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OXBRIDGE RE HOLDINGS LTD - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 13, 2014

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q, including in this Management's Discussion and Analysis, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements generally are identified by the words "believe," "project," "predict," "expect," "anticipate," "estimate," "intend," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result, " and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled "Risk Factors " contained in our Prospectus filed with the Securities and Exchange Commission ("SEC") on March 21, 2014. We undertake no obligation to publicly update or revise any forward -looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned not to place undue reliance on the forward -looking statements which speak only to the dates on which they were made. GENERAL The following is a discussion and analysis of our results of operations for the three months ended March 31, 2014 and our financial condition as of March 31, 2014 and December 31, 2013. The following discussion should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in our Prospectus filed with the SEC on March 21, 2014. References to "we," "us," "our," "our company," or "the Company" refer to Oxbridge Re Holdings Limited and its wholly-owned subsidiary, Oxbridge Reinsurance Limited, unless the context dictates otherwise. Overview We are a Cayman Islands specialty property and casualty reinsurer that provides reinsurance solutions through our subsidiary, Oxbridge Reinsurance Limited. We focus on underwriting fully-collateralized reinsurance contracts primarily for property and casualty insurance companies in the Gulf Coast region of the United States, with an initial emphasis on Florida. We intend to specialize in underwriting medium frequency, high severity risks, where we believe sufficient data exists to analyze effectively the risk/return profile of reinsurance contracts. 15



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We intend to underwrite reinsurance contracts on a selective and opportunistic basis as opportunities arise based on our goal of achieving favorable long-term returns on equity for our shareholders. Our goal is to achieve long-term growth in book value per share by writing business that will generate attractive underwriting profits relative to the risk we bear. Unlike other insurance and reinsurance companies, we do not intend to pursue an aggressive investment strategy and instead will focus our business on underwriting profits rather than investment profits. Our initial business focus will be on fully collateralized reinsurance contracts for property catastrophes in the Gulf Coast region of the United States with an initial emphasis on Florida, and within that market and risk category, we will attempt to select the most economically attractive opportunities across a variety of property and casualty insurers. As our capital base grows, however, we expect that we will consider growth opportunities in other geographic areas and risk categories. Our level of profitability is primarily determined by how adequately our premiums assumed and investment income (if any) cover our costs and expenses, which consist primarily of acquisition costs and other underwriting expenses, claim payments and administrative expenses. One factor leading to variation in our operational results is the timing and magnitude of any follow on offerings we undertake, as we are able to deploy new capital to collateralize new reinsurance treaties and consequently, earn additional premium revenue. In addition, our results of operations may be seasonal in that hurricanes and other tropical storms typically occur during the period from June 1 through November 30. Further, our results of operations may be subject to significant variations due to factors affecting the property and casualty insurance industry in general, which include competition, legislation, regulation, general economic conditions, judicial trends, and fluctuations in interest rates and other changes in the investment environment.



Recent Events

Effective January 1, 2014, we entered into a property catastrophe excess of loss reinsurance contract with an unrelated insurer domiciled in Dallas, Texas. The contract expires on March 1, 2015, and under the terms of the agreement, we undertake to provide $250,000 of fully-collateralized coverage, with a reinstatement option for an additional $250,000 of coverage. On January 19, 2014, our board of directors declared a dividend of $0.12 per ordinary share for the third quarter of 2013, which was paid on February 14, 2014 to stockholders of record as of December 31, 2013. Also on January 19, 2014, our board of directors declared a dividend of $0.12 per ordinary share for the fourth quarter of 2013, which was paid on February 21, 2014 to stockholders of record as of December 31, 2013.



On March 26, 2014, we closed our initial public offering of 4,884,650 units at a public offering price of $6.00 per unit. We raised $29.3 million from our initial public offering and received $26.9 million net of underwriting expenses.

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PRINCIPAL REVENUE AND EXPENSE ITEMS

Revenues

We will derive our revenues from two principal sources:

premiums assumed from reinsurance on property and casualty business; and

income from investments. Premiums assumed include all premiums received by a reinsurance company during a specified accounting period, even if the policy provides coverage beyond the end of the period. Premiums are earned over the term of the related policies. At the end of each accounting period, the portion of the premiums that are not yet earned are included in the unearned premiums reserve and are realized as revenue in subsequent periods over the remaining term of the policy. Our policies typically have a term of twelve months. Thus, for example, for a policy that is written on July 1, 2013, one-half of the premiums were earned in 2013 and the other half would be earned during 2014.



Premiums from reinsurance on property and casualty business assumed are directly related to the number, type and pricing of contracts we write.

