Oxbridge Re Holdings Ltd (OXBR) 2017 Q2 法說會逐字稿

Good afternoon. Welcome to Oxbridge Re Holdings Second quarter 2017 Earnings Call. My name is Hector, and I will be your conference operator this afternoon. (Operator Instructions) Joining us for today's presentation is Oxbridge Re President and CEO, Jay Madhu; and CFO and Corporate Secretary, Wrendon Timothy. (Operator Instructions).

I would like to remind everyone that this call is also being broadcast live via webcast and available via webcast replay until September 14, 2017 on the Investor Information section of the Oxbridge Re website at www.oxbridgere.com.

Now -- I would now like to turn the call over to Wrendon Timothy, CFO of Oxbridge Re, who will provide the necessary cautions regarding the forward-looking statements that will be made by management during this call. Sir, please proceed.

Thank you, operator. During today's call, there would be forward-looking statements made regarding future events, including Oxbridge Re's future financial performance. These forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995.

Words such as anticipates, estimates, expects, intend, plan, project and other similar words and expressions are intended to signify forward-looking statements. Forward-looking statements are not guarantees of future results and conditions but rather are subject to various risks and uncertainties. Some of these risks and uncertainties are identified in the company's filings with the SEC. The occurrence of any of these risks and uncertainties could have a material adverse effect on the company's business, financial condition and results of operation. Any forward-looking statements made on this call speak only as of the date of this conference call and except as required by law, the company undertakes no obligation to update any forward-looking statements made on this call, even if the company's expectations or any related events, conditions or circumstances change.

Now I would like to turn the call over to our President and Chief Executive Officer, Jay Madhu. Jay?

Thank you, Wrendon, and welcome, everyone. Thank you for joining us today. As we do each quarter, before we get into our results, I would like to take a moment to provide a brief overview of our company.

Oxbridge Re Holdings was founded more than 4 years ago with a mission to provide reinsurance solutions, primarily to property and casualty insurers in the Gulf Coast region of United States. Through our licensed reinsurance subsidiary, Oxbridge Reinsurance Limited, we write fully collateralized policies to cover property losses from specific catastrophes.

And as some of you already know, because we write fully collateralized contracts, we can compete effectively with larger carriers. We specialize in underwriting medium frequency, high severity risks, where we believe sufficient data exists to efficiently analyze the risk/return profile of reinsurance contracts.

Our objective is to achieve long-term growth and book value per share by writing business on a selective and opportunistic basis that will generate attractive underwriting profits relative to risk, while distributing profits to shareholders in the form of regular quarterly dividends.

As for our investment portfolio, we remain opportunistic and will deploy our capital when favorable return opportunities arise, which we believe will in turn drive our results through supplemental investment income. That being said, our focus and top priority remains on profitable underwriting.

As our company began to grow, we saw significant opportunity to accelerate our growth even further, opportunities that could be much more attainable with access to the public markets. As such, we became public at the end of 2014, where we raised $26.4 million.

With that background and introduction, I will turn it over to Wrendon to take us through our financial results for the second quarter and 6 months ending June 30, 2017. Wrendon?

Thank you, Jay, and good afternoon again. We are pleased to report that we had a profitable second quarter and earned $0.19 for the period. This was an improvement from the $0.14 we generated in Q2 of last year.

Regarding net premiums earned for the second quarter of 2017, net premiums earned decreased to $2.5 million from $3.3 million in the second quarter of 2016. The decrease was due both to an increase in premiums assumed, which reflected a growth in size of reinsurance contracts place, but this was more than offset by a change in unearned premium reserve and premium ceded. The change in unearned premium reserve decreased by a greater margin than premiums assumed as a result of accounting adjustments that were made in the previous period that were not made in the current period.

For the 6 months ended June 30, 2017, net premiums earned totaled $4 million compared with $4.7 million for the full 6 months of 2016. The decrease, again, was primarily both to an increase in premiums assumed, reflecting a growth in size of reinsurance contracts place, but this was more than offset by a change in unearned premium reserve and premium ceded. The change in unearned premium reserve decreased by a greater margin than premiums assumed as a result of accounting adjustments made in the previous period that were not made during the 6 months ended June 30, 2017.

With respect to investment income. For the second quarter of 2017, net investment income totaled $127,000 coupled with $46,000 of net realized investment gains. This compares with $109,000 of net investment income coupled with $77,000 of net realized investment gains for the second quarter of 2016.

For the 6 months ended June 30, 2017, net investment income totaled $213,000 coupled with net realized investment gains of $48,000. This compares with $203,000 of net investment income coupled with $133,000 of net realized investment gains for the full 6 months of 2016.

