain thresholds relating to direct competition
between HCI Group and Oxbridge Re Holdings Limited are met, and the
Department of Justice and/or Federal Trade Commission challenge the
arrangement, Mr. Madhu and/or Mr. Patel may be required to resign
his positions with one of the companies and/or fines or other
penalties could be assessed against Mr. Madhu, Mr. Patel, and
Oxbridge Re Holdings Limited. We expect that our company and HCI
Group and its subsidiaries will have different business focuses and
marketing strategies, thus minimizing the risk of direct
competition. However, it is possible that the potential for direct
competition may exist with respect to the business that we pursue
with insurance companies other than HCI Group and its
subsidiaries.
The business relationships between us and HCI Group, together with
the positions held by our directors and executives with HCI Group,
may present difficult conflicts of interest and business
opportunity issues.
We may
continue to derive a substantial portion of our business from HCI
Group subsidiaries during our first few years of operation. Jay
Madhu, our Chief Executive Officer and a member of our Board of
Directors, is also a member of the board of directors of HCI Group
and a former executive officer of HCI Group. Also, Paresh Patel,
the non-executive Chairman of our Board of Directors and largest
shareholder of our company, is the Chairman, President, and Chief
Executive Officer of HCI Group. Because of these business
relationships, various conflicts of interest could arise with
respect to business opportunities that could be advantageous to HCI
Group or its subsidiaries, on the one hand, and us or any of our
subsidiaries, on the other hand. Moreover, because of these
relationships, HCI Group may have the ability to otherwise
significantly influence certain business decisions by us, including
our writing of future policies. These relationships and potential
conflicts of interest could also result in contracts between us and
HCI Group and/or its subsidiaries that are less favorable to us
than contracts that could be negotiated with other third
parties.
12
Failure to become rated by A.M. Best, or receipt of a negative
rating, could significantly and negatively affect our ability to
grow.
Companies, insurers
and reinsurance brokers use ratings from independent ratings
agencies as an important means of assessing the financial strength
and quality of reinsurers. This rating reflects the rating
agency’s opinion of our financial strength, operating
performance and ability to meet obligations. It is not an
evaluation directed toward the protection of investors or a
recommendation to buy, sell or hold our securities. A.M. Best
assigns ratings based on its analysis of balance sheet strength,
operating performance and business profile.
Currently, A.M Best
has not assigned us a financial strength rating, and we do not
intend to seek a rating in the forseesable future. Without a
rating, or if we received a negative rating, our growth potential
and business strategy will be limited because of the need to
collateralize the insurance policies that we write.
Established competitors with greater resources may make it
difficult for us to effectively market our products or offer our
products at a profit.
The
reinsurance industry is highly competitive. We compete with major
reinsurers, all of which have substantially greater financial,
marketing and management resources than we do. Competition in the
types of business that we seek to underwrite is based on many
factors, including:
●
premium
charges;
●
the general
reputation and perceived financial strength of the
reinsurer;
●
relationships with
reinsurance brokers;
●
terms and
conditions of products offered;
●
ratings assigned by
independent rating agencies;
●
speed of claims
payment and reputation; and
●
the experience and
reputation of the members of our underwriting team in the
particular lines of reinsurance we seek to underwrite.
Additionally,
although the members of our underwriting team have general
experience across many property and casualty lines, they may not
have the requisite experience or expertise to compete for all
transactions that fall within our strategy of offering customized
frequency and severity contracts at times and in markets where
capacity and alternatives may be limited.
Our
competitors include Third Point Reinsurance Ltd., Blue Capital
Reinsurance Holdings Ltd., ACE Ltd., Everest Re, General Re
Corporation, Hannover Re Group, Munich Reinsurance Company, Partner
Re Ltd., Swiss Reinsurance Company, Transatlantic Reinsurance
Company, Berkshire Hathaway, PartnerRe Ltd, Aeolus, and Nephila, as
well as smaller companies and other niche reinsurers. Although we
seek to provide coverage where capacity and alternatives are
limited, we will directly compete with these larger companies due
to the breadth of their coverage across the property and casualty
market in substantially all lines of business.
13
We
cannot assure you that we will be able to compete successfully in
the reinsurance market. Our failure to compete effectively could
significantly and negatively affect our financial condition and
results of operations and may increase the likelihood that we may
be deemed to be a passive foreign investment company or an
investment company.
If actual renewals of our existing contracts do not meet
expectations, our premiums assumed in future years and our future
results of operations could be materially adversely
affected.
Many
of our contracts are generally written for a one-year term. In our
financial forecasting process, we make assumptions about the
renewal of our prior year’s contracts. The insurance and
reinsurance industries have historically been cyclical businesses
with periods of intense competition, often based on price. If
actual renewals do not meet expectations or if we choose not to
write on a renewal basis because of pricing conditions, our
premiums assumed in future years and our future operations would be
materially adversely affected.
Reputation is an important factor in the reinsurance industry, and
our lack of an established reputation may make it difficult for us
to attract or retain business.
Reputation is a
very important factor in the reinsurance industry, and competition
for business is, in part, based on reputation. Although our
reinsurance policies will be fully collateralized, we are a
relatively newly formed reinsurance company and do not yet have a
well-established reputation in the reinsurance industry. Our lack
of an established reputation may make it difficult for us to
attract or retain business. In addition, we do not have or
currently intend to obtain financial strength ratings, which may
discourage certain counterparties from entering into reinsurance
contracts with us.
If our losses and loss adjustment expenses greatly exceed our loss
reserves, our financial condition may be significantly and
negatively affected.
Our
results of operations and financial condition will depend upon our
ability to accurately assess the potential losses and loss
adjustment expenses associated with the risks we reinsure. Reserves
are estimates at a given time of claims an insurer ultimately
expects to pay, based upon facts and circumstances then known,
predictions of future events, estimates of future trends in claim
severity and other variable factors. The inherent uncertainties of
estimating loss reserves are generally greater for reinsurance
companies as compared to primary insurers, primarily due
to:
●
the lapse of time
from the occurrence of an event to the reporting of the claim and
the ultimate resolution or settlement of the claim;
●
the diversity of
development patterns among different types of reinsurance treaties;
and
●
the necessary
reliance on the client for information regarding
claims.
Our
estimation of reserves may be less reliable than the reserve
estimations of a reinsurer with a greater volume of business and an
established loss history. Our actual losses and loss adjustment
expenses paid may deviate substantially from the estimates of our
loss reserves and could negatively affect our results of
operations. If our loss reserves are later found to be inadequate,
we would increase our loss reserves with a corresponding reduction
in our net income and capital in the period in which we identify
the deficiency, and such a reduction would also negatively affect
our results of operations. If our losses and loss adjustment
expenses greatly exceed our loss reserves, our financial condition
may be significantly and negatively affected.
14
The property and casualty reinsurance market may be affected by
cyclical trends.
We
write reinsurance in the property and casualty markets, which tend
to be cyclical in nature. Ceding company underwriting results,
prevailing general economic and market conditions, liability
retention decisions of companies and ceding companies and
reinsurance premium rates each influence the demand for property
and casualty reinsurance. Prevailing prices and available surplus
to support assumed business then influence reinsurance supply.
Supply may fluctuate in response to changes in return on capital
realized in the reinsurance industry, the frequency and severity of
losses and prevailing general economic and market
conditions.
Continued increases
in the supply of reinsurance may have consequences for the
reinsurance industry generally and for us, including lower premium
rates, increased expenses for customer acquisition and retention,
less favorable policy terms and conditions and/or lower premium
volume. Furthermore, unpredictable developments, including courts
granting increasingly larger awards for certain damages, increases
in the frequency of natural disasters (such as hurricanes,
windstorms, tornados, earthquakes, wildfires and floods),
fluctuations in interest rates, changes in the investment
environment that affect market prices of investments and
inflationary pressures, affect the industry’s profitability.
The effects of cyclicality could significantly and negatively
affect our financial condition and results of
operations.
Our property and property catastrophe reinsurance operations will
make us vulnerable to losses from catastrophes and may cause our
results of operations to vary significantly from period to
period.
Our
reinsurance operations expose us to claims arising out of
unpredictable catastrophic events, such as hurricanes, hailstorms,
tornados, windstorms, earthquakes, floods, fires, explosions, and
other natural or man-made disasters. The incidence and severity of
catastrophes are inherently unpredictable but the loss experience
of property catastrophe reinsurers has been generally characterized
as low frequency and high severity. Claims from catastrophic events
could reduce our earnings and cause substantial volatility in our
results of operations for any fiscal quarter or year and adversely
affect our financial condition. Corresponding reductions in our
surplus levels could impact our ability to write new reinsurance
policies.
Catastrophic losses
are a function of the insured exposure in the affected area and the
severity of the event. Because accounting standards do not permit
reinsurers to reserve for catastrophic events until they occur,
claims from catastrophic events could cause substantial volatility
in our financial results for any fiscal quarter or year and could
significantly and negatively affect our financial condition and
results of operations.
We could face unanticipated losses from war, terrorism, and
political unrest, and these or other unanticipated losses could
have a material adverse effect on our financial condition and
results of operations.
Like
other reinsurers, we face potential exposure to large, unexpected
losses resulting from man-made catastrophic events, such as acts of
war, acts of terrorism and political instability. These risks are
inherently unpredictable and recent events may indicate that the
frequency and severity of these types of losses may increase. It is
difficult to predict the timing of these events or to estimate the
amount of loss that any given occurrence will generate. To the
extent that losses from these risks occur, our financial condition
and results of operations could be significantly and negatively
affected.
15
We depend on our clients’ evaluations of the risks associated
with their insurance underwriting, which may subject us to
reinsurance losses.
In the
proportional reinsurance business, in which we assume an agreed
percentage of each underlying insurance contract being reinsured,
or quota share contracts, we do not separately evaluate each of the
original individual risks assumed under these reinsurance
contracts. Therefore, we are largely dependent on the original
underwriting decisions made by ceding companies. We are subject to
the risk that the clients may not have adequately evaluated the
insured risks and that the premiums ceded may not adequately
compensate us for the risks we assume. We also do not separately
evaluate each of the individual claims made on the underlying
insurance contracts under quota share arrangements. Therefore, we
are dependent on the original claims decisions made by our
clients.
Changing climate conditions may adversely affect our financial
condition, profitability or cash flows.
Climate
change, to the extent it produces extreme changes in temperatures
and changes in weather patterns, could impact the frequency or
severity of weather events and wildfires. Further, it could impact
the affordability and availability of homeowners insurance, which
could have an impact on pricing. Changes in weather patterns could
also affect the frequency and severity of other natural catastrophe
events to which we may be exposed. The occurrence of these events
would significantly and negatively affect our financial condition
and results of operations.
Operational risks, including human or systems failures, are
inherent in our business.
Operational risks
and losses can result from, among other things, fraud, errors,
failure to document transactions properly or to obtain proper
internal authorization, failure to comply with regulatory
requirements, information technology failures or external
events.
We
believe that our modeling, underwriting and information technology
and application systems are critical to our business and our growth
prospects. Moreover, we rely on our information technology and
application systems to further our underwriting process and to
enhance our ability to compete successfully. A major defect or
failure in our internal controls or information technology and
application systems could result in management distraction, harm to
our reputation or increased expenses.
The effect of emerging claim and coverage issues on our business is
uncertain.
As
industry practices and legal, judicial and regulatory conditions
change, unexpected issues related to claims and coverage may
emerge. It is possible that certain provisions of our future
reinsurance contracts, such as limitations or exclusions from
coverage or choice of forum, may be difficult to enforce in the
manner we intend, due to, among other things, disputes relating to
coverage and choice of legal forum. These issues may adversely
affect our business by either extending coverage beyond the period
that we intended or by increasing the number or size of claims. In
some instances, these changes may not manifest themselves until
many years after we have issued insurance or reinsurance contracts
that are affected by these changes. As a result, we may not be able
to ascertain the full extent of our liabilities under our insurance
or reinsurance contracts for many years following the issuance of
our contracts. The effects of unforeseen development or substantial
government intervention could adversely impact our ability to
adhere to our goals.
16
We are required to maintain sufficient collateral accounts, which
could significantly and negatively affect our ability to implement
our business strategy.
We are
not licensed or admitted as a reinsurer in any jurisdiction other
than the Cayman Islands. Certain jurisdictions, including the
United States, do not permit insurance companies to take credit for
reinsurance obtained from unlicensed or non-admitted insurers on
their statutory financial statements unless appropriate security
measures are implemented. Consequently, we must continue to
maintain sufficient funds in escrow accounts to serve as collateral
for our reinsurance contracts. Because we intend to continue to
utilize our funds (rather than utilizing the credit markets) to
serve as collateral for our reinsurance obligations, we may not be
able to fully utilize our capital to expand our reinsurance
coverage as rapidly as other reinsurers.
The inability to obtain business provided from brokers could
adversely affect our business strategy and results of
operations.
We
anticipate that a substantial portion of our business will be
placed primarily through brokered transactions, which involve a
limited number of reinsurance brokers. If we are unable to identify
and grow the brokered business provided through one or more of
these reinsurance brokers, many of whom may not be familiar with
our Cayman Islands jurisdiction, this failure could significantly
and negatively affect our business and results of
operations.
The involvement of reinsurance brokers may subject us to their
credit risk.
As a
standard practice of the reinsurance industry, reinsurers
frequently pay amounts owed on claims under their policies to
reinsurance brokers, and these brokers, in turn, remit these
amounts to the ceding companies that have reinsured a portion of
their liabilities with the reinsurer. In some jurisdictions, if a
broker fails to make such a payment, the reinsurer might remain
liable to the client for the deficiency notwithstanding the
broker’s obligation to make such payment. Conversely, in
certain jurisdictions, when the client pays premiums for policies
to reinsurance brokers for payment to the reinsurer, these premiums
are considered to have been paid and the client will no longer be
liable to the reinsurer for these premiums, whether or not the
reinsurer has actually received them. Consequently, we assume a
degree of credit risk associated with the brokers that we do
business with.
We may be unable to purchase reinsurance for the liabilities we
reinsure, and if we successfully purchase such reinsurance, we may
be unable to collect, which could adversely affect our business,
financial condition and results of operations.
Retrocessional
coverage (reinsurance for the liabilities we reinsure) may not
always be available to us. From time to time, we expect that we
will purchase retrocessional coverage for our own account in order
to mitigate the effect of a potential concentration of losses upon
our financial condition. The insolvency or inability or refusal of
a reinsurer of reinsurance to make payments under the terms of its
agreement with us could have an adverse effect on us because we
remain liable to our client. From time to time, market conditions
have limited, and in some cases have prevented, reinsurers from
obtaining the types and amounts of retrocession that they consider
adequate for their business needs. Accordingly, we may not be able
to obtain our desired amounts of retrocessional coverage or
negotiate terms that we deem appropriate or acceptable or obtain
retrocession from entities with satisfactory creditworthiness. Our
failure to establish adequate retrocessional arrangements or the
failure of our retrocessional arrangements to protect us from
overly concentrated risk exposure could significantly and
negatively affect our business, financial condition and results of
operations.
17
U.S. and global economic downturns could harm our business, our
liquidity and financial condition and the price of our
securities.
Weak
economic conditions may adversely affect (among other aspects of
our business) the demand for and claims made under our products,
the ability of customers, counterparties and others to establish or
maintain their relationships with us, our ability to access and
efficiently use internal and external capital resources and our
investment performance. Volatility in the U.S. and other securities
markets may adversely affect our investment portfolio and our
resulting results of operations.
Our ability to implement our business strategy could be delayed or
adversely affected by Cayman Islands employment
restrictions.
Under
Cayman Islands law, persons who are not Caymanian, do not possess
Caymanian status, or are not otherwise entitled to reside and work
in the Cayman Islands pursuant to provisions of the Immigration Law
(2015 Revision) of the Cayman Islands, which we refer to as the
Immigration Law, may not engage in any gainful occupation in the
Cayman Islands without an appropriate governmental work permit. The
failure to obtain work permits, or extensions thereof, for our
employees could prevent us from continuing to implement our
business strategy.
If we lose or are unable to retain our senior management and other
key personnel and are unable to attract qualified personnel, our
ability to implement our business strategy could be delayed or
hindered, which, in turn, could significantly and negatively affect
our business.
Although we only
employ two individuals, both of whom are members of senior
management, our future success depends to a significant extent on
the efforts of our senior management and other key personnel (who
have not yet been hired) to implement our business strategy. We
believe there are only a limited number of available, qualified
executives with substantial experience in our industry. In
addition, we will need to add personnel, including underwriters, to
implement our business strategy. We could face challenges
attracting personnel to the Cayman Islands. Accordingly, the loss
of the services of one or more of the members of our senior
management or other key personnel (when hired), or our inability to
hire and retain other key personnel, could delay or prevent us from
fully implementing our business strategy and, consequently,
significantly and negatively affect our business.
We do
not currently maintain key man life insurance with respect to any
of our senior management. If any member of senior management dies
or becomes incapacitated, or leaves the Company to pursue
employment opportunities elsewhere, we would be solely responsible
for locating an adequate replacement for such senior management and
for bearing any related cost. To the extent that we are unable to
locate an adequate replacement or are unable to do so within a
reasonable period of time, our business may be significantly and
negatively affected.
18
There are differences under Cayman Islands corporate law and
Delaware corporate law with respect to interested party
transactions which may benefit certain of our shareholders at the
expense of other shareholders.
Under
Cayman Islands corporate law, a director may vote on a contract or
transaction where the director has an interest as a shareholder,
director, officer or employee provided such interest is disclosed.
None of our contracts will be deemed to be void because any
director is an interested party in such transaction and interested
parties will not be held liable for monies owed to the company.
Under Delaware law, interested party transactions are
voidable.
Risks Relating to Insurance and Other Regulations
Any suspension or revocation of our reinsurance license would
materially impact our ability to do business and implement our
business strategy.
Oxbridge
Reinsurance Limited is licensed as an insurer only in the Cayman
Islands by the CIMA, and we do not intend to obtain a license in
any other jurisdiction. The suspension or revocation of our license
to do business as a reinsurance company in the Cayman Islands for
any reason would mean that we would not be able to enter into any
new reinsurance contracts until the suspension ended or we became
licensed in another jurisdiction. Any such suspension or revocation
of our license would negatively impact our reputation in the
reinsurance marketplace and could have a material adverse effect on
our results of operations.
As a
regulated insurance company, Oxbridge Reinsurance Limited is
subject to the supervision of CIMA and CIMA may at any time direct
Oxbridge Reinsurance Limited, in relation to a policy, a line of
business or the entire business, to cease or refrain from
committing an act or pursing a course of conduct and to perform
such acts as in the opinion of CIMA are necessary to remedy or
ameliorate the situation.
Furthermore, in
certain circumstances, including when CIMA is of the opinion
that:
●
a licensee either
is or appears to be likely to become unable to meet its obligations
as they fall due;
●
a licensee is
carrying on its business in a manner which is seen as detrimental
to the general public interest or to the interests of its creditors
or policy holders;
●
the activities of
any member of the licensee’s insurance group are detrimental
to those interests of the licensee’s creditors, as well as
its policy holders;
●
a licensee has
contravened the Law or the Money Laundering Regulations (2015
Revision) of the Cayman Islands;
●
the licensee has
failed to comply with a condition of its license such as
maintaining a margin of solvency as prescribed by
CIMA;
●
the direction
and/or management of the licensee’s business has not been
conducted in a fit and proper manner;
●
a director, manager
or officer of the licensee’s business is not someone who
would qualify or be seen as a person suitable to hold the
respective position;
19
●
any person who is
either holding or acquiring control or ownership of the licensee is
not a fit and proper person to have such control or
ownership;
●
the licensee has
ceased to carry on business; or
●
the licensee is
placed in liquidation or is dissolved;
CIMA
may take one of a number of steps, including:
●
requiring the
licensee to take steps to rectify the matter;
●
suspending the
license of the licensee pending a full inquiry into the
licensee’s affairs;
●
revoking the
license;
●
imposing conditions
upon the licensee in terms of decisions made by it, including the
suspension of voting rights or nullification of votes cast by it,
and amending or revoking any such condition;
●
requiring the
substitution or removal of any director, manager or officer of the
licensee, at the expense of the licensee;
●
appointing a person
to advise the licensee on the proper conduct of its affairs, at the
expense of the licensee;
●
appointing a person
to assume control of the licensee’s affairs; or
●
otherwise requiring
such action to be taken by the licensee as CIMA considers
necessary.
Failures to comply
with a direction given by CIMA may be punishable by a fine of up to
five hundred thousand Cayman Islands dollars (US$609,756.10 based
on the Cayman Islands’ pegged exchange rate of CI$0.82 per
US$1.00 as of March 6, 2017 or imprisonment for a term of five
years or both, and a fine of an additional ten thousand Cayman
Islands dollars (US$12,195.12) for every day after conviction on
which the offense so continues.
Our reinsurance subsidiary is subject to minimum capital and
surplus requirements, and our failure to meet these requirements
could subject us to regulatory action.
Pursuant to the
Capital and Solvency Regulations, Oxbridge Reinsurance Limited, our
reinsurance subsidiary, is required to maintain the statutory
minimum capital requirement (as defined under the Capital and
Solvency Regulations) of $500 and prescribed capital requirement
(as defined under the Capital and Solvency Regulations) of $500,
and a minimum margin of solvency equal to or in excess of the total
prescribed capital requirement. Any failure to meet the applicable
requirements or minimum statutory capital requirements could
subject us to further examination or corrective action by CIMA,
including restrictions on dividend payments, limitations on our
writing of additional business or engaging in finance activities,
supervision or liquidation.
20
As a holding company, we will depend on the ability of our
subsidiaries to pay dividends.
We are
a holding company and do not have any significant operations or
assets other than our ownership of the shares of our subsidiaries
(currently only Oxbridge Reinsurance Limited). Dividends and other
permitted distributions from our subsidiaries will be our primary
source of funds to meet ongoing cash requirements, including future
debt service payments, if any, and other expenses, and to pay
dividends to our shareholders if we choose to do so. Oxbridge
Reinsurance Limited, as well as some of our future subsidiaries,
will be subject to applicable law as well as significant regulatory
restrictions limiting their ability to declare and pay dividends.
The inability of our subsidiaries to pay dividends in an amount
sufficient to enable us to meet our cash requirements at the
holding company level could have an adverse effect on our
operations and our ability to pay dividends to our shareholders if
we choose to do so and/or meet our debt service obligations, if
any.
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 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.
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.
To the
extent that the laws and regulations change in the future so that
contracts we write are deemed not to be reinsurance contracts, we
will be at greater risk of not qualifying for the Investment
Company Act exemption. Additionally, it is possible that our
classification as an investment company would result in the
suspension or revocation of our reinsurance license.
21
Insurance regulations to which we are, or may become, subject, and
potential changes thereto, could have a significant and negative
effect on our business.
Although we do not
presently expect that we will conduct business in any jurisdiction
other than the Cayman Islands, we cannot assure you that insurance
regulators in the United States or elsewhere will not review our
activities and claim that we are subject to such
jurisdiction’s insurance licensing requirements. In addition,
we are subject to indirect regulatory requirements imposed by
jurisdictions that may limit our ability to provide reinsurance.
For example, our ability to write reinsurance may be subject, in
certain cases, to arrangements satisfactory to applicable
regulatory bodies, and proposed legislation and regulations may
have the effect of imposing additional requirements upon, or
restricting the market for, non-U.S. reinsurers such as Oxbridge
Reinsurance Limited, with whom domestic companies may place
business. We do not know of any such proposed legislation pending
at this time.
Furthermore, we may
not be able to comply fully with, or obtain desired exemptions
from, revised statutes, regulations and policies that currently, or
may in the future, govern the conduct of our business. Failure to
comply with, or to obtain desired authorizations and/or exemptions
under, any applicable laws could result in restrictions on our
ability to do business or undertake activities that are regulated
in the jurisdiction in which operate and could subject us to fines
and other sanctions. In addition, changes in the laws or
regulations to which our subsidiary is subject or may become
subject, or in the interpretations thereof by enforcement or
regulatory agencies, could have a material adverse effect on our
business, our business plans, and our growth strategy.
We will likely be exposed to credit risk due to the possibility
that counterparties may default on their obligations to
us.
Due to
our investments in our portfolio, we are exposed to credit risk due
to the possibility that counterparties may default on their
obligations to us. Issuers or borrowers whose securities or debt we
hold, customers, reinsurers, clearing agents, exchanges, clearing
houses and other financial intermediaries and guarantors may
default on their obligations to us due to bankruptcy, insolvency,
lack of liquidity, adverse economic conditions, operational
failure, fraud or other reasons. Such defaults could have a
significant and negative effect on our results of operations,
financial condition and cash flows.
Risks Relating to our Securities
Provisions of our Third Amended and Restated Memorandum and
Articles of Association (“Articles”) could adversely
affect the value of our securities.
Our
Articles permit our Board of Directors to allot, issue, grant
options over or otherwise dispose of further shares (including
fractions of such share) with or without preferred, deferred or
other rights or restrictions, whether in regard to dividend or
other distribution, voting, return of capital or otherwise and to
such persons, at such times and on such other terms as they
consider appropriate. Accordingly, our Board of Directors may
authorize the issuance of preferred shares with terms and
conditions and under circumstances that could have an effect of
discouraging a takeover or other transaction, deny shareholders the
receipt of a premium on their ordinary shares in the event of a
tender or other offer for ordinary shares and have a depressive
effect on the value of our ordinary shares.
22
Provisions of the Companies Law of the Cayman Islands could prevent
a merger or takeover of our company.
As
compared to mergers under corporate law in the United States, it
may be more difficult to consummate a merger of two or more
companies in the Cayman Islands or the merger of one or more Cayman
Islands companies with one or more overseas companies, even if such
transaction would be beneficial to our shareholders. The Companies
Law of the Cayman Islands, as amended (the “Companies
Law”), permits mergers and consolidations between Cayman
Islands companies and between Cayman Islands companies and
non-Cayman Islands companies. For these purposes, (a)
“merger” means the merging of two or more constituent
companies and the vesting of their undertaking, property and
liabilities in one of such companies as the surviving company and
(b) a “consolidation” means the combination of two or
more constituent companies into a combined company and the vesting
of the undertaking, property and liabilities of such companies to
the consolidated company. In order to effect such a merger or
consolidation, the directors of each constituent company must
approve a written plan of merger or consolidation, which must then
be authorized by (a) a special resolution of the shareholders of
each constituent company, and (b) such other authorization, if any,
as may be specified in such constituent company’s articles of
association. The written plan of merger or consolidation must be
filed with the Registrar of Companies together with a declaration
as to the solvency of the consolidated or surviving company, a list
of the assets and liabilities of each constituent company and an
undertaking that a copy of the certificate of merger or
consolidation will be given to the shareholders and creditors of
each constituent company and that notification of the merger or
consolidation will be published in the Cayman Islands Gazette.
Dissenting shareholders have the right to be paid the fair value of
their shares (which, if not agreed between the parties, will be
determined by the Cayman Islands court) if they follow the required
procedures, subject to certain exceptions. Court approval is not
required for a merger or consolidation which is effected in
compliance with these statutory procedures.
In
addition, there are statutory provisions that facilitate the
reconstruction and amalgamation of companies, provided that the
arrangement is approved by a majority in number of each class of
shareholders or creditors (representing 75% by value) with whom the
arrangement is to be made and who must, in addition, represent
three-fourths in value of each such class of shareholders or
creditors, as the case may be, that are present and voting either
in person or by proxy at a meeting, or meetings, convened for that
purpose. The convening of the meetings and subsequently the
arrangement must be sanctioned by the Grand Court of the Cayman
Islands. While a dissenting shareholder has the right to express to
the court the view that the transaction ought not to be approved,
the court can be expected to approve the arrangement if it
determines that:
●
the statutory
provisions as to the required majority vote have been
met;
●
the shareholders
have been fairly represented at the meeting in question and the
statutory majority are acting bona fide without coercion of the
minority to promote interests adverse to those of the
class;
●
the arrangement is
such that may be reasonably approved by an intelligent and honest
man of that class acting in respect of his interest;
and
●
the arrangement is
not one that would more properly be sanctioned under some other
provision of the Companies Law.
23
When a
takeover offer is made and accepted by holders of 90% of the shares
within four months, the offeror may, within a two-month period
commencing on the expiration of such four month period, require the
holders of the remaining shares to transfer such shares on the
terms of the offer. An objection can be made to the Grand Court of
the Cayman Islands, but such objection is unlikely to succeed in
the case of an offer which has been so approved unless there is
evidence of fraud, bad faith or collusion.
If an
arrangement and reconstruction is thus approved, the dissenting
shareholder would have no rights comparable to appraisal rights,
which would otherwise ordinarily be available to dissenting
shareholders of certain corporations incorporated in the United
States, including Delaware corporations, providing rights to
receive payment in cash for the judicially determined value of the
shares.
Holders of our securities may have difficulty obtaining or
enforcing a judgment against us, and they may face difficulties in
protecting their interests because we are incorporated under Cayman
Islands law.
Because
we are a Cayman Islands company, there is uncertainty as to whether
the Grand Court of the Cayman Islands would recognize or enforce
judgments of United States courts obtained against us predicated
upon the civil liability provisions of the securities laws of the
United States or any state thereof, or be competent to hear
original actions brought in the Cayman Islands against us
predicated upon the securities laws of the United States or any
state thereof.
We are
incorporated as an exempted company limited by shares under the
Companies Law. A significant amount of our assets are located
outside of the United States. As a result, it may be difficult for
persons purchasing our securities to effect service of process
within the United States upon us or to enforce judgments against us
or judgments obtained in U.S. courts predicated upon the civil
liability provisions of the federal securities laws of the United
States or any state of the United States.
Although there is
no statutory enforcement in the Cayman Islands of judgments
obtained in the United States, the courts of the Cayman Islands
will, based on the principle that a judgment by a competent foreign
court will impose upon the judgment debtor an obligation to pay the
sum for which judgment has been given, recognize and enforce a
foreign judgment of a court of competent jurisdiction if such
judgment is final, for a liquidated sum, not in respect of taxes or
a fine or penalty if not inconsistent with a Cayman Islands
judgment in respect of the same matters, and was not obtained in a
manner, and is not of a kind, the enforcement of which is contrary
to the public policy of the Cayman Islands. There is doubt,
however, as to whether the courts of the Cayman Islands will, in an
original action in the Cayman Islands, recognize or enforce
judgments of U.S. courts predicated upon the civil liability
provisions of the securities laws of the United States or any state
of the United States on the grounds that such provisions are penal
in nature. Furthermore, a Cayman Islands court may stay proceedings
if concurrent proceedings are being brought elsewhere.
Unlike
many jurisdictions in the United States, Cayman Islands law does
not specifically provide for shareholder appraisal rights on a
merger or consolidation of an entity. This may make it more
difficult for shareholders to assess the value of any consideration
they may receive in a merger or consolidation or to require that
the offeror give a shareholder additional consideration if he
believes the consideration offered is insufficient. In addition,
shareholders of Cayman Islands exempted companies such as ours have
no general rights under Cayman Islands law to inspect corporate
records and accounts. Our directors have discretion under our
Articles to determine whether or not, and under what conditions,
the corporate records may be inspected by shareholders, but are not
obligated to make them available to shareholders. This fact may
make it more difficult for shareholders to obtain the information
needed to establish any facts necessary for a shareholder motion or
to solicit proxies from other shareholders in connection with a
proxy contest. Finally, subject to limited exceptions, under Cayman
Islands law, a minority shareholder may not bring a derivative
action against our Board of Directors.
