Investment volatility hurts collateralized reinsurer Oxbridge Re in 2015

Collateralized reinsurance firm Oxbridge Re reported a decline in net income for the final quarter of 2015, owing to poor performance on the investment side of its portfolio, as financial market volatility continues to challenge the non-traditional investment strategy.

The testing investment and financial market conditions, that saw hedge fund manager backed reinsurers Greenlight Re, and Third point Re suffer full-year investment losses in 2015, is impacting reinsurance businesses that have investment oriented business models.

Fully collateralized Cayman-based reinsurer Oxbridge Re has reported that its fourth quarter 2015 investment income totalled $75,000, offset by just under $1 million of net realized investment losses.

In comparison, during the same period in 2014 the firm reported a net investment income of $49,000, combined with net realized investment gains of $476,000.

As we’ve discussed previously at Artemis, Oxbridge Re follows a different investment strategy with a higher return target, largely allocating capital to fixed-maturity and equity securities which can see it assume a little more risk on the investment side of its business than many other firms.

As a result of this approach, when investment conditions are more favourable the firm will likely generate more attractive returns for its investors.

However, as seen with hedge fund style reinsurers that utilise an investment oriented or total return approach, financial market volatility and unfavourable global macro investment trends can lead to steep losses on the asset side of the business.

For full-year 2015 and the collateralized reinsurer also reported net realized investment losses, amounting to $325,000, taking its net investment income to $337,000 for the year.

In 2014, the firm’s first, fully operational year, it reported a net investment income of $99,000, coupled with net realized investment gains of $641,000, revealing just how challenging the investment landscape is for a range of companies.

Oxbridge Re’s net income for the fourth quarter of 2015 totalled $0.4 million, nearly a quarter of the $1.7 million reported in Q4 2014.

The firm explained, “The decrease in net income was primarily due to the performance of the investment portfolio, which was partially offset by an increase in net premiums earned.”

As in Q3 2015 Oxbridge Re noted its persistent focus on growing its book of business in terms of both the size of collateralized reinsurance contracts placed and the number of transactions.

This is evidence in the increase in net premiums earned during both the fourth-quarter and for the full-year 2015, which grew by 9% to $1.8 million, and 40% to $6.7 million, respectively.

Despite investment losses the collateralized reinsurer’s net income for the full-year 2015 increased to $4.6 million, driven by its growth in net earned premiums.

President and Chief Executive Officer (CEO) of Oxbridge Re, Jay Madhu commented; “Our second full year of operations, 2015, was a strong year for Oxbridge as we diversified our book of reinsurance contracts and expanded our distribution channel with reinsurance brokers.

“Our robust balance sheet positions us well to place fully collateralized reinsurance contracts as we seek to further expand and diversify our business.”

Through its less traditional, investment-oriented strategy, Oxbridge Re underwrites Gulf Coast region property catastrophe risks on a fully collateralized basis, which provides investors with an interesting avenue to access reinsurance-linked returns.

It also operates as a kind of reinsurance sidecar for Floridian insurer Homeowners Choice (part of HCI Group), which guarantees it a certain level of premium.

With a strategy that weighs more heavily on the asset side of the balance sheet and its collateralized business model, as well as the relationship with HCI and a NASDAQ Capital Market listing, Oxbridge Re will be an interesting reinsurer to watch and an interesting option for reinsurance linked investors.