10-Q 1 oxbr_10q.htm QUARTERLY REPORT Blueprint
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
[X] 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2018
 
[ ] 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________
 
Commission File Number: 1-36346
 
OXBRIDGE RE HOLDINGS LIMITED
(Exact name of registrant as specified in its charter)
 
 
 
Cayman Islands
 
98-1150254
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
Strathvale House, 2nd Floor90 North Church Street, GeorgetownP.O. Box 469
Grand Cayman, Cayman Islands
 
KY1-9006
(Address of principal executive offices)
 
(Zip Code)
 
 
Registrant’s telephone number, including area code: (345) 749-7570
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes             X
 
No            
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes             X
 
No            
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer                                            
 
 
Accelerated filer                                        
 
Non-accelerated filer 
 
Smaller reporting company                                                        X
 
Emerging growth company X
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ______
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes            
 
No             X
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
As of August 14, 2018; 5,733,587 ordinary shares, par value $0.001 per share, were outstanding.

 
 
OXBRIDGE RE HOLDINGS LIMITED
 
INDEX
 
PART I – FINANCIAL INFORMATION
Page
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
Consolidated Balance Sheets June 30, 2018 (unaudited) and December 31, 2017
3
 
 
 
 
Consolidated Statements of Operations Three and Six Months Ended June 30, 2018 and 2017 (unaudited)
4
 
 
 
 
Consolidated Statements of Comprehensive Income Three and Six Months Ended June 30, 2018 and 2017 (unaudited)
5
 
 
 
 
Consolidated Statements of Cash Flows Six Months Ended June 30, 2018 and 2017 (unaudited)
6
 
   
 
 
Consolidated Statements of Changes in Shareholders’ Equity Six Months Ended June 30, 2018 and 2017 (unaudited)
8
 
   
 
 
Notes to Consolidated Financial Statements (unaudited) 
9
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
35
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
48
 
 
 
Item 4.
Controls and Procedures 
49
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings 
49
 
 
 
Item 1A.
Risk Factors 
49
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
49
 
 
 
Item 3.
Defaults Upon Senior Securities 
49
 
 
 
Item 4.
Mine Safety Disclosures 
50
 
 
 
Item 5.
Other Information 
50
 
 
 
Item 6.
Exhibits 
50
 
 
 
 
Signatures 
51
 
 
 
 
 
 
PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
 
Consolidated Balance Sheets
(expressed in thousands of U.S. Dollars, except per share and share amounts)
 
 
 
At June 30, 2018
 
 
At December 31, 2017
 
 
 
(Unaudited)
 
 
 
 
Assets
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
Fixed-maturity securities, available for sale, at fair value (amortized cost: $4,779 and $4,450, respectively)
 $4,758 
  4,433 
Equity securities, available for sale, at fair value (cost of $2,058 in 2017)
  - 
  2,036 
Equity securities, at fair value (cost of $1,652 in 2018)
  1,535 
  - 
       Total investments
  6,293 
  6,469 
Cash and cash equivalents
  7,053 
  7,763 
Restricted cash and cash equivalents
  4,192 
  3,124 
Accrued interest and dividend receivable
  28 
  39 
Premiums receivable
  2,338 
  3,798 
Deferred policy acquisition costs
  263 
  48 
Prepayment and other assets
  140 
  116 
Property and equipment, net
  25 
  36 
  Total assets
 $20,332 
  21,393 
 
    
    
Liabilities and Shareholders’ Equity
    
    
Liabilities:
    
    
Reserve for losses and loss adjustment expenses
 $167 
  4,836 # 
Loss experience refund payable
  - 
  135 
Losses payable
  796 
  386 
Notes payable to Series 2018-1 noteholders
  2,000 
  - 
Unearned premiums reserve
  2,393 
  2,012 
Accounts payable and other liabilities
  945 
  106 
  Total liabilities
  6,301 
  7,475 
 
    
    
Shareholders’ equity:
    
    
Ordinary share capital, (par value $0.001, 50,000,000 shares authorized; 5,733,587 shares issued and outstanding)
  6 
  6 
Additional paid-in capital
  32,163 
  32,100 
Accumulated Deficit
  (18,117)
  (18,149)
Accumulated other comprehensive loss
  (21)
  (39)
Total shareholders’ equity
  14,031 
  13,918 
Total liabilities and shareholders’ equity
 $20,332 
  21,393 
 
The accompanying Notes to Consolidated Financial Statements are an integral
part of the Consolidated Financial Statements.
 
 
3
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
 Consolidated Statements of Operations
(Unaudited)
(expressed in thousands of U.S. Dollars, except per share amounts)
 
 
 
 
Three Months Ended
 
 
Six Months Ended
 
 
 
 June 30,
 
 
 June 30,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
 
 
 
 
 
 
Assumed premiums
 $2,580 
  17,376 
  2,580 
  18,256 
Premiums ceded
  - 
  (147)
  - 
  (147)
Change in loss experience refund payable
  (90)
  (512)
  (225)
  (1,260)
Change in unearned premiums reserve
  (2,156)
  (14,231)
  (1,801)
  (12,815)
 
    
    
    
    
Net premiums earned
  334 
  2,486 
  554 
  4,034 
Net income from derivative instruments
  208 
  - 
  376 
  - 
Net investment and other income
  108 
  127 
  180 
  213 
           Net realized investment gains (losses)
  - 
  46 
  (176)
  48 
           Change in fair value of equity securities
  73 
  - 
  (96)
  - 
 
    
    
    
    
Total revenue
  723 
  2,659 
  838 
  4,295 
 
    
    
    
    
Expenses
    
    
    
    
Losses and loss adjustment expenses
  - 
  1,059 
  - 
  1,027 
Net loss on commutation
  8 
  - 
  8 
  - 
Policy acquisition costs and underwriting expenses
  29 
  94 
  38 
  158 
General and administrative expenses
  359 
  390 
  676 
  724 
 
    
    
    
    
Total expenses
  396 
  1,543 
  722 
  1,909 
 
    
    
    
    
Income before (income) attributable to Series 2018-1 noteholders
 $327 
  1,116 
  116 
  2,386 
 
    
    
    
    
(Income) attributable to Series 2018-1 noteholders
  (62)
  - 
  (62)
  - 
 
    
    
    
    
Net income
  265 
  1,116 
  54 
  2,386 
 
    
    
    
    
Earnings per share
    
    
    
    
Basic and Diluted
 $0.05
  0.19 
  0.01
  0.41 
 
    
    
    
    
 
    
    
    
    
Dividends paid per share
 $- 
  0.12 
  - 
  0.24 
 
The accompanying Notes to Consolidated Financial Statements are an integral
part of the Consolidated Financial Statements.
 