24
Provisions of our Articles may reallocate the voting power of our
ordinary shares.
In
certain circumstances, the total voting power of our ordinary
shares held by any one person will be reduced to less than 9.9% of
the total voting power of the total issued and outstanding ordinary
shares. In the event a holder of our ordinary shares acquires
shares representing 9.9% or more of the total voting power of our
total ordinary shares, there will be an effective reallocation of
the voting power of the ordinary shares as described in the
Articles.
We are an “emerging growth company” and we cannot be
certain whether the reduced disclosure requirements and relief from
certain other significant obligations that are applicable to
emerging growth companies will make our securities less attractive
to investors.
We are
an “emerging growth company,” as defined in the
Jumpstart Our Business Startups Act of 2012, or JOBS Act, and we
intend to take advantage of certain exemptions from various
reporting requirements that are applicable to other public
companies that are not “emerging growth companies”
including, but not limited to, not being required to comply with
the auditor attestation requirements of Section 404 of the
Sarbanes-Oxley Act of 2002, less extensive disclosure obligations
regarding executive compensation in our periodic reports and proxy
statements, exemptions from the requirements to hold a nonbinding
advisory vote on executive compensation and shareholder approval of
any golden parachute payments not previously approved and an
extended transition period for complying with new or revised
accounting standards. This may make comparison of our financial
statements with any other public company that is either not an
emerging growth company or is an emerging growth company that has
opted out of using the extended transition period difficult, as
different or revised standards may be used by such companies. We
cannot predict if investors will find our securities less
attractive because we will rely on these exemptions. If some
investors find our securities less attractive as a result, there
may be a less active trading market for our securities and the
price of our securities may be more volatile.
Risks Relating to Taxation
We may become subject to taxation in the Cayman Islands which would
negatively affect our results.
Under
current Cayman Islands law, we are not obligated to pay any taxes
in the Cayman Islands on either income or capital gains. The
Governor-in-Cabinet of Cayman Islands has granted us an exemption
from the imposition of any such tax on us for twenty years from
April 23, 2013. We cannot be assured that after such date we would
not be subject to any such tax. If we were to become subject to
taxation in the Cayman Islands, our financial condition and results
of operations could be significantly and negatively
affected.
We may be subject to United States federal income
taxation.
We are
incorporated under the laws of the Cayman Islands and intend to
operate in a manner that will not cause us to be treated as
engaging in a United States trade or business and will not cause us
to be subject to current United States federal income taxation on
our income. However, because there are no definitive standards
provided by the Internal Revenue Code of 1986, as amended (the
“Code”), regulations or court decisions as to the
specific activities that constitute being engaged in the conduct of
a trade or business within the United States, and as any such
determination is essentially factual in nature, we cannot assure
you that the United States Internal Revenue Service, or the IRS,
will not successfully assert that we are engaged in a trade or
business in the United States and thus are subject to current
United States federal income taxation.
25
We may be treated as a PFIC, in which case a U.S. holder of our
ordinary shares should be subject to disadvantageous rules under
U.S. federal income tax laws.
Significant
potential adverse United States federal income tax consequences
generally apply to any United States person who owns shares in a
“passive foreign investment company”, or PFIC. In
general, a non-U.S. corporation is classified as a PFIC for a
taxable year in which, after taking into account the income and
assets of the corporation and certain subsidiaries pursuant to
certain look-through rules, either (i) 75% or more of its gross
income is passive income, or (ii) 50% or more of the average
quarterly value of its gross assets is attributable to assets that
produce passive income or are held for the production of passive
income. In general, either of Oxbridge Re Holdings Limited or
Oxbridge Reinsurance Limited would be deemed to be a PFIC for a
taxable year if 75% or more of its income constitutes
‘‘passive income’’ or 50% or more of its
assets produce ‘‘passive
income.’’
Passive
income generally includes interest, dividends and other investment
income but does not include income derived in the active conduct of
an insurance business by a corporation predominantly engaged in an
insurance business. This exception for insurance companies is
intended to ensure that a bona fide insurance company’s
income is not treated as passive income, except to the extent such
income is attributable to financial reserves in excess of the
reasonable needs of the insurance business. We believe that we are
currently operating and intend to continue operating our business
with financial reserves at a level that should not cause us to be
deemed PFICs, although we cannot assure you the IRS will not
successfully challenge this conclusion. In addition, sufficient
risk must be transferred under an insurance company’s
contracts with its insureds in order to qualify for the insurance
exception. Whether our insurance contracts possess adequate risk
transfer for purposes of determining whether income under our
contracts is insurance income, and whether we are predominantly
engaged in the insurance business, are subjective in nature and
there is very little authority on these issues. We cannot assure
you that the IRS will not successfully challenge the level of risk
transfer under our reinsurance contracts for purposes of the
insurance company exception, nor can we cannot assure you that the
IRS will not successfully challenge our interpretation of the scope
of the active insurance company exception and our qualification for
the exception. Further, the IRS may issue regulatory or other
guidance that causes us to fail to qualify for the active insurance
company exception on a prospective or retroactive basis. Therefore,
we cannot assure you that we will satisfy the exception for
insurance companies and will not be treated as PFICs currently or
in the future. Although we do not expect that we were a PFIC in
2016, nor do we expect to be a PFIC in 2017 or thereafter, no
assurance can be provided in that regard or as to our status in
future years. If you are a United States person, we advise you to
consult your own tax advisor concerning the potential tax
consequences to you under the PFIC rules.
We may be treated as a CFC and may be subject to the rules for
related person insurance income, and in either case this may
subject a U.S. holder of our ordinary shares to disadvantageous
rules under U.S. federal income tax laws.
Controlled Foreign Corporation
. United
States persons who, directly or indirectly or through attribution
rules, own 10% or more of our ordinary shares, which we refer to as
United States 10% shareholders, may be subject to the controlled
foreign corporation, or CFC, rules. Under the controlled foreign
corporation rules of the Code, each United States 10% shareholder
must annually include his pro rata share of the controlled foreign
corporation’s ‘‘subpart F income,’’
even if no distributions are made. In general, a foreign insurance
company will be treated as a controlled foreign corporation only if
United States 10% shareholders collectively own more than 25% of
the total combined voting power or total value of the
company’s shares for an uninterrupted period of 30 days or
more during any year. We believe that the anticipated dispersion of
our ordinary shares among holders and the restrictions placed on
transfer, issuance or repurchase of our ordinary shares, will
generally prevent shareholders who acquire ordinary shares from
being United States 10% shareholders. In addition, because our
Articles prevent any person from holding 9.9% or more of the total
combined voting power of our shares (whether held directly,
indirectly, or constructively), unless such provision is waived by
the unanimous consent of our Board of Directors, we believe no
persons holding ordinary shares should be viewed as United States
10% shareholders of a CFC for purposes of the CFC rules. We cannot
assure you, however, that these rules will not apply to you. If you
are a United States person we strongly urge you to consult your own
tax advisor concerning the controlled foreign corporation
rules.
26
Related Person Insurance Income
. A
different definition of CFC is applicable in the case of a foreign
corporation which earns “related person insurance
income” (“RPII”). RPII is a Code Subpart F
insurance income attributable to insurance policies or reinsurance
contracts where the person that is directly or indirectly insured
or reinsured is a RPII shareholder or a related person to the RPII
shareholder. A “RPII shareholder” is a United States
person who owns, directly or indirectly through foreign entities,
any amount of our ordinary shares. Generally, for purposes of the
RPII rules, a related person is someone who controls or is
controlled by the RPII shareholder or someone who is controlled by
the same person or persons which control the RPII shareholder.
Control is measured by either more than 50% in value or more than
50% in voting power of shares after applying certain constructive
ownership rules. For purposes of taking into account RPII, and
subject to the exceptions described below, Oxbridge Reinsurance
Limited will be treated as a CFC if our RPII shareholders
collectively own, indirectly, 25% or more of the total combined
voting power or value of their respective shares on any day during
a taxable year. If Oxbridge Reinsurance Limited is a CFC for an
uninterrupted period of at least 30 days during any taxable year
under the special RPII rules, any U.S. Holder that owns ordinary
shares on the last day of any such taxable year must include in
gross income for U.S. federal income tax purposes the U.S.
Holder’s allocable share of the RPII of Oxbridge Reinsurance
Limited for the entire taxable year, subject to certain
modifications. Among other exceptions, the RPII rules do not apply
if the insurance company’s RPII, determined on a gross basis,
is less than 20% of such respective entity’s gross insurance
income for such taxable year. We do not believe that the 20% gross
insurance income threshold will be met. However, we cannot assure
you that this is or will continue to be the case. Consequently, we
cannot assure you that a person who is a direct or indirect United
States shareholder will not be required to include amounts in its
income in respect of RPII in any taxable year.
United States tax-exempt organizations who own ordinary shares may
recognize unrelated business taxable income.
If you
are a United States tax-exempt organization you may recognize
unrelated business taxable income if a portion of our Code Subpart
F insurance income is allocated to you. In general, Code Subpart F
insurance income will be allocated to you if we are a CFC as
discussed above and you are a United States 10% shareholder or
there is related person insurance income and certain exceptions do
not apply. Although we do not believe that any United States
persons will be allocated Code Subpart F insurance income, we
cannot assure you that this will be the case. If you are a United
States tax-exempt organization, we advise you to consult your own
tax advisor regarding the risk of recognizing unrelated business
taxable income.
27
Changes in United States tax laws may be retroactive and could
subject us, and/or United States persons who own ordinary shares to
United States income taxation on our undistributed
earnings.
The tax
laws and interpretations regarding whether a company is engaged in
a United States trade or business, is a CFC, has RPII, or is a PFIC
are subject to change, possibly on a retroactive basis. There are
currently no regulations regarding the application of the PFIC
rules to an insurance company and the regulations regarding RPII
are still in proposed form. New regulations or pronouncements
interpreting or clarifying such rules may be forthcoming from the
IRS. We are not able to predict if, when or in what form such
guidance will be provided and whether such guidance will have a
retroactive effect.
ITEM 1B
UNRESOLVED STAFF COMMENTS
The
Company has no unresolved written comments regarding its periodic
or current reports from the staff of the SEC.
ITEM 2
PROPERTIES
We
currently lease office space at Strathvale House building at 90
North Church Street, Georgetown, Grand Cayman. We believe that the
Strathvale House office is suitable and sufficient for us to
conduct our operations for the foreseeable future.
ITEM 3
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 4
MINE SAFETY DISCLOSURES
Not
applicable.
28
ITEM 5
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information for Ordinary Shares
The
following table sets forth the high and low sales price per share
of our ordinary shares as reported on The NASDAQ Capital Market for
the periods indicated:
|
|
2016
|
2015
|
||
|
|
High
|
Low
|
High
|
Low
|
|
First Quarter
|
$
5.61
|
$
4.52
|
$
6.79
|
$
5.48
|
|
Second
Quarter
|
$
5.40
|
$
4.81
|
$
6.56
|
$
5.70
|
|
Third
Quarter
|
$
5.43
|
$
4.81
|
$
6.82
|
$
5.80
|
|
Fourth
Quarter
|
$
6.00
|
$
4.38
|
$
6.09
|
$
5.50
|
Holders of Record and Tax Information
As of
February 15, 2017, there were 20 holders of record of our ordinary
shares. There are no current applicable Cayman Islands laws,
decrees or regulations relating to restrictions on the import or
export of capital or exchange controls affecting remittances of
dividends, interest and other payments to non-resident holders of
our ordinary shares. There are no existing laws or regulations of
the Cayman Islands imposing taxes or containing withholding
provisions to which United States holders of our ordinary shares
are subject. There are no reciprocal tax treaties between the
Cayman Islands and the United States.
Dividend Policy
The
declaration and payment of dividends will be at the discretion of
our Board of Directors and will depend on our results of operations
and cash flows, our financial position and capital requirements,
general business conditions, rating agency guidelines (if
applicable), any legal, tax, regulatory and contractual
restrictions on the payment of dividends, and any other factors
considered relevant by our Board of Directors. Our ability to pay
dividends will also depend on the requirements of any future
financing agreements to which we may be a party and the ability of
our reinsurance subsidiary to pay dividends to us. Although
Oxbridge Re Holdings Limited is not subject to any significant
legal prohibitions on the payment of dividends, Oxbridge
Reinsurance Limited, our reinsurance subsidiary, is 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 Oxbridge
Reinsurance Limited is $500. As of December 31, 2016, Oxbridge
Reinsurance Limited exceeded the minimum requirement. By law,
Oxbridge Reinsurance Limited is restricted from paying a dividend
if such a dividend would cause its net worth to drop to less than
the required minimum.
29
The
following table shows the frequency and amount of all cash
dividends declared on our ordinary shares for the two most recent
fiscal years.
|
Declaration
Date
|
Payment
Date
|
Record
Date
|
Per Share
Amount
|
|
2016
|
|
|
|
|
January
20, 2016
|
March
30, 2016
|
March
1, 2016
|
$0.12
|
|
May 12,
2016
|
June
30, 2016
|
June
20, 2016
|
$0.12
|
|
August
13, 2016
|
September
30, 2016
|
September
23, 2016
|
$0.12
|
|
November
12, 2016
|
December
30, 2016
|
December
23, 2016
|
$0.12
|
|
2015
|
|
|
|
|
January
28, 2015
|
March
27, 2015
|
February
27, 2015
|
$0.12
|
|
May 12,
2015
|
June
29, 2015
|
June 8,
2015
|
$0.12
|
|
August
11, 2015
|
September
30, 2015
|
September
7, 2015
|
$0.12
|
|
November
9, 2015
|
December
30, 2015
|
December
7, 2015
|
$0.12
|
Any
future determination to declare cash dividends will be made at the
discretion of our Board of Directors, subject to applicable laws,
and will depend on a number of factors, including our financial
condition, results of operations, capital requirements, contractual
restrictions, general business conditions and other factors that
our Board of Directors may deem relevant.
Unregistered Sales of Equity Securities
There
were no sales of unregistered securities during the year ended
December 31, 2016.
Use of Proceeds
On
March 26, 2014, we closed our initial public offering of 4,884,650
units (the “Units”), with each Unit consisting of one
ordinary share and one warrant at a price of $6.00 per Unit. The
offer and sale of all of the Units in the initial public offering
were registered under the Securities Act of 1933, as amended,
pursuant to our Registration Statement on Form S-1, as amended
(File No. 333-193577) and subsequent Registration Statement on Form
S-1 (File No. 333-194648) pursuant to Rule 462(b), which were
declared effective on February 28, 2014 and March 18, 2014,
respectively. We received aggregate net proceeds of approximately
$26.9 million after deducting commissions and offering expenses. As
of December 31, 2016, we used approximately $15 million of the net
proceeds of the offering to capitalize our reinsurance
subsidiary.
30
Issuer Purchases of Equity Securities
On May 12, 2016, the
Company’s Board of Directors authorized a plan to repurchase
up to $2,000,000 of the Company’s common shares, inclusive of
commissions and fees.
The plan
expires on December 31, 2017. The table below summarizes the number
of common shares repurchased during the three months ended December
31, 2016 under the share repurchase
plan.
|
For the Month Ended
|
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs (a)
|
Average
Price Paid
Per Share
|
Maximum Dollar
Value of Shares
That
May Yet Be
Purchased Under
The Plans
or Programs (b)
|
|
|
|
|
|
|
31-Oct-16
|
28,162
|
$
4.98
|
1,461,086
|
|
30-Nov-16
|
11,983
|
$
5.04
|
1,400,670
|
|
31-Dec-16
|
25,319
|
$
5.66
|
1,257,373
|
|
|
|
|
|
|
|
65,464
|
$
5.25
|
|
31
ITEM 6
SELECTED FINANCIAL DATA
As a smaller reporting company as defined by Rule 229.10(f)(1) of
the Exchange Act, we are not required to provide the information
under this item and we have elected to exclude this information as
our operating history does not cover the requisite five-year
period.
