Oxbridge Re Holdings Limited (OXBR) Q3 2022 Earnings Report, Transcript and Summary

Good afternoon. Welcome to Oxbridge Re's Third Quarter 2022 Earnings Call. My name is Karen, 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. [Operator Instructions]. I would like to remind everyone that this call is also being broadcast live and available for replay until November 28, 2022, 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 of Oxbridge Re, who will provide the necessary cautions regarding the forward-looking statements that will be made by management during this call.

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. A detailed discussion of the risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled Risk Factors contained in our Form 10-Q filed on September 30, 2022, and our Form 10-Q filed today with Securities and Exchange Commission. The occurrence of any of these risks and uncertainties could have a material adverse effect on the company's business, financial condition and the volatility of earnings, which in turn can cause significant market price and trading volume fluctuations for our security. 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. 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. Before we start, I would like to take a moment to provide a brief overview of our company. Oxbridge Re Holdings Limited was founded over 9 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, Oxford Re NS, we write fully collateralized policies to cover property losses from specific catastrophes. And because we write fully collateralized contracts, we believe 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 the 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. As previously committed, we are also very pleased to have completed our investment in Oxbridge Acquisition Corp. in early August of last year. A special purpose acquisition company, or SPAC, focused on disruptive technology. We believe innovators and entrepreneurs in such disruptive businesses such as DeFi, blockchain, insurtech and artificial intelligence, clean energy offer a real and significant opportunity to build value for our investors over the long term. We look forward to keeping you updated on its progress. Regarding our investment portfolio, we remain opportunistic and will deploy our capital when favorable return opportunities arise. That can contribute to the growth in capital and surplus in our licensed reinsurance subsidiaries over time. Clearly, the current volatility being experienced in the global financial markets is impacting our investment portfolios with unrealized losses so far in 2022. With the negative impact of the last 2 years under COVID-19 pandemic fully receding, economies and business around the world now are faced with inflationary cost pressure and supply chain disruptions. These in turn have resulted in significant declines over the last few months in equity and capital markets around the world. And while our business is not generally impacted by these economic challenges, the equity market declines do have an effect on our net income due to unrealized losses in our equity portfolio as well as unrealized losses on our investment in the SPAC as Wrendon will shortly outline. Having said this, we continue to stay in close touch with our markets and insurance industry to ensure we continue to deliver value to our shareholders. Over the long term, we remain highly optimistic about the prospects for our core reinsurance business and our investment to the SPAC or Oxbridge Acquisition Corp. The largest impact of our results in the third quarter of this year was a devastation caused by Hurricane Ian, which triggered limit losses on our reinsurance contracts. Our thoughts go out to all those affected by this catastrophic event. I'll now turn things over to Wrendon to take us through our financial results.

Thank you, Jay. I would like to remind you that our typical contract period is from June 1 to May 31 of the following year. With respect to net premiums earned, net premiums for the 3 and 9 months ended September 30, 2022, increased due primarily to the acceleration of premium recognition on 2 of our reinsurance contracts due to the limit loss suffered, resulting from the impact of Hurricane Ian as well as higher rates on our reinsurance contracts compared to the prior year. Our net investment income and other income rose moderately through the first 9 months of the year, primarily due to administrative fees, income relating to our SPAC investment. We experienced a $1.3 million unrealized loss in the third quarter, due to the negative fair value change in our equity investment Oxbridge Acquisition Corp., resulting in a negative unrealized loss of $986,000 through the first 9 months of the year. In last year's third quarter, we had recognized $7.1 million unrealized gain, one of the main factors in the change in our net income this year compared to prior year. The investment continues to be booked at a substantial discount due to the current illiquidity of our investment in the SPAC. We also recognized a $355,000 negative change in the fair value of our equity securities at September 30, 2022, due largely to the challenging global capital market environment we are all experiencing. All of the factors taken together resulted in total revenue declining to negative $696,000 for the first 9 months of 2022 compared to $8.2 million last year, which I mentioned included $7.1 million unrelated gain on investment in SPAC. Total expenses included in losses and loss adjustment expenses, policy acquisition costs and general admin expenses were up through the first 9 months of 2022 due primarily to the $1.1 million loss included in the third quarter resulting from [indiscernible] limit loss on 2 insurance -- reinsurance contracts as a result of Hurricane Ian. In addition, we have experienced higher general and admin expenses this year due to personnel cost and inflationary cost pressures. With respect to net income loss, largely due to Hurricane Ian loss and loss adjustment in the third quarter of 2022 and a significant unrealized loss on the tax investments in the third year -- in the third quarter, we experienced a net loss of $2.2 million or $0.37 per share in the third quarter and $2.5 million or $0.43 per share for the 9-month period ended September 30, 2022, compared to net income of $6.5 million and $7 million in the comparable period last year. With respect to our financial ratios as we have discussed before on our investor calls, we use various measures to analyze growth and profitability of our business operations. For our Reinsurance business, we measure underwriting profitability by examining our loss ratio, acquisition ratio, expense ratio and combined ratio. Our loss ratio, which measures underwriting profitability, is the ratio of loss and loss adjustment expenses incurred to net premium spend. The loss ratio increased to 181.6% and 107.8% for the quarter and 9-month period ended September 30, 2022, respectively, compared to 20.9% and 107.8% for the prior-year respective periods. The increases are only due to the limit losses suffered on 2 of our regions contracts as a result of Hurricane Ian, partially offset by a higher denominator in net premiums earned. Our acquisition cost ratio, which measures operational efficiency, compares policy acquisition costs and net premiums earned, this ratio decreased marginally to 11% in the third quarter and increased marginally to 11.1% for the first 9 months of 2022 compared to 11% in the prior-year period. Our expense ratio, which measures operating performance, compares policy acquisition costs and general and admin expenses, with net premiums earned. The expense ratio decreased to 65.7% and 116.6% for the quarter and 9 months ended September 30, 2022, respectively, compared to 86.8% and 122.9% for the prior-year respective period. The decreases are due to a higher denominator in net premiums earned as a result of premium acceleration, partially offset by increased policy acquisition costs and general and administrative expenses in 2022 compared to the prior year. Our combined ratio, which is used to measure underwriting performance, is the sum of the loss ratio and the expense ratio. The combined ratio increased to 247.2% and 224.4% for the quarter and 9-month period ended September 30, 2022, respectively, compared to 224.4% and 143.8% for the prior year respective period. The increase was again due to the increase in the loss ratio during the third quarter resulted in Hurricane Ian limit loss as well as increased general and administrative expenses. Now turning to the balance sheet. Our investment portfolio increased to $625,000 at September 30, 2022 from $577,000 at year-end, primarily due to the net purchase of equity securities, partially offset by unrealized losses we experienced due to the volatile capital markets. Other investment decreased, as mentioned, due to the negative change in the fair value of investment in Oxbridge Acquisition Corp. Cash and cash equivalents -- cash and cash equivalents decreased to $4.4 million at September 30, 2022 compared with $5.4 million at December 31, 2021. Total shareholders' equity at quarter end was $14.3 million or $2.47 book value per share. I'll now turn the call back to Jay to wrap up before we take your questions.

