We are a Bermuda exempted limited liability company which offers collateralized reinsurance in the property catastrophe market. 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.
Subject to the discretion of the Company’s board of directors (the "Board"), the Company intends to continue to distribute through dividends or repurchases of Common Shares a minimum of 90% of its annual Distributable Income to its holders of Common Shares and RSUs. "Distributable Income," a non-GAAP measure, means GAAP net income plus (minus) non-cash expenses (revenues) recorded in net income for the period.
The majority of our property catastrophe business is originated during the key January and June annual renewal periods. We experienced an overall risk adjusted rate increase of approximately 12% on the risks we wrote during the January 2018 renewals and 4.5% during the June 2018 renewals, reflecting the impact of the 2017 loss events and a reversal of pricing declines experienced in recent years.
The Manager monitors our net exposure to any one catastrophe loss event in any single zone within certain broadly defined major catastrophe zones at each treaty renewal date. Our last major treaty renewal date was January 1, 2019. On January 1, 2019 our estimated net exposures by zone were in compliance with our underwriting guidelines. Namely, our estimated net exposure from any one catastrophe loss event in any individual zone was at or below 50% of our then-projected shareholders’ equity at December 31, 2018.
(1) The Company to the best of its knowledge has not made and does not have current plans to have any contacts with any governments or entities targeted by U.S. sanctions including those applicable to Sudan, Syria and Iran.
We operate 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 offers collateralized reinsurance; and (ii) Blue Capital Re ILS, a Bermuda exempted limited liability company which conducts hedging and other investment activities in support of Blue Capital Re’s operations.
Our reinsurance premiums written and earned during 2018 and 2017 included $4.6 million and $4.7 million, respectively of reinstatement premiums.
During 2017, we established $79.0 million of loss and LAE reserves for estimated losses incurred primarily driven by the catastrophe events summarized in the following table, together with reported attritional losses and incurred but not reported ("IBNR") reserves. In addition, during the year ended December 31, 2017 we recognized $1.1 million of net adverse loss and LAE reserve development for estimated losses incurred primarily during 2016. The prior year loss and LAE development we recognized during 2017 was the result of new or revised loss information received from our cedants in respect of multiple 2016 loss events.
Our reinsurance acquisition costs relating to commissions, brokerage costs, fronting fees and related costs in 2018 were comparable to the costs incurred during 2017. The reinsurance acquisition cost ratio has increased in 2018 compared to 2017 due to greater cessions to third party reinsurers by Blue Water Re which have reduced earned premiums. Our profit commissions incurred, which fluctuate based on our loss experience, were modestly higher in 2018 compared to 2017 as a result of adjustments to older underwriting year treaties.
Our public company expenses incurred during the years presented consisted of director fees, corporate insurance premiums, audit fees, share-based compensation and other expenses associated with being a publicly traded company. The increase in these expenses during the year ended December 31, 2018, versus those of 2017, is due to higher professional fees and legal expenses.
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 10 of the Notes to Consolidated Financial Statements.
As of December 31, 2018 and 2017, the Company held $2.2 million and $6.0 million of cash and cash equivalents which represented unencumbered cash on hand.
On May 6, 2016, the Company entered into the 2016 Credit Facility with Endurance Investment Holdings Ltd. (the "Lender"), a wholly-owned subsidiary of Sompo International. The 2016 Credit Facility provides the Company with an unsecured $20.0 million revolving credit facility for working capital and general corporate purposes. Borrowings under the 2016 Credit Facility bear interest, set at the time of the borrowing, at a rate equal to the applicable LIBOR rate plus 150 basis points. A one-time fee of $20,000 was due to the Lender in connection with establishing the 2016 Credit Facility. The 2016 Credit Facility contains covenants that limit the Company’s ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, or incur debt. If the Company fails to comply with any of these covenants, the Lender could revoke the facility and exercise remedies against the Company. In addition, in the event of a default in the performance of any of the agreements or covenants under certain management agreements with the Manager by the Company, the Lender has the right to terminate the 2016 Credit Facility. The 2016 Credit Facility was amended on July 31, 2018 to extend its expiry to September 30, 2020 under identical terms. As of December 31, 2018, the Company was in compliance with all of its respective covenants associated with the 2016 Credit Facility. On December 31, 2018, Endurance Investment Holdings Ltd. merged into its parent, Endurance Bermuda, and the obligations of the Lender were assumed.