ITEM 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The
following discussion and analysis is intended to help the reader
understand our business, financial condition, results of
operations, liquidity and capital resources. You should read this
discussion in conjunction with our Consolidated Financial
Statements and the related notes contained elsewhere in this Annual
Report on Form 10-K for the fiscal year ended December 31,
2016.
This discussion contains forward-looking
statements that are not historical facts, including statements
about our beliefs and expectations. These statements are
based upon current plans, estimates and projections. Our
actual results may differ materially from those projected in these
forward-looking statements as a result of various factors. See
“
Forward Looking
Statements
” appearing at
the beginning of this Annual Report on Form 10-K and Item
1A, “
Risk
Factors
.”
General
The
following is a discussion and analysis of our results of operations
for the years ended December 31, 2016 and 2015 and our financial
condition as of December 31, 2016 and 2015. The following
discussion should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this
Annual Report on Form 10-K. References to “we,”
“us,” “our,” “our company,” or
“the Company” refer to Oxbridge Re Holdings Limited and
its wholly-owned subsidiary, Oxbridge Reinsurance Limited, unless
the context dictates otherwise.
Overview and Trends
We are
a Cayman Islands specialty property and casualty reinsurer that
provides reinsurance solutions through our subsidiary, Oxbridge
Reinsurance Limited. 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.
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.
32
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.
Due
to influx of new risk capital from alternative capital market
participants such as hedge funds and pension funds, we believe that
the reinsurance industry is currently over-capitalized, and will
continue in this trend for the foreseeable future. The
over-capitalization of the market is not uniform as there are a
number of insurers and reinsurers that have suffered and continue
to suffer from capacity issues. We continue to assess the
opportunities that may be available to us with insurance and
reinsurance companies with this profile. If the reinsurance market
continues to soften, our strategy is to reduce premium writings
rather than accept mispriced risk, and conserve our capital for a
more opportune environment. Significant rate increases could occur
if financial and credit markets experience adverse shocks that
result in the loss of capital of insurers and reinsurers, or if
there are major catastrophic events, especially in North America.
The persistent low interest rate environment has reduced the
earnings of many insurance and reinsurance companies and we believe
that the continuation of low interest rates, coupled with the
reduction of prior years' reserve redundancies, could cause the
industry to adopt overall higher pricing.
PRINCIPAL REVENUE AND EXPENSE ITEMS
Revenues
We
derive our revenues from two principal sources:
●
premiums
assumed from reinsurance on property and casualty business;
and
●
income
from investments.
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, 2016, one-half of the premiums
will be earned in 2016 and the other half will be earned during
2017.
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.
33
Income
from our investments is primarily comprised of interest income,
dividends and net realized gains on investment securities. Such
income is primarily from the Company’s investments, which
includes investments held in trust accounts that collateralize the
reinsurance policies that we write. The investment parameters for
trust accounts are generally established by the cedant for the
relevant policy.
Expenses
Our
expenses consist primarily of the following:
●
losses
and loss adjustment expenses;
●
policy
acquisition costs and underwriting expenses; and
●
general
and administrative 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 where necessary, 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 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 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.
34
RESULTS
OF OPERATIONS
The following table summarizes our results of operations for the
years ended December 31, 2016 and 2015 (dollars in thousands,
except per share amounts):
|
|
Years Ended December 31,
|
|
|
|
2016
|
2015
|
|
Revenue
|
|
|
|
Assumed
premiums
|
$
15,065
|
14,888
|
|
Change
in loss experience refund payable
|
883
|
(8,294
)
|
|
Change
in unearned premiums reserve
|
2,110
|
173
|
|
|
|
|
|
Net
premiums earned
|
18,058
|
6,767
|
|
Net
realized investment (losses) gains
|
554
|
(325
)
|
|
Net
investment income
|
450
|
337
|
|
Other-than-temporary
impairment losses
|
-
|
(399
)
|
|
|
|
|
|
Total
revenue
|
19,062
|
6,380
|
|
|
|
|
|
Expenses
|
|
|
|
Losses
and loss adjustment expenses
|
14,775
|
-
|
|
Policy
acquisition costs and underwriting expenses
|
286
|
344
|
|
General
and administrative expenses
|
1,420
|
1,435
|
|
|
|
|
|
Total
expenses
|
16,481
|
1,779
|
|
|
|
|
|
Net
income
|
$
2,581
|
4,601
|
|
|
|
|
|
Earnings per share
|
|
|
|
Basic
and Diluted
|
$
0.43
|
0.76
|
|
|
|
|
|
Weighted-average
shares outstanding
|
|
|
|
Basic
and Diluted
|
6,022,985
|
6,056,219
|
|
|
|
|
|
Dividends paid per share
|
$
0.48
|
0.48
|
|
|
|
|
|
|
|
|
|
Performance ratios to net premiums earned:
|
|
|
|
Loss
ratio
|
82
%
|
0
%
|
|
Acquisition
cost ratio
|
1.6
%
|
5.1
%
|
|
Expense
ratio
|
9.4
%
|
26.3
%
|
|
Combined
ratio
|
91.3
%
|
26.3
%
|
|
|
|
|
35
Comparison of the Year Ended December 31, 2016 to Year Ended
December 31, 2016
General
. Net income
for the year ended December 31, 2016 was $2.6 million or $0.43 per
basic and diluted earnings per share compared to a net income of
$4.6 million or $0.76 per basic and diluted earnings per share for
the year ended December 31, 2015. The decrease in net income from
$4.6 million to $2.6 million was primarily due to significant net
underwriting losses experienced during the year ended December 31,
2016, compared to no losses during the year ended December 31,
2015.
Premium
Income
.
Premiums earned
reflects the pro-rata inclusion into income of premiums assumed
(net of loss experience refund) over the life of our reinsurance
contracts.
Net premiums earned for the
year ended December 31, 2016 increased $11.3 million, or 167%, to
$18.1 million, from $6.8 million for year ended December 31, 2015.
The increase in net premiums earned was primarily as a result of
the derecognition of cumulative loss experience refund payable
during the year ended December 31, 2016 as the Company experienced
significant losses under one of its retrospectively rated
multi-year contracts. Such derecognition is recorded in the change
in loss experience refund payable, a component of net premiums
earned.
Losses
Incurred
.
Losses incurred for year ended December 31, 2016
increased $14.8 million as a result of weather-related events
during the year ended December 31, 2016 that significantly impacted
our book of business.
There were no losses incurred during
the year ended December 31, 2015.
Policy Acquisition Costs
and Underwriting Expenses
.
Acquisition
costs represent the amortization of the brokerage fees and federal
excise taxes incurred on reinsurance contracts placed.
Policy acquisition costs and underwriting expenses
for the year ended December 31, 2016 decreased by $58 thousand, or
17%, to $286 thousand from $344 thousand for the year ended
December 31, 2015. The decrease is the result of a
lower
weighted-average acquisition costs on reinsurance contracts in
force during the year ended December 31, 2016, when compared with
the previous year.
General
and Administrative Expenses
.
General and administrative
expenses for the year ended December 31, 2016 decreased marginally
by $15 thousand. The decrease is not considered
material
.
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. See also the analysis above relating
to the growth in premiums assumed.
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 year ended December 31, 2015
to 82% for the year ended December 31, 2016. The increase is wholly
due to effect of weather-events during the year ended December 31,
2016 that affected our book of business.
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
decreased from 5.1% for the year ended December 31, 2015 to 1.6%
for the year ended December 31, 2016. The decrease is due to the
overall lower weighted-average acquisition costs on reinsurance
contracts in force during the year ended December 31, 2016,
compared with year ended December 31, 2015, as well as the impact
of an adjustment to net premiums earned due to the derecognition of
loss experience refund payable mentioned above.
36
Expense Ratio.
The
expense ratio is the ratio of policy acquisition costs, other
underwriting expenses and
general and
administrative expenses to net premiums earned. We use the expense
ratio to measure our operating performance. The expense ratio
decreased from 26.3% for the year ended December 31, 2015 to 9.4%
for the year ended December 31, 2016. The decrease is primarily due
to the increase net premiums earned as a result of the
derecognition of loss experience refund payable on one of our
multi-year retrospectively rated contracts, as mentioned above,
coupled with lower policy acquisition costs.
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. If the combined ratio is at
or above 100%, we are not underwriting profitably and may not be
profitable. The combined ratio increased from 26.3% for the year
ended December 31, 2015 to 91.3% for the year ended December 31,
2016. The increase in the combined ratio is due primarily to
weather-related events affecting our book of business during the
year ended December 31, 2016, partially offset by the impact of
higher net premiums earned due to derecognition of loss experience
refund payable mentioned above. There were no loss events during
the year ended December 31, 2015.
FINANCIAL
CONDITION – DECEMBER 31, 2016 COMPARED TO DECEMBER 31,
2015
Restricted
Cash and Cash Equivalents
.
As of December 31, 2016, our restricted cash and
cash equivalents decreased by $6.9 million, or 23%, to $23.4
million, from $30.3 million as of December 31, 2015. The decrease
is due primarily to the use of collateral by cedant to pay for
losses suffered from weather-related events during the year, in
addition to collateral being returned on expiration of a number of
insurance contracts, partially offset by collateral being placed
for June 1, 2016 renewals.
Investments
.
As of December 31, 2016, our available
for sale securities increased by $1.6 million, or 18%, to $10.9
million, from $9.3 million as of December 31, 2015. The increase is
primarily a result of net purchases of fixed-maturity and equity
securities, coupled with a significant reduction in unrealized
losses on investments in fixed-maturity and equity securities
during the year ended December 31, 2016.
Loss
Experience Refund Payable
.
As of December 31, 2016, our loss experience
refund payable decreased primarily by $8.4 million, or 85%, to $1.5
million, from $9.9 million at December 31, 2015. The decrease is
due to
the derecognition of loss experience refund payable
under one reinsurance contract, under which significant losses were
experienced during the year ended December 31, 2016, partially
offset by the recognition of a pro-rated liability over the year
ended December 31, 2016 because the absence of loss experience
under certain reinsurance contracts obligates us to refund premium
to the reinsurers.
Reserve for losses and loss
adjustment expense
.
As of December 31, 2016, our reserve
for losses and loss adjustment expenses increased to $8.7 million,
from $0 at December 31, 2015. The increase is wholly due to the
establishment of loss reserves due to loss events occurring during
the year ended December 31, 2016.
37
LIQUIDITY AND CAPITAL RESOURCES
General
We are
organized as a holding company with substantially no operations at
the holding company level. Our operations are conducted through our
sole reinsurance subsidiary, Oxbridge Reinsurance Limited, which
underwrites risks associated with our property and casualty
reinsurance programs. We have minimal continuing cash needs at the
holding company level, with such expenses principally being related
to the payment of administrative expenses and shareholder
dividends. There are restrictions on Oxbridge Reinsurance
Limited’s 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. 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 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
long-term securities that we own in a rising market to generate
liquidity.
As of
December 31, 2016 , 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
plans to issue debt and 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, Oxbridge Reinsurance
Limited is 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
Oxbridge Reinsurance Limited is $500. As of December 31, 2016,
Oxbridge Reinsurance Limited exceeded the minimum required. By law,
Oxbridge Reinsurance Limited 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 years ended December 31, 2016 and 2015 are summarized
below.
Cash Flows for the
Year ended December 31, 2016
(in thousands)
Net
cash provided by operating activities for the year ended December
31, 2016 totaled $416, which consisted primarily of cash received
from net written premiums less cash disbursed for operating
expenses. Net cash provided by investing activities of $6,869 was
primarily due to the net sales of available for sale securities and
collateral withdrawals from trust accounts. Net cash used in
financing activities totaled $3,627 representing net cash dividend
payments and cash used to repurchase ordinary shares under the
Company’s share repurchase plan.
38
Cash Flows for the
Year ended December 31, 2015
(in thousands)
Net
cash provided by operating activities for the year ended December
31, 2015 totaled $8,126, which consisted primarily of cash received
from net written premiums less cash disbursed for operating
expenses. Net cash used in investing activities of $1,951 was
primarily due to the net sales of available for sale securities and
increased collateral deposited in trust accounts. Net cash used in
financing activities totaled $2,908 representing cash dividend
payments.
Share Repurchase Program
On May 12, 2016, the
Board of Directors of Oxbridge Re Holdings Limited (the
“Company”) authorized a share repurchase program (the
“Share Repurchase Program”), pursuant to which the
Company may, from time to time, purchase shares of its ordinary
stock for an aggregate repurchase price not to exceed $2 million.
The plan expires on December 31, 2017. Share repurchases may be
executed through various means, including, without limitation, open
market transactions, privately negotiated transactions or tender
offers
. The repurchases will be
funded from cash on hand or other capital markets sources. The
stock repurchase program may be suspended or discontinued at any
time without prior notice.
The
Company has adopted a Rule 10b5-1 share repurchase plan under the
Securities Exchange Act of 1934 (the “Plan”) in
connection with the Share Repurchase Program. The Plan allows the
Company to repurchase its shares at times when it otherwise might
be prevented from doing so under insider trading laws or because of
self-imposed trading blackout periods. Because repurchases under
the Plan are subject to certain pricing parameters, there is no
guarantee as to the exact number of shares that will be repurchased
under the Plan or that there will be any repurchases pursuant to
the Plan. Subject to applicable regulations, the Company may elect
to amend or cancel the Plan at its discretion.
At
December 31, 2016, there was approximately $1,258,000 available
under the Plan.
OFF-BALANCE
SHEET ARRANGEMENTS
As of
December 31, 2016, 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 United
Stated generally accepted accounting principles (“U.S.
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.
39
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 notes. 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 premium revenues and risk transfer, reserve for
loss and loss adjustment expenses and reporting of deferred
acquisition costs.
Premium Revenue and Risk
Transfer
.
We record
premiums revenue as earned pro-rata over the terms of
the
reinsurance agreements 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.
Loss experience refund
payable
.
Certain
contracts include retrospective provisions that adjust premiums or
result in profit commissions in the event losses are minimal or
zero. Under such contracts, the Company expects to recognize
aggregate liabilities payable to the ceding insurers assuming no
losses occur during the contract period. In accordance with U.S.
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 contract. 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 term, will reduce the liability
should a catastrophic loss event covered by the Company
occu
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 (“IBNR”), we use 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 income 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.
As
at December 31, 2016 our best estimate for reserves for loss and
loss adjustment expenses was $8.7 million, with IBNR representing
approximately 54% of such reserves.
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.
40
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.
JOBS ACT
The
JOBS Act contains provisions that, among other things, reduce
certain reporting requirements for an emerging growth
company. We have determined that, as an emerging growth
company, we will not: (i) provide an auditor’s
attestation report on our system of internal controls over
financial reporting pursuant to Section 404(b);
(ii) provide all of the compensation disclosure that may be
required of non-emerging growth public companies under the
Dodd-Frank Wall Street Reform and Consumer Protection Act;
(iii) comply with any requirement that may be adopted by the
Public Company Accounting Oversight Board regarding mandatory audit
firm rotation or a supplement to the auditor’s report
providing additional information about the audit and the financial
statements; (iv) disclose certain executive
compensation-related items such as the correlation between
executive compensation and performance and comparisons of our Chief
Executive Officer’s compensation to median employee
compensation; or (v) comply with new or revised accounting
standards on the relevant dates on which adoption of such standards
is required for non-emerging growth companies.
