Oxbridge Re Holdings Ltd (OXBR) 2019 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Oxbridge Re Holdings Fourth Quarter 2019 Earnings Results Call. (Operator Instructions)

At this time, it is my pleasure to turn the floor over to Wrendon Timothy, Chief Financial Officer. Sir, the floor is yours.

Thank you, operator. During today's call, there will 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, intends, plans, projects 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 recurrence of any of these risks and uncertainties could have a material adverse effect on the company's business, financial condition and results of operations. Any forward-looking statements made on this conference 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 contained on this call or in any company presentation 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 Chairman, President and Chief Executive Officer, Jay Madhu. Jay?

Thank you, Wrendon, and welcome, everyone. Thank you for joining us today. These are trying times with all that is happening to humanity. This year, while the COVID-19 or the coronavirus pandemic and its consequences are spreading throughout the world at an alarming rate, I would like to point out that there are no reinsurance implications for Oxbridge. Having said that, we urge people to stay home and stay safe.

As we do each quarter, before we get to our results, I would like to take a moment to provide a brief overview of our company. Oxbridge Re Holdings Limited was founded over 6 years ago with a mission to provide reinsurance solutions, primarily to property and casualty insurers in the Gulf Coast region of the United States. Through our licensed reinsurance subsidiary, Oxbridge Reinsurance Limited, and our licensed reinsurance sidecar, Oxbridge Re NS, 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 are able to compete effectively with larger carriers.

We specialize in underwriting low-frequency, high-severity risks where we believe sufficient data exists to effectively 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, but we will generate attractive underwriting profits relative to risk.

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

Looking at 2019, the net loss we experienced in 2018 was significantly reduced. We effectively broke even the last 2 quarters of the year. And at the year-end, our key financial ratios have all strengthened compared to the end of 2018. Our book value stands at $1.40 per share, and our risk management underwriting focus allowed us to remain unaffected by the devastation caused by Hurricane Dorian and other global catastrophes.

In addition, 2019 was the second year of operations for our wholly owned subsidiary, Oxbridge Re NS, our reinsurance sidecar. While the contract year ends on May 31, 2020, our sidecar investors are on track to earn an attractive return of approximately 40%. We look to grow that portion of our business again this upcoming season beginning June 1, 2020.

I'll now turn things over to Wrendon to take us through our financial results for the fourth quarter and year ended December 31, 2019. Wrendon?

Thank you, Jay. First, a point to note is our typical contract period is from June 1 to May 31 of the following year. With respect to net premiums earned, net premiums earned for the fourth quarter of 2019 reduced to $245,000 from $1.5 million in the fourth quarter of 2018. The decrease was fully due to significantly lower capital being deployed this year when compared to prior year when we experienced an acceleration of premium recognition due to limit losses on all of our reinsurance contracts. Net premiums earned for the year ended 31st December 2019 reduced to $617,000 from $2.7 million last year. The decrease was primarily due to lower capital being deployed during the year compared to the prior year.

Net investment and other income for the fourth quarter of 2019 totaled $48,000 plus a $5,000 change in the fair value of equity securities. This compares with $86,000 of net investment income offset by a $48,000 change in fair value of equity securities and $18,000 of net realized investment losses for the fourth quarter of 2018.

For the year ended December 31, 2019, net investment income totaled $230,000 plus $3,000 of net realized gain and a $25,000 change in the fair value of equity securities. This compares with a $366,000 of net investment income offset by $26,000 of change in fair value of equity securities and $255,000 of net realized investment losses in 2018. Also during the quarter and year ended December 31, 2019, we recognized a gain of $106,000 on successful commutation of 2 reinsurance contracts. This compares with a loss of $8,000 on commutation during 2018.

Total expenses for the fourth quarter of 2019, including loss and loss adjustment expenses, policy acquisition costs and underwriting expenses and general and administrative expenses were $282,000 compared with $10.5 million in the fourth quarter of 2018. The decrease in expenses was due to the decrease in policy acquisition costs and underwriting expenses as a result of a decrease in net premiums earned during the quarter as well as a decrease in general and admin expenses due to further cost savings initiatives implemented by the company when compared to the prior year's fourth quarter. For the year ended December 31, 2019, total expenses were $1.1 million compared with $11.6 million in 2018. The decrease in total expenses was primarily due to no losses incurred in 2019 compared with limit losses incurred in our reinsurance portfolio in 2018 as well as cost savings initiatives that we implemented during the year.