Our investment income strategy is opportunistic in nature and involves deployment of some of our investment capital into fixed maturity and equity securities.

Due to the nature of the securities we invest in, we may periodically realize losses on other than temporary impairment drawdowns that impact our investment performance. However, we did not experience any such losses in the second quarter of 2017 or 2016.

We are pleased with the overall performance of our investment portfolio. As we look forward, we believe we are very well positioned to capitalize on a more favorable interest rate environment.

With respect to expenses, total expenses for the second quarter of 2017, including loss and loss adjustment expenses, policy acquisition costs and underwriting expenses, and general and administrative expenses were $1.5 million compared with $2.7 million in the second quarter of 2016. The decrease was primarily the result of favorable development on losses recorded as established by our independent actuary. This was partially offset by minor increases in policy acquisition costs and underwriting expenses, as well as general and administrative expenses.

For the 6 months ended June 30, 2017, total expenses, including losses and loss adjustment expenses, policy acquisition costs and underwriting expenses and general and administrative expenses, were $1.9 million compared with $3.1 million for the full 6 months of 2016. The decrease in total expenses, again, was primarily the result of favorable development on losses as recorded by our independent actuary, which was partially offset by a minor increase in policy acquisition costs and underwriting expenses.

With respect to net income. For the second quarter of 2017, net income totaled $1.1 million or $0.19 per basic and diluted shares compared with net income of $872,000 or $0.14 per basic and diluted shares in the second quarter of 2016. The increase in net income was primarily due to loss and loss adjustment expenses decreasing by a greater margin than earned premiums during the quarter.

For the 6 months ended June 30, 2017, net income totaled $2.4 million or $0.41 per basic and diluted common shares compared with net income of $1.9 million or $0.32 per basic and diluted common shares for the first 6 months of 2016. The increase in net income was primarily due to losses and loss adjustment expenses decreasing by a greater margin than earned premiums during the 6 months ended June 30, 2017.

With respect to dividends. During the second quarter of 2017, we paid a dividend of $0.12, which was consistent with the comparable year ago period. For the 6 months ended June 30, 2017, dividends paid per share were $0.24, which was also unchanged from the same year ago period.

Subsequent to the quarter's end, we declared a regular quarterly cash dividend in the amount of $0.12. The dividend will be paid on September 30 to shareholders of record on the close of business on September 23, 2017.

As we have mentioned on prior calls, our Board of Directors evaluates our dividend every quarter, which we believe reflects our ongoing commitment to our shareholders.

Regarding our share repurchases. During the second quarter of 2017, we repurchased 55,538 common shares under the $2 million share repurchase plan, which was approved by the Board of Directors in May of last year. These shares were repurchased at an average price of $5.98 per share, bringing the total repurchases at June 30, 2017 to approximately $1.4 million.

Now turning to our financial results for the 3 and 6 months ended June 30, 2017. At Oxbridge, we use various measures to analyze the growth and profitability of our business operations. For our reinsurance business, we measure underwriting profitability by examining our loss ratio, underwriting expense ratio and combined ratio.

Our loss ratio, which measures underwriting profitability, is the ratio of loss and loss adjustment expenses incurred to net premiums earned. Our loss ratio for the second quarter of 2017 was 42.6% compared to 66.2% for the second quarter of 2016. The decrease in loss ratio was primarily due to favorable development of losses during the quarter coupled with a lower denominator in net premiums earned recorded during the quarter.

For the 6 months ended June 30, 2017, the loss ratio was 25.5% compared to a loss ratio of 48.2% during the first 6 months of 2016. The decrease in the loss ratio was, again, primarily due to favorable development of losses during the 6-month period ended June 30, 2017 coupled with a lower denominator in net premiums earned recorded during the 6-month period.

Regarding acquisition costs. Our acquisition cost ratio, which measures operational efficiency, this compares policy acquisition costs and underwriting expenses to net premiums earned. The acquisition cost ratio was 3.8% for the second quarter of 2017 compared with 2% for the same year ago period. The increase was due primarily to the lower denominator in net premiums earned recorded during the quarter.

For the 6 months ended June 30, 2017, the acquisition cost ratio was 3.9% compared with 2.7% for the same year ago period. The increase, again, was due to a lower denominator in net premiums earned as recorded during the 6-month period ended June 30, 2017.

Our expense ratio, which measures operating performance, compares policy acquisition costs, other underwriting expenses and general and administrative expenses to net premiums earned.

The expense ratio totaled 19.5% during the second quarter of 2017 compared with 13.3% for the second quarter of 2016. Again, the increase was due primarily to the lower denominator in net premiums earned as recorded during the quarter.