 
4
 
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
 Consolidated Statements of Comprehensive Income
(Unaudited)
(expressed in thousands of U.S. Dollars)
 
 
 
Three Months Ended
 
 
Six Months Ended
 
 
 
June 30,
 
 
June 30,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 $265 
  1,116 
  54
 
  2,386 
Other comprehensive (loss) income:
    
    
    
    
Change in unrealized loss on investments:
    
    
    
    
Unrealized (loss) gain arising during the period
  (1)
  181 
  (177)
  140 
Reclassification adjustment for net realized losses (gains) included in net (loss) income
  - 
  (46)
  173 
  (48)
 
    
    
    
    
Net change in unrealized loss
  (1)
  135 
  (4)
  92 
 
    
    
    
    
Total other comprehensive (loss)/income
  (1)
  135 
  (4)
  92 
 
    
    
    
    
Comprehensive income
 $264 
  1,251 
  50
 
  2,478 
 
The accompanying Notes to Consolidated Financial Statements are an integral
part of the Consolidated Financial Statements.
 
 
5
 
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
 Consolidated Statements of Cash Flows
(Unaudited)
(expressed in thousands of U.S. Dollars)
 
 
 
Six Months Ended
 
 
 
June 30,
 
 
 
2018
 
 
2017
 
Operating activities
 
 
 
 
 
 
Net income
 $54 
  2,386 
Adjustments to reconcile net income to net cash (used in) / provided by operating activities:
    
    
Stock-based compensation
  63 
  63 
Net amortization of premiums on investments in fixed-maturity securities
  7 
  42 
Depreciation and amortization
  11 
  11 
Net realized investment losses (gains)
  176 
  (48)
       Change in fair value of equity securities
  96 
  - 
Change in operating assets and liabilities:
    
    
Accrued interest and dividend receivable
  11 
  (8)
Premiums receivable
  1,460 
  (8,074)
Deferred policy acquisition costs
  (215)
  (449)
Unearned premiums ceded
  - 
  (733)
Prepayment and other assets
  (24)
  (53)
Reserve for losses and loss adjustment expenses
  (4,669)
  (5,659)
Loss experience refund payable
  (135)
  1,260 
Losses payable
  410 
  1,467 
Unearned premiums reserve
  381 
  12,815 
Accounts payable and other liabilities
  839 
  (52)
 
    
    
Net cash (used in) / provided by operating activities
 $(1,535)
  2,968 
 
    
    
Investing activities
    
    
Purchase of fixed-maturity securities
  (3,336)
  (3,987)
Purchase of equity securities
  (5,804)
  (10,007)
Proceeds from sale of fixed-maturity and equity securities
  9,033 
  9,678 
Purchase of property and equipment
  - 
  (6)
 
    
    
Net cash used in investing activities
 $(107)
  (4,322)
 
    
    
Financing activities
    
    
Proceeds on issuance of notes payable to Series 2018-1 noteholders
  2,000 
  - 
Repurchases of common stock under share repurchase plan
  - 
  (671)
Dividends paid
  - 
  (1,403)
 
    
    
Net cash provided by / (used in) financing activities
 $2,000 
  (2,074)
 
 
 
(continued)
 
 
 
6
 
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
 Consolidated Statements of Cash Flows, continued
(Unaudited)
(expressed in thousands of U.S. Dollars)
 
 
 
Six Months Ended     
 
 
 
June 30,     
 
 
 
2018
 
 
 2017
 
Cash and cash equivalents, and restricted cash and cash equivalents:
 
 
 
 
 
 
Net change during the period
  358 
  (3,428)
Balance, beginning of period
  10,887 
  35,682 
 
    
    
Balance, end of period
 $11,245 
  32,254 
 
    
    
Supplemental disclosure of cash flow information
    
    
Interest paid
  - 
  - 
Income taxes paid
  - 
  - 
 
    
    
Non-cash investing activities
    
    
Net change in unrealized gain on securities available for sale
  (1)
  92 

The accompanying Notes to Consolidated Financial Statements are an integral
part of the Consolidated Financial Statements.
 
 
7
 
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity (unaudited)
 Six Months Ended June 30, 2018 and 2017
(expressed in thousands of U.S. Dollars, except per share and share amounts)
 
 
 
 
Ordinary Share Capital
 
 
Additional Paid-in
 
 
Retained Earnings /
 
 
Accumulated Other
 
 
Total Shareholders'
 
 
 
Shares
 
 
Amount
 
 
Capital
 
 
(Accumulated Deficit)
 
 
Comprehensive Loss
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
  5,916,149 
 $6 
 $33,034 
 $4,534 
 $(411)
 $37,163 
Cash dividends paid
  - 
  - 
  - 
  (1,403)
  - 
  (1,403)
Repurchase and retirement of common stock under share repurchase plan
  (109,815)
  - 
  (671)
  - 
  - 
  (671)
Net income for the period
  - 
  - 
  - 
  2,386 
  - 
  2,386 
Stock-based compensation
  - 
  - 
  63 
  - 
  - 
  63 
Total other comprehensive loss
  - 
  - 
  - 
  - 
  92 
  92 
Balance at June 30, 2017
  5,806,334 
  6 
  32,426 
  5,517 
  (319)
  37,630 
 
    
    
    
    
    
    
 
    
    
    
    
    
    
 Balance at December 31, 2017
  5,733,587 
  6 
  32,100 
  (18,149)
  (39)
  13,918 
Cumulative effect of change in accounting for equity securities as of January 1, 2018
  - 
  - 
  - 
  (22)
  22 
  - 
Net income for the period
  - 
  - 
  - 
  54 
  - 
  54 
Stock-based compensation
  - 
  - 
  63 
  - 
  - 
  63 
Total other comprehensive loss
  - 
  - 
  - 
  - 
  (4)
  (4)
Balance at June 30, 2018
  5,733,587 
 $6 
 $32,163 
 $(18,117)
 $(21)
 $14,031 
 
The accompanying Notes to Consolidated Financial Statements are an integral
part of the Consolidated Financial Statements.
 
