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, 2018.
The following is a discussion and analysis of our results of operations for the years ended December 31, 2018 and 2017 and our financial condition as of December 31, 2018 and 2017. 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.
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, as well as globally through ILW’s. 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 further growth opportunities in other geographic areas and risk categories.
Due to these natural disasters, some of which were reinsured by the Company, we suffered limit losses on all of our contracts.
● other fee income from management and underwriting performance of the reinsurance side-car
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, 2018, typically one-half of the premiums will be earned in 2018 and the other half will be earned during 2019. 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.
Comparison of the Year Ended December 31, 2018 to Year Ended December 31, 2017
Net premiums earned for the year ended December 31, 2018 decreased $20.8 million, to $2.7 million, from $23.5 million for the year ended December 31, 2017. The decrease is primarily due to the limit losses suffered in 2017 resulting in a significantly lower deployment of capital during 2018, and consequentially lower premiums, when compared with the prior fiscal year.
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, 2018 decreased by $418 thousand, to $263 thousand from $681 thousand for the year ended December 31, 2017. The decrease is primarily due to the limit losses suffered in 2017 resulting in a significantly lower deployment of capital during 2018, and consequentially lower premiums and policy acquisitions costs, when compared with the prior fiscal year.
General and Administrative Expenses. General and administrative expenses for the year ended December 31, 2017 decreased marginally by $43 thousand. The decrease is not considered material.
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 2.9% for the year ended December 31, 2017 to 9.6% for the year ended December 31, 2018. The increase is due to the overall higher weighted-average acquisition costs on reinsurance contracts in force during the year ended December 31, 2018, 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 188.5% for the year ended December 31, 2017 to 310.1% (256.6% when taking Series 2018-1 notes into consideration) for the year ended December 31, 2018. The increase in the combined ratio is due to a significantly higher loss ratio during year ended December 31, 2018 as mentioned above, when compared with the prior fiscal year.
FINANCIAL CONDITION - DECEMBER 31, 2018 COMPARED TO DECEMBER 31, 2017
Restricted Cash and Cash Equivalents. As of December 31, 2018, our restricted cash and cash equivalents increased marginally by $100 thousand, or 3%, to $3.2 million, from $3.1 million as of December 31, 2017. The increase is the net result of withdrawals by the cedants for settlement of losses under the reinsurance contracts during the year ended December 31, 2018 more than offset by premium receipts and collateral deposits.
As of December 31, 2018, 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 and Oxbridge Re NS are 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 each subsidiary is $500. As of December 31, 2018, 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.
Our reinsurance operations exposed us to claims arising out of unpredictable catastrophic events particularly during the third and fourth quarter of 2018. The incidence and severity of catastrophes are inherently unpredictable, but the loss experience of property catastrophe reinsurers has been generally characterized as low frequency and high severity. Claims from catastrophic events have reduced our earnings and caused substantial volatility in our results of operations, and adversely affected our financial condition. The corresponding reduction in our surplus level will impact our ability to write new reinsurance policies at future renewal periods.
Cash Flows for the Year ended December 31, 2018 (in thousands)
Net cash used in operating activities for the year ended December 31, 2018 totaled $6,633, 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 $5,045 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 provided by financing activities totaled $2,000 representing the proceeds on issuance of the Series 2018-1 participating notes during the year ended December 31, 2018.
As of December 31, 2018, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
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 45 of this Annual Report on Form 10-K.