And for the 6 months June 30, 2017, the expense ratio was 21.9% compared with 18.4% for the first 6 months of 2016. Again, the increase was primarily due to the lower denominator in net premiums earned as recorded during the 6 months during the period ended June 30, 2017.

Our combined ratio, which is used to measure underwriting performance, is the sum of the loss ratio and expense ratio. If the combined ratio is at or above 100%, underwriting is not profitable.

For the second quarter of 2017, the combined ratio was 62% compared with 79.5% for the second quarter of 2016. And for the 6 months ended June 30, 2017, the combined ratio was 47.3% compared with 66.6% for the same year ago period.

Turning to our balance sheet. The total investments, which include investments in fixed maturity and equity securities, totaled $15.4 million at June 30, 2017 compared with $11 million at December 31, 2016.

Total shareholders' equity at June 30, 2017 was $37.6 million, up slightly from $37.2 million at December 31, 2016.

At June 30, 2017, cash and cash equivalents and restricted cash and cash equivalents totaled $32.3 million compared with $35.7 million at December 31, 2016.

Now with that, I'd like to turn the call back over to Jay. Jay?

Thank you, Wrendon. Needless to say, we are pleased with our results for the second quarter. We experienced yet another period of profitable growth. Additionally, the second quarter marks our 12th consecutive quarter of regular dividend distribution.

As we have seen over the last several years, our conservative approach and underwriting process provide a solid and reliable foundation while also providing sustained value to our shareholder base.

As a follow-on to my opening remarks, because Oxbridge Re is a provider of reinsurance primarily to clients in the Gulf Coast of United States, we understand that losses are inevitable in some periods.

Having said that, as some of you know, we are currently in the heart of hurricane season. The season in the Gulf Coast began on June 1. Hurricane Emily recently crossed into Florida and the state experienced some heavy rainfall and strong winds.

However, at this time, we don't expect Emily to be an event of note to us. We understand that this and other conditions are subject to change.

We are proud of the fact that this year, just like last, we have noted an increase in not only clients but also markets that have been made available to us. We have increased our client base from 6 clients as of last year to 7 this year. We go into 2017, 2018 treaty year with our capital well deployed.

We have implemented substantial risk management practices and do our best to limit our exposure to risk. We do this by maintaining an increasingly diversified book of reinsurance and also holding significant cash reserves to cover any losses we may encounter.

All of these criteria, we believe permit us to patiently evaluate the marketplace, while also being strategically opportunistic in our underwriting and investment income strategy.

Looking ahead for the second half of the year, we will continue to make repurchases of our common stock as laid out previously by our stock buyback program as of May of last year.

We also hope to maintain our regular dividend payment to shareholders as directed each quarter by our Board of Directors. It is our goal to reward our investors, while we also work to improve operations internally and try to capitalize on the significant opportunities in the marketplace as they present themselves.

With that, we are ready to open the call for questions. Operator, please provide the appropriate instructions.

(Operator Instructions) And our first question comes from Casey Alexander with Compass Point.

First of all, the losses that you did incur during the quarter, can you give us a sense of where they came from?

Yes, Casey, this is Wrendon. Thanks for your question. The losses during the quarter represents loss development on massive claims as determined by our independent actuary as well as new information and updated loss runs and information that we typically receive from the client each month.

Okay. So it's no new event for the quarter. It's true up for Hurricane Matthew.

Correct, correct.

Okay, great. Secondly, Wrendon, I wasn't sure if you said the share repurchase was $5.19 or $5.90?

It was $5.98, I believe is what I said.

$5.98. Okay. Now as it relates to your book in the new year, Jay, what kind of color can you give us for how the negotiations went, how rates are? And now that you have 7 clients instead of 6, can you give us some sense of also where your concentration is? And there has always been a particular emphasis on the percentage that came from your first client. Where are you with the first client in the new book? So if you could give us sort of a recap on that, please?

Yes, absolutely, Casey. This year has actually been a banner year for us. What we found is every year has been a better year. And this year has followed the same. So this year, we went from 6 to 7 clients. We rotated out of some contracts. We picked up some new clients as well. Currently, we're about 70% in Florida. We're also in Texas and Louisiana, with about 2% each. And we have some worldwide contracts at about 26%. In relationship to our original client that we started out with at year 1, we were about 99.9% reliant on them and we have since decreased that dependency. I believe last year, we were slightly less than 25%. And this year, we reduced that dependency to just less than 20%. So we're very happy with that. It's -- again, it's not because we were actively trying to reduce that dependency, because it's not a dependency at this point. It's not like we're trying to reduce exposure to that client, but it's just worked out that way that we've taken on some additional risk in different areas. And that has in itself reduced itself.

Okay. Also, the premiums ceded are kind of a new entry on both the income statement and on the balance sheet. Could you give me an idea of where the genesis of that is?

