We previously leased office space at 2nd Floor, Strathvale House, Georgetown, Grand Cayman, Cayman Islands. Effective March 1, 2019, we lease office space at Suite 201, 42 Edward Street, Georgetown Grand Cayman. We believe that our current office is suitable and sufficient for us to conduct our operations for the foreseeable future.
The following management 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, 2019.
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.”
The following is a discussion and analysis of our results of operations for the years ended December 31, 2019 and 2018 and our financial condition as of December 31, 2019 and 2018. 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 subsidiaries, Oxbridge Reinsurance Limited and Oxbridge Re NS, unless the context dictates otherwise.
The property and casualty reinsurance industry historically has been cyclical in nature, owing to fluctuations in the supply of capital. During 2019, several developments have caused an increase in the demand for capital, including natural catastrophes in the Caribbean and Japan, increased capital requirements at some Lloyd’s syndicates, and the voluntary withdrawal of capital from some under-performing business.
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, 2019, typically one-half of the premiums will be earned in 2019 and the other half will be earned during 2020. However, in the event of limit losses on our policies, premium recognition will be accelerated to match losses incurred in the period, when there is no possibility of any future treaty-year losses under the contracts.
Loss and loss adjustment expenses are a function of the amount and type of reinsurance contracts we write and of the loss experience of the underlying coverage. As described below, loss and loss adjustment expenses are based on the claims reported by our Company’s ceding insurers, and may include an actuarial analysis of the estimated losses, including losses incurred during the period and changes in estimates from prior periods. Depending on the nature of the contract, loss and loss adjustment expenses may be paid over a period of years.
The following table summarizes our results of operations for the years ended December 31, 2019 and 2018 (dollars in thousands, except per share amounts):
Comparison of the Year Ended December 31, 2019 to Year Ended December 31, 2018
Net premiums earned for the year ended December 31, 2019 decreased $2.1 million, to $617 thousand, from $2.7 million for the year ended December 31, 2018. The decrease is primarily due to the fact that lower capital was deployed during 2019, when compared with the prior fiscal year.
Losses Incurred. Losses incurred for the year ended December 31, 2019 decreased $10 million to $0, from $10 million for the year ended December 31, 2018. The decrease is primarily due to no losses incurred during 2019 when compared with the reinsurance portfolio that suffered limit losses during the year ended December 31, 2018.
General and Administrative Expenses. General and administrative expenses for the year ended December 31, 2019 decreased by $200 thousand to $1.1 million from $1.3 million for the year ended December 31, 2018. The decrease is due to further cost savings initiatives implemented by the Company.
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.
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 decreased from 268.6% for the year ended December 31, 2018 to 0% for the year ended December 31, 2019. The decrease is due to no loss and loss adjustment expenses incurred during the year ended December 31, 2019 compared with limit losses suffered during the prior fiscal year.
Acquisition Cost Ratio. The acquisition cost ratio is the ratio of policy acquisition costs and other underwriting expenses to net premiums earned. The acquisition cost ratio measures our operational efficiency in producing, underwriting and administering our reinsurance business. The acquisition cost ratio increased from 9.6% for the year ended December 31, 2018 to 10.4% for the year ended December 31, 2019. The increase is due to the overall marginally higher weighted-average acquisition costs on reinsurance contracts in force during the year ended December 31, 2019, compared with the prior fiscal year.
Investments. As of December 31, 2019, our total investments decreased by $463 thousand, or 40%, to $692 thousand, from $1.2 million as of December 31, 2018. The decrease is primarily a result of the sale of fixed-maturity securities during the year ended December 31, 2019.
Reserve for losses and loss adjustment expenses. As of December 31, 2019, our reserve for losses and loss adjustment expenses decreased by $4.1 million, or 100%, to $0, from $4.1 million at December 31, 2018. The decrease is wholly due to the settlement of losses on weather-related events occurring in the previous year and commutation of prior contracts, coupled with the fact that there were no significant events and no reported claims in 2019 to necessitate a reserve.
Although Oxbridge Re Holdings Limited is not subject to any significant legal prohibitions on the payment of dividends, Oxbridge Reinsurance Limited and Oxbridge Re NS are subject to Cayman Islands regulatory constraints that affect their ability to pay dividends to us and include a minimum net worth requirement. Currently, the minimum net worth requirement for each subsidiary is $500. As of December 31, 2019, Oxbridge Reinsurance Limited and Oxbridge Re NS exceeded the minimum required. By law, Oxbridge Reinsurance Limited and Oxbridge Reinsurance NS are restricted from paying a dividend if such a dividend would cause its net worth to drop to less than the required minimum.
Cash Flows for the Year ended December 31, 2019 (in thousands)
As of December 31, 2019, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
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.
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.