News Column

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

August 14, 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- month and six-month periods ended June 30, 2014 and June 30, 2013 and our financial condition as of June 30, 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. 16



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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 cover our costs and expenses, which consist primarily of acquisition costs and other underwriting expenses, claim payments and general 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 June 1, 2014, we entered into three new property catastrophe excess of loss reinsurance agreements, two of which were contracted with an unrelated insurer domiciled in Florida. Under the terms of these new agreements, we have provided approximately $24.5 million of fully-collateralized coverage in the aggregate. Additionally, effective July 1, 2014, we entered into an industry loss warranty reinsurance agreement, providing approximately $2 million of fully-collateralized coverage.



On July 6, 2014, our board of directors declared a dividend of $0.12 per ordinary share for the second quarter of 2014, due to be paid on August 29, 2014 to shareholders of record as of August 8, 2014.

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. 17



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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, 2014, one-half of the premiums will be earned in 2014 and the other half will be earned during 2015.



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 cedants under two of our reinsurance contracts. The contracts contain 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 premiums under the contracts, 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 from the company's investment capital, some of 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:

losses and loss adjustment expenses; acquisition costs & other underwriting expenses; 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. Depended on the nature of the contract, loss and loss adjustment expenses may be paid over a period of years. Acquisition costs & other underwriting expenses consist primarily of brokerage fees, ceding commissions, premium taxes and other direct expenses that relate to our writing of reinsurance contracts. We amortize deferred acquisition costs over the related contract term. 18



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General and administrative expenses consist of salaries and benefits and related costs, including costs associated with our professional fees, rent and other general operating expenses consistent with operating as a public company.



RESULTS OF OPERATIONS

The following table summarizes our results of operations for the three and six months ended June 30, 2014 and 2013 (dollars in thousands, except per share amounts): Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (Unaudited) (Unaudited) Revenue Assumed premiums $ 13,767 4,886 $ 13,825 4,886 Change in loss experience refund payable (1,075 ) (195 ) (1,660 ) (195 ) Change in unearned premiums reserve (11,793 ) (4,479 ) (10,617 ) (4,479 ) Net premiums earned 899 212 1,548 212 Total revenue 899 212 1,548 212 Expenses Policy acquisition costs & underwriting expenses 130 14 173 14 Preopening and organizational costs - 145 - 145 General and administrative expenses 228 53 440 53 Total expenses 358 212 613 212 Net income $ 541 - $ 935 - Earnings per share: Basic $ 0.09 - $ 0.25 - Diluted $ 0.09 - $ 0.25 - Weighted-average shares outstanding: Basic 6,000,000 - 3,706,104 - Diluted 6,000,000 - 3,706,104 - Dividends paid per share $ - - $ 0.24 - Performance ratios to net premiums earned: Loss ratio 0 % 0 % 0 % 0 % Acquisition cost ratio 14 % 7 % 11 % 7 % Expense ratio 40 % 32 % 40 % 32 % Combined ratio 40 % 32 % 40 % 32 % 19



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General. Net income for the quarter ended June 30, 2014, was $541 thousand or $0.09 per basic and diluted share compared to a net income of $0 for the quarter ended June 30, 2013. The increase in net income from $0 to $541 thousand was primarily due to increase in premium income, coupled with the fact that we began operating and underwriting in June 2013, and as such, only one month of revenue was recognized during the quarter ended June 30, 2013, compared with recognition of three months revenue for the quarter ended June 30, 2014. Additionally, all preopening and organizational costs amounting to $145 thousand were expensed during the quarter ended June 30, 2013. Net income for the six months ended June 30, 2014, was $935 thousand or $0.25 per basic and diluted share compared to a net income of $0 for the six-month period ended June 30, 2013. The increase in net income from $0 to $935 thousand was primarily due to increased premium income, coupled with the fact that we began operating and underwriting in June 2013, and as such, only one month of revenue was recognized during the six months ended June 30, 2013, compared with recognition of six months revenue for the six-month period ended June 30, 2014. Additionally, all preopening and organizational costs amounting to $145 thousand were expensed during the quarter ended June 30, 2013.



Premium Income. Premiums earned reflects the pro rata inclusion into income of premiums assumed (net of loss experience refund) over the life of the reinsurance contracts.

Assumed premiums for the quarter ended June 30, 2014 increased $8.9 million or 182%, to $13.8 million, from $4.9 million for the quarter ended June 30, 2013. The growth of assumed premiums, and consequently, the growth of net premiums earned of $687 thousand or 324%, to $899 thousand from $212 thousand for the quarter ended June 30, 2013, was driven by continued growth in the number and size of reinsurance contracts placed. Additionally, our initial reinsurance contracts were effective from June 1, 2013, and as such, premiums for the quarter ended June 30, 2013 represents only one month of revenue, compared to three months of revenue for the quarter ended June 30, 2014. Assumed premiums for the six months ended June 30, 2014 increased $8.9 million or 183%, to $13.8 million, from $4.9 million for the six months June 30, 2013. The growth of assumed premiums, and consequently, the growth of net premiums earned of $1.3 million or 630%, to $1.5 million from $212 thousand for the six months ended June 30, 2013, was driven by continued growth in the number and size of reinsurance contracts placed. Additionally, our initial contracts were effective from June 1, 2013, and as such, premiums for the six months ended June 30, 2013 represents only one month of revenue, when compared to six months revenue for the six-month period ended June 30, 2014. During the six months ended June 30, 2014, we successfully completed our initial public offering and consequently, we were able to underwrite additional fully-collateralized reinsurance contracts with part of the proceeds of the initial public offering.



Losses Incurred. There were no losses incurred for the three months and six months ended June 30, 2014 and 2013.

Acquisition Costs & Underwriting Expenses. Acquisition costs represent the amortization of the brokerage fees and federal excise taxes incurred on reinsurance contracts

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placed. Additionally, included within policy acquisition costs and underwriting expenses for the three month and six-month period ended June 30, 2014, is an underwriting consulting expense of $75 thousand paid under the terms of an agreement with Resonant Consultants, Inc. Acquisition costs and underwriting expenses for the quarter ended June 30, 2014 increased $116 thousand or 829%, to $130 thousand from $14 thousand for the quarter ended June 30, 2013. The increase is due in part to the underwriting consulting expense mentioned above, as well as the increase in assumed premiums, and consequently, brokerage and federal excise taxes paid on new reinsurance contracts have increased. Additionally, our initial reinsurance contracts were effective from June 1, 2013, and as such, acquisition costs and underwriting expenses for the quarter ended June 30, 2013 represents only one month of acquisition costs, when compared to three months of acquisition costs for the quarter ended June 30, 2014. Acquisition costs and underwriting expenses for the six months ended June 30, 2014 increased $159 thousand or 1,136%, to $173 thousand, from $14 thousand for the six months ended June 30, 2013. The increase is due in part to the underwriting consulting expense mentioned above, as well as the increase in assumed premiums, and consequently, brokerage and federal excise taxