On July 25, 2019, after considering strategic alternatives, the Company announced a plan to cease active operations and pursue an orderly run-off of its liabilities and in-force portfolio and return capital to shareholders. As and when capital becomes available after settlement of existing liabilities and expenses and receipt of any necessary regulatory approvals, the Company expects to declare special distributions to shareholders.
During the seven months ended July 31, 2019, we recorded a net income of $1.7 million, compared to a net loss of $28.6 million in the year ended December 31, 2018.
We declared and paid regular dividends of $0.15 per Common Share and RSU in the first two quarters of 2019, and $0.30 per Common Share and RSU in the first three quarters of 2018.
deterioration in losses incurred related to 2017 catastrophe events Hurricane Irma, and to a lesser extent Hurricane Maria, as well as deterioration in losses incurred related to Typhoon Jebi, which occurred in 2018, partially offset by favorable development related to the 2018 California Wildfires.
Net Assets in Liquidation as at December 31, 2019 of $67.3 million include a negative liquidation valuation adjustment of $2.1 million as an estimate of future cashflows expected from revenues and expenses. This adjustment includes management's estimate of future investment income to be earned of $0.8 million, less estimated future general and administrative expenses of $2.9 million. The Company does not expect to incur significant costs related specifically to the disposal of its assets since they are predominantly comprised of highly liquid collateral balances in the form of cash and cash equivalents under the caption ‘funds held by ceding companies’ on the statement of net assets (liquidation basis).
Prior to ceasing active operations we operated as a single business segment through the Company and its wholly-owned subsidiaries: (i) Blue Capital Re, a Bermuda exempted limited liability company registered as a Class 3A insurer in Bermuda, which offered collateralized reinsurance; and (ii) Blue Capital Re ILS, a Bermuda exempted limited liability company which conducted hedging and other investment activities in support of Blue Capital Re’s operations.
During the seven months ended July 31, 2019 and the year ended December 31, 2018 we wrote $11.1 million and $33.2 million of reinsurance premiums, respectively, all of which represented indemnity reinsurance contracts relating to property catastrophe risks. The decrease in reinsurance premiums written during the current period of 2019, versus that of the comparable 2018 period was due to the current period reflecting seven months of activity, as the company adopted the
The following table sets forth a breakdown of Blue Capital’s gross reinsurance premiums written by geographic area of risks insured for the seven month period ended July 31, 2019 and the year ended December 31, 2018:
(1) "Worldwide" comprises reinsurance contracts that cover risks in more than one geographic area and do not specifically exclude the U.S.
During 2018, we incurred current year losses and loss adjustment expenses of $31.5 million primarily driven by the catastrophe events summarized in the following table together with reported attritional losses and incurred but not reported ("IBNR") reserves. The catastrophe event losses shown are net of recoveries from retrocessional protection purchased by Blue Water Re totaling $19.5 million. In addition, during the year ended December 31, 2018, we recognized $19.0 million of net adverse loss and LAE reserve development for estimated losses incurred related to 2017 catastrophe events, primarily Hurricane Irma, which made landfall in the U.S. in September 2017 following the receipt of new or revised loss information from our cedants.
Our reinsurance acquisition costs relating to commissions, brokerage costs, fronting fees and related costs for the seven months ended July 31, 2019, reduced compared to the costs incurred during the 2018 year due to the lower volume of business written. The increase in the reinsurance acquisition ratio compared to 2018 is mainly due to the higher concentration of quota share business which incurs higher override commissions.
The following table summarizes our general and administrative expenses for the seven month period ended July 31, 2019 and the year ended December 31, 2018.
See Note 9 of the Notes to Consolidated Financial Statements for detailed information regarding the nature of the expenses that we incur pursuant to the Investment Management Agreement, the Underwriting and Insurance Management Agreement and the Administrative Services Agreement.
The Company has no operations of its own and relies on dividends and distributions from its operating subsidiaries to pay its expenses and dividends to its shareholders and to repay any outstanding borrowings under the 2016 Credit Facility. There are restrictions imposed by the BMA on the payment of dividends to the Company from its operating subsidiaries as described below and in Note 8 of the Notes to Consolidated Financial Statements.
The primary sources of cash for Blue Capital Re are premium collections, releases of collateral from trust accounts and investment income. The primary uses of cash for the Blue Capital Re are payments of loss and LAE reserves, reinsurance acquisition costs, general and administrative expenses, and dividends or distributions.
As of December 31, 2019 and 2018, the Company held $0.6 million and $2.2 million of cash and cash equivalents which represented unencumbered cash on hand.