We generated a net income of $61,000 or $0.01 per basic and diluted share for the fourth quarter of 2019 compared with a net loss of $6.5 million or a loss of $0.13 (sic) [$1.13] per share in the fourth quarter of 2018. The significant improvement in our net income was the result of no catastrophic losses experienced in the quarter compared with the triggering of limit losses on all reinsurance contracts in the fourth quarter of 2018.

For the year ended December 31, 2019, net loss reduced significantly to only $305,000 or a loss of $0.05 per basic and diluted common share compared with a net loss of $5.7 million or $1 per basic and diluted common share in 2018. Again, the significant improvement in our earnings in 2019 was due to no limit losses experienced during the year compared to losses experienced in 2018.

Now turning to our financial ratios for the quarter and year ended December 31, 2019. 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, acquisition expense ratio, underwriting expense ratio and combined ratio.

Our loss ratio, which measures underwriting profitability, is the ratio of loss and loss adjustment expenses included to net premiums earned. Our loss ratio for the fourth quarter of 2019 was 0% compared to 589% for the fourth quarter of 2018. As mentioned, we experienced significant limit losses in last year's fourth quarter. For the year ended December 31, 2019, the loss ratio was also 0% compared to the loss ratio of 269% in 2018. The improvement is due to no losses or loss adjustment expenses in 2019.

Our acquisition cost ratio, which measures operational efficiency, compares policy acquisition costs and other underwriting expenses to net premiums earned. Our acquisition cost ratio was 9.4% for the fourth quarter of 2019 compared with 11% last year. For the year ended December 31, 2019, the acquisition cost ratio was 10.4% compared with 9.6% in 2018. The increase in acquisition cost ratios was due to overall higher weighted average acquisition costs on reinsurance contracts in-force in 2019 compared to the prior year.

Our expense ratio, which measures operating performance, compares policy acquisition costs and general and administrative expenses with net premiums earned. The expense ratio was 115.1% during the fourth quarter of 2019 compared with 27.3% for the fourth quarter of 2018. For the year ended December 31, 2019, the expense ratio was 183.3% compared with 41.5% for the year ended December 31, 2018. The increase in the expense ratio in 2019 was due primarily to lower net premiums earned and net income from derivative instruments during the quarter and the year ended December 31, 2019, when compared with the same period a year ago.

Our combined ratio, which is used to measure underwriting performance, is the sum of the loss ratio and the expense ratio. If the combined ratio is at or above 100%, underwriting is not profitable. The combined ratio totaled 115.1% for the fourth quarter of 2019 compared to 616.5% last year. For the year ended December 31, 2019, the combined ratio was 183.3% or with 310% in 2018. The decrease in the combined ratio in 2019 was primarily due to no losses being suffered during 2019 when compared to the previous year.

Now turning to the balance sheet. Total investments, which include investments in fixed maturity and equity securities totaled $692,000 at December 31, 2019, compared with $1.2 million at December 31, 2018. Total shareholders' equity at December 31, 2019, was $8 million compared to $8.3 million at December 31, 2018. At December 21, 2019, our current book value per share stood at $1.40. At December 31, 2019, cash and cash equivalents and restricted cash and cash equivalents totaled $8 million compared with $11.3 million on December 31, 2018.

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

Thank you, Wrendon. During the third quarter of 2019, we experienced a major storm, Hurricane Dorian, that wreaked devastation in the Bahamas as a category 5 hurricane before making landfall in the United States. Despite this event, having significant estimated insured losses as high as $8 billion, we have not been impacted by this event. Through our reinsurance sidecar, we have been able to add a degree of diversity to our revenue streams and risk while still having the ability to achieve attractive returns. As mentioned before, while the contract year ends on May 31, 2020, our sidecar investors are on track to earn an attractive return of approximately 40%. We will look to grow that portion of our business again this upcoming season, beginning June 1, 2020.

