Oxbridge Re Holdings Limited (OXBR) Q3 2020 Earnings Report, Transcript and Summary

Good afternoon. Welcome to Oxbridge Re's Third Quarter 2020 Earnings Call. My name is Jamie, and I will be your conference operator this afternoon. [Operator Instructions] Joining us for today's presentation is Oxbridge Re's Chairman, President and Chief Executive Officer, Jay Madhu; and Chief Financial Officer and Corporate Secretary, Wrendon Timothy. Following their remarks, we will open up the call for your questions. I would like to remind everyone that this call is also being broadcast live via webcast and available via webcast replay until Wednesday, November 10, 2021, on the Investor Information section of the Oxbridge Re website at www.oxbridgere.com. Now I would like to turn the call over to Wrendon Timothy, Chief Financial Officer, who will provide the necessary cautions regarding the forward-looking statements that will be made by management during this call. Sir, please proceed.

Thank you, operator. During today's call, there will be forward-looking statements made regarding future events, including Oxbridge Re's future financial performance. These forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995. Words such as anticipates, estimates, expects, intends, plans, projects and other similar words and expressions are intended to signify forward-looking statements. Forward-looking statements are not guarantees of future results and conditions, but rather are subject to various risks and uncertainties. Some of these risks and uncertainties are identified in the company's filing with the SEC. The occurrence of any of these risks and uncertainties could have a material adverse effect on the company's business, financial condition and results of operations. Any forward-looking statements made on this conference call speak only as of the date of this conference call, and except as required by law, the company undertakes no obligation to update any forward-looking statements contained on this call or in any company presentation, even if the company's expectations or any related events, conditions or circumstances change. In addition, on March 11, 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic. The disruption of global commercial activities across all market sectors and the significant declines and volatility in financial markets as a result of the COVID-19 pandemic could result in a material adverse impact on our financial position, results of operations and cash flows. Possible effects may include, but are not limited to, uncertainties with respect to current and future losses, reduction in interest rates and equity market volatility, and ongoing business and financial market impacts of an economic downturn. The insurance industry is likely to experience material losses resulting from COVID-19, which will reduce available capital, and we expect will help to sustain the upward pricing trend for reinsurers that we have seen across many lines of business before COVID-19. However, the ultimate impact on current business in force as well as risks and potential opportunities on future business remains highly unpredictable. Now I would like to turn the call over to our Chairman, President and Chief Executive Officer, Jay Madhu. Jay?

Thank you, Wrendon, and welcome, everyone. Thank you for joining us today. Over the last 9 months, we experienced a world severely challenged by the COVID-19 pandemic. Our key goal during these challenging times is to ensure the health and safety of our employees and our community. The pandemic, however, has not adversely affected our business at this time. We are monitoring our markets and the insurance re -- industry insurance industry, in general, and I will keep you posted on our progress during these difficult times. We are pleased, however, to return to normal business operations during the second quarter after months of disruption. While our operations and business remain stable as we work -- we all work remotely, it is good to get back to our offices and continue the collegial work -- working environment and culture of performance we have developed over the years. Should things change in the future, we will revert to working remotely to ensure the well-being of our team. As we do each quarter, before we get into our results, I would like to take a moment to provide a brief overview of our company. Oxbridge Re Holdings Limited was founded over 6 years ago with a mission to provide reinsurance solutions primarily to property and casualty insurers in the Gulf Coast region of the United States. Through our licensed reinsurance subsidiary, Oxbridge Reinsurance Limited, and our licensed reinsurance sidecar, Oxbridge Re NS, we rightfully collateralize policies to cover property losses from specific catastrophes. As some of you already know, because we write fully collateralized contracts, we can compete effectively with large carriers. We specialize in underwriting low frequency, high severity risks, where we believe sufficient data exists to effectively analyze a risk-return profile of reinsurance contracts. Our objective is to achieve long-term growth in book value per share by writing business on a selective and opportunistic basis that will generate attractive underwriting profits relative to risk. Regarding our investment portfolio, we remain opportunistic and will deploy our capital and favorable return when opportunities arise, which we believe will in turn drive our results through supplemental investment income. Our focus and top priority remains on profitable underwriting. In addition, we continue to make progress in the new year for our wholly owned subsidiary, Oxbridge Re NS, as our reinsurance sidecar. The contract year ended May 31, 2020. Our sidecar investors earned an attractive return of approximately 36%. This year, if loss-free, could be around the same. I will now turn over the call to Wrendon to take us through our financial results. Wrendon?