We
will continue to be an emerging growth company until the earliest
of: (i) the last day of the fiscal year during which we had
total annual gross revenues of at least $1 billion (as indexed for
inflation); (ii) the last day of the fiscal year following the
fifth anniversary of the date of our initial public offering;
(iii) the date on which we have, during the previous
three-year period, issued more than $1.0 billion in non-convertible
debt; and (iv) the date on which we are deemed to be a
“large accelerated filer,” as defined under the
Exchange Act.
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
As a smaller reporting company as defined by Rule 229.10(f)(1) of
the Exchange Act, we are not required to provide the information
under this item.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
financial statements and supplementary data have been filed as a
part of this Annual Report on Form 10-K as indicated in the Index
to Consolidated Financial Statements and Financial Statement
Schedules appearing on page 65 of this Annual Report on Form
10-K.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
41
ITEM 9A
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under
the supervision and with the participation of our principal
executive officer and our principal financial officer, we have
evaluated the effectiveness of our disclosure controls and
procedures
(as defined in Rules
13a-15(e) and 15d-15(e) of the Exchange Act)
as of the end
of the period covered by this Annual Report on Form 10-K (December
31, 2016 ).
Our disclosure controls
and procedures are intended to ensure that the information we are
required to disclose in the reports that we file or submit under
the Exchange Act is (i) recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules
and forms and (ii) accumulated and communicated to our management,
including the principal executive officer and principal financial
officer to allow timely decisions regarding required
disclosures.
Based
on that evaluation, our principal executive officer and principal
financial officer concluded that, as of the end of the period
covered by this Annual Report on Form 10-K, our disclosure controls
and procedures were effective.
It
should be noted that any system of controls, however well designed
and operated, can provide only reasonable, and not absolute,
assurance that the objectives of the system will be met. In
addition, the design of any control system is based in part upon
certain assumptions about the likelihood of future
events.
Management’s Report on Internal Control Over Financial
Reporting
Management
is responsible for establishing and maintaining adequate internal
control over our financial reporting (as defined in Rule 13a-15(f)
and 15d-15(f) of the Exchange Act). Internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the
United States of America.
Our
internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets, (ii) provide
reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of
America, and that our receipts and expenditures are being made only
in accordance with authorizations of our management and directors,
and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of
our assets that could have a material effect on the financial
statements.
Our management, with the participation of our
Principal Executive Officer and Principal Financial Officer,
conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in
Internal Control
– Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation,
our Principal Executive Officer and Principal Financial Officer
concluded that, as of December 31, 2016, our internal control over
financial reporting was effective.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
This
Annual Report does not include an attestation report of our
independent registered public accounting firm regarding internal
control over financial reporting. Management’s report was not
subject to attestation by our independent registered public
accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit us to provide only
management’s report in this Annual Report.
42
Changes in Internal Control Over Financial Reporting
There
have been no changes in our internal control over financial
reporting that occurred during the fiscal year ended December 31,
2016 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.
ITEM 9B
OTHER INFORMATION
None.
ITEM 10
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Other
than the information regarding our code of ethics set forth below,
the information required by this Item is incorporated herein by
reference to the definitive proxy statement for our 2017 annual
meeting of stockholders to be filed with the SEC not later than 120
days after December 31, 2016.
We
have adopted a code of ethics applicable to all employees and
directors, including our principal executive officer, principal
financial officer and principal accounting officer. We have posted
the text of our code of ethics to our internet website:
www.oxbridgere.com. To access our code of ethics, select
“Investor Information” on our website and then select
“Corporate Governance,” then “Code of
Conduct.” We intend to disclose any change to or waiver from
our code of ethics by posting such change or waiver to our internet
website within the same section as described above.
ITEM 11
EXECUTIVE COMPENSATION
The
information required by this Item is incorporated herein by
reference to the definitive proxy statement for our 2017 annual
meeting of stockholders to be filed with the SEC not later than 120
days after December 31, 2016.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
The
information required by this Item is incorporated herein by
reference to the definitive proxy statement for our 2017 annual
meeting of stockholders to be filed with the SEC not later than 120
days after December 31, 2016.
43
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The
information required by this Item is incorporated herein by
reference to the definitive proxy statement for our 2017 annual
meeting of stockholders to be filed with the SEC not later than 120
days after December 31, 2016.
ITEM 14
PRINCIPAL ACCOUNTING FEES AND SERVICES
The
information required by this Item is incorporated herein by
reference to the definitive proxy statement for our 2017 annual
meeting of stockholders to be filed with the SEC not later than 120
days after December 31, 2016.
ITEM 15
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
Documents Filed as Part of the Report
The Consolidated Financial Statements, other
financial information, financial statement schedules and report of
independent registered public accounting firm have been filed as
part of this Annual Report on Form 10-K as indicated in the
Index to Consolidated Financial Statements and Financial Statement
Schedules appearing
on
page 48 of this Annual Report on Form
10-K.
(b)
Exhibits
Reference is made
to the separate exhibit index contained on pages 45 through 46
filed herewith.
44
Oxbridge Re Holdings Limited
Index to Exhibits
|
Exhibit
|
|
Title
|
|
|
|
|
|
3
|
|
Third Amended and Restated Memorandum and Articles of Association
of Oxbridge Re Holdings Limited, as amended through December 19,
2014 (incorporated by reference to Exhibit 3.1 to Oxbridge Re
Holdings Limited’s Current Report on Form 8-K filed December
24, 2014) (Commission File No. 1-36346).
|
|
|
|
|
|
4.1
|
|
Warrant Agreement, dated March 26, 2014, between Oxbridge Re
Holdings Limited and Broadridge Corporate Issuer Solutions, Inc.
(incorporated by reference to Exhibit 4.1 to Oxbridge Re Holdings
Limited’s Current Report on Form 8-K filed May 28, 2014)
(Commission File No. 1-36346).
|
|
|
|
|
|
4.2
|
|
Form of Warrant Agreement between Oxbridge Re Holdings Limited and
Broadridge Corporate Issuer Solutions, Inc. (incorporated by
reference to Exhibit 4.1 to Oxbridge Re Holdings Limited’s
Registration Statement on Form S-1 filed January 27, 2014)
(Commission File No. 333-193577).
|
|
|
|
|
|
4.3
|
|
Form of Warrant Agreement issued to investors in May/June 2013
Private Placement (incorporated by reference to Exhibit 4.2 to
Oxbridge Re Holdings Limited’s Registration Statement on Form
S-1 filed January 27, 2014) (Commission File No.
333-193577).
|
|
|
|
|
|
10.1
|
|
Lease between 90 North Church Street Ltd. and Oxbridge Re Holdings
Limited dated April 17, 2015 (incorporated by reference to Exhibit
10.1 to Oxbridge Re Holdings Limited’s Annual Report on Form
10-K filed March 17, 2016) (Commission File No.
1-36346).
|
|
|
|
|
|
10.2*
|
|
Oxbridge
Re Holdings Limited 2014 Omnibus Incentive Plan (incorporated by
reference to Exhibit 10.10 to Oxbridge Re Holdings Limited’s
Current Report on Form 8-K filed December 24, 2014) (Commission
File No. 1-36346).
|
|
|
|
|
|
10.4*
|
|
Executive Employment Agreement, dated July 18, 2013, by and between
Oxbridge Re Holdings Limited and Jay Madhu (incorporated by
reference to Exhibit 10.3 to Oxbridge Re Holdings Limited’s
Registration Statement on Form S-1 filed January 27, 2014)
(Commission File No. 333-193577).
|
|
|
|
|
|
10.5*
|
|
Offer of Employment from Oxbridge Re Holdings Limited to Wrendon
Timothy, executed on August 1, 2013 (incorporated by reference to
Exhibit 10.4 to Oxbridge Re Holdings Limited’s Registration
Statement on Form S-1 filed January 27, 2014) (Commission
File No. 333-193577
).
|
|
|
|
|
|
10.6*
|
|
Form of Oxbridge Re Holdings Limited 2014 Omnibus Incentive Plan
Restricted Share Award (incorporated by reference to
Exhibit
10.1 to Oxbridge Re Holdings Limited’s Current Report on Form
8-K filed January 28, 2015) (Commission File No.
1-36346).
|
|
|
|
|
|
10.7*
|
|
Form of Oxbridge Re Holdings Limited 2014 Omnibus Incentive Plan
Share Option Award Agreement (incorporated by reference to
Exhibit 10.2 to Oxbridge Re Holdings Limited’s Current Report
on Form 8-K filed January 28, 2015) (Commission File No.
1-36346).
|
|
|
|
|
|
10.8*
|
|
Amendment dated July 19, 2016 to
Employment Agreement between Jay Madhu and Oxbridge Re Holdings
Limited dated July 18, 2013 (incorporated by reference to
Exhibit 10.31 to Oxbridge Re Holdings Limited’s Quarterly
Report on Form 10-Q filed August 15,2016) (Commission File No.
1-36346).
|
|
|
|
|
|
10.9*
|
|
|
|
|
|
|
|
21
|
|
List of Subsidiaries of Oxbridge Re Holdings Limited (incorporated
by reference to Exhibit 21.1 to Oxbridge Re Holdings
Limited’s Registration Statement on Form S-1 filed January
27, 2014) (Commission File No. 333-193577).
|
|
|
|
|
45
|
31.1
|
|
Certifications of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under
the Securities Exchange Act of 1934.
|
|
|
|
|
|
31.2
|
|
Certifications of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under
the Securities Exchange Act of 1934.
|
|
|
|
|
|
32
|
|
Written Statement of the Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. § 1350.
|
|
|
|
|
|
101
|
|
The following materials from Oxbridge Re Holdings Limited’s
Annual Report on Form 10-K for the fiscal year ended December 31,
2016 are filed herewith, formatted in XBRL (Extensible Business
Reporting Language): (i) Consolidated Balance Sheets, (ii)
Consolidated Statements of Income, (iii) Consolidated Statements of
Comprehensive Income (iv) Consolidated Statements of Cash Flows,
(v) Consolidated Statements of Changes in Shareholders’
Equity and (vi) Notes to Consolidated Financial
Statements.
|
*
Indicates a management contract or compensatory plan or
arrangement.
(c)
Financial
Statement Schedules
The
financial statement schedules and report of independent registered
public accounting firm have been filed as part of this Annual
Report on Form 10-K as indicated in the Index to Consolidated
Financial Statements and Financial Statement Schedules appearing on
page 48 of this Annual Report on Form 10-K.
46
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) 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
|
|
|
|
|
|
|
|
By
|
/s/ JAY MADHU
|
|
|
|
Jay Madhu
|
|
|
|
Chief
Executive Officer and President
(Principal
Executive Officer)
|
|
|
|
|
|
|
Date:
|
March 4, 2017
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report
has been signed below as of March 4, 2017 by the following persons
on behalf of the registrant and in the capacities
indicated:
|
/s/ WRENDON
TIMOTHY
Wrendon
Timothy
Chief
Financial Officer and Secretary
(Principal
Financial Officer and Principal Accounting Officer)
|
|
/s/ JAY
MADHU
Jay
Madhu
Chief
Executive Officer, President and Director
(Principal
Executive Officer)
|
|
|
|
|
|
/s/ PARESH
PATEL
Paresh
Patel
Director
|
|
/s/ KRISHNA
PERSAUD
Krishna
Persaud
Director
|
|
|
|
|
|
/s/ RAY
CABILLOT
Ray
Cabillot
Director
|
|
/s/ ALLAN
MARTIN
Allan
Martin
Director
|
|
|
|
|
|
/s/ MAYUR
PATEL
Mayur
Patel
Director
|
|
|
47
Index to Consolidated Financial Statements and Financial Statement
Schedules
|
|
Form
10-K
Page(s)
|
|
Consolidated
Financial Statements
|
|
|
|
|
|
Report of
Independent Registered Public Accounting Firm
|
F-1
|
|
|
|
|
Consolidated Balance
Sheets at December 31, 2016 and
2015
|
F-2
|
|
|
|
|
Consolidated Statements of Income
for the years ended December 31, 2016
and 2015
|
F-3
|
|
|
|
|
Consolidated
Statements of Comprehensive Income for the years ended
|
|
|
December 31, 2016
and 2015
|
F-4
|
|
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31,
2016
|
|
|
and
2015
|
F-5
|
|
|
|
|
Consolidated
Statements of Changes in Shareholders’ Equity for the years
ended
|
|
|
December 31, 2016
and 2015
|
F-7
|
|
|
|
|
Notes to
Consolidated Financial Statements
|
F-8
|
|
|
|
|
|
|
|
Financial
Statements Schedules
|
|
|
|
|
|
Schedule
I – Summary of Investments
– Other than Investments in Related
Parties
|
F-30
|
|
|
|
|
Schedule
II – Condensed Financial Information of the
Registrant
|
F-31
|
|
|
|
|
Schedule III
– Supplementary Insurance Information
|
F-34
|
|
|
|
|
Schedule IV –
Supplementary Reinsurance Information
|
F-35
|
48
Report
of Independent Registered Public Accounting Firm
Board
of Directors and Shareholders Oxbridge Re Holdings Limited Grand
Cayman, Cayman Islands:
We have
audited the accompanying consolidated balance sheets of Oxbridge Re
Holdings Limited and Subsidiary (the “Company”) as of
December 31, 2016 and 2015, and the related consolidated statements
of income, comprehensive income, changes in shareholders' equity
and cash flows for years then ended. These consolidated financial
statements are the responsibility of the Companyís management.
In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedules
listed in the accompanying index. These financial statements and
schedules are the responsibility of the Companyís management.
Our responsibility is to express an opinion on these consolidated
financial statements and schedules based on our
audits.
We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
the Company at December 31, 2016 and 2015, and the results of its
operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the
United States of America.
Also,
in our opinion, the financial statement schedules, when considered
in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth
therein.