Premiums assumed are recorded net of change in loss experience refund, which consists of changes in amounts due to the cedant under one of our reinsurance contracts. The contract contains retrospective provisions that adjusts premiums in the event losses are minimal or zero. We recognize a liability pro-rata over the period in which the absence of loss experience obligates us to refund premium under the contract and, we will derecognize such liability in the period in which a loss experience arises. The change in loss experience refund is negatively correlated to loss and loss adjustment expenses described below. Income from our investments will primarily be comprised of interest income, dividends and gains, and net realized and unrealized gains on investment securities. Such income will be primarily derived from the company's capital which will be held in trust accounts that collateralize the reinsurance policies that we write. The investment parameters for capital held in such trust accounts will generally be established by the cedant for the relevant policy.



Expenses

Our expenses consist primarily of the following:

underwriting losses and loss adjustment expenses; acquisition costs; and general and administrative expenses. Loss and loss adjustment expenses are a function of the amount and type of reinsurance contracts we write and of the loss experience of the underlying coverage. As described below, loss and loss adjustment expenses are based on the claims reported by our company's ceding insurers, and where necessary, includes an actuarial analysis of the estimated losses, including losses incurred during the period and changes in estimates from prior periods. Depending on the nature of the contract, loss and loss adjustment expenses may be paid over a period of years. 17



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Acquisition costs consist primarily of brokerage fees, ceding commissions, premium taxes and other direct expenses that relate to our writing reinsurance contracts. We amortize deferred acquisition costs over the related contract term.

General and administrative expenses consist primarily of salaries and benefits and related costs, including costs associated with our professional fees, rent and other general operating expenses.



ANALYSIS OF FINANCIAL CONDITION - MARCH 31, 2014 COMPARED TO DECEMBER 31, 2013

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our accompanying condensed unaudited consolidated financial statements and related notes.

During the three months ended March 31, 2014, our combined cash and cash equivalents and restricted cash and cash equivalents positions increased by approximately $26.5 million, which was primarily as a result of the completion of our initial public offering on March 26, 2014. The increase in ordinary share capital and additional paid-in capital of $26.9 million was also attributable to the completion of our initial public offering on March 26, 2014. Refer to further disclosure in Note 5 of the notes to the Condensed Consolidated Financial Statements included within this report.



MEASUREMENT OF RESULTS

We use various measures to analyze the growth and profitability of business operations. For our reinsurance business, we measure growth in terms of premiums assumed and we measure underwriting profitability by examining our loss, underwriting expense and combined ratios. We analyze and measure profitability in terms of net income and return on average equity. Premiums Assumed. We use gross premiums assumed (net of loss experience refunds) to measure our sales of reinsurance products. Gross premiums assumed also correlates to our ability to generate net premiums earned. During the three-month period ended March 31, 2014, we assumed premiums of $58 thousand. We did not assume any premiums during the three-month period ended March 31, 2013 as we did not begin underwriting until June 2013. Loss Ratio. The loss ratio is the ratio of losses and loss adjustment expenses incurred to premiums earned and measures the underwriting profitability of our reinsurance business. There were no losses incurred during the three-month period ended March 31, 2014. Acquisition Cost Ratio. The acquisition cost ratio is the ratio of policy acquisition costs and other underwriting expenses to net premiums earned. The acquisition cost ratio measures our operational efficiency in producing, underwriting and administering our reinsurance business. The acquisition cost ratio for the three-month period ended March 31, 2014 was 6.6% 18



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We have no acquisition cost ratio to report for the comparable period in 2013 as we did not begin underwriting until June 2013.

Expense Ratio. The expense ratio is the ratio of policy acquisition costs, other underwriting expenses and other administrative expenses to net premiums earned. We use the expense ratio to measure our operating performance. The expense ratio for the three-month period ended March 31, 2014 was 39.4%. We have no expense ratio to report for the comparable period in 2013 as we did not being underwriting until June 2013. Combined Ratio. We use the combined ratio to measure our underwriting performance. The combined ratio is the sum of the loss ratio and the expense ratio. If the combined ratio is at or above 100%, we are not underwriting profitably and may not be profitable. The combined ratio for the three-month period ended March 31, 2014 was 39.4%. We have no combined ratio to report for the comparable period in 2013 as we did not being underwriting until June 2013.



RESULTS OF OPERATIONS

Please refer to our Condensed Consolidated Statements of Income on page 4 of this Quarterly Report on Form 10-Q for a summary of our results of operations for the three months ended March 31, 2014. We were incorporated in April 2013, and entered into our first two fully-collateralized reinsurance contracts on June 1, 2013. As such, there is no comparative financial information for the three month period ended March 31, 2013. Premium Income. For the three-month period ended March 31, 2014, we assumed premiums of $58 thousand from an unrelated insurer and recognized a total of $648 thousand of earned premium (net of loss experience refund). Premiums earned reflects the pro rata inclusion into income of premiums assumed (net of loss experience refund) over the life of the reinsurance contracts. Losses Incurred. There were no losses incurred for the three-month period ended March 31, 2014. For the three-month period ended March 31, 2014, we have recognized within premium income above, a loss experience refund charge of $586 thousand, representing a pro-rated liability over the period in which the absence of loss experience under one of the reinsurance contracts obligates us to refund premium to our ceding reinsurer. Acquisition Costs. Acquisition costs for the three-month period ended March 31, 2014 totaled $43 thousand. These acquisition costs represent the amortization of the brokerage fees and federal excise taxes incurred on contracts written in June 2013 and January 2014. Deferred acquisition costs are limited to the amount expected to be recovered from future earned premiums and anticipated investment income. General and Administrative Expenses. General and administrative expenses for the three-month period ended March 31, 2014 were $212 thousand. We expect our general and administrative expenses to increase given that we are now subject to reporting requirements applicable to public companies. 19



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Exposure to Catastrophes

As with other reinsurers, our operating results and financial condition could be adversely affected by volatile and unpredictable natural and man-made disasters, such as hurricanes, windstorms, earthquakes, floods, fires, riots and explosions. Although we attempt to limit our exposure to levels we believe are acceptable, it is possible that an actual catastrophic event or multiple catastrophic events could have a material adverse effect on our financial condition, results of operations and cash flows. As described under "CRITICAL ACCOUNTING POLICIES-Reserves for Losses and Loss Adjustment Expenses" below, under U.S. GAAP, we are not permitted to establish loss reserves with respect to losses that may be incurred under reinsurance contracts until the occurrence of an event which may give rise to a claim. As a result, only loss reserves applicable to losses incurred up to the reporting date may be established, with no provision for a contingency reserve to account for expected future losses.



LIQUIDITY AND CAPITAL RESOURCES

General

We are organized as a holding company with no operations of our own. All of our operations are conducted through our sole reinsurance subsidiary, Oxbridge Reinsurance Limited, which underwrites risks associated with our property and casualty reinsurance programs. We have minimal continuing cash needs which are principally related to the payment of administrative expenses and shareholder dividends. There are restrictions on Oxbridge Reinsurance Limited's ability to pay dividends which are described in more detail below.



Sources and Uses of Funds

Our sources of funds will primarily consist of premium receipts (net of brokerage and ceding commissions) and investment income, including realized gains. We expect to use cash to pay losses and loss adjustment expenses, commissions, dividends, and general and administrative expenses. Substantially all of our surplus funds, net of funds required for cash liquidity purposes, will be invested in accordance with our investment guidelines. Our investment portfolio will be primarily comprised of publicly-traded securities, which we will classify as trading securities and can be liquidated to meet current liabilities. We believe that we will have sufficient flexibility to liquidate the long securities that we will own in a rising market to generate liquidity. Since inception, we have financed our cash flow requirements through issuance of our ordinary shares and net premiums received. In May 2013, we issued and sold 1,115,350 ordinary shares in a private placement to a group of accredited investors, including certain of our officers and directors, for an aggregate purchase price of approximately $6.7 million. During the three months ended March 31, 2014, our cash and restricted cash positions increased by approximately $26.5 million primarily as a result of the completion of our initial public offering on March 26, 2014. We intend to use approximately half of the proceeds from our initial public offering to increase the statutory capital and surplus of our insurance subsidiary. We believe our cash from net premiums and investment income (if any) will be sufficient to cover our cash outflows for at least the next 12 months. During the three month period ended March 31, 2014, net cash provided by operating activities amounted to approximately $1.2 million and net cash used in investing activities amounted to $50 thousand. These investing activities were primarily the purchase of property 20