We intend to make further special distributions to shareholders from time to time pursuant to our plans to effect an orderly run-off of the Company. Any future determination to make distributions will remain at the discretion of the Board and will be dependent upon many factors, including: (i) our financial condition, liquidity, run-off performance (including our ability to generate cash flow in excess of our expenses) and capital requirements; (ii) general business conditions, (iii) legal, tax and regulatory limitations; (iv) contractual prohibitions and other restrictions; (v) regulatory approval of Blue Capital Re's dividend payments to the Company; and (vi) any other factors that the Board deems relevant. Subject to the PFIC rules discussed above under "Taxation Risks", for U.S. federal income tax purposes, it is expected that U.S. Holders (as defined below) of our Common Shares generally will recognize gain or loss equal to the difference between (i) the sum of the amount of cash and the fair market value (determined at the time of the distribution) of property, if any, distributed to them and (ii) their adjusted tax basis in our Common Shares. Such gain or loss generally will be computed on a per-share basis. Accordingly, if a U.S. Holder acquired our Common Shares at different prices or at different times, the amount that such shareholder receives on each liquidating distribution will be allocated to each different block of our Common Shares based on the number of shares in each block. Within each block, a cost recovery approach will generally be applied, and a U.S. Holder’s full tax basis of a block will generally be recovered before any gain is recognized with respect to it. When a distribution is one in a series of distributions in complete liquidation, as is expected, these basis recovery rules will apply to the aggregate basis of all of the U.S. Holder's Common Shares, and any loss generally will be recognized by a U.S. Holder only in the tax year in which the shareholder receives our final liquidating distribution. For these purposes, a "U.S. Holder" is any beneficial owner of our Common Shares that, for U.S. federal income tax purposes, is (i) a citizen or individual resident of the United States; (ii) a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States or any state thereof, including the District of Columbia; (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source; or (iv) a trust if such trust has validly elected to be treated as a United States person for U.S. federal income tax purposes or if (1) a court within the United States is able to exercise primary supervision over its administration and (2) one or more United States persons have the authority to control all of the substantial decisions of such trust. See "Risk Factors" contained in Item 1A herein. Holders of our Common Shares should consult their tax advisors regarding the tax consequences to them of the receipt of any distributions from us.
Each of the reinsurance contracts that Blue Capital Re has written is required to be fully-collateralized by cash and cash equivalents or funds held by reinsurance companies. This collateral is not available to Blue Capital Re for any other purpose until the expiration of the applicable reinsurance contract (or, in the event of a covered loss, the resolution of such loss under the applicable contract). Due to buffer loss provisions in the treaties that the Company entered into, collateral associated with more recent loss affected treaties will remain encumbered for the contractual period, impacting the time it will take to run-off the Company.
The table above illustrates the anticipated payment of loss and loss adjustment expenses in line with the Company's plan to complete the liquidation of its net assets and return of capital to shareholders by the end of 2021, and does not reflect the natural run-off of the liabilities on a going concern basis. The Company expects to fund the obligations noted in the table above from releases of cash from funds held by ceding companies.
A summary of our obligations pursuant to each of these agreements follows:
Underwriting and Insurance Management Agreement. Pursuant to the Underwriting and Insurance Management Agreement, we are obligated to pay the Manager a performance fee (the "Performance Fee") which is equal to 20% of our pre-tax, pre-Performance Fee income over a hurdle amount (as defined in the Underwriting and Insurance Management Agreement) and payable in arrears in cash each quarter (or part thereof) that such agreement is in effect.
As of December 31, 2019, if we were to terminate either the Investment Management Agreement or the Underwriting and Insurance Management Agreement, we would be required to pay the Manager a one-time termination fee of approximately $3.4 million. The Company does not expect to incur any termination fees as a result of the decision to pursue an orderly run-off and return capital to shareholders.
The Company and its subsidiaries are subject to regulation and capital requirements established by supervisors in multiple jurisdictions. See Note 8 of the Notes to Consolidated Financial Statements for detailed information concerning our regulatory and capital requirements.
During the year ended December 31, 2018, our net releases of cash and cash equivalents from trusts established by Blue Water Re and cash inflows from other operating activities exceeded our payments of general and administrative expenses by $0.1 million. We also paid $7.9 million in dividends to holders of Common Shares and RSUs partially offset by borrowings under the 2016 Credit Facility of $4.0 million.
We do not have any operations outside of Bermuda and, accordingly, we do not expect to repatriate any cash or other assets from any other jurisdiction.
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.
As a result of the decision to pursue an orderly run-off and return capital to shareholders, the Company's basis of accounting transitioned from going concern basis of accounting to the liquidation basis of accounting in accordance with GAAP, effective July 31, 2019. The liquidation basis of accounting requires that certain of our assets are based on estimates of future revenue streams and certain of our liabilities are based on estimates of losses and expenses yet to be incurred.
The timeliness of loss reporting can be affected by such factors as the nature of the event causing the loss, the location of the loss and where our exposure falls within the cedant’s overall reinsurance program. Our reserving process is highly dependent on the loss information we receive from ceding companies and brokers. Furthermore, during the loss settlement period, which may last several years, additional facts regarding individual claims and trends often will become known, and case law may change, all of which can affect our ultimate expected losses.
We have determined that our best estimates for our gross and net loss and LAE reserves at December 31, 2019 and 2018 were $34.5 million and $49.9 million respectively. The following table summarizes the composition of these reserves at December 31, 2019 and 2018:
Prior to ceasing active operations, we wrote reinsurance contracts on both an excess-of-loss and a pro-rata basis. For excess-of-loss contracts, written premiums are typically based on the deposit or minimum premium specified in the reinsurance contract. For pro-rata contracts, written premiums are recognized based on estimates of ultimate premiums provided by either the ceding companies or the Manager.