 
8
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
June 30, 2018
 
 
1. 
ORGANIZATION AND BASIS OF PRESENTATION
 
(a) 
Organization
 
Oxbridge Re Holdings Limited (the “Company”) was incorporated as an exempted company on April 4, 2013 under the laws of the Cayman Islands. Oxbridge Re Holdings Limited owns 100% of the equity interest in Oxbridge Reinsurance Limited, an entity incorporated on April 23, 2013 under the laws of the Cayman Islands and for which a Class “C” Insurer’s license was granted on April 29, 2013 under the provisions of the Cayman Islands Insurance Law. Oxbridge Re Holdings Limited also owns 100% of the equity interest in Oxbridge Re NS, an entity incorporated as an exempted company on December 22, 2017 under the laws of the Cayman Islands to function as a reinsurance sidecar facility and to increase the underwriting capacity of Oxbridge Reinsurance Limited. The Company, through its subsidiaries (collectively “Oxbridge Re”) provides collateralized reinsurance in the property catastrophe market and invests in various insurance-linked securities. The Company operates as a single business segment through its wholly-owned subsidiaries. The Company’s headquarters and principal executive offices are located at Strathvale House, 90 North Church Street, Georgetown, Grand Cayman, Cayman Islands, and have their registered offices at P.O. Box 309, Ugland House, Grand Cayman, Cayman Islands.
 
The Company’s ordinary shares and warrants are listed on The NASDAQ Capital Market under the symbols “OXBR” and “OXBRW,” respectively.
 
(b) 
Basis of Presentation and Consolidation
 
The accompanying unaudited, consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, and the Securities and Exchange Commission (“SEC”) rules for interim financial reporting. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying interim consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the Company’s consolidated financial position as of June 30, 2018 and the consolidated results of operations and cash flows for the periods presented. The consolidated results of operations for interim periods are not necessarily indicative of the results of operations to be expected for any subsequent interim period or for the fiscal year ended December 31, 2018. The accompanying unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2017 included in the Company’s Form 10-K, which was filed with the SEC on March 13, 2018.
 
In preparing the interim unaudited consolidated financial statements, management was required to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the financial reporting date and throughout the periods being reported upon. Certain of the estimates result from judgments that can be subjective and complex and consequently actual results may differ from these estimates, which would be reflected in future periods.
 
 
9
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
June 30, 2018
 
Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the reserve for losses and loss adjustment expenses, which include amounts estimated for claims incurred but not yet reported. The Company uses various assumptions and actuarial data it believes to be reasonable under the circumstances to make these estimates. In addition, accounting policies specific to valuation of investments, assessment of other-than-temporary impairment (“OTTI”) and loss experience refund payable involve significant judgments and estimates material to the Company’s consolidated financial statements. Although considerable variability is likely to be inherent in these estimates, management believes that the amounts provided are reasonable. These estimates are continually reviewed and adjusted if necessary. Such adjustments are reflected in current operations.
 
The Company consolidates in these Consolidated Financial Statements the results of operations and financial position of all voting interest entities (“VOE”) in which the Company has a controlling financial interest and all variable interest entities (“VIE”) in which the Company is considered to be the primary beneficiary. The consolidation assessment, including the determination as to whether an entity qualifies as a VIE or VOE, depends on the facts and circumstances surrounding each entity.
 
All significant intercompany balances and transactions have been eliminated.
 
2. 
SIGNIFICANT ACCOUNTING POLICIES
 
Cash and cash equivalents: Cash and cash equivalents are comprised of cash and short term investments with original maturities of three months or less.
 
Restricted cash and cash equivalents: Restricted cash and cash equivalents represent funds held in accordance with the Company’s trust agreements with ceding insurers and trustees, which requires the Company to maintain collateral with a market value greater than or equal to the limit of liability, less unpaid premium.
 
Investments: The Company’s investments consist of fixed-maturity securities and equity securities, and for which its fixed-maturity securities are classified as available-for-sale. The Company’s investments are carried at fair value with changes in fair value included as a separate component of accumulated other comprehensive loss in shareholders’ equity with respect to its fixed-maturity securities. For the Company’s investment in equity securities, the changes in fair value are recorded within the consolidated statements of operations.
 
Unrealized gains or losses are determined by comparing the fair market value of the securities with their cost or amortized cost. Realized gains and losses on investments are recorded on the trade date and are included in the consolidated statements of operations. The cost of securities sold is based on the specified identification method. Investment income is recognized as earned and discounts or premiums arising from the purchase of debt securities are recognized in investment income using the interest method over the remaining term of the security.
 
 
10
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
June 30, 2018
 
The Company reviews all fixed-maturity securities for other-than-temporary impairment ("OTTI") on a quarterly basis and more frequently when economic or market conditions warrant such review. When the fair value of any investment is lower than its cost, an assessment is made to see whether the decline is temporary of other-than-temporary. If the decline is determined to be other-than-temporary the investment is written down to fair value and an impairment charge is recognized in operations in the period in which the Company makes such determination. For a fixed-maturity security that the Company does not intend to sell nor is it more likely than not that the Company will be required to sell before recovery of its amortized cost, only the credit loss component is recognized in operations, while impairment related to all other factors is recognized in other comprehensive income. The Company considers various factors in determining whether an individual security is other-than-temporarily impaired (see Note 4).
 
Fair value measurement: GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under GAAP are as follows:
 
Level 1
Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date;
 
 
Level 2
Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active; and
 
 
Level 3
Inputs that are unobservable.
 
Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. For fixed-maturity securities, inputs may include price information, volatility statistics, specific and broad credit data, liquidity statistics, broker quotes for similar securities and other factors. The fair value of investments in common stocks and exchange-traded funds is based on the last traded price. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company’s investment custodians. The investment custodians consider observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant markets. The categorization of a financial instrument within the hierarchy is based upon the pricing transparency of the instrument.
 
 
11
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
June 30, 2018
 
Derivative Financial Instruments
 
The Company may from time to time enter into underwriting contracts such as industry loss warranty contracts (“ILW”) that are treated as derivatives for GAAP purposes. GAAP requires that an entity recognize all derivatives in the balance sheet at fair value. It also requires that unrealized gains and losses resulting from changes in fair value be included in operations or comprehensive (loss) income. The Company’s derivative financial instrument assets are included in prepayments and other assets. Derivative financial instrument liabilities are included in accounts payable and other liabilities.
 
