We were incorporated on June 24, 2013 and we commenced our operations on November 12, 2013. We do not have any operating history prior to 2013.
Selected consolidated statement of operations data, ending consolidated balance sheet data and share data at December 31, 2014 and 2013, for the year ended December 31, 2014 and for the period from June 24, 2013 to December 31, 2013, follows:
(b) We incurred no expenses in 2013 other than $0.7 million of general and administrative expenses during the period from June 24 to December 31 of that year.
The following is a discussion and analysis of our results of operations for the year ended December 31, 2014 and for the period from June 24, 2013 to December 31, 2013, and our financial condition as of December 31, 2014 and 2013. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes thereto included elsewhere in this report.
The following table presents our computations of book value per Common Share (“BVPS”) and FCBVPS as of December 31, 2014 and 2013:
We are a Bermuda exempted limited liability company that, through our subsidiaries, provides collateralized reinsurance in the property catastrophe market and invests in various insurance-linked securities. Our principal objective is to maximize the expected total return for our shareholders, primarily through the payment of dividends, by underwriting a diversified portfolio of short-tail reinsurance contracts and investing in insurance-linked securities with what we believe to be attractive risk and return characteristics. We provide our shareholders with the opportunity to own an alternative asset class whose returns we believe have historically been largely uncorrelated to those of other asset classes, such as global equities, bonds and hedge funds.
During 2014, our first full year of operations, we experienced solid profitability by generating $15.1 million of net income. Overall, we achieved an 8.7% increase in our FCBVPS for the year after taking into account dividends declared on Common Shares and RSUs.
Despite the competitive market conditions we currently face, through the efforts of the Manager thus far in 2015, we believe that we have achieved preferred signings with our business partners. Given our strong balance sheet and the Manager’s disciplined underwriting approach, we believe we are positioned to perform well in 2015 and beyond.
The following discussion should be read in conjunction with the “Risk Factors” contained in Item 1A herein, in particular the risk factor entitled “Our stated catastrophe and enterprise-wide risk management exposures are based on estimates and judgments which are subject to significant uncertainties.”
For certain defined natural catastrophe region and peril combinations, the Manager assesses the probability and likely magnitude of losses using a combination of industry third-party models, CATM® and underwriting judgment. The Manager attempts to model the projected net impact from a single event, taking into account contributions from property catastrophe reinsurance (including retrocessional business), property pro-rata reinsurance and event-linked derivative securities, offset by the net benefit of any reinsurance or derivative protections we purchase and the benefit of premiums.
The table that follows details the projected net impact from single event losses as of January 1, 2015 for selected zones at specified return periods using AIR Worldwide Corporation’s Touchstone 2.0 and CATRADER 16.0, both of which are industry-recognized third-party vendor models. It is important to note that each catastrophe model contains its own assumptions as to the frequency and severity of loss events, and results may vary significantly from model to model.
(1) A “100-year” return period can also be referred to as the 1.0% occurrence exceedance probability (“OEP”), meaning there is a 1.0% chance in any given year that this level will be exceeded. A “250-year” return period can also be referred to as the 0.4% OEP, meaning there is a 0.4% chance in any given year that this level will be exceeded.
The Manager views this approach as a supplement to our single event stress test as it allows for multiple losses from both natural catastrophe and other circumstances and attempts to take into account certain risks that are unrelated to our underwriting activities. Through our modeling, we endeavor to take into account many risks that we face as an enterprise. However, by the very nature of the insurance and reinsurance business, and due to limitations associated with the use of models in general, our simulated result does not cover every potential risk.
Our consolidated results of operations for the year ended December 31, 2014 and for the period from June 24, 2013 to December 31, 2013 were as follows:
Note: For the period from June 24, 2013 (the date of our formation) to December 31, 2013, we had no revenues.
During 2014 we wrote $45.0 million of reinsurance premiums, all of which represented indemnity reinsurance contracts relating to property catastrophe risks. See “Reinsurance Premiums and Acquisition Costs” in Note 1 of the Notes to Consolidated Financial Statements.
Our total reinsurance acquisition costs incurred during 2014 were $7.7 million, representing an acquisition cost ratio of 17.5%. The reinsurance acquisition costs we incurred that were attributable to commissions, brokerage costs and other were $6.5 million, which contributed 14.7 percentage points to our 2014 reinsurance acquisition cost ratio. The reinsurance acquisition costs we incurred that were attributable to profit commissions, which fluctuate based on our loss experience, were $1.2 million, which contributed the remaining 2.8 percentage points to our 2014 reinsurance acquisition cost ratio.
The following table summarizes our general and administrative expenses for the year ended December 31, 2014 and for the period from June 24, 2013 to December 31, 2013:
Our public company expenses incurred during the periods presented consisted primarily of director fees, corporate insurance premiums, audit fees and other expenses associated with being a publicly traded company.
On May 2, 2014, we entered into the Credit Agreement which permits us to borrow up to $20.0 million on a revolving basis for working capital and general corporate purposes. As of December 31, 2014, we had $8.0 million of outstanding borrowings under the Credit Agreement.
We incurred $0.1 million in non-recurring fees in establishing the Credit Agreement and we are subject to an ongoing annual commitment and administrative fee of 0.375% of the facility’s total capacity.
We incurred and paid interest, commitment fees and guarantee fees of $0.1 million during 2014 in connection with the Credit Agreement.
As of December 31, 2014, we held $11.5 million of cash and cash equivalents of which: (i) $10.0 million was pledged to trust accounts established for the benefit of third parties; (ii) $0.4 million was pledged to trust accounts established for the benefit of Blue Water Re (in support of the BW Retrocessional Agreement); and (iii) $1.1 million represented unencumbered cash on hand.