HACKER,
JOHNSON & SMITH PA
Tampa,
Florida
March
4, 2017
F-1
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
(expressed in thousands of U.S. Dollars, except per share and share
amounts)
|
|
At December
31,
|
|
|
|
2016
|
2015
|
|
Assets
|
|
|
|
Investments:
|
|
|
|
Fixed-maturity
securities, available for sale, at fair value (amortized cost:
$6,060 and $3,080, respectively) $
|
6,051
|
3,096
|
|
Equity
securities, available for sale, at fair value (cost: $5,343 and
$7,742, respectively)
|
4,941
|
6,252
|
|
Total
investments
|
10,992
|
9,348
|
|
Cash
and cash equivalents
|
12,242
|
8,584
|
|
Restricted
cash and cash equivalents
|
23,440
|
30,368
|
|
Accrued
interest and dividend receivable
|
48
|
25
|
|
Premiums
receivable
|
4,038
|
4,117
|
|
Deferred
policy acquisition costs
|
88
|
90
|
|
Prepayment
and other receivables
|
98
|
91
|
|
Property
and equipment, net
|
54
|
64
|
|
Total
assets
|
$
51,000
|
52,687
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
Liabilities:
|
|
|
|
Reserve
for losses and loss adjustment expenses
|
$
8,702
|
-
|
|
Loss
experience refund payable
|
1,470
|
9,913
|
|
Unearned
premiums reserve
|
3,461
|
5,571
|
|
Accounts
payable and other liabilities
|
204
|
176
|
|
Total
liabilities
|
13,837
|
15,660
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
Ordinary
share capital, (par value $0.001, 50,000,000 shares authorized;
5,916,149 and 6,060,000 shares issued and outstanding)
|
6
|
6
|
|
Additional
paid-in capital
|
33,034
|
33,657
|
|
Retained
earnings
|
4,534
|
4,838
|
|
Accumulated
other comprehensive loss
|
(411
)
|
(1,474
)
|
|
Total
shareholders’ equity
|
37,163
|
37,027
|
|
Total
liabilities and shareholders’ equity
|
$
51,000
|
52,687
|
See accompanying Notes to Consolidated Financial
Statements
F-2
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
(expressed in thousands of U.S. Dollars, except per share
amounts)
|
|
Years
Ended December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Revenue
|
|
|
|
Assumed
premiums
|
$
15,065
|
14,888
|
|
Change
in loss experience refund payable
|
883
|
(8,294
)
|
|
Change
in unearned premiums reserve
|
2,110
|
173
|
|
|
|
|
|
Net
premiums earned
|
18,058
|
6,767
|
|
Net
realized investment gains (losses)
|
554
|
(325
)
|
|
Net
investment income
|
450
|
337
|
|
Other-than-temporary
impairment losses
|
-
|
(399
)
|
|
|
|
|
|
Total
revenue
|
19,062
|
6,380
|
|
|
|
|
|
Expenses
|
|
|
|
Losses
and loss adjustment expenses
|
14,775
|
-
|
|
Policy
acquisition costs and underwriting expenses
|
286
|
344
|
|
General
and administrative expenses
|
1,420
|
1,435
|
|
|
|
|
|
Total
expenses
|
16,481
|
1,779
|
|
|
|
|
|
Net
income
|
$
2,581
|
4,601
|
|
|
|
|
|
Earnings per share
|
|
|
|
Basic
and Diluted
|
$
0.43
|
0.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per share
|
$
0.48
|
0.48
|
See accompanying Notes to Consolidated Financial
Statements
F-3
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(expressed in thousands of U.S. Dollars)
|
|
Years Ended December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
2,581
|
4,601
|
|
Other
comprehensive income (loss):
|
|
|
|
Change
in unrealized gain on investments:
|
|
|
|
Unrealized
gain (loss) arising during the year
|
1,617
|
(2,215
)
|
|
Other-than-temporary
impairment losses
|
-
|
399
|
|
Reclassification
adjustment for net realized (gains) losses included in net
income
|
(554
)
|
325
|
|
|
|
|
|
Net
change in unrealized loss
|
1,063
|
(1,491
)
|
|
|
|
|
|
Total
other comprehensive income (loss)
|
1,063
|
(1,491
)
|
|
|
|
|
|
Comprehensive
income
|
3,644
|
3,110
|
See
accompanying Notes to Consolidated Financial
Statements
F-4
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
(expressed in thousands of U.S. Dollars)
|
|
Years Ended December 31,
|
|
|
|
2016
|
2015
|
|
Operating activities
|
|
|
|
Net
income
|
$
2,581
|
4,601
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
Stock-based
compensation
|
119
|
117
|
|
Net
amortization of premiums on investments in fixed-maturity
securities
|
21
|
-
|
|
Depreciation
and amortization
|
21
|
18
|
|
Net
realized investment (gains) losses
|
(554
)
|
325
|
|
Other-than-temporary
impairment losses
|
-
|
399
|
|
Change
in operating assets and liabilities:
|
|
|
|
Accrued
interest and dividend receivable
|
(23
)
|
(3
)
|
|
Premiums
receivable
|
79
|
(36
)
|
|
Deferred
policy acquisition costs
|
2
|
42
|
|
Prepayment
and other receivables
|
(7
)
|
(11
)
|
|
Reserve
for loss and loss adjustment expenses
|
8,702
|
-
|
|
Loss
experience refund payable
|
(8,443
)
|
2,780
|
|
Unearned
premiums reserve
|
(2,110
)
|
(173
)
|
|
Accounts
payable and other liabilities
|
28
|
67
|
|
|
|
|
|
Net
cash provided by operating activities
|
$
416
|
8,126
|
|
|
|
|
|
Investing activities
|
|
|
|
Change
in restricted cash and cash equivalents
|
6,928
|
(2,190
)
|
|
Purchase
of fixed-maturity securities
|
(3,111
)
|
(1,101
)
|
|
Purchase
of equity securities
|
(10,024
)
|
(12,029
)
|
|
Proceeds
from sale of equity securities
|
12,968
|
12,272
|
|
Proceeds
from sale of fixed-maturity securities
|
119
|
1,133
|
|
Purchase
of property and equipment
|
(11
)
|
(36
)
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
$
6,869
|
(1,951
)
|
|
|
|
|
|
Financing activities
|
|
|
|
Repurchases
of common stock under share repurchase plan
|
(742
)
|
-
|
|
Cash
dividends paid
|
(2,885
)
|
(2,908
)
|
|
|
|
|
|
Net
cash used in by financing activities
|
$
(3,627
)
|
(2,908
)
|
|
|
|
|
|
(continued)
|
||
F-5
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Consolidated Statements of Cash Flows, continued
(expressed in thousands of U.S. Dollars)
|
|
Years Ended December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
3,658
|
3,267
|
|
Cash
and cash equivalents at beginning of year
|
8,584
|
5,317
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
$
12,242
|
8,584
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
Interest
paid
|
-
|
-
|
|
Income
taxes paid
|
-
|
-
|
|
|
|
|
|
Non-cash investing activities
|
|
|
|
Net
change in unrealized gain (loss) on securities available for
sale
|
1,063
|
(1,491
)
|
See accompanying Notes to Consolidated Financial
Statements
F-6
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Consolidated
Statements of Changes in Shareholders’ Equity
Years ended December 31, 2016 and 2015
(expressed in thousands of U.S. Dollars, except per share
amounts)
|
|
Ordinary
Share Capital
|
|
|
|
|
|
|
|
Shares
|
Amount
|
Additional Paid-in
Capital
|
Retained
Earnings
|
Accumulated
Other
Comprehensive Loss
|
Total Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2014
|
6,000,000
|
6
|
33,540
|
3,145
|
17
|
36,708
|
|
Cash
dividends
|
-
|
-
|
-
|
(2,908
)
|
-
|
(2,908
)
|
|
Net
income
|
-
|
-
|
-
|
4,601
|
-
|
4,601
|
|
Issuance
of restricted stock
|
60,000
|
-
|
-
|
-
|
-
|
-
|
|
Stock-based
compensation
|
-
|
-
|
117
|
-
|
-
|
117
|
|
Total
other comprehensive loss
|
-
|
-
|
-
|
-
|
(1,491
)
|
(1,491
)
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2015
|
6,060,000
|
6
|
33,657
|
4,838
|
(1,474
)
|
37,027
|
|
Cash
dividends
|
-
|
-
|
-
|
(2,885
)
|
-
|
(2,885
)
|
|
Repurchase
and retirement of common stock under share repurchase
plan
|
(143,851
)
|
-
|
(742
)
|
-
|
-
|
(742
)
|
|
Net
income
|
-
|
-
|
-
|
2,581
|
-
|
2,581
|
|
Stock-based
compensation
|
-
|
-
|
119
|
-
|
-
|
119
|
|
Total
other comprehensive income
|
-
|
-
|
-
|
-
|
1,063
|
1,063
|
|
Balance
at December 31, 2016
|
5,916,149
|
6
|
33,034
|
4,534
|
(411
)
|
37,163
|
See accompanying Notes to Consolidated Financial
Statements
F-7
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes
to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
1.
ORGANIZATION
AND BASIS OF PRESENTATION
(a)
Organization
Oxbridge Re
Holdings Limited was incorporated as an exempted company on April
4, 2013 under the laws of the Cayman Islands. Oxbridge Re Holdings
Limited owns 100% of the equity interest in Oxbridge Reinsurance
Limited (the “Subsidiary”), an entity incorporated on
April 23, 2013 under the laws of the Cayman Islands and for which a
Class “C” Insurer’s license was granted on April
29, 2013 under the provisions of the Cayman Islands Insurance Law.
Oxbridge Re Holdings Limited and the Subsidiary (collectively, the
“Company”) have their registered offices at P.O. Box
309, Ugland House, Grand Cayman, Cayman Islands.
The
Company’s ordinary shares and warrants are listed on The
NASDAQ Capital Market under the symbols “OXBR” and
“OXBRW,” respectively.
The
Company operates as a single business segment through the
Subsidiary, which provides collateralized reinsurance to cover
excess of loss catastrophe risks of various affiliated and
nonaffiliated ceding insurers, including Claddaugh Casualty
Insurance Company, Ltd. (“Claddaugh”) and Homeowners
Choice Property & Casualty Insurance Company
(“HCPCI”), which are related-party entities domiciled
in Bermuda and Florida, respectively.
(b)
Basis
of Presentation
The
accompanying consolidated financial statements for the Company have
been prepared in accordance with accounting principles generally
accepted in the United States of America
(“GAAP”)
. All significant
intercompany transactions and balances have been eliminated upon
consolidation.
2.
SIGNIFICANT
ACCOUNTING POLICIES
Use of
Estimates
:
In
preparing the 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 determination of the
reserve for losses and loss adjustment
expenses,
which 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, assessment of
other-than-temporary impairment (“OTTI”) and loss
experience refund payable
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.
F-8
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes
to Consolidated Financial Statements, Continued
2.
SIGNIFICANT
ACCOUNTING POLICIES (continued)
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’s investments consist of fixed-maturity
securities and equity securities, and are classified as
available-for-sale. The Company’s investments are carried at
fair value with changes in fair value included as a separate
component of accumulated other comprehensive loss in
shareholders’ equity.
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 income. 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.
The
Company reviews all securities for other-than-temporary impairment
("OTTI") on a quarterly basis and more frequently when economic or
market conditions warrant such review. When the fair value of any
investment is lower than its cost, an assessment is made to see
whether the decline is temporary of other-than-temporary. If the
decline is determined to be other-than-temporary the investment is
written down to fair value and an impairment charge is recognized
in income in the period in which the Company makes such
determination. For a debt security that the Company does not intend
to sell nor is it more likely than not that the Company will be
required to sell before recovery of its amortized cost, only the
credit loss component is recognized in income, while impairment
related to all other factors is recognized in other comprehensive
income (loss). The Company considers various factors in determining
whether an individual security is other-than-temporarily impaired
(see Note 4).
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;
|
|
|
|
|
|
|
|
|
|
|
|
|
F-9
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements,
Continued
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair value measurement (continued)
|
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 debt
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 common 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
management and the Company’s investment
custodians.
Management
and 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
and does not necessarily correspond to management and the
investment custodians’ perceived risk of that
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 December 31, 2016 and 2015, 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 years ended
December 31, 2016 and 2015, there were no impairments in property
and equipment.
F-10
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes
to Consolidated Financial Statements, Continued
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for
uncollectible receivables
:
Management evaluates credit quality by
evaluating the exposure to individual counterparties, and, 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 as income in the year in which they are
determined. At December 31, 2016 and 2015, no receivables were
determined to be overdue or impaired and, accordingly, no allowance
for uncollectible receivables has been established.
Reserves for
losses
and loss adjustment
expenses
:
The Company
determines its reserves for losses and loss adjustment expenses on
the basis of the claims reported by the Company’s ceding
insurers, and for losses incurred but not reported, if any,
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 income in the period in which they are
determined.
Loss experience
refund payable
:
Certain contracts 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 occur which is covered by the Company.
Premiums
assumed
:
The Company
records premiums assumed, net of loss experience refunds, as earned
pro-rata over the terms of the reinsurance agreements 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.
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 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.
F-11
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes
to Consolidated Financial Statements, Continued
2.
SIGNIFICANT ACCOUNTING POLICIES
(continued)
Premiums assumed (continued)
Reinstatement
premiums that are contractually calculated on a pro-rata basis of
the original premiums are earned over the remaining coverage
period.
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 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 December 31, 2016 and 2015.
Earnings per
share:
Basic
earnings per share has been computed on the basis of the
weighted-average number of ordinary shares outstanding during the
periods presented. Diluted earnings 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 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.
F-12
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes
to Consolidated Financial Statements, Continued
2.
SIGNIFICANT ACCOUNTING POLICIES
(continued)
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
:
Certain 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
|
|
December
31,
|
|
|
|
2016
|
2015
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Cash
on deposit
|
$
6,868
|
$
3,567
|
|
Cash
held with custodians
|
5,374
|
5,017
|
|
Restricted
cash held in trust
|
23,440
|
30,368
|
|
|
|
|
|
Total
|
35,682
|
38,952
|
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 Bank of New York
Mellon and Wells Fargo 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.
F-13
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes
to Consolidated Financial Statements, Continued
4.
INVESTMENTS
The
Company holds investments in fixed-maturity securities and equity
securities that are classified as available for sale. At December
31, 2016 and 2015, the cost or amortized cost, gross unrealized
gains and losses, and estimated fair value of the Company’s
available-for-sale securities by security type were as
follows:
|
|
Cost
or
|
Gross
|
Gross
|
Estimated
|
|
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|
|
Cost
|
Gain
|
Loss
|
Value
($000)
|
|
|
($ in
thousands)
|
|||
|
As of December 31, 2016
|
|
|
|
|
|
Fixed-maturity securities
|
|
|
|
|
|
U.S.
Treasury and agency securities
|
$
6,060
|
$
28
|
$
(37
)
|
$
6,051
|
|
|
|
|
|
|
|
Total
fixed-maturity securities
|
6,060
|
28
|
(37
)
|
6,051
|
|
|
|
|
|
|
|
Mutual
funds
|
400
|
2
|
(6
)
|
396
|
|
Preferred
stocks
|
687
|
8
|
(4
)
|
691
|
|
Common
stocks
|
4,256
|
126
|
(528
)
|
3,854
|
|
|
|
|
|
|
|
Total
equity securities
|
5,343
|
136
|
(538
)
|
4,941
|
|
|
|
|
|
|
|
Total
available for sale securities
|
$
11,403
|
$
164
|
$
(575
)
|
$
10,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
|
|
Fixed-maturity securities
|
|
|
|
|
|
U.S.
Treasury and agency securities
|
$
2,969
|
$
12
|
$
-
|
$
2,981
|
|
Exchange-traded
debt securities
|
111
|
4
|
-
|
115
|
|
|
|
|
|
|
|
Total
fixed-maturity securities
|
3,080
|
16
|
-
|
3,096
|
|
|
|
|
|
|
|
Preferred
stocks
|
1,674
|
15
|
(174
)
|
1,515
|
|
Common
stocks
|
6,068
|
158
|
(1,489
)
|
4,737
|
|
|
|
|
|
|
|
Total
equity securities
|
7,742
|
173
|
(1,663
)
|
6,252
|
|
|
|
|
|
|
|
Total
available for sale securities
|
$
10,822
|
$
189
|
$
(1,663
)
|
$
9,348
|
At
December 31, 2016 and 2015, securities with a fair value of
$3,502,000 and $3,638,000, respectively, are held in trust accounts
as collateral under reinsurance contracts with the Company’s
ceding insurers.
F-14
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes
to Consolidated Financial Statements, Continued
4.
INVESTMENTS
(continued)
Expected maturities will differ from contractual maturities as
borrowers may have the right to call or prepay obligations with or
without penalties. The scheduled contractual maturities of
fixed-maturity securities at December 31, 2016 and 2015 are as
follows:
|
|
Amortized
|
Estimated
|
|
|
Cost
|
Fair Value
|
|
|
($ in thousands)
|
|
|
As of December 31, 2016
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
Due
within one year
|
$
2,970
|
$
2,998
|
|
Due after one year
through five years
|
3,090
|
3,053
|
|
|
|
|
|
|
$
6,060
|
$
6,051
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
Due
after one year through five years
|
$
2,969
|
$
2,981
|
|
Due
after ten years
|
111
|
115
|
|
|
|
|
|
|
$
3,080
|
$
3,096
|
Gross
proceeds received, and the gross realized gains and losses from
sales of available-for-sale securities, for the years ended
December 31, 2016 and 2015 are as follows:
|
|
Gross proceeds
from
|
Gross
Realized
|
Gross
Realized
|
|
|
sales
|
Gains
|
Losses
|
|
|
($
in thousands)
|
||
|
|
|
|
|
|
Year ended December 31, 2016
|
|
|
|
|
Fixed-maturity
securities
|
$
119
|
$
8
|
$
-
|
|
|
|
|
|
|
Equity
securities
|
$
12,968
|
$
1,663
|
$
(1,117
)
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
|
|
|
Fixed-maturity
securities
|
$
1,133
|
$
81
|
$
(251
)
|
|
|
|
|
|
|
Equity
securities
|
$
12,272
|
$
968
|
$
(1,123
)
|
F-15
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes
to Consolidated Financial Statements, Continued
4.