Deferred policy acquisition costs (“DAC”): Policy acquisition costs consist of brokerage fees, federal excise taxes and other costs related directly to the successful acquisition of new or renewal insurance contracts and are deferred and amortized over the terms of the reinsurance agreements to which they relate. The Company evaluates the recoverability of DAC by determining if the sum of future earned premiums and anticipated investment income is greater than the expected future claims and expenses. If a loss is probable on the unexpired portion of policies in force, a premium deficiency loss is recognized. At June 30, 2018, the DAC was considered fully recoverable and no premium deficiency loss was recorded.
 
Property and equipment:  Property and equipment are recorded at cost when acquired. Property and equipment are comprised of motor vehicles, furniture and fixtures, computer equipment and leasehold improvements and are depreciated, using the straight-line method, over their estimated useful lives, which are five years for furniture and fixtures and computer equipment and four years for motor vehicles. Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or remaining lease term. The Company periodically reviews property and equipment that have finite lives, and that are not held for sale, for impairment by comparing the carrying value of the assets to their estimated future undiscounted cash flows. For the three-month period ended June 30, 2018, there were no impairments in property and equipment.
 
Allowance for uncollectible receivables: Management evaluates credit quality by evaluating the exposure to individual counterparties; where warranted management also considers the credit rating or financial position, operating results and/or payment history of the counterparty. Management establishes an allowance for amounts for which collection is considered doubtful. Adjustments to previous assessments are recognized as income in the year in which they are determined. At June 30, 2018, no receivables were determined to be overdue or impaired and, accordingly, no allowance for uncollectible receivables has been established.
 
Reserves for losses and loss adjustment expenses: The Company determines its reserves for losses and loss adjustment expenses on the basis of the claims reported by the Company’s ceding insurers and for losses incurred but not reported (“IBNR”), management uses the assistance of an independent actuary. The reserves for losses and loss adjustment expenses represent management’s best estimate of the ultimate settlement costs of all losses and loss adjustment expenses. Management believes that the amounts are adequate; however, the inherent impossibility of predicting future events with precision, results in uncertainty as to the amount which will ultimately be required for the settlement of losses and loss expenses, and the differences could be material. Adjustments are reflected in the consolidated statements of operations in the period in which they are determined.
 
 
12
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
June 30, 2018
 
 
 
Loss experience refund payable: Certain contracts include retrospective provisions that adjust premiums or result in profit commissions in the event losses are minimal or zero. In accordance with GAAP, the Company will recognize a liability in the period in which the absence of loss experience obligates the Company to pay cash or other consideration under the contracts. On the contrary, the Company will derecognize such liability in the period in which a loss experience arises. Such adjustments to the liability, which accrue throughout the contract terms, will reduce the liability should a catastrophic loss event covered by the Company occur.
 
Premiums assumed: The Company records premiums assumed, net of loss experience refunds, as earned pro-rata over the terms of the reinsurance agreements, or period of risk, where applicable, and the unearned portion at the consolidated balance sheet date is recorded as unearned premiums reserve. A reserve is made for estimated premium deficiencies to the extent that estimated losses and loss adjustment expenses exceed related unearned premiums. Investment income is not considered in determining whether or not a deficiency exists.
 
Subsequent adjustments of premiums assumed, based on reports of actual premium by the ceding companies, or revisions in estimates of ultimate premium, are recorded in the period in which they are determined. Such adjustments are generally determined after the associated risk periods have expired, in which case the premium adjustments are fully earned when assumed.
 
Certain contracts allow for reinstatement premiums in the event of a full limit loss prior to the expiration of the contract. A reinstatement premium is not due until there is a full limit loss event and therefore, in accordance with GAAP, the Company records a reinstatement premium as written only in the event that the reinsured incurs a full limit loss on the contract and the contract allows for a reinstatement of coverage upon payment of an additional premium. For catastrophe contracts which contractually require the payment of a reinstatement premium equal to or greater than the original premium upon the occurrence of a full limit loss, the reinstatement premiums are earned over the original contract period. Reinstatement premiums that are contractually calculated on a pro-rata basis of the original premiums are earned over the remaining coverage period.
 
Unearned Premiums Ceded: The Company reduces the risk of future losses on business assumed by reinsuring certain risks and exposures with other reinsurers (retrocessionaires). The Company remains liable to the extent that any retrocessionaire fails to meet its obligations and to the extent that the Company does not hold sufficient security for their unpaid obligations.
 
Ceded premiums are written during the period in which the risk incept and are expensed over the contract period in proportion to the period of protection. Unearned premiums ceded consist of the unexpired portion of the reinsurance obtained.
 
 
 
13
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
June 30, 2018
 
Uncertain income tax positions: The authoritative GAAP guidance on accounting for, and disclosure of, uncertainty in income tax positions requires the Company to determine whether an income tax position of the Company is more likely than not to be sustained upon examination by the relevant tax authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For income tax positions meeting the more likely than not threshold, the tax amount recognized in the consolidated financial statements, if any, is reduced by the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant taxing authority. The application of this authoritative guidance has had no effect on the Company’s consolidated financial statements because the Company had no uncertain tax positions at June 30, 2018.
 
Earnings per share: Basic earnings per share has been computed on the basis of the weighted-average number of ordinary shares outstanding during the periods presented. Diluted earnings per share is computed based on the weighted-average number of ordinary shares outstanding and reflects the assumed exercise or conversion of diluted securities, such as stock options and warrants, computed using the treasury stock method.
 
Stock-Based Compensation: The Company accounts for stock-based compensation under the fair value recognition provisions of GAAP which requires the measurement and recognition of compensation for all stock-based awards made to employees and directors, including stock options and restricted stock issuances based on estimated fair values. The Company measures compensation for restricted stock based on the price of the Company’s ordinary shares at the grant date. Determining the fair value of share purchase options at the grant date requires significant estimation and judgment. The Company uses an option-pricing model (Black-Scholes option pricing model) to assist in the calculation of fair value for share purchase options. The Company's shares have not been publicly traded for a sufficient length of time to solely use the Company's performance to reasonably estimate the expected volatility. Therefore, when estimating the expected volatility, the Company takes into consideration the historical volatility of similar entities. The Company considers factors such as an entity's industry, stage of life cycle, size and financial leverage when selecting similar entities. The Company uses a sample peer group of companies in the reinsurance industry as well as the Company’s own historical volatility in determining the expected volatility. Additionally, the Company uses the full life of the options, ten years, as the estimated term of the options, and has assumed no forfeitures during the life of the options.
 