As of December 31, 2014, the Company had $8.0 million of outstanding borrowings under the Credit Agreement. Of these borrowings, $4.0 million was repaid on January 26, 2015, and (while outstanding) was subject to an annual interest rate of 1.33%, and $4.0 million must be repaid no later than April 10, 2015, and is subject to an annual interest rate of 1.32%. See Note 7 of the Notes to Consolidated Financial Statements.
The Company’s January 2015 repayment of $4.0 million of its outstanding borrowings under the Credit Agreement was made with funds received from Blue Capital Re, which were made available to Blue Capital Re in the normal course through the release of funds previously held as collateral. The Company intends to repay the remaining $4.0 million of its outstanding borrowings under the Credit Agreement in April 2015 with funds it expects to receive from Blue Capital Re, which are expected to be made available to Blue Capital Re in the normal course through scheduled releases of funds currently held as collateral.
The Company declared cash dividends per Common Share and RSU of $0.90 during the year ended December 31, 2014. The total amount of dividends paid to holders of Common Shares and RSUs during 2014 was $7.9 million.
On February 9, 2015, the Company declared a fourth “special” dividend of $0.66 per Common Share and RSU, which is payable on March 13, 2015 to holders of record on February 27, 2015. The total amount of the special dividend to be paid in March 2015 is $5.8 million. The Company intends to pay the special dividend with funds it expects to receive from Blue Capital Re, which are expected to be made available to Blue Capital Re in the normal course through scheduled releases of funds currently held as collateral.
Our total shareholders’ equity (or total capital) was $180.5 million and $173.3 million at December 31, 2014 and 2013, respectively. The increase in our total capital during the year ended December 31, 2014 was the result of recording net income of $15.1 million and declaring $7.9 million in dividends to holders of Common Shares and RSUs.
As of December 31, 2014, the Company had $8.0 million of outstanding borrowings under the Credit Agreement. Of these borrowings, $4.0 million was repaid on January 26, 2015 and $4.0 million must be repaid no later than April 10, 2015.
The Company and its subsidiaries are subject to regulation and capital requirements established by supervisors in multiple jurisdictions. See Note 10 of the Notes to Consolidated Financial Statements for detailed information concerning our regulatory and capital requirements.
During the year ended December 31, 2014, our transfers of cash and cash equivalents into trusts established by Blue Water Re in support of our reinsurance obligations and payments of general and administrative expenses exceeded our premium collections and other operating activities by $162.4 million. We also paid $7.9 million in dividends to holders of Common Shares and RSUs and raised $8.0 million pursuant to borrowings under the Credit Agreement during the period.
Our Consolidated Financial Statements have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported and disclosed amounts of our assets and liabilities as of the balance sheet dates and the reported amounts of our revenues and expenses during the reporting periods. We believe the items that require the most subjective and complex estimates are: (1) our loss and LAE reserves; (2) our written and earned reinsurance premiums; and (3) the implications of being an emerging growth company under the JOBS Act. Our accounting policies for these items are of critical importance to our consolidated financial statements.
Our loss and LAE reserves are comprised of case reserves, which are based on claims that have been reported to us, and incurred but not reported (“IBNR”) reserves, which are based on losses that we believe to have occurred but for which claims have not yet been reported to us and which may include a provision for expected future development on our case reserves.
Our case reserve estimates are initially determined on the basis of loss reports we receive from our cedants. Our IBNR reserve estimates are determined using various actuarial methods as well as a combination of historical insurance industry loss experience, estimates of pricing adequacy trends and our professional judgment. The process we use to estimate our IBNR reserves involves projecting our estimated ultimate loss and LAE reserves and then subtracting paid claims and case reserves as notified by the ceding company, to arrive at our IBNR reserves.
The two primary bases we use for estimating the ultimate loss associated with a large event are: (i) actual and precautionary claims advice received from the cedant; and (ii) the nature and extent of the impact the event is estimated to have on the industry as a whole and the affected underlying contracts. Immediately after a loss event, the estimated industry market loss is the primary driver of our ultimate loss from such event. In order to estimate the nature and extent of the event, we rely on output provided by commercially available catastrophe models, as well as proprietary models developed by Montpelier and utilized by the Manager. The exposure of each cedant potentially affected by the event is analyzed on the basis of this output. As the amount of information received from cedants increases during the period following an event, so does our reliance on this information.
We have determined that our best estimates for our gross and net loss and LAE reserves at December 31, 2014 and 2013 were $7.9 million and zero, respectively. The following table summarizes the composition of these reserves at December 31, 2014 and 2013:
All of our reinsurance contracts are currently being written on a losses-occurring basis, which means that all claims occurring during the period of the contract are covered, regardless of the inception dates of the underlying policies. Any claims occurring after the expiration of a losses-occurring contract are not covered.
Some of our reinsurance contracts may include contract terms that require an automatic reinstatement of coverage in the event of a loss. Reinstatement premiums are fully earned or expensed as applicable when a triggering loss event occurs and losses are recorded. We record reinstatement premiums on a basis consistent with our estimates of losses and LAE. During 2014 and 2013 we recorded net written and earned reinstatement premiums totaling $0.3 million and zero, respectively.
We routinely review the creditworthiness of our cedants on the basis of our market knowledge, the cedant’s current financial strength ratings, the timeliness of cedants’ past payments and the status of current balances owing. Based on our reviews, we have determined that we did not require an allowance for uncollectible reinsurance premiums receivable as of December 31, 2014 and 2013.