Thank you, Wrendon. As previously mentioned, through our Reinsurance subsidiary, we look to invest close to 50% of our equity. Last year was no different between the reinsurance contracts and through investments, and OAC Sponsor Ltd., the sponsor of the SPAC, we have stuck to that result. While Oxbridge Re is a lead investor in the SPAC, some of the risk capital was laid off to additional investors from the sponsor at a higher share price. The result being that despite the fact that Oxbridge Re contributed approximately 34.7% of the risk capital, Oxbridge economics are significantly maximized, in that it owns approximately 49.6% and 63.1% of the ordinary shares and preferred shares, respectively, of the sponsor, which tracks the Class B shares and private placement warrants, respectively, in the SPAC. Thus our investment further diversifies our business and positions us to capitalize on growth in the emerging disruptive technologies being developed. We are very excited about the future value of our investment and the potential that Oxbridge Acquisition Corp. can bring to our shareholders. Looking ahead, we remain optimistic about the long-term prospects of our business. As always, we continue to evaluate additional opportunities for growth as well as further diversification of our risk profile. So in closing, our business is well diversified, resolved limiting our exposure to reinsurance contracts this year, help significantly in lowering the potential loss by catastrophic damage caused by hurricanes Ian and Nicole. Our investment in Oxbridge acquisition offers an entry into disruptive technology businesses with a focus on blockchain, insurtech, artificial intelligence and clean energy. That investment continues to be booked at a substantial discount to current fair market value. We remain debt-free. We have a strong balance sheet with solid cash position; and most importantly, we have real opportunity based on a viable business model that is based on diversification. We remain opportunistic not only for our business, but also for our broader view of the market. With that, we are ready to open the call for questions. Operator, please provide the appropriate instructions.

[Operator Instructions]. We'll take our first question from Kent Engelke with Capital Securities. It appears we lost Mr. Engelke.

Can you extrapolate a little bit further on the unrealized losses in both the SPAC as well as the investment portfolio? Secondly, what about the -- any of the losses or limit losses on both Ian and Nicole? Are there -- is there going to be anything else coming on down both those hurricanes? And thirdly and perhaps most specifically, you all filed for an extension on the SPAC, I think for another, I think, 9 months, I think it was. Where do we stand on that?

Yes. So Kent, I'll take the hurricane question first. So Hurricane Ian and Nicole, they've been catastrophic for the industry. Various different folks, RMS and CoreLogic have come out saying that the losses -- industry losses are somewhere between $50 billion to $75 billion. While this was a huge catastrophic loss for the industry, Oxbridge didn't have a substantial loss. Oxbridge only lost about $500,000 of capital during the year. And that the reason for that was our resolve to not invest too much in reinsurance contracts. So while it was a loss for us, it could have been a lot larger had we had invested to a higher degree.

So in other words, just to quantify, there's nothing else come further from both those hurricanes as quantified?

That is correct. That is correct. In respect to the losses of the mark-to-market that we have taken, that's exactly what it is, their mark-to-market losses. Based on the trading of the SPAC, based on where we are with that, we thought prudent to take a slight haircut on the market value of the SPAC or the shares rather. So that's basically what you're seeing. So it's not an actual loss. It is just a mark-to-market drawdown is what you're seeing there.

Okay. And my final question, you all filed for the extension on the SPAC. I don't believe I have seen an 8-K on that as of yet. Did you get the -- I think it was an 8- or 9-month extension on that?

Yes. We just filed documents with the SEC this evening after market close. But we did get a 9-month extension, which to us, I think, is excellent. Because it gives us another 9 months to work through the opportunities that are afforded to us.

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

Thank you for joining us on today's call. Before we wrap up, I want to thank our employees, business partners and investors for their continued support. I especially want to express our gratitude to the Oxbridge team, who continues to leverage their significant experience to manage and build our business during these challenging times. We look forward to updating you on our next call. If you have any further questions, please contact us 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 via replay link -- will be available for replay via like available in the Investors section of the company's website. Thank you for joining us today for our presentation. You may now disconnect, and have a great day.