(a) We earned no revenues during 2013, primarily because the completion of the IPO occurred subsequent to the key 2013 renewal periods for the reinsurance industry and prior to the January 1, 2014 annual renewal period. However, through the January 1, 2014 annual renewal period, we had cumulatively deployed $144.2 million, or 90%, of the Deployable Capital in indemnity reinsurance contracts and investments in insurance-linked securities. We expect to deploy substantially all of the remaining Deployable Capital throughout the first half of 2014.
(b) We incurred general and administrative expenses of $0.7 million during the period from June 24, 2013 to December 31, 2013.
(c) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in
The following is a discussion and analysis of our results of operations for the period from June 24, 2013 to December 31, 2013 and our financial condition as of December 31, 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 on Form 10-K.
The following table presents our computation of BVPS at December 31, 2013:
We currently intend to declare our first regular cash dividend, in the amount of $0.30 per Common Share, on or about April 1, 2014. Whereas we currently expect that we will have sufficient retained earnings at that time to declare a dividend of this amount, any such dividend will be dependent upon the actual amount of retained earnings that we have at that time and the approval of the Board. Further, the actual timing of this payment, if any, will also be subject to approval by the Board.
Whereas we experienced significant competition during the key January 1, 2014 renewal season due to relatively light catastrophe losses experienced by our industry in 2013, the terms and conditions we were able to achieve were largely consistent with our expectation of the January 1, 2014 market at the time we completed the IPO.
Since the Managers utilize a combination of third-party models, CATM® and underwriting judgement to project the net impact from single event losses, our internal projections may be higher or lower than those presented in the following table:
The Managers view 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.
We operate as a single business segment through our wholly-owned subsidiaries: (i) Blue Capital Re, a Bermuda exempted limited liability company registered as a Class 3A insurer in Bermuda, which offers collateralized reinsurance; and (ii) Blue Capital Re ILS, a Bermuda exempted limited liability company which conducts hedging and other investment activities, including entering into industry loss warranties and purchasing catastrophe bonds, in support of Blue Capital Re’s operations.
Due to the nature of the underlying exposure, there was no change in the fair value of the ILS Swap during 2013. Therefore, Blue Capital Re ILS did not recognize any revenue or expense from the ILW Swap during 2013.
During the period from June 24, 2013 to December 31, 2013, we were not subject to income taxes in any jurisdiction.
The Company raised $174.0 million of net proceeds from the IPO and the Private Placement. The Company subsequently contributed $160.0 million of such net proceeds to Blue Capital Re (representing the Deployable Capital) and retained $14.0 million for its anticipated cash obligations, including its first three regular quarterly dividend payments to shareholders, for the initial year of its operations.
The Company has no operations of its own and will rely on dividends and distributions from its operating subsidiaries to pay its expenses and dividends to its shareholders beyond the initial year of its operations. There are restrictions imposed by the BMA on the payment of dividends to the Company from its operating subsidiaries as described under “Regulation and Capital Requirements” contained in Item 1 herein. The Company intends to distribute dividends to shareholders in accordance with our dividend policy as described under “Dividend Policy” contained in Item 1 herein, but any determination to pay dividends to our shareholders will be at the discretion of the Board and will depend on a variety of factors, including: (i) the Company’s financial condition, liquidity, results of operations (including its ability to generate cash flow in excess of expenses and its expected or actual net income) and capital requirements; (ii) general business conditions, (iii) legal, tax and regulatory limitations; (iv) contractual prohibitions and other restrictions; and (v) any other factors that the Board deems relevant.
The primary sources of cash for the Company’s operating subsidiaries are capital contributions, premium collections, investment income, sales of investment securities, sales of and recoveries from insurance-linked securities and reinsurance recoveries. The primary uses of cash for the Company’s operating subsidiaries are payments of losses and LAE, acquisition costs, operating expenses, including fees payable to the Managers, ceded reinsurance, purchases of insurance-linked securities and dividends and distributions.
Neither the Company nor its operating subsidiaries currently have a revolving credit facility but any or all or them may enter into a short-term revolving credit facility in the future in order to meet their short-term liquidity needs.
As of December 31, 2013, neither the Company nor its operating subsidiaries had any commitments for operating leases or capital expenditures and neither the Company nor its operating subsidiaries expect any material expenditures of this type during the next 12 months or for the foreseeable future.
The Company and its operating subsidiaries have entered into the Investment Management Agreement, the Underwriting and Insurance Management Agreement and the Administrative Services Agreement with the Managers. 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 Reinsurance Manager the Performance Fee which is calculated and payable in arrears in cash each quarter that such agreement is in effect in an amount, as outlined on page 15 herein.