INVESTMENTS
(continued)
The
Company regularly reviews its individual investment securities for
OTTI. The Company considers various factors in determining whether
each individual security is other-than-temporarily impaired,
including:
|
|
●
|
|
the
financial condition and near-term prospects of the issuer,
including any specific events that may affect its operations or
income;
|
|
|
●
|
|
the
length of time and the extent to which the market value of the
security has been below its cost or amortized cost;
|
|
|
●
|
|
general
market conditions and industry or sector specific
factors;
|
|
|
●
|
|
nonpayment
by the issuer of its contractually obligated interest and principal
payments; and
|
|
|
●
|
|
the
Company’s intent and ability to hold the investment for a
period of time sufficient to allow for the recovery of
costs.
|
Securities with gross unrealized loss positions at December 31,
2016 and 2015, aggregated by investment category and length of time
the individual securities have been in a continuous loss position,
are as follows:
|
|
Less
Than Twelve
|
Twelve
Months or
|
|
|||
|
|
Months
|
Greater
|
Total
|
|||
|
As of December 31,
2016
|
Gross
|
Estimated
|
Gross
|
Estimated
|
Gross
|
Estimated
|
|
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
|
|
Loss
|
Value
|
Loss
|
Value
|
Loss
|
Value
|
|
|
($ in
thousands)
|
($ in
thousands)
|
($ in
thousands)
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
U.S.
Treasury and agency securities
|
37
|
3,053
|
-
|
-
|
37
|
3,053
|
|
|
|
|
|
|
|
|
|
Total
fixed-maturity securities
|
37
|
3,053
|
-
|
-
|
37
|
3,053
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
Mutual
funds
|
6
|
193
|
-
|
-
|
6
|
193
|
|
Preferred
stocks
|
4
|
396
|
-
|
-
|
4
|
396
|
|
All
other common stocks
|
84
|
1,142
|
444
|
1,088
|
528
|
2,230
|
|
|
|
|
|
|
|
|
|
Total
equity securities
|
94
|
1,731
|
444
|
1,088
|
538
|
2,819
|
|
|
|
|
|
|
|
|
|
Total
available for sale securities
|
$
131
|
$
4,784
|
$
444
|
$
1,088
|
$
575
|
$
5,872
|
At December 31, 2016 , there were 17 securities in an unrealized
loss position of which 5 of these positions had been in an
unrealized loss position for 12 months or greater.
F-16
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes
to Consolidated Financial Statements, Continued
4.
INVESTMENTS
(continued)
|
|
Less Than Twelve
|
Twelve Months or
|
|
|||
|
|
Months
|
Greater
|
Total
|
|||
|
As of December 31,
2015
|
Gross
|
Estimated
|
Gross
|
Estimated
|
Gross
|
Estimated
|
|
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
|
|
Loss
|
Value
|
Loss
|
Value
|
Loss
|
Value
|
|
|
($
in thousands)
|
($
in thousands)
|
($
in thousands)
|
|||
|
Equity securities
|
|
|
|
|
|
|
|
Preferred
stocks
|
174
|
1,054
|
-
|
-
|
174
|
1,054
|
|
All
other common stocks
|
1,405
|
3,274
|
84
|
316
|
1,489
|
3,590
|
|
|
|
|
|
|
|
|
|
Total
equity securities
|
1,579
|
4,328
|
84
|
316
|
1,663
|
4,644
|
|
|
|
|
|
|
|
|
|
Total
available for sale securities
|
$
1,579
|
$
4,328
|
$
84
|
$
316
|
$
1,663
|
$
4,644
|
At December 31, 2015, there were 24 securities in an unrealized
loss position of which 2 of these positions had been in an
unrealized loss position for 12 months or greater.
The Company believes
there were no fundamental issues such as credit losses or other
factors with respect to its fixed-maturity securities. It is
expected that the securities would not be settled at a price less
than the par value of the investments
and because the Company has the ability and intent
to hold these securities and it is probable that the Company will
not be required to sell these securities until a market price
recovery or maturity, the Company does not consider any of its
fixed-maturity securities to be other-than-temporarily impaired at
December 31, 2016 and 2015.
In
determining whether equity securities are other than temporarily
impaired, the Company considers its intent and ability to hold a
security for a period of time sufficient to allow for the recovery
of cost. For the year ended December 31, 2015, the Company
determined that two equity securities were other-than-temporarily
impaired after considering factors such as the length of time each
security had been in an unrealized loss position, the extent of the
decline and the near term prospect for recovery alongside other
factors. As a result, the Company recognized impairment losses of
$399,000 for year ended December 31, 2015. There were no impairment
losses recorded for the year ended December 31, 2016.
F-17
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes
to Consolidated Financial Statements, Continued
4.
INVESTMENTS
(continued)
Assets Measured at Estimated Fair Value on a Recurring
Basis
The following table presents information about the Company’s
financial assets measured at estimated fair value on a recurring
basis that is reflected in the consolidated balance sheets at
carrying value. The table indicates the fair value hierarchy of the
valuation techniques utilized by the Company to determine such fair
value as of December 31, 2016 and 2015:
|
|
Fair Value Measurements Using
|
|
||
|
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Total
|
|
As of December 31,
2016
|
($ in thousands)
|
|||
|
Financial
Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
12,242
|
$
-
|
$
-
|
$
12,242
|
|
|
|
|
|
|
|
Restricted cash and cash equivalents
|
$
23,440
|
$
-
|
$
-
|
$
23,440
|
|
|
|
|
|
|
|
Fixed-maturity securities:
|
|
|
|
|
|
U.S.
Treasury and agency securities
|
6,051
|
-
|
-
|
6,051
|
|
|
|
|
|
|
|
Total
fixed-maturity securities
|
6,051
|
-
|
-
|
6,051
|
|
|
|
|
|
|
|
Mutual
funds
|
396
|
-
|
-
|
396
|
|
Preferred
stocks
|
691
|
-
|
-
|
691
|
|
All
other common stocks
|
3,854
|
-
|
-
|
3,854
|
|
|
|
|
|
|
|
Total
equity securities
|
4,941
|
-
|
-
|
4,941
|
|
|
|
|
|
|
|
Total
available for sale securities
|
10,992
|
-
|
-
|
10,992
|
|
|
|
|
|
|
|
Total
|
$
46,674
|
$
-
|
$
-
|
$
46,674
|
F-18
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes
to Consolidated Financial Statements, Continued
4.
INVESTMENTS
(continued)
|
|
Fair Value Measurements Using
|
|
||
|
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Total
|
|
As of December 31, 2015
|
($ in thousands)
|
|||
|
Financial
Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
8,584
|
$
-
|
$
-
|
$
8,584
|
|
|
|
|
|
|
|
Restricted cash and cash equivalents
|
$
30,368
|
$
-
|
$
-
|
$
30,368
|
|
|
|
|
|
|
|
Fixed-maturity securities:
|
|
|
|
|
|
U.S.
Treasury and agency securities
|
2,981
|
-
|
-
|
2,981
|
|
Exchange-traded
debt securities
|
115
|
-
|
-
|
115
|
|
|
|
|
|
|
|
Total
fixed-maturity securities
|
3,096
|
-
|
-
|
3,096
|
|
|
|
|
|
|
|
Preferred
stocks
|
1,515
|
-
|
-
|
1,515
|
|
All
other common stocks
|
4,737
|
-
|
-
|
4,737
|
|
|
|
|
|
|
|
Total
equity securities
|
6,252
|
-
|
-
|
6,252
|
|
|
|
|
|
|
|
Total
available for sale securities
|
9,348
|
-
|
-
|
9,348
|
|
|
|
|
|
|
|
Total
|
$
48,300
|
$
-
|
$
-
|
$
48,300
|
5.
TAXATION
Under
current Cayman Islands law, no corporate entity, including the
Company and the Subsidiary, is obligated to pay taxes in the Cayman
Islands on either income or capital gains. The Company and the
Subsidiary 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
the Subsidiary or their operations, or to the ordinary shares or
related obligations, until April 23, 2033 and May 17, 2033,
respectively.
The
Company and its subsidiary 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.
F-19
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes
to Consolidated Financial Statements, Continued
6.
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 years ending December 31, 2016
and 2015.
|
|
Year ended
|
|
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
$
-
|
-
|
|
Incurred
related to:
|
|
|
|
Current
year
|
14,775
|
-
|
|
Prior
year
|
-
|
-
|
|
Total
incurred
|
14,775
|
-
|
|
Paid
related to:
|
|
|
|
Current
year
|
(6,073
)
|
-
|
|
Prior
year
|
-
|
-
|
|
Total
paid
|
(6,073
)
|
-
|
|
Balance,
end of year
|
$
8,702
|
-
|
The
reserves for losses and LAE are 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.
F-20
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements,
Continued
6.
RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES (
continued)
The
following table discloses information about the Company’s
incurred and paid claims development as of December 31, 2016, net
of reinsurance, as well as cumulative claim frequency and the total
of incurred-but-not-reporting and expected development on reported
claims included within the net incurred claims amounts.
A claim is defined as a reported loss from a cedant on an
excess-of-loss reinsurance contract arising from a loss event for
which the Company records a paid loss or case reserve.
The
Company operates a single business segment, being property
catastrophe reinsurance.
|
Property Catastrophe Reinsurance
|
|
|
|
|
|
|
|
|
|
|||
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
Incurred Losses and Loss Adjustment
Expenses
|
December
31, 2016
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
of Incurred-but-Not-Reported
Liabilities
Plus Expected
Development
on
Reported Claims
|
Cumulative
Number of Reported Claims
|
||||
|
|
|
|
|
|
|
|
|
|
|
( dollars in thousands) |
|
|
|
Accident Year
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
$14,775
|
|
|
$4,704
|
|
5
|
|
|
Cumulative
Paid Losses and Loss Adjustment
Expenses
For the
Year Ended December 31,
|
|
|
|
(in
thousands)
|
|
|
Accident Year
|
|
2016
|
|
2016
|
|
$
6,073
|
|
|
|
|
|
Reserve for loss and loss adjustment expenses at December 31,
2016
|
$
8,702
|
|
F-21
OXBRIDGE
RE HOLDINGS LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements,
Continued
6.
RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES (
continued)
The
following table shows the historical average annual percentage
payout of claims as at December 31, 2016. This is the
Company’s first year of experience underwriting
losses.
|
|
Average
Annual Percentage Payout of Incurred Claims by Age
|
|
|
|
|
Years
|
1
|
|
|
|
|
Property
Catastrophe Reinsurance
|
41
%
|
7.
EARNINGS
PER SHARE
A summary of the numerator and denominator of the basic and diluted
earnings per share is presented below (dollars in thousands except
per share amounts):
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
Numerator:
|
|
|
|
Net
earnings
|
$
2,581
|
4,601
|
|
|
|
|
|
Denominator:
|
|
|
|
Weighted
average shares - basic
|
6,022,985
|
6,056,219
|
|
Effect
of dilutive securities - Stock options
|
-
|
-
|
|
Shares
issuable upon conversion of warrants
|
-
|
-
|
|
Weighted
average shares - diluted
|
6,022,985
|
6,056,219
|
|
Earnings
per shares - basic
|
$
0.43
|
0.76
|
|
Earnings
per shares - diluted
|
$
0.43
|
0.76
|
For the years ended December 31, 2016 and 2015, 215,000 options to
purchase 215,000 ordinary shares and 180,000 options to purchase
180,000 ordinary shares, respectively, were anti-dilutive as the
sum of the proceeds, including unrecognized compensation expense,
exceeded the average market price of the Company’s ordinary
share during the periods presented.
For the years ended December 31, 2016 and 2015, 8,230,700 warrants
to purchase an aggregate of 8,230,700 ordinary shares were not
dilutive because the exercise price of $7.50 exceeded the average
market price of the Company’s ordinary share during the
periods presented.
GAAP requires the Company to use the two-class method in computing
basic earnings 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 per share
during periods of net income.
F-22
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements,
Continued
8.
SHAREHOLDERS’
EQUITY
On
February 28, 2014, the Company’s Registration Statement on
Form S-1, as amended, relating to the initial public offering of
the Company’s units was declared effective by the SEC. The
Registration Statement covered the offer and sale by the Company of
4,884,650 units, each consisting of one ordinary share and one
warrant (“Unit”), which were sold to the public on
March 26, 2014 at a price of $6.00 per Unit. The ordinary shares
and warrants comprising the Units began separate trading on May 9,
2014. The ordinary shares and warrants are traded on The NASDAQ
Capital Market under the symbols “OXBR” and
“OXBRW,” respectively. One warrant may be exercised to
acquire one ordinary share at an exercise price equal to $7.50 per
share on or before March 26, 2019. At any time after September 26,
2014 and before the expiration of the warrants, the Company at its
option may cancel the warrants in whole or in part, provided that
the closing price per ordinary share has exceeded $9.38 for at
least ten trading days within any period of twenty consecutive
trading days, including the last trading day of the
period.
The
initial public offering resulted in aggregate gross proceeds to the
Company of approximately $29.3 million (of which approximately $5
million related to the fair value proceeds on the warrants issued)
and net proceeds of approximately $26.9 million after deducting
underwriting commissions and offering expenses.
The
fair value of the warrants issued in the initial public offering
and initial private placement offering of $1.04 per warrant was
determined by the Black-Scholes pricing model using the following
assumptions: volatility of 48%, an expected life of 5 years,
expected dividend yield of 8% and a risk-free interest rate of
1.69%. There were 8,230,700 warrants outstanding at December 31,
2016 and 2015. No warrants were exercised during the years ended
December 31, 2016 and 2015.
The
Company declared and paid quarterly cash dividends of $0.12 per
ordinary share during each of the four quarters of the year ended
December 31, 2016. The total amount of such dividends
declared and paid during 2016 and 2015 were approximately $2.9
million in each year.
In May 2016, the Company’s Board of Directors authorized a
plan to repurchase up to $2,000,000 of the Company’s ordinary
shares, inclusive of commissions and fees. During the year ended
December 31, 2016, the Company repurchased and retired a total of
143,851 shares at a weighted average price per share of $5.16 under
this authorized repurchase plan. The total cost of shares
repurchased, inclusive of fees and commissions, during the year
ended December 31, 2016 was $742,000.
As of
December 31, 2016 and 2015, 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
the Subsidiary, a dividend from the Subsidiary would likely be
required in order to fund a dividend to the Company’s
shareholders and would require notification to 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. See
also Note 10.
On
January 20, 2017, our Board of Directors declared a quarterly cash
dividend of $0.12 per share payable on March 30, 2017 to
shareholders of record on March 17, 2017.
F-23
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements,
Continued
9.
SHARE-BASED COMPENSATION
The Company currently
has outstanding stock-based awards granted under the 2014 Omnibus
Incentive Plan (the “Plan”).
Under the Plan, the Company has discretion to
grant equity and cash incentive awards to eligible individuals,
including the issuance of up to 1,000,000 of the Company’s
ordinary shares.
At December 31, 2016,
there were 725,000 shares available for grant under the
Plan.
Stock options
Stock options granted and outstanding under the Plan vests
quarterly over four years, and are exercisable over the contractual
term of ten years.
