We underwrite reinsurance contracts on a selective and opportunistic basis as opportunities arise based on our goal of achieving favorable long-term returns on equity for our shareholders. Our goal is to achieve long-term growth in book value per share by writing business that generates attractive underwriting profits relative to the risk we bear. Unlike other insurance and reinsurance companies, we do not intend to pursue an aggressive investment strategy and instead will focus our business on underwriting profits rather than investment profits. However, we intend to complement our underwriting profits with investment profits on an opportunistic basis. Our primary business focus is on fully collateralized reinsurance contracts for property catastrophes, primarily in the Gulf Coast region of the United States, with an emphasis on Florida. Within that market and risk category, we attempt to select the most economically attractive opportunities across a variety of property and casualty insurers. As our capital base grows, however, we expect that we will consider growth opportunities in other geographic areas and risk categories.
Because we employ an opportunistic underwriting and investment philosophy, period-to-period comparisons of our underwriting results may not be meaningful. In addition, our historical investment results may not necessarily be indicative of future performance. Due to the nature of our reinsurance and investment strategies, our operating results will likely fluctuate from period to period.
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, 2014, one-half of the premiums will be earned in 2014 and the other half will be earned during 2015.
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 where necessary, 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.
Comparison of the Year Ended December 31, 2014 to the Period from April 4, 2013 (Date of Incorporation) to December 31, 2013
General. Net income for the year ended December 31, 2014 was $4 million, or $0.82 per basic and diluted share, compared to a net income of $853 thousand, or $0.88 per basic and diluted share, for the period from April 4, 2013 (date of incorporation) to December 31, 2013. The increase in net income of $3.15 million, from $853 thousand to $4 million was primarily due to an increase in net premiums earned coupled with the fact that we began operating and underwriting in June 2013, and as such, only seven months of revenue was recognized during the period from April 4, 2013 (date of incorporation) to December 31, 2013, compared with recognition of one year of revenue in 2014. Additionally, all preopening and organizational costs amounting to $145 thousand were expensed during the period from April 4, 2013 (date of incorporation) to December 31, 2013. Finally, we began investing in fixed-maturity and equity securities during August 2014 and earned $740 thousand of investment income, compared to $0 of investment income in the period from April 4, 2013 (date of incorporation) to December 31, 2013.
Although net income increased for the year ended December 31, 2014 when compared to the period from April 4, 2013 (date of incorporation) to December 31, 2013, the basic and diluted share value fell slightly from $0.88 to $0.82. This was solely due to the higher level of weighted-average outstanding shares during the year ended December 31, 2014, when compared to the period from April 4, 2013 (date of incorporation) to December 31, 2013.
Premium Income. Premiums earned reflects the pro-rata inclusion into income of premiums assumed (net of loss experience refund) over the life of our reinsurance contracts.
Assumed premiums for the year ended December 31, 2014 increased $9.4 million, or 193%, to $14.3 million, from $4.9 million for the period from April 4, (date of incorporation) to December 31, 2013. The growth of assumed premiums, and consequently, the growth of net premiums earned of as indicated above, was driven by continued growth in the number and size of reinsurance contracts placed. Additionally, our initial contracts were effective from June 1, 2013, and as such, premiums for the period from April 4, 2013 (date of incorporation) to December 31, 2013 represent only seven months of revenue, when compared to year ended December 31, 2014. During the year ended December 31, 2014, we successfully completed our initial public offering and consequently, we were able to underwrite additional fully-collateralized reinsurance contracts with part of the proceeds of the initial public offering.
Losses Incurred. There were no losses incurred for the year ended December 31, 2014 or period from April 4, 2013 (date of incorporation) to December 31, 2013.
Policy Acquisition Costs and Underwriting Expenses. Acquisition costs represent the amortization of the brokerage fees and federal excise taxes incurred on reinsurance contracts placed. Additionally, included within policy acquisition costs and underwriting expenses for the year ended December 31, 2014, are underwriting consulting expenses of $150 thousand, which were paid under the terms of an agreement with Resonant Consultants, Inc.
Policy acquisition costs and underwriting expenses for the year ended December 31, 2014 increased $335 thousand, or 349%, to $431 thousand, from $96 thousand for the period from April 4, 2013 (date of incorporation) to December 31, 2013. The increase is due in part to the underwriting consulting expenses as mentioned above, as well as the increase in assumed premiums, which also resulted in increased brokerage fees and federal excise taxes (which are paid with respect to new reinsurance contracts). Additionally, our initial reinsurance contracts were effective from June 1, 2013, and as such, acquisition costs and underwriting expenses for the period from April 4, 2013 (date of incorporation) to December 31, 2013 represent only seven months of acquisition costs, when compared to the year ended December 31, 2014.