Thank you, Jay. First, the point to note is our typical contract period is from June 1 to May 31 of the following year. With respect to net premiums earned, third quarter net premiums declined slightly $247,000 from $279,000 last year due to lower capital deployed in the period compared to last year. Net premiums earned for the 9 months ended September 30, 2020, increased $646,000 from $372,000 in the prior year. The increase is due to only 1 month of premium being recognized through the first 9 months of last year as a result of previous accelerated premium recognition when compared to normal premium recognition in 2020. For the third quarter of 2020, we experienced a small loss on net realized investments and a small negative change in fair value of equity securities compared to gains in last year's third quarter. Net investment and other income for the first 9 months of 2020 totaled $90,000 compared to $182,000 last year. Net realized gains of $325,000 were significantly higher than $3,000 last year. However, we experienced a $343,000 decline in fair value for equity securities compared to a gain of $20,000 last year. Total expenses, including loss and loss adjustment expenses, policy acquisition costs and underwriting expenses, and general administrative expenses reduced further in the third quarter and for 9 months of 2020 compared to last year. The reductions in total expenses are due primarily to continued reductions on efficiencies in our G&A cost, which declined to $767,000 through the first 9 months of the year from $808,000 last year. With the higher revenues and reduced expenses, we generated a reduced net loss for the 9 months ended September 30, 2020, of $232,000 or $0.04 per share compared to a net loss of $366,000 or $0.06 per share through the first 9 months of last year. The third quarter 2020 loss increased slightly to $33,000 from $15,000 in last year's third quarter. With respect to financial issues, we use various measures to analyze the growth and profitability of our business operations. For our reinsurance business, we measure underwriting profitability by examining the loss ratio, [ with set ] expense ratio, underwriting expense ratio and combined ratio. Our loss ratio, which measures underwriting profitability, is the ratio of losses and loss adjustment expenses incurred to net premiums earned. Our loss ratio for the third quarter and first 9 months of 2020 was 0%, the same as last year, but there was no loss or loss adjustment expenses in either period. Our acquisition cost ratio, which measures operational efficiency, compared to policy acquisition cost and other underwriting expenses to net premium earned. Our acquisition cost ratio was 10.9% and 11% for the third quarter and first 9 months of 2020, respectively, compared to 11.1% and 11% for the same periods last year. The decrease in the third quarter was due to lower weighted average acquisition costs on reinsurance contracts in force in the period compared to last year's third quarter. The acquisition cost ratio remained unchanged for the 9-month period ended September 30, 2020 and 2019. Our expense ratio, which measures operating performance compared to policy acquisition costs and general administrative expense with net premiums earned. The expense ratio for the third quarter and first 9 months of 2020 were 107.7% and 129.7%, respectively, compared to 105.7% and 228.2% for the same periods last year. The increase in third quarter is due primarily to a lower denominator in net premiums earned as recorded during the third quarter when compared with the previous period. The decrease for the 9 months ended September 30, 2020, was due to reduced general and admin expenses this year and a higher denominator in net premiums earned to date in 2020 when compared with the same period in 2019. Our combined ratio, which is used to measure underwriting performance, is the sum of the loss ratio and the expense ratio. The combined ratio for the 3 and 9 months ended September 30, 2020, was 107.7% and 129.7%, respectively, compared to 105.7% and 228.2% for the same periods in 2019. The increase in the third quarter was due to the lower denominator in net premiums earned compared to last year, and the decrease through the first 9 months of the year resulted from our higher denominated net premiums earned and the reduced total expenses in 2020 when compared with the prior year. Now turning to the balance sheet. Total investments, which comprises of investments in equity securities, totaled $635,000 at September 30, 2020, compared with $692,000 at December 31, 2019. The decrease is due to the sale of equity securities during the current year. At September 30, 2020, cash and cash equivalents and restricted cash and cash equivalents totaled $7.4 million compared with $8 million at December 31, 2019. Total shareholder equity at September 30, 2020, was $7.8 million compared to $8 million at December 31, 2019. At September 30, 2020, our book value per share was $1.37. Now with that, I'd like to turn the call back over to Jay. Jay?