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and equipment for our new office. Net cash provided by financing activities amounted to approximately $26.6 million, and represented cash provided through the initial public offering, net of offering expenses and dividends paid to shareholders. On January 19, 2014, our board of directors declared a dividend of $0.12 per ordinary share for the third quarter of 2013 to be paid on February 14, 2014 to stockholders of record as of December 31, 2013. Also on January 19, 2014, our board of directors declared a dividend of $0.12 per ordinary share for the fourth quarter of 2013 to be paid on February 21, 2014 to stockholders of record as of December 31, 2013. As of March 31, 2014, we believe we had sufficient cash flow from operations to meet our liquidity requirements. We expect that our operational needs for liquidity will be met by cash, funds generated from underwriting activities and investment income, together with the net proceeds of the initial public offering. We have no plans to issue debt and expect to fund our operations for the foreseeable future from operating cash flow and the net proceeds of the initial public offering. However, we cannot provide assurances that in the future we will not incur indebtedness to implement our business strategy, pay claims or make acquisitions. Although Oxbridge Re Holdings Limited is not subject to any significant legal prohibitions on the payment of dividends, Oxbridge Reinsurance Limited is subject to Cayman Islands regulatory constraints that affect its ability to pay dividends to us and include a minimum net worth requirement. Currently, the minimum net worth requirement for Oxbridge Reinsurance Limited is $500. As of March 31, 2014, Oxbridge Reinsurance Limited exceeded the minimum required. By law, Oxbridge Reinsurance Limited is restricted from paying a dividend if such a dividend would cause its net worth to drop to less than the required minimum.



Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of March 31, 2014: Payment Due by Period (in thousands) More Less than 1-3 3-5 than Total 1 Year Years Years 5 Years Operating lease (1) $ 29 29 - - - Underwriting advisory agreement (2) 75 75 - - - Operating Lease (3) 33 33 - - - Total $ 137$ 137 - - -



(1) On October 1, 2013, we entered into an operating lease agreement for

residential space at Britannia Villas #616, Grand Cayman, Cayman Islands. The

term of the lease is 13 months which commenced on October 1, 2013. Rent

expense for the three-month period ended March 31, 2014 was $12,600 and lease

commitments at March 31, 2014 were $29,400. 21



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Table of Contents (2) On January 19, 2014, we entered into an underwriting advisory agreement with

an underwriting consultant, under which the terms provide for a minimum fee

of $75,000 to be payable to the underwriting consultant within 30 days after

the completion of our initial public offering.

(3) On February 3, 2014, we entered into an operating lease agreement for office

space at Harbour Place, 103 South Church, Grand Cayman, Cayman Islands. The

term of the lease is 12 months which commenced on March 1, 2014, at $3,000

per month. Rent expense for the three-month period ended March 31, 2014 was

$3,000 and lease commitments at March 31, 2014 were $33,000.

OFF-BALANCE SHEET ARRANGEMENTS

As of March 31, 2014, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

CRITICAL ACCOUNTING POLICIES

We are required to make estimates and assumptions in certain circumstances that affect amounts reported in our consolidated financial statements and related footnotes. We evaluate these estimates and assumptions on an on-going basis based on historical developments, market conditions, industry trends and other information that we believe to be reasonable under the circumstances. These accounting policies pertain to premium revenues and risk transfer, reserve for loss and loss adjustment expenses and the reporting of deferred acquisition costs. Premium Revenue and Risk Transfer. We record premiums revenue as earned pro-rata over the terms of the reinsurance agreements and the unearned portion at the 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. We account for reinsurance contracts in accordance with ASC 944, ''Financial Services - Insurance." Assessing whether or not a reinsurance contract meets the conditions for risk transfer requires judgment. The determination of risk transfer is critical to reporting premiums written. If we determine that a reinsurance contract does not transfer sufficient risk, we must account for the contract as a deposit liability. Reserves for Losses and Loss Adjustment Expenses. We determine our reserves for losses and loss adjustment expenses on the basis of the claims reported by our ceding insurers, and for losses incurred but not reported, if any, we will use 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. We believe that the amounts that are determined by us will be 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. 22



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Under U.S. GAAP, we are not permitted to establish loss reserves until the occurrence of an actual loss event. As a result, only loss reserves applicable to losses incurred up to the reporting date may be recorded, with no allowance for the provision of a contingency reserve to account for expected future losses. Losses arising from future events, which could be substantial, are estimated and recognized at the time the loss is incurred. Deferred Acquisition Costs. We defer certain expenses that are directly related to and vary with producing reinsurance business, including brokerage fees on gross premiums assumed, premium taxes and certain other costs related to the acquisition of reinsurance contracts. These costs are capitalized and the resulting asset, deferred acquisition costs, is amortized and charged to expense in future periods as premiums assumed are earned. The method followed in computing deferred acquisition costs limits the amount of such deferral to its estimated realizable value. The ultimate recoverability of deferred acquisition costs is dependent on the continued profitability of our reinsurance underwriting. If our underwriting ceases to be profitable, we may have to write off a portion of our deferred acquisition costs, resulting in a further charge to income in the period in which the underwriting losses are recognized.


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