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. There were no losses incurred during the year ended December 31, 2014 or period from April 4, 2013 (date of incorporation) to December 31, 2013.
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 6.5% for the period from April 4, 2013 (date of incorporation) to December 31, 2013 to 8.9% for the year ended December 31, 2014. This increase is due primarily to the recording of underwriting consulting expenses of $150 thousand for the year ended December 31, 2014 as well as the placement of additional reinsurance contracts during the year ended December 31, 2014.
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 of 32.4% and 32.7% for the year ended December 31, 2014 and period from April 4, 2013 (date of incorporation) to December 31, 2013 is the same as the expense ratio above, given that we have not experienced losses.
Investments. We had no investments at December 31, 2013. As of December 31, 2014, we had investment securities available for sale with a fair value of $11.8 million. During the year ended December 31, 2014, the Investment Committee of our Board of Directors approved the purchase of fixed-maturity and equity securities, which are included within our investment guidelines.
Shareholders’ Equity. As of December 31, 2014, shareholders’ equity increased by $29.3 million to $36.7 million, or 392%, from $7.5 million at December 31, 2013. The increase is due to the net proceeds received upon completion of our initial public offering on March 26, 2014 as well as our net income of $4 million for the year ended December 31, 2014 offset by dividends paid to shareholders of $1.7 million. See the disclosure in Note 6 of the notes to the Consolidated Financial Statements included within this Annual Report on Form 10-K for additional information.
Since inception, we have financed our cash flow requirements through the proceeds from the issuance of our securities and net premiums received. In May 2013, we issued and sold 1,115,350 ordinary shares in a private placement to a group of accredited investors, including certain of our officers and directors, for an aggregate purchase price of approximately $6.7 million. During the year ended December 31, 2014, our cash positions increased by approximately $4.6 million primarily as a result of the completion of our initial public offering on March 26, 2014 and the use of approximately half of the proceeds from our initial public offering to increase the statutory capital and surplus of our insurance subsidiary and to use as collateral under our new reinsurance contracts. We believe our cash from the proceeds from the issuance of our securities, net premiums and investment income will be sufficient to cover our cash outflows for at least the next 12 months.
For the year ended December 31, 2014 and period from April 4, 2013 (date of incorporation) to December 31, 2013, the net cash provided by operating activities was $8.7 million and $4.2 million, respectively. The increase in operating cash was primarily driven by our continuous operating profitability over the year ended December 31, 2014, compared with only seven months of operations during the period from April 4, 2013 (date of incorporation) to December 31, 2013.
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, 2014, 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.
(1) On October 1, 2013, we entered into an operating lease agreement for residential space at Britannia Villas #616, Grand Cayman, Cayman Islands. The original term of the lease, which commenced on October 1, 2013, was 13 months. The lease was extended for another 12 months under substantially the same terms and conditions. Rent expense under this lease for year ended December 31, 2014 was $50,400, and lease commitments at December 31, 2014 were $42,000.
(2) On February 3, 2014, we entered into an operating lease agreement for office space at Harbour Place, 103 South Church, Grand Cayman, Cayman Islands. The term of the lease is one year, which commenced on March 1, 2014. Rent expense under this lease for the year ended December 31, 2014 was $30,000 and lease commitments at December 31, 2014 were $6,000.
As of December 31, 2014, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
As with other reinsurers, our operating results and financial condition could be adversely affected by volatile and unpredictable natural and man-made disasters, such as hurricanes, windstorms, earthquakes, floods, fires, riots and explosions. Although we attempt to limit our exposure to levels we believe are acceptable, it is possible that an actual catastrophic event or multiple catastrophic events could have a material adverse effect on our
financial condition, results of operations and cash flows. As described under “CRITICAL ACCOUNTING POLICIES-Reserves for Losses and Loss Adjustment Expenses” below, under United Stated generally accepted accounting principles (“U.S. GAAP”), we are not permitted to establish loss reserves with respect to losses that may be incurred under reinsurance contracts until the occurrence of an event which may give rise to a claim. As a result, only loss reserves applicable to losses incurred up to the reporting date may be established, with no provision for a contingency reserve to account for expected future losses.
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 63 of this Annual Report on Form 10-K.