Thank you, Wrendon. Through our reinsurance sidecar, we've been able to add a degree of diversity to our revenue stream and risk, while still having the ability to achieve attractive returns. As I mentioned, we were very pleased with the returns generated for the contract year ended May 31, 2020, where our sidecar investors earned an attractive return of 36%. Going forward, over the long term, we remain opportunistic about the prospects of not only our core business, but also our reinsurance sidecar. We continue to evaluate additional opportunities for growth as well as diversification of risk. So in closing, we continue to reduce our G&A costs. Our sidecar investors continue to earn an attractive return. We remain invested mostly in cash. We are debt-free. We have a strong balance sheet and a solid cash position. And more importantly, we have a real opportunity for growth at a stable and viable business. With that, we are ready to open the call for questions. Operator, please provide the appropriate instructions.

[Operator Instructions] Our first question is from Kent Engelke, Capitol Securities.

Today, I read a story about the catastrophic bond market, how it's basically imploding and how yields are basically spiking. How does that play in regards to -- on the reinsurance market?

Yes. That really gives us a -- by the way, Kent, thanks for the question. That really gives us the opportunity to grow that sidecar business because while the bond market cat bonds are paying anywhere from 6% to 10%, somewhere thereabouts, our sidecar is producing a much higher return. And while folks could argue various different ways on the way the investment looks in terms of various different things, we believe there's significant opportunity to grow that sidecar piece of us. So while it's a slightly different way of investing in the reinsurance business, it definitely bodes well for us.

My understanding that the only way to be involved in reinsurance contracts is being a reinsurance company itself or invest in a sidecar. Is that a correct assumption?

Yes, that is correct.

So I would think with the yields that you're getting and the returns that you're getting, I would think the funds should, like, be flowing in like water based upon the incredible returns that you have, based upon the -- really, your -- another competitor has been knocked off because of issues beyond their control.

The -- we have significant opportunity in the sidecar because a sidecar is actually open to almost everybody within certain constraints. However, this year, when we were marketing for our sidecar, that's when we got -- that's when the world got caught up with COVID. So by the time things settled down, it was too late for us to deploy more capital through that sidecar because that window of raising the money for sidecar had gone through. So hopefully, once we go through next year and once we come up with next year, we'll have that -- we'll have another bite of the apple for this following season. So yes, we look forward to taking advantage of that.

I look forward to the potential profitability coming from that and the like, and as you grow that because, again, my very limited understanding is that it operates like the old fashioned hedge fund 2 and 20, and it's very easy to do the math on the potential profitability that is there. So hope you market it and bring in a gazillion dollars in it.

Look forward -- yes, Kent. Thank you so much.

[Operator Instructions] At this time, this concludes our question-and-answer session. I will now turn the call back over to Mr. Madhu for his closing remarks.

Thank you for joining us on today's call. Before we wrap up, I'd like to thank our employees, business partners and investors for their continued support. I especially want to express a gratitude to our Oxbridge team, who continue to leverage their significant experience to management -- to manage and build our business during these challenging types. It is their dedication and expertise that will get us through these days. And we look forward to updating you on our next call. If you have any further questions, please reach out any time. Thank you again for your time and attention today and your interest in Oxbridge. Operator?

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