Yes. As part of our underwriting strategy, we are starting our (inaudible) in terms of establishing relationships with retrocessionaires, where we write premiums or assume premiums on the front end and then we reinsure it on the back end. So what we have done this year for the first time is we have taken on some risk on the front end and developed relationships to release some of those risks on the back end with the intention that we may be able to earn some type of margin or spread on that strategy. That way we can build our book a little bit quicker and faster without necessarily taking additional risk.

Our next question comes from Kent Engelke with Capitol Securities Management.

Looking briefly on the income statement and the like, it looks like that you're a little bit over 50% in regards to -- with your funds in regards to using your funds by contracting the like. Is that correct -- am I reading that correctly?

Yes, it is. What we -- last quarter, we alluded to that fact as well. We've increased our -- we've increased the amount of policies that we write very marginally -- very, very marginally. And we've exceeded that 50% threshold very marginally again. And it was because we were able to gain additional dispersion. We not only like -- write policies in Louisiana, but we also have Texas policies, plus in addition, we have a very small concentration in commercial properties through some of those relationships as well.

And is that one of the ways that you're ready to go from 6 clients to 7 clients? I think that dispersion or getting increased number of clients, I think that just speaks very positive for Oxbridge there.

Yes, absolutely.

(Operator Instructions) Our next question comes from Steve Marascia with Capitol Securities Management.

Just want to kind of dovetail onto Kent's question about policies written or premiums written, policy premiums written. Do you have a target where you guys want to be within next 2 to 3 years, because it seems like lacking any type of infusion on capital, you're going to be running at -- around the same premium levels for the foreseeable future?

Yes, that's very quite possible. However, it's one of those things that we have wrestled with in the past. And part of this also is that we will look to raise additional capital in the future. But currently, we're exploring the possibilities of ceding or increasing our diversification or dispersion and achieving some of that same -- achieving some of that same growth that way.

Is that why you included the ceded premiums line on your balance sheet?

Yes.

Okay. And one other question real quick. What did you say that cash and cash equivalents were on your balance sheet at the close of 2Q '17?

A total of $32.2 million.

Our next question is from Casey Alexander with Compass Point.

Yes, sorry to jump back in. Wrendon, is there any way for you to tell me what the loss experience refund payable would have been had there been no losses in the quarter?

Yes, that will be pretty difficult to do off the bat. But with loss experience refund payable works, that number is a rolling estimate. Every month, we make an estimate of what the ultimate payout back to the client is going to be. The reason why this quarter looked a little bit funky was last quarter of 2016, there was about $1.8 million adjustment during the quarter because of the mechanics of how that contract worked. And for this quarter, I can tell you there were minimal loss adjustment experience expenses for relating to Matthew claims. So this quarter looks a little bit more normal if there hasn't been a loss, if that makes sense to you.

Okay. I will follow up with you offline on that.

Our next question is from George Burmann with IFS-Raymond James.

Got a quick question here. Are there any opportunities for you to acquire maybe additional companies? Or are you looking to continue to grow organically? Reason I'm asking, it seems that the company for the last, what, 2, 3 years or so has been stuck in a price range I think you went public at $6 a unit. You're trading between $5 and $6. I think the high was around $7-ish. And it seems that being a public company, you should have the advantage that you could add to your stable of insured companies a little bit more? And it's sort of been a very, very slow, albeit steady move for you. Where do you see you guys going in the future and how quick?

Yes, George, it's -- that's a good question. So what we have always maintained is our company is not going to be one that will grow at -- growth at any rate. Currently, what we're seeing is there -- yes, there may be opportunities in the market, so on and so forth, but we're currently very small to acquire other companies. What we think we will have -- what will happen with the company is as we continue to move forward, we will work on our back-end processes, as I mentioned earlier. But while we're doing that, the stock may be stuck where it is. But, however, since then, we paid out 12 quarters of dividends at $0.12 a quarter. So in itself, our investors are being paid to wait.

Okay, okay. The company has a set of warrants outstanding. At what strike price do they call in?

The strike is $7.50.

$7.50. So that could eventually just generate some additional cash for you guys if exercised, correct?

Absolutely. That in itself will be like an inherent capital raise.

And that would also increase your float a little bit and you would basically reissue the shares that you are currently buying back real cheap?

Yes, sir.

(Operator Instructions) At this time, this concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Madhu for closing remarks.

Thank you for joining us today on today's call. I especially want to thank our employees, business partners and investors on their continued support. We look forward to updating you on our next call. Thank you. Operator?

Before we conclude today's call, I would like to remind everyone that a recording of today's call will be available for replay via a link available in the Investors section of the company's website. Thank you for joining us today for our presentation. You may now disconnect.