The Company uses the straight-line attribution method for all grants that include only a service condition. Compensation expense related to all awards is included in general and administrative expenses. 
 
Recent adopted accounting pronouncements:
 
Accounting Standards Update No. 2016-01. In January 2016, the FASB revised GAAP with the issuance of Accounting Standards Update 2016-01 (“ASU 2016-01”), Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities to improve the recognition and measurement of financial instruments. The new ASU requires certain investments in equity securities to be measured at fair value with changes in fair value reported in operations and requires changes in instrument-specific credit risk for financial liabilities recorded at fair value under the fair value option to be reported in Other Comprehensive (Loss) Income. The company adopted this ASU on January 1, 2018, and applied it prospectively without prior period amounts restated. As a result of the adoption, $22 thousand of unrealized losses on equity securities was reclassified on January 1, 2018, from accumulated other comprehensive loss to accumulated deficit. Results of operations were impacted as changes in fair value of equity securities are now reported as a separate component in net income instead of reported in other comprehensive income.
 
14
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
June 30, 2018
 
 
Accounting Standards Update No. 2016-18. In November 2016, the FASB revised GAAP, Statement of Cash Flows (Topic 230): Restricted Cash with the issuance of the ASU 2016-18, to reduce diversity in the classification and presentation of changes in restricted cash in the statement of cash flows. The new ASU requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The Company is required to reconcile such total to amounts on the Consolidated Balance Sheets and disclose the nature of the restrictions. The Company adopted this ASU effective January 1, 2018, which only resulted in a change in the presentation of the Consolidated Statements of Cash Flows.
 
Accounting Standards Update No. 2017-09. In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 clarifies when to account for a change to the terms or conditions of a share based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The effective date of ASU 2017-09 was for interim and annual reporting periods, beginning after December 15, 2017, and was applied prospectively. The company adopted this ASU effective January 1, 2018, and it did not have a material impact on our company's consolidated financial position, cash flows or results of operations.
 
Pending Accounting Updates:
 
Accounting Standards Update No. 2016-13. In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurements of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 amends the guidance on reporting credits losses and affects loans, debt securities, trade receivables, reinsurance recoverables and other financial assets that have the contractual right to receive cash. The amendments are effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted for any organization for annual periods beginning after December 15, 2018 and interim periods within those annual periods. The Company is in the process of evaluating the impact of the requirements of ASU 2016-13 on the Company’s consolidated financial statements and anticipates implementing ASU 2016-13 during the first quarter of fiscal year 2020.
 
 
15
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
June 30, 2018
 
 
Accounting Standards Update No. 2016-02. In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which supersedes Topic 840 and creates the new lease accounting standards for lessees and lessors, primarily related to the recognition of lease assets and liabilities by lessees for leases classified as operating leases. ASU 2016-02 is effective for all public entities for reporting periods beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted for all entities. The Company is currently evaluating the impact of this guidance on the Company’s consolidated financial statements.
 
Accounting Standards Update No. 2018-07. In June 2018, the FASB issued ASU No. 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The ASU is intended to reduce the cost and complexity and to improve financial reporting for nonemployee share-based payments. The ASU expands the scope of Topic 718. Compensation Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes Subtopic 505-50, Equity-Equity-Based payments to Non-Employees. The ASU is effective for the Company for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company is currently evaluating the impact of the ASU, if any, on its consolidated financial statements
 
Segment Information: Under GAAP, operating segments are based on the internal information that management uses for allocating resources and assessing performance as the source of the Company’s reportable segments. The Company manages its business on the basis of one operating segment, Property and Casualty Reinsurance, in accordance with the qualitative and quantitative criteria established under GAAP.
 
Reclassifications: Certain reclassifications of prior period amounts have been made to conform to the current period presentation.
 
3. CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AND CASH EQUIVALENTS
 
 
 
At June 30,
 
 
At December 31,
 
 
 
2018
 
 
2017
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Cash on deposit
 $1,025 
 $4,052 
Cash held with custodians
  6,028 
  3,711 
Restricted cash held in trust
  4,192 
  3,124 
 
    
    
Total
  11,245 
  10,887 
 
Cash and cash equivalents are held by large and reputable counterparties in the United States of America and in the Cayman Islands. Restricted cash held in trust is custodied with SunTrust Bank and is held in accordance with the Company’s trust agreements with the ceding insurers and trustees, which require that the Company provide collateral having a market value greater than or equal to the limit of liability, less unpaid premium.
 
 
16
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
June 30, 2018
 
4. INVESTMENTS
 
The Company holds investments in fixed-maturity securities and equity securities, with its fixed-maturity securities classified as available-for-sale. At June 30, 2018 and December 31, 2017, the cost or amortized cost, gross unrealized gains and losses, and estimated fair value of the Company’s available-for-sale securities by security type were as follows:
 
 
 
Cost or
 
 
Gross
 
 
Gross
 
 
Estimated
 
 
 
Amortized
 
 
Unrealized
 
 
Unrealized
 
 
Fair
 
 
 
Cost
 
 
Gain
 
 
Loss
 
 
Value ($000)
 
 
 
($ in thousands)
 
As of June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-maturity securities
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency securities
 $4,779 
 $2 
 $(23)
 $4,758 
 
    
    
    
    
 
    
    
    
    
Total fixed-maturity securities
  4,779 
  2 
  (23)
  4,758 
 
    
    
    
    
 
    
    
    
    
Total available for sale securities
 $4,779 
 $2 
 $(23)
 $4,758 
 
As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-maturity securities
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency securities
 $4,450 
 $- 
 $(17)
 $4,433 
 
    
    
    
    
 
    
    
    
    
Total fixed-maturity securities
  4,450 
  - 
  (17)
  4,433 
 
    
    
    
    
Mutual funds
  400 
  29 
  - 
  429 
Preferred stocks
  200 
  - 
  (1)
  199 
Common stocks
  1,458 
  12 
  (62)
  1,408 
 
    
    
    
    
Total equity securities (1)
  2,058 
  41 
  (63)
  2,036 
 
    
    
    
    
 
    
    
    
    
Total available for sale securities
 $6,508 
 $41 
 $(80)
 $6,469 
 
(1) Effective January 1, 2018, the Company adopted ASU No. 2016-01 and equity securities are no longer classified as available-for-sale. Prior periods have not been restated to conform to the current presentation. See Note 2, Accounting Policies, for additional information.
 
