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, 2017.
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.
On November 12, 2017, the Company’s board of directors decided to suspend the Company’s regular $0.12 quarterly cash dividend, with the suspension to commence with the dividend that would have otherwise been payable for the third quarter of 2017. The board of directors intends to reconsider in the future the payment of a quarterly cash dividend, but the timing of such reconsideration has not been determined, and there is no intention to resume dividend payments in the foreseeable future, if at all. Any decision to resume dividend payments will be dependent upon a variety of factors, including the state of the Company’s business as well as general market conditions at the time of reconsideration, and there is no assurance that dividend payments will recommence.
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 be established by the cedant for the relevant policy.
The following table summarizes our results of operations for the years ended December 31, 2017 and 2016 (dollars in thousands, except per share amounts):
Comparison of the Year Ended December 31, 2017 to Year Ended December 31, 2016
Premium Income. Net premiums earned typically reflects the pro-rata inclusion into income of premiums assumed (net of loss experience refund and premiums ceded) over the life of the reinsurance contracts. However, given the limit losses experienced on all our reinsurance contracts during the year ended December 31, 2017, premiums recognition has not been deferred through the remaining lives of those contracts and have been accelerated into 2017, as there is no possibility of any future treaty-year losses under such contracts.
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, 2017 increased by $395 thousand, to $681 thousand from $286 thousand for the year ended December 31, 2016. The increase is due both to the higher policy acquisition costs resulting from more capital deployed, as well as the acceleration of premium recognition as mentioned above, and the resulting acceleration of policy acquisition costs.
General and Administrative Expenses. General and administrative expenses for the year ended December 31, 2017 decreased marginally by $95 thousand. The decrease is not considered material.
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 81.8% for the year ended December 31, 2016 to 180% for the year ended December 31, 2017. The increase is due to the multiple limit losses suffered during year ended December 31, 2017, partially offset by a higher denominator in net premiums earned, when compared with the prior fiscal year.
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 9.4% for the year ended December 31, 2016 to 8.5% for the year ended December 31, 2017. The decrease is due wholly to a significant increase in net premiums earned partially offset by increased policy acquisition costs as recorded during the year ended December 31, 2017, when compared with the prior fiscal year.
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 91.3% for the year ended December 31, 2016 to 188.5% for the year ended December 31, 2017 The increase in the combined ratio is due to a significantly higher loss ratio during year ended December 31, 2017 as mentioned above, when compared with the prior fiscal year.
FINANCIAL CONDITION - DECEMBER 31, 2017 COMPARED TO DECEMBER 31, 2016
Restricted Cash and Cash Equivalents. As of December 31, 2017, our restricted cash and cash equivalents decreased by $20.3 million, or 87%, to $3.1 million, from $23.4 million as of December 31, 2016. The decrease is the net result of premium receipts and collateral deposits, more than offset by collateral returned on the expiration of reinsurance contracts, coupled with withdrawals by the cedants for settlement of losses under the reinsurance contracts during the year ended December 31, 2017.
Investments. As of December 31, 2017, our available for sale securities decreased by $4.5 million, or 41%, to $6.5 million, from $11 million as of December 31, 2016. The decrease is primarily a result of net sales of fixed-maturity and equity securities during the year ended December 31, 2017.
Reserve for losses and loss adjustment expenses. As of December 31, 2017, our reserve for losses and loss adjustment expenses decreased by $3.9 million, or 44%, to $4.8 million, from $8.7 million at December 31, 2016. The decrease is wholly due to the timely settlement of limit losses on weather-related events occurring during the year ended December 31, 2017.
Unearned Premiums Reserve. As of December 31, 2017, our unearned premiums reserve decreased by $1.5 million, or 42%, to $2.0 million, from $3.5 million at December 31, 2016. The decrease is due primarily to the successful placement of reinsurance contracts for the treaty year effective June 1, 2017 more than offsetting by the acceleration of premium recognition due to the full limit losses on all of our contracts.
We are organized as a holding company with substantially no operations at the holding company level. Our operations are conducted through our 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, if any. There are restrictions on Oxbridge Reinsurance Limited’s ability to pay dividends which are described in more detail below.
As of December 31, 2017, 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, 2017, 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.
Our cash flows from operating, investing and financing activities for the years ended December 31, 2017 and 2016 are summarized below.
Net cash used in operating activities for the year ended December 31, 2017 totaled $26,310, which consisted primarily of cash received from net written premiums less cash disbursed for operating expenses and net loss payments. Net cash provided by investing activities of $24,983 was primarily due to the net sales of available for sale securities and collateral withdrawals from trust accounts to settle losses arising during the year. Net cash used in financing activities totaled $3,152 representing net cash dividend payments and cash used to repurchase ordinary shares under the Company’s share repurchase plan.
On May 12, 2016, the Board of Directors of the Company authorized a share repurchase program (the “Share Repurchase Program”), pursuant to which the Company had been authorized, from time to time, to purchase shares of its common stock for an aggregate repurchase price not to exceed $2 million. The Share Repurchase Program was set to expire on December 31, 2017. On September 28, 2017, the Company discontinued the Share Repurchase Program. Through September 28, 2017, the Company had repurchased an aggregate of 326,413 shares for an aggregate of $1.8 million under the Share Repurchase Program.
The Company had previously 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 allowed 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. The Company has cancelled the Plan effective September 28, 2017.
As of December 31, 2017, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
As at December 31, 2017 our best estimate for reserves for loss and loss adjustment expenses was $4.8 million, with IBNR representing approximately 27% of such reserves. See Note 6 to the consolidated financial statements.
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 49 of this Annual Report on Form 10-K.