A summary of the stock option activity for the years ended December
31, 2016 and 2015 is as follows (option amounts not in
thousands):
|
|
|
|
Weighted-
|
|
|
|
|
Weighted-
|
Average
|
|
|
|
Number
|
Average
|
Remaining
|
Aggregate
|
|
|
of
|
Exercise
|
Contractual
|
Intrinsic
|
|
|
Options
|
Price
|
Term
|
Value ($000)
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2015
|
-
|
|
|
|
|
Granted
|
180,000
|
$
6
|
|
|
|
Outstanding
at December 31, 2015
|
180,000
|
$
6
|
9
years
|
$
-
|
|
Granted
|
35,000
|
$
6
|
|
|
|
Outstanding
at December 31, 2016
|
215,000
|
$
6
|
8.2
years
|
$
-
|
|
Exercisable
at December 31, 2016
|
98,750
|
$
6
|
8.2
years
|
$
-
|
Compensation expense
recognized for the years ended December 31, 2016 and 2015 totaled
$31,000 and $29,000, respectively, and is included in general and
administrative expenses. At December 31, 2016 and 2015, there was
approximately $67,000 and $87,000, respectively, of total
unrecognized compensation expense related to non-vested stock
options granted under the Plan. The
Company expects to recognize the remaining
compensation expense over a weighted-average period of twenty-six
(26) months.
F-24
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements,
Continued
9.
SHARE-BASED COMPENSATION
(continued)
During
the years ended December 31, 2016 and 2015, 35,000 options and
180,000 options, respectively, were granted with fair value
estimated on the date of grant using the following assumptions and
the Black-Scholes option pricing model:
|
|
2016
|
2015
|
|
|
|
|
|
Expected
dividend yield
|
9.6
%
|
8
%
|
|
Expected
volatility
|
35
%
|
35
%
|
|
Risk-free
interest rate
|
2.03
%
|
1.81
%
|
|
Expected
life (in years)
|
10
|
10
|
|
Per
share grant date fair value of options issued
|
$
0.34
|
$
0.64
|
Restricted Stock Awards
The Company has granted and may grant restricted
stock awards to eligible individuals in connection with their
service to the Company. The terms of the Company’s
outstanding restricted stock grants may include service,
performance and market-based conditions. The fair value of the
awards with market-based conditions is determined using a Monte
Carlo simulation method, which calculates many potential outcomes
for an award and then establishes fair value based on the most
likely outcome. The determination of fair value with respect to the
awards with only performance or service-based conditions is based
on the value of the Company’s stock on the grant date.
Restricted
stock awards granted and outstanding under the Plan vests quarterly
over four years.
Information
with respect to the activity of unvested restricted stock awards
during the years ended December 31, 2016 and 2015 is as follows
(share amounts not in thousands):
|
|
Weighted-
|
|
|
|
Number
of
|
Weighted-
|
|
|
Restricted
|
Average
|
|
|
Stock
|
Grant
Date
|
|
|
Awards
|
Fair
Value
|
|
Nonvested
at January 1, 2015
|
-
|
|
|
Granted
|
60,000
|
$
5.86
|
|
Vested
|
(15,000
)
|
|
|
Nonvested
at December 31, 2015
|
45,000
|
$
5.86
|
|
|
|
|
|
Nonvested
at January 1, 2016
|
45,000
|
|
|
Vested
|
(15,000
)
|
|
|
Nonvested
at December 31, 2016
|
30,000
|
$
5.86
|
F-25
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements,
Continued
9.
SHARE-BASED COMPENSATION
(continued)
Compensation expense
recognized for the years ended December 31, 2016 and 2015 totaled
$88,000, and is included in general and administrative expenses. At
December 31, 2016 and 2015, there was approximately $176,000 and
$264,000, respectively, of total unrecognized compensation expense
related to non-vested restricted stock granted under the Plan.
The
Company expects to
recognize the remaining compensation expense over a
weighted-average period of twenty-four (24)
months.
10.
NET
WORTH FOR REGULATORY PURPOSES
The
Subsidiary is subject to a minimum and prescribed capital
requirement as established by CIMA. Under the terms of its license,
the Subsidiary is required to maintain a minimum and prescribed
capital requirement of $500 in accordance with the
Subsidiary’s approved business plan filed with CIMA. At
December 31, 2016 and 2015, the Subsidiary’s net worth of
$22.9 million and $24.4 million, respectively, exceeded the minimum
and prescribed capital requirement. For the years ended December
31, 2016 and 2015, the Subsidiary’s net income was
approximately $1.2 and $4.4 million, respectively.
The
Subsidiary is not required to prepare separate statutory financial
statements for filing with CIMA, and there were no material
differences between the Subsidiary’s GAAP capital, surplus
and net income, and its statutory capital, surplus and net income
as of December 31, 2016 and 2015 or for the years then
ended.
11.
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 receivables
and accounts payable and accruals, approximate their fair values
due to their short-term nature.
Concentration of underwriting risk
A
substantial portion of the Company’s current reinsurance
business ultimately relates to the risks of two entities domiciled
in Florida in the United States, one of which is under common
directorship; accordingly the Company’s underwriting risks
are not significantly diversified.
F-26
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements,
Continued
11.
FAIR
VALUE AND CERTAIN RISKS AND UNCERTAINTIES (continued)
Credit risk
The
Company is exposed to credit risk in relation to counterparties
that may default on their obligations to the Company. The amount of
counterparty credit risk predominantly relates to premiums
receivable and assets held at the counterparties. The Company
mitigates its counterparty credit risk by using several
counterparties which decreases the likelihood of any significant
concentration of credit risk with any one counterparty. In
addition, the Company is exposed to credit risk on fixed-maturity
debt instruments to the extent that the debtors may default on
their debt obligations.
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.
12.
COMMITMENTS
AND CONTINGENCIES
The
Company has an operating lease for office space located at
Strathvale House,
2
nd
Floor, 90 North
Church Street, Grand Cayman, Cayman Islands. The term of the lease
is thirty-eight months and commenced on April 17, 2015. Rent
expense under this lease for the year ended December 31, 2016 and
2015 was $59,000 and $31,000, respectively, and lease commitments
at December 31, 2016 were $86,000.
The
Company also has an operating lease for residential space at
Britannia Villas #616, Grand Cayman, Cayman Islands that runs
through October 31, 2017. Rent expense under this lease for the
years ended December 31, 2016 and 2015 was $51,600 and $50,600,
respectively, and lease commitments at December 31, 2016 were
$43,000.
F-27
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements,
Continued
13.
RELATED
PARTY TRANSACTIONS
The
Company has entered into reinsurance agreements with Claddaugh and
HCPCI, both of which are related entities through common
directorships. At December 31, 2016 and 2015, included within loss
experience refund payable and unearned premiums reserve on the
consolidated balance sheets are the following related-party
amounts:
|
|
December
31,
|
|
|
|
2016
|
2015
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Loss
experience refund payable
|
$
1,470
|
$
6,510
|
|
Unearned
premiums reserve
|
$
1,417
|
$
1,392
|
During
the years ended December 31, 2016 and 2015, included within assumed
premiums, change in loss experience refund payable and change in
unearned premiums reserve on the consolidated statements of income
are the following related-party amounts:
|
|
December
31,
|
|
|
|
2016
|
2015
|
|
|
(in
thousands)
|
|
|
Revenue
|
|
|
|
Assumed
premiums
|
$
3,400
|
$
3,340
|
|
Change
in loss experience refund payable
|
$
(2,520
)
|
$
(2,594
)
|
|
Change
in unearned premiums reserve
|
$
(25
)
|
$
721
|
F-28
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements,
Continued
14.
PROPERTY
AND EQUIPMENT, NET
Property and equipment, net consist of the following (in
thousands):
|
|
At December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
|
|
|
|
Leasehold
improvements
|
$
21
|
21
|
|
Furniture
and Fixtures
|
38
|
38
|
|
Motor
vehicle
|
21
|
21
|
|
Computer
equipment and software
|
26
|
15
|
|
Total,
at cost
|
106
|
95
|
|
less
accumulated depreciation and amortization
|
(52
)
|
(31
)
|
|
Property
and equipment, net
|
$
54
|
64
|
15.
SUBSEQUENT
EVENTS
We
evaluate all subsequent events and transactions for potential
recognition or disclosure in our financial statements.
Except
as disclosed in Note 8 of these consolidated financial statements,
there were no other events subsequent to December 31, 2016 for
which disclosure was required.
F-29
SCHEDULE
I
OXBRIDGE
RE HOLDINGS LIMITED AND SUBSIDIARY
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31,
2016
(expressed
in thousands of U.S. dollars)
|
Type of investment
|
Cost or
Amortized
Cost
|
Fair
Value |
Balance Sheet
Value
|
|
Fixed-maturity securities
|
|
|
|
|
U.S.
Treasury and agency securities
|
$
6,060
|
$
6,051
|
$
6,051
|
|
|
|
-
|
-
|
|
|
|
|
|
|
Total
fixed-maturity securities
|
6,060
|
6,051
|
6,051
|
|
|
|
|
|
|
Mutual
Funds
|
400
|
396
|
396
|
|
Preferred
stocks
|
687
|
691
|
691
|
|
Common
stocks
|
4,256
|
3,854
|
3,854
|
|
|
|
|
|
|
Total
equity securities
|
5,343
|
4,941
|
4,941
|
|
|
|
|
|
|
|
|
|
|
|
Total
investments
|
$
11,403
|
$
10,992
|
10,992
|
F-30
SCHEDULE
II
|
OXBRIDGE RE HOLDINGS LIMITED
|
|||||||||||
|
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
|
|||||||||||
|
CONDENSED BALANCE SHEET - PARENT COMPANY ONLY
|
|||||||||||
|
(expressed in thousands of U.S. Dollars)
|
|
|
At
December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
6,360
|
5,543
|
|
Investments,
available for sale, at fair value
|
7,490
|
5,710
|
|
Investment
in subsidiary
|
22,894
|
24,431
|
|
Accrued
interest and dividend receivable
|
41
|
18
|
|
Due
from subsidiary
|
439
|
1,354
|
|
Prepayment
and other receivables
|
89
|
82
|
|
Property
and equipment, net
|
54
|
64
|
|
Total
assets
|
$
37,367
|
37,202
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
Liabilities:
|
|
|
|
Accounts
payable and other liabilities
|
204
|
175
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
Total
shareholders’ equity
|
37,163
|
37,027
|
|
Total
liabilities and shareholders’ equity
|
$
37,367
|
37,202
|
F-31
SCHEDULE
II (continued)
|
OXBRIDGE RE HOLDINGS LIMITED
|
|
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
|
|
CONDENSED STATEMENTS OF INCOME - PARENT COMPANY ONLY
|
|
(expressed in thousands of U.S. Dollars)
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
Net
investment income
|
$
413
|
300
|
|
Net
realized investment gains (losses)
|
646
|
(69
)
|
|
Other-than-temporary
impairment losses
|
-
|
(399
)
|
|
Other
income
|
1,776
|
1,788
|
|
Operating
expenses
|
(1,410
)
|
(1,425
)
|
|
Income
before equity in earnings of subsidiary
|
1,425
|
195
|
|
Equity
in earnings of subsidiary
|
1,156
|
4,406
|
|
|
|
|
|
Net
income
|
$
2,581
|
4,601
|
F-32
SCHEDULE
II (continued)
|
OXBRIDGE RE HOLDINGS LIMITED
|
|
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
|
|
CONDENSED STATEMENT OF CASH - PARENT COMPANY ONLY
|
|
(expressed in thousands of U.S. Dollars)
|
|
|
|
|
Years
Ended December 31,
|
|
|
|
2016
|
2015
|
|
Operating activities
|
|
|
|
Net
income
|
$
2,581
|
4,601
|
|
Adjustments
to reconcile net income to net cash provided/(used in) by operating
activities:
|
|
|
|
Equity
in earnings of subsidiary
|
(1,156
)
|
(4,406
)
|
|
Stock-based
compensation
|
119
|
117
|
|
Net
amortization of premiums on investments in fixed-maturity
securities
|
21
|
-
|
|
Depreciation
|
21
|
18
|
|
Net
realized investment (gains) losses
|
(646
)
|
69
|
|
Other-than-temporary
impairment losses
|
-
|
399
|
|
Change
in operating assets and liabilities:
|
|
|
|
Accrued
interest and dividend receivable
|
(23
)
|
(3
)
|
|
Due
from subsidiary
|
915
|
(239
)
|
|
Prepayment
and other receivables
|
(7
)
|
(10
)
|
|
Accounts
payable and other liabilities
|
29
|
66
|
|
|
|
|
|
Net
cash provided by / (used in) operating activities
|
$
1,854
|
612
|
|
|
|
|
|
Investing activities
|
|
|
|
Dividends
from subsidiary
|
2,880
|
2,880
|
|
Purchase
of available for sale securities
|
(13,136
)
|
(10,670
)
|
|
Proceeds
from sale of available for sale securities
|
12,857
|
11,524
|
|
Purchase
of property and equipment
|
(11
)
|
(36
)
|
|
|
|
|
|
Net
cash provided by / (used in) investing activities
|
$
2,590
|
3,698
|
|
|
|
|
|
Financing activities
|
|
|
|
Repurchases
of common stock under share repurchase plan
|
(742
)
|
-
|
|
Cash
dividends paid
|
(2,885
)
|
(2,908
)
|
|
|
|
|
|
Net
cash used in financing activities
|
$
(3,627
)
|
(2,908
)
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
817
|
1,402
|
|
Cash
and cash equivalents at beginning of year
|
5,543
|
4,141
|
|
Cash
and cash equivalents at end of year
|
$
6,360
|
5,543
|
F-33
SCHEDULE
III
|
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARY
|
||
|
SUPPLEMENTARY INSURANCE INFORMATION
|
||
|
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
|
(expressed in thousands of U.S.
dollars)
|
Year
|
Segment
|
Deferred
acquisition costs, net |
Reserves
for losses
and
loss
adjustment
expenses – gross |
Unearned
premiums
–
gross
|
Net
premiums
earned |
Investment
income (loss) |
Net
losses,
and loss adjustment expenses |
Amortization
of deferred acquisition costs |
Operating
expenses |
Gross
premiums
written
|
|
2016
|
Property
& Casualty
|
$
88
|
$
8,702
|
$
3,461
|
$
18,058
|
$
1,004
|
$
14,775
|
$
286
|
$
1,420
|
$
15,065
|
|
2015
|
Property
& Casualty
|
$
90
|
$
-
|
$
5,571
|
$
6,767
|
$
(387
)
|
$
-
|
$
344
|
$
1,435
|
$
14,888
|
F-34
SCHEDULE
IV
|
|
|
|
|
Premiums
|
Premiums
|
|
Percentage
|
|
|
|
|
Direct
|
ceded to
|
assumed
|
|
of amount
|
|
|
|
|
Gross
|
other
|
from other
|
|
assumed to
|
|
Year
|
|
Segment
|
Premiums
|
companies
|
companies
|
Net amount
|
net
|
|
2016
|
|
Property
& Casualty
|
$
-
|
$
-
|
$
15,065
|
$
15,065
|
100
%
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
Property
& Casualty
|
$
-
|
$
-
|
$
14,888
|
$
14,888
|
100
%
|
F-35
TABLE OF CONTENTS
Part IItem 1 BusinessItem 1A Risk FactorsItem 1B Unresolved Staff CommentsItem 2 PropertiesItem 3 Legal ProceedingsItem 4 Mine Safety DisclosuresPart IIItem 5 Market For Registrant S Common Equity, Related Shareholder Matters and Issuer Purchases Of Equity SecuritiesItem 6 Selected Financial DataItem 7 Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A Quantitative and Qualitative Disclosures About Market RiskItem 8 Financial Statements and Supplementary DataItem 9 Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A Controls and ProceduresItem 9B Other InformationPart IIIItem 10 Directors, Executive Officers and Corporate GovernanceItem 11 Executive CompensationItem 12 Security Ownership Of Certain Beneficial Owners and Management and Related Shareholder MattersItem 13 Certain Relationships and Related Transactions, and Director IndependenceItem 14 Principal Accounting Fees and ServicesPart IVItem 15 Exhibits, Financial Statement Schedules