At June 30, 2018 and December 31, 2017, available-for-sale securities with fair value of $4,393,000 and $1,430,000, respectively, are held in trust accounts as collateral under reinsurance contacts with the Company’s ceding insurers.
 
 
17
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
June 30, 2018
 
4. 
INVESTMENTS (continued)
 
Expected maturities will differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without penalties. The scheduled contractual maturities of fixed-maturity securities at June 30, 2018 and December 31, 2017 are as follows:
 
 
 
Amortized
 
 
Estimated
 
 
 
Cost
 
 
Fair Value
 
 
 
($ in thousands)
 
As of June 30, 2018
 
 
 
 
 
 
Available for sale
 
 
 
 
 
 
Due within one year
 $1,854 
  1,855 
Due after one year through five years
  2,925 
  2,903 
 
    
    
 
    
    
 
 $4,779 
 $4,758 
 
    
    
 
    
    
As of December 31, 2017
    
    
Available for sale
    
    
Due within one year
 $3,007 
 $3,003 
Due after one year through five years
  1,443 
  1,430 
 
    
    
 
 $4,450 
 $4,433 
 
Proceeds received, and the gross realized gains and losses from sales of available-for-sale fixed-maturity securities, and equity securities, for the three months ended June 30, 2018 and 2017 were as follows:
 
 
 
Gross 
 
 
Gross
 
 
Gross
 
 
 
 proceeds
 
 
Realized
 
 
Realized
 
 
 
 from sales
 
 
Gains
 
 
Losses
 
 
 
($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
Available-for-sale fixed-maturity securities
 $- 
 $- 
 $- 
 
    
    
    
Equity securities
 $- 
 $- 
 $- 
 
    
    
    
Six Months Ended June 30, 2018
    
    
    
Available-for-sale fixed-maturity securities
 $3,000 
 $3 
 $- 
 
    
    
    
Equity securities
 $6,033 
 $418 
 $(594)
 
    
    
    
Three Months Ended June 30, 2017
    
    
    
Available-for-sale fixed-maturity securities
 $- 
 $- 
 $- 
 
    
    
    
Equity securities
 $6,101 
 $540 
 $(494)
 
    
    
    
Six Months Ended June 30, 2017
    
    
    
Available-for-sale fixed-maturity securities
 $- 
 $- 
 $- 
 
    
    
    
Equity securities
 $9,678 
 $732 
 $(684)
 
 
18
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
June 30, 2018
 
4. 
INVESTMENTS (continued)
 
The Company regularly reviews its individual fixed-maturity securities for OTTI. The Company considers various factors in determining whether each individual fixed-maturity security is other-than-temporarily impaired, including:
 
the financial condition and near-term prospects of the issuer, including any specific events that may affect its operations or income;
 
the length of time and the extent to which the market value of the security has been below its cost or amortized cost;
 
general market conditions and industry or sector specific factors;
 
nonpayment by the issuer of its contractually obligated interest and principal payments; and
 
the Company’s intent and ability to hold the investment for a period of time sufficient to allow for the recovery of costs.
 
Available-for-sale securities with gross unrealized loss positions at June 30, 2018 and December 31, 2017, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows:
 
 
 
Less Than Twelve
 
 
Twelve Months or
 
 

 
 
 
Months
 
 
Greater
 
 
Total
 
 
 
Gross
 
 
Estimated
 
 
Gross
 
 
Estimated
 
 
Gross
 
 
Estimated
 
 
 
Unrealized
 
 
Fair
 
 
Unrealized
 
 
Fair
 
 
Unrealized
 
 
Fair
 
As of June 30, 2018
 
Loss
 
 
Value
 
 
Loss
 
 
Value
 
 
Loss
 
 
Value
 
 
 
($ in thousands)
 
 
($ in thousands)
 
 
($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency securities
 $23 
  3,399 
  - 
  - 
  23 
  3,399 
 
    
    
    
    
    
    
Total fixed-maturity securities
  23 
  3,399 
  - 
  - 
  23 
  3,399 
 
    
    
    
    
    
    
Total available for sale securities
 $23 
 $3,399 
 $- 
 $- 
 $23 
 $3,399 
 
At June 30, 2018, there were 5 securities in an unrealized loss position of which none of these positions had been in an unrealized loss position for 12 months or greater.
 
 
19
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
June 30, 2018
 
4. 
INVESTMENTS (continued)
 
 
 
Less Than Twelve
 
 
Twelve Months or
 
 
         
 
 
 
Months
 
 
Greater
 
 
Total
 
 
 
Gross
 
 
Estimated
 
 
Gross
 
 
Estimated
 
 
Gross
 
 
Estimated
 
 
 
Unrealized
 
 
Fair
 
 
Unrealized
 
 
Fair
 
 
Unrealized
 
 
Fair
 
As of December 31, 2017
 
Loss
 
 
Value
 
 
Loss
 
 
Value
 
 
Loss
 
 
Value
 
 
 
($ in thousands)
 
 
($ in thousands)
 
 
($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency securities
 $13 
  1,428 
  4 
  3,003 
  17 
  4,431 
 
    
    
    
    
    
    
Total fixed-maturity securities
  13 
  1,428 
  4 
  3,003 
  17 
  4,431 
 
    
    
    
    
    
    
Equity securities
    
    
    
    
    
    
Preferred stocks
  1 
  199 
  - 
  - 
  1 
  199 
All other common stocks
  36 
  769 
  26 
  174 
  62 
  943 
 
    
    
    
    
    
    
Total equity securities
  37 
  968 
  26 
  174 
  63 
  1,142 
 
    
    
    
    
    
    
 
    
    
    
    
    
    
Total available for sale securities
 $50 
 $2,396 
 $30 
 $3,177 
 $80 
 $5,573 
 
At December 31, 2017, there were 8 securities in an unrealized loss position of which 2 of these positions had been in an unrealized loss position for 12 months or greater.
 
The Company believes there were no fundamental issues such as credit losses or other factors with respect to its fixed-maturity securities. It is expected that the securities would not be settled at a price less than the par value of the investments and because the Company has the ability and intent to hold these securities and it is probable that the Company will not be required to sell these securities until a market price recovery or maturity, the Company does not consider any of its fixed-maturity securities to be other-than-temporarily impaired at June 30, 2018 and December 31, 2017.
 