The Company intends to ultimately repay its outstanding borrowings under the Credit Facility with funds it expects to receive from Blue Capital Re, which are made available to Blue Capital Re in the normal course through scheduled releases of funds held as collateral.
During 2018 and 2017, we declared and paid quarterly cash dividends of $0.30 per Common Share and RSU during each of the first three quarters of the year. In addition, in the first quarter of 2017 we declared a special dividend of $0.59 per Common Share and RSU with respect to the 2016 fiscal year. The total amount of dividends paid to holders of Common Shares and RSUs during 2018 and 2017 was $7.9 million and $13.1 million, respectively.
We intend to distribute a minimum of 90% of annual Distributable Income by continuing to make regular quarterly dividend payments for each of the first three fiscal quarters of each fiscal year, followed by either repurchases of Common Shares or payment of a special dividend after the end of our fiscal year. Any future determination to pay dividends or repurchase Common Shares will remain at the discretion of the Board and will be dependent upon many factors, including: (i) our financial condition, liquidity, results of operations (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) trading price of the Company's Common Shares as compared to the Company's book value per share; and (vi) any other factors that the Board deems relevant. We generally expect that our dividends will be subject to customary dividend tax treatment in the U.S., but if our total dividends paid during any given year exceed our current and accumulated earnings and profits as of the end of such year (determined under U.S. tax principles), a portion of our dividends paid in that year will be treated: (i) first, as a nontaxable return of capital, to the extent of a shareholder’s tax basis in Common Shares (on a dollar-for-dollar basis); and (ii) subsequently, as capital gain.
Our total shareholders’ equity (or total capital) was $90.7 million and $127.1 million at December 31, 2018 and 2017, respectively. The decrease in our total capital during the year ended December 31, 2018 was primarily the result of recording a net loss of $28.6 million and declaring $7.9 million in dividends to holders of Common Shares and RSUs.
The issuance of any new debt, equity or hybrid securities might be on terms and conditions that are unfavorable to our shareholders. Any new issuances of equity or hybrid securities could include the issuance of securities with rights, preferences and privileges that are senior or otherwise superior to those of Common Shares and could be dilutive to our existing shareholders. Any new debt securities may contain terms that materially restrict our operations, including our ability to
Each of the reinsurance contracts that Blue Capital Re writes 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). As a result of the significant losses incurred from the catastrophe events of 2017 and 2018, in line with contractual requirements for buffer loss provisions in the treaties that the Company enters into, collateral that we would typically expect to be available at the key 2019 renewal dates will not be available for deployment. As of January 1, 2019 approximately 11% of projected shareholders' equity was unavailable for deployment as a result of buffer loss provision terms. We expect this locked up collateral will be released systematically through the course of 2019 and 2020.
Since the Underwriting and Insurance Management Agreement is dependent on our future performance, we are unable to determine the amount of Performance Fees we would expect to pay the Manager in future periods pursuant to this agreement. During 2018, we have not incurred any Performance Fees pursuant to this agreement.
As of December 31, 2018, 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 $4.5 million.
Neither the Company nor its operating subsidiaries had any commitments for operating leases or capital expenditures at December 31, 2018 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.
During the year ended December 31, 2017, 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 $14.4 million. We also paid $13.1 million in dividends to holders of Common Shares and RSUs.
We have determined that our best estimates for our gross and net loss and LAE reserves at December 31, 2018 and 2017 were $49.9 million and $43.4 million respectively. The following table summarizes the composition of these reserves at December 31, 2018 and 2017:
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 2018 and 2017.
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 73 of this report.