Going forward, we remain opportunistic about the long-term prospects of not only our core business but also our reinsurance sidecar. We continue to evaluate additional opportunities for growth as well as diversification of risk. So in closing, we continue to reduce our G&A costs; our sidecar investors are on track to an attractive return of approximately 40%; our book value per share is $1.40, mostly in cash; we are debt-free; we have a strong cash position; and most importantly, we have opportunity and a viable business model.

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 Kent Engelke with Capitol Securities.

Jay and Wrendon, enjoyable times we're in, that's for sure. On that, so we -- what is the impact of the implosion of the pandemic bond market as well as just the pricing on reinsurance contracts? Are you seeing all these incredible events increase in the yield because of lack of competition for reinsurance contracts?

Yes, we're hearing some and we're definitely hearing that there's a slight increase from last year. And everything that's going on in the capital markets doesn't help that. On the other side, it's good for us in terms of pricing. However, it's -- that's to be seen, but our preliminary indications are contracts that were affected, those have gone up, some have gone up regardless. But it's a little early for the layers that we participate in to actually come up with an accurate number at this point. But yes, these are definitely interesting times.

Yes, it is. One of the things about Oxbridge, of course, in some regards, you're insensitive to economic behavior, just sensitive to acts of God. Any comments about -- anything about the odds with the upcoming hurricane season and years past? At times, you have talked at length about that. Can you add any color on that just statistically and readily acknowledging that this is just statistics?

Yes. Statistically, when we take a look at -- when we take a look at the hurricane history since 1951, 1952 to now, we see that we don't have hurricanes every single year, year in and year out. And if you just take a very short-term look, a very short-term view, over the last 14 years, 2 out of the last 14 years, the hurricanes had wreaked havoc. So a, it needs to be a hurricane that's not only in our quadrant, but it needs to make landfall; b, when that hurricane makes landfall, it needs to be in a category 3 or above to do the devastation and to rip roofs and shingles and so on and so forth. Unless you have a really hard -- unless you have a really big hurricane, these hurricanes don't impact layers. They don't go through people's reinsurance towers and so on.

So in the last 14 years, only 2 out of the last 14 years we've seen major devastation in the market. So hopefully, this year will be one of those years where we escape again, but we don't rely just on the fact that it's a flip of a coin type of thing. We take a look at statistical data. We take a look at our contracts, we make sure that the risk is appropriately priced. In the past, we have stepped off of contracts -- or stepped away from contracts because we didn't feel the pricing was right or the timing was right. This year, this past year, we took a very conservative approach on going into the market, and we deployed very little capital this year. We worked on growing our sidecar business. And as we go forward, we'll take a look at pricing, and we'll take a look at the market. We'll take a look at the sidecar business and deploy appropriately.

And our next question comes from Harry Sauers with Sauers Value Partners.

So based on your 10-K, we're sitting mostly in cash as you addressed here. And clearly, you're getting favorable premiums, based on my math, for the risks that you're all insuring. I do have a concern with that. And per the 10-K, we're at about a little over $8 million in cash and restricted cash. Is that correct?

Yes.

As you said, we have virtually no debt. What is our plan to deploy that cash to enhance shareholder value?

Yes. We -- as we go forward, we do have some cash. We do have some cash and a few securities and things like that. And depending on the market, depending on situation, and -- we'll make a decision whether to put that money to use or not. I can't comment for this quarter, but everything over here is based off of last quarter. But I think in times like this, it's very valuable to note that we're debt-free and we have cash.

Yes. I've always been a fan of Oxbridge's cash position, being cash-rich, especially in times like this where we have these credit crunches, I mean, I'm sure you're aware of the importance of that cash position. My one gripe or just a little concern is that we're trading at $0.76 a share right now against almost double that in cash, net of all liabilities. So to me, right, especially given that we don't have very steep net losses and are quite close to breaking even, that tells me the stock is severely undervalued. Have you or the management team ever considered undergoing a buyback program at such depressed levels?