In determining whether equity securities are other than temporarily impaired, the Company considers its intent and ability to hold a security for a period of time sufficient to allow for the recovery of cost, along with factors including the length of time each security had been in an unrealized loss position, the extent of the decline and the near-term prospect for recovery. Based on management’s evaluation, the Company did not consider any of its equity securities to be other-than-temporarily impaired at December 31, 2017. Additionally, upon adoption of ASU 2016-01, changes in fair value of equity securities are now recorded within the consolidation statements of operations, and as such, OTTI considerations are no longer made with respect to equity securities.
 
 
20
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
June 30, 2018
 
4. 
INVESTMENTS (continued)
 
Assets Measured at Estimated Fair Value on a Recurring Basis
 
The following table presents information about the Company’s financial assets measured at estimated fair value on a recurring basis that is reflected in the consolidated balance sheets at carrying value. The table indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as of June 30, 2018 and December 31, 2017:
 
 
 
 
Fair Value Measurements Using
 
 
 
 
 
 
(Level 1)
 
 
(Level 2)
 
 
(Level 3)
 
 
Total
 
As of June 30, 2018
 
($ in thousands)
 
Financial Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 $7,053 
 $- 
 $- 
 $7,053 
 
    
    
    
    
Restricted cash and cash equivalents
 $4,192 
 $- 
 $- 
 $4,192 
 
    
    
    
    

    
    
    
    
U.S. Treasury and agency securities
  4,758 
  - 
  - 
  4,758 
 
    
    
    
    
 
    
    
    
    
Total fixed-maturity securities
  4,758 
  - 
  - 
  4,758 
 
    
    
    
    
Mutual funds
  555 
  - 
  - 
  555 
All other common stocks
  980 
  - 
  - 
  980 
 
    
    
    
    
Total equity securities
  1,535 
  - 
  - 
  1,535 
 
    
    
    
    
Total securities
  6,293 
  - 
  - 
  6,293 
 
    
    
    
    
Total
 $17,538 
 $- 
 $- 
 $17,538 
 
As disclosed in Note 5, the Company is a counterparty to an investment in an industry loss warranty swap. The swap was valued on the basis of models developed by the counterparty, which represent unobservable (Level 3).
 
There were no transfers between Levels 1, 2 and 3 during the three months ended June 30, 2018.
 
 
21
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
June 30, 2018
 
4. 
INVESTMENTS (continued)
 
 
 
 
 
Fair Value Measurements Using
 
 
 
 
 
 
(Level 1)
 
 
(Level 2)
 
 
(Level 3)
 
 
Total
 
As of December 31, 2017
 
($ in thousands)
 
Financial Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 $7,763 
 $- 
 $- 
 $7,763 
 
    
    
    
    
Restricted cash and cash equivalents
 $3,124 
 $- 
 $- 
 $3,124 
 
    
    
    
    

    
    
    
    
U.S. Treasury and agency securities
  4,433 
  - 
  - 
  4,433 
 
    
    
    
    
 
    
    
    
    
Total fixed-maturity securities
  4,433 
  - 
  - 
  4,433 
 
    
    
    
    
 
    
    
    
    
Mutual funds
  429 
  - 
  - 
  429 
Preferred stocks
  199 
  - 
  - 
  199 
All other common stocks
  1,408 
  - 
  - 
  1,408 
 
    
    
    
    
Total equity securities
  2,036 
  - 
  - 
  2,036 
 
    
    
    
    
Total available for sale securities
  6,469 
  - 
  - 
  6,469 
 
    
    
    
    
Total
 $17,356 
 $- 
 $- 
 $17,356 
 
5.  DERIVATIVE INSTRUMENTS
 
Inward Industry Loss Warranty ("ILW") Swap
 
In January 2018, the Company entered into an inward ILW swap (the "2018 Inward ILW Swap") with a third-party under which qualifying loss payments are triggered by reference to the level of losses incurred by the insurance industry as a whole, rather than by losses incurred by the insured. In return for a fixed payment received of $1 million, the Company is required to make a floating payment in the event of certain losses incurred from specified natural catastrophes in North America, Caribbean, Europe, Japan, Australia, New Zealand and Latin America from January 2018 to December 2018. The Company’s maximum payment obligation under the 2018 Inward ILW Swap is $4 million. During the quarter ending June 30, 2018, the Company was not aware of any industry loss event occurring that would have triggered a payment obligation under the 2018 Inward ILW Swap.
 
The Inward ILW Swap was valued on the basis of models developed by the counterparty, which represent unobservable (Level 3) inputs. As of June 30, 2018, the fair value of the 2018 Inward ILW Swap was $0.62 million, and was recorded with "accounts payable and other liabilities" on the Company's June 30, 2018 Consolidated Balance Sheet.
 
 
22
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
June 30, 2018
 
5.  DERIVATIVE INSTRUMENTS (continued)
 
Inward Industry Loss Warranty ("ILW") Swap
 
During the three and six months ended June 30, 2018, the Company recognized a gain from derivative instruments of $0.2 million and $0.37 million, respectively, pursuant to the 2018 Inward ILW Swap.
 
6.  TAXATION
 
Under current Cayman Islands law, no corporate entity, including the Company and the subsidiaries, is obligated to pay taxes in the Cayman Islands on either income or capital gains. The Company and its subsidiaries have an undertaking from the Governor-in-Cabinet of the Cayman Islands, pursuant to the provisions of the Tax Concessions Law, as amended, that, in the event that the Cayman Islands enacts any legislation that imposes tax on profits, income, gains or appreciations, or any tax in the nature of estate duty or inheritance tax, such tax will not be applicable to the Company and its subsidiaries or their operations, or to the ordinary shares or related obligations, until April 23, 2033 and May 17, 2033, respectively.
 
The Company and its subsidiaries intend to conduct substantially all of their operations in the Cayman Islands in a manner such that they will not be engaged in a trade or business in the U.S. However, because there is no definitive authority regarding activities that constitute being engaged in a trade or business in the U.S. for federal income tax purposes, the Company cannot assure that the U.S. Internal Revenue Service will not contend, perhaps successfully, that the Company or its subsidiary is engaged in a trade or business in the U.S. A foreign corporation deemed to be so engaged would be subject to U.S. federal income tax, as well as branch profits tax, on its income that is treated as effectively connected with the conduct of that trade or business unless the corporation is entitled to relief under an applicable tax treaty.
 