We currently expect to pay the Investment Manager approximately $0.7 million per year in future periods pursuant to this agreement, which is inclusive of the fee that we are currently paying for the services of our interim Chief Financial Officer. We expect to hire a permanent Chief Financial Officer, who will not be an employee of Montpelier, within 24 months of the IPO. Once we hire a permanent Chief Financial Officer, we expect to pay the Investment Manager approximately $0.3 million per year in future periods pursuant to this agreement.
Certain Termination Provisions Associated with the Foregoing Agreements. We may not terminate the Investment Management Agreement, the Underwriting and Insurance Management Agreement or the Administrative Services Agreement for five years after the completion of the IPO, whether or not the Managers’ performance results are satisfactory. Upon any termination or non-renewal of either of the Investment Management Agreement or the Underwriting and Insurance Management Agreement (other than for a material breach by, or the insolvency of, the applicable Manager), we must pay a one-time termination fee to either the Investment Manager or the Reinsurance Manager, as applicable, equal to 5% of our GAAP shareholders’ equity, calculated as of the most recently completed quarter prior to the date of termination.
During the period from June 24, 2013 to December 31, 2013, we experienced a net increase in cash and cash equivalents of 173.8 million, representing our net proceeds from the IPO and the Private Placement of $174.0 million, less $0.2 million in routine operating cash outflows. We had no investing cash flows during this period.
In addition, Montpelier incurred and paid (on our behalf) a $1.3 million structuring fee to Deutsche Bank Securities Inc., equal to one percent of the gross IPO proceeds that we received from third-parties.
Our loss and LAE reserves will represent our best estimate of future amounts needed to pay our claims and related expenses (such as claim adjusters’ fees and litigation expenses) for insured losses that have occurred. The process of estimating these reserves involve a considerable degree of judgment, and our estimates as of any given date will be inherently uncertain. The Reinsurance Manager will provide us with assistance in establishing, maintaining and settling our loss and LAE reserves.
Estimating loss and LAE reserves will require us to make assumptions regarding reporting and development patterns, frequency and severity trends, claims settlement practices, potential changes in legal environments, inflation, loss amplification and other factors. These estimates and judgments will be based on numerous considerations and will be revised as: (i) we receive changes in loss amounts reported by ceding companies and brokers; (ii) we obtain additional information, experience or other data; (iii) new or improved methodologies are developed; or (iv) laws change.
Our loss and LAE reserves will be comprised of case reserves (which are based on claims that have been reported to us) and incurred but not reported, which we refer to as “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).
Most of our reinsurance contracts will be comprised of business that will have both a low frequency of claims occurrence and a high potential severity of loss, primarily from claims arising from natural and man-made catastrophes. Given the high-severity, low-frequency nature of these events, the losses typically generated therefrom do not lend themselves to traditional actuarial reserving methods, such as statistical calculations of a range of estimates surrounding the best point estimate of our loss and LAE reserves. Therefore, our reserving approach for these types of coverages will be to estimate the ultimate cost associated with a single loss event rather than to analyze the historical development patterns of past losses as a means of estimating ultimate losses for an entire accident year. We will estimate our reserves for these large events on a contract-by-contract basis by means of a review of policies with known or potential exposure to a particular loss event.
To the extent we rely on industry data to aid us in our reserve estimates, there will be a risk that the data may not match our risk profile or that the industry’s overall reserving practices differ from our own and those of our cedants. In addition, reserving may prove to be especially difficult should a significant loss take place near the end of a reporting period, particularly if the loss involves a catastrophic event. These factors will further contribute to the degree of uncertainty in our reserving process.
Since we will rely on ceding company estimates of case and IBNR reserves in the process of establishing our own loss and LAE reserves, we will maintain certain procedures designed to mitigate the risk that this information is incomplete or inaccurate. These procedures may include: (i) comparisons of expected premiums to reported premiums, which will help us to identify delinquent client periodic reports; (ii) ceding company audits to facilitate loss reporting and identify inaccurate or incomplete claim reporting; and (iii) underwriting reviews to ascertain that the losses ceded are covered as provided under the contract terms. We will also utilize catastrophe model outputs and industry market share information to evaluate the reasonableness of reported losses, which will also be compared to loss reports received from other cedants. These procedures will be incorporated in our internal controls processes on an ongoing basis and will be regularly evaluated and amended as market conditions, risk factors and unanticipated areas of exposure develop.
The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an emerging growth company. As an emerging growth company, we are electing not to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision not to take advantage of the extended transition period is irrevocable.
Since we have elected not to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards, our consolidated financial statements may not be comparable to those emerging growth companies that have chosen not to take advantage of the extended transition period afforded by the JOBS Act.