Yes. No -- at this point -- now I'll give you the canned answer, right? This is something -- and the canned answer is it will be depending on the Board of Directors meeting and what the Board decides. But just depending on situation, depending on what's decided and matters at hand, I think, as you mentioned, cash is king at this point. And we see some gyrations in the stock itself. The stock has bounced up and come down and so on and so forth. But the $0.76 of where it's trading is at a significant discount to book. Book's at $1.40, which is primarily in -- predominantly in cash -- cash and cash equivalents. So we're trading at a huge discount. So where would that...

I would like -- would you tell the Board that I personally really enjoy buying dollar bills at $0.50 apiece?

Yes. I get that. Yes. But it's -- at this point, we'll consider all options and thoughts and so forth. But there is a possibility that there may be better things to put our monies to work. But at some point, you are right, it may come down to the possibility of a share buyback, but that will be decided in future paths. Where we find some significant opportunity is in our sidecar that we are developing, and sidecar is pretty much open to anybody who's an accredited investor and is not adverse to risk. So being that our company is an offshore entity, there may be some tax benefits for somebody looking at that because it's on a multi-year contract with a 1 year out, but there is a possibility for folks to take a look at that and earn some very attractive returns. And that money is put -- that money is put alongside our company money and put to work in reinsurance contracts. And all at the same time, none of that money is exposed to the capital markets. We don't -- to juice -- to try to juice return, we don't go in and buy stock in equities and so on and so forth. So that is the one part of our business that we're very excited on and that we look to grow.

And what kind of cash is that going to require to grow from the standpoint of the common stock of Oxbridge?

Initially, that money -- initially, that raise is going to be a very small raise, especially what's going on in the market at this point, but that remains to be seen. But we believe going forward and in the future because that money comes in, we are basically acting as a money manager in reinsurance contracts. We have a very small number as a management fee that we take, and there's no other expenses that come out of that. And we turn around and take a percentage of the profit. So somebody who doesn't want to go set up their own reinsurance company and doesn't want to spend the millions of bucks that's involved and plus in order to get contracts, you really have to be in this insurance industry to begin with. So barrier to entry is very high, but somebody can invest their cash alongside us, all at the same time get a significant return. Yes, there is risk. But it's risk/reward.

Well, I'm definitely a fan of expanding the sidecar business. That was, among a few other things, one of the key things that drew me towards Oxbridge several months ago. I do have one last question for you, and that is that your -- congratulations first on continuing to decrease your general and admin costs. But we are still running about as much in that area as we are taking in, in premiums. Fortunately, it's at that breakeven level. But would you be able to offer any guidance on when you expect to return to profitability?

Yes, we're working diligently towards that. We're a big fan of not trying to act rashly or -- after all, we're in the insurance/reinsurance business, right, so we kind of try to manage that risk. Coming out of 2 seasons of tumultuous times is not the best of times to take a rash -- and make rash decisions and make -- take on too much risk. So to answer your question, we evaluate contracts. At the same time, we take a look and see how the contracts are priced. And if the risk is adequately priced, we'd take it. But going forward, we believe not only our core business of taking on risk, but also our sidecar business will augment us towards getting back to where shareholders would appreciate where we are.

Right. My concern is a little bit more on the expenses side rather than the top line there because I've always seen you've done a great job managing the top line and the expenses, though they're falling, right, I would -- as a shareholder, I'd really like to see those fall far below the premiums earned.

Look, our expenses are -- there's not much more we can cut in terms of expenses. But point noted, and we'll continue to evaluate that.

All right. I appreciate that. And again, no time line for expecting a return to profitability there?

No. As I mentioned, it all depends on what the situation at hand is. And don't get me wrong, we are all looking towards that same goal.

Of course. Just you don't have necessarily the exact time line given the state of the markets and catastrophic events, I understand.

Yes.

And that does conclude our question-and-answer session for today. I'd now like to turn the call back over to Mr. Madhu for his closing remarks.

Thank you for joining us on today's call. I especially want to thank our employees, business partners and investors for their continued support. We look forward to updating you on our next call. If you have any further questions, please give us a call anytime. Thank you for your time, and stay safe.

And that does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time, and have a great day.