 
23
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
June 30, 2018
 
7. VARIABLE INTEREST ENTITIES
 
Oxbridge Re NS. On December 22, 2017, the Company established Oxbridge Re NS, a Cayman domiciled and licensed special purpose insurer, formed to provide additional collateralized capacity to support Oxbridge Reinsurance Limited’s reinsurance business. In respect of the debt issued by Oxbridge Re NS to investors, Oxbridge Re NS has entered into a retrocession agreement with Oxbridge Reinsurance Limited effective June 1, 2018. Under this agreement, Oxbridge Re NS receives a quota share of Oxbridge Reinsurance Limited’s catastrophe business. Oxbridge Re NS is a non-rated insurer and the risks have been fully collateralized by way of funds held in trust for the benefit of Oxbridge Reinsurance Limited. Oxbridge Re NS is able to provide investors with access to diversified natural catastrophe risk backed by the distribution, underwriting, analysis and research expertise of Oxbridge Re.
 
The Company has determined that Oxbridge Re NS meets the definition of a VIE as it does not have sufficient equity capital to finance its activities. The Company concluded that it is the primary beneficiary and has consolidated the subsidiary upon its formation, as it owns 100% of the voting shares, 100% of the issued share capital and has a significant financial interest and the power to control the activities of Oxbridge Re NS that most significantly impacts its economic performance. The Company has no other obligation to provide financial support to Oxbridge Re NS. Neither the creditors nor beneficial interest holders of Oxbridge Re NS have recourse to the Company’s general credit.
 
Upon issuance of a series of participating notes by Oxbridge Re NS, all of the proceeds from the issuance are deposited into collateral accounts, to fund any potential obligation under the reinsurance agreements entered into with Oxbridge Reinsurance Limited underlying such series of notes. The outstanding principal amount of each series of notes generally is expected to be returned to holders of such notes upon the expiration of the risk period underlying such notes, unless an event occurs which causes a loss under the applicable series of notes, in which case the amount returned is expected to be reduced by such noteholder's pro rata share of such loss, as specified in the applicable governing documents of such notes. In addition, holders of such notes are generally entitled to interest payments, payable annually, as determined by the applicable governing documents of each series of notes. Oxbridge Re Holdings Limited receives an origination and structuring fee in connection with the formation, management and operation of Oxbridge Re NS.
 
 
 
24
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
June 30, 2018
 
7. VARIABLE INTEREST ENTITIES (continued)
 
Notes Payable to Series 2018-1 noteholders
 
Oxbridge Re NS issued $2 million of participating notes on June 1, 2018, all of which were issued to third parties and which provides quota share support for Oxbridge Re’s global property catastrophe excess of loss reinsurance business. The operations of Oxbridge Re NS commenced on June 1, 2018. The participating notes are due to mature on June 1, 2021. None of the participating notes were redeemed during the period ending June 30, 2018.
 
The income from Oxbridge Re NS operations that are attributable to the participating notes noteholders for the three and six months ended June 30, 2018 was $61,602, and are included within accounts payable and other liabilities as at June 30, 2018.
 
8.  RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
 
The following table summarizes the Company’s loss and loss adjustment expenses (“LAE”) and the reserve for loss and LAE reserve movements for the three and six-month periods ending June 30, 2018 and 2017:
 
 
 
Three Months Ended
 
 
Six Months Ended
 
 
 
June 30,
 
 
June 30,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
 
($ in thousands)
 
 
($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
 $4,154 
  5,684 
 $4,836 
  8,702 
Incurred related to:
    
    
    
    
     Current period
  - 
  - 
  - 
  - 
     Prior period 1
  (1,012)
  1,059 
  (1,012)
  1,027 
           Total incurred
  (1,012)
  1,059 
  (1,012)
  1,027 
Paid related to:
    
    
    
    
     Current period
  - 
  - 
  - 
  - 
     Prior period
  (2,975)
  (3,700)
  (3,657)
  (6,686)
           Total paid
  (2,975)
  (3,700)
  (3,657)
  (6,686)
Balance, end of period
 $167 
  3,043 
 $167 
  3,043 
 
 
The reserves for losses and LAE are comprised of case reserves (which are based on claims that have been reported) and IBNR reserves (which are based on losses that are believed to have occurred but for which claims have not yet been reported and include a provision for expected future development on existing case reserves). The Company uses the assistance of an independent actuary in the determination of IBNR and expected future development of existing case reserves.
 
 
25
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
June 30, 2018
 
8.  RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES (continued)
 
The uncertainties inherent in the reserving process and potential delays by cedants and brokers in the reporting of loss information, together with the potential for unforeseen adverse developments, may result in the reserve for losses and LAE ultimately being significantly greater or less than the reserve provided at the end of any given reporting period. The degree of uncertainty is further increased when a significant loss event takes place near the end of a reporting period. Reserve for losses and LAE estimates are reviewed periodically on a contract by contract basis and updated as new information becomes known. Any resulting adjustments are reflected in income in the period in which they become known.
 
The Company’s reserving process is highly dependent on the timing of loss information received from its cedants and related brokers.
 
1   During the three and six-month periods ending June 30, 2018, the Company entered into final commutation agreements with two (2) cedants under which the Company’s liabilities were commuted at an agreed-upon fixed price. The Company recognized a net loss on commutation of $8,000 which is presented as a separate line item in the Consolidated Statement of Operations. Included in the net loss on commutation is favorable loss development of $1,012 thousand on one of the commuted contracts.
 
 
26
 
OXBRIDGE RE HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
June 30, 2018
 
9.  EARNINGS PER SHARE
 
A summary of the numerator and denominator of the basic and diluted earnings per share is presented below (dollars in thousands except per share amounts):
 
 
 
Three Months Ended
 
 
Six Months Ended
 
 
 
 June 30,
 
 
 June 30,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
 
 
 
 
     Net earnings
 $265 
  1,116 
 $54 
  2,386 
 
    
    
    
    
Denominator:
    
    
    
    
    Weighted average shares - basic
  5,733,587 
  5,833,192 
  5,733,587 
  5,862,376 
    Effect of dilutive securities - Stock options
  - 
  - 
  - 
  - 
    Shares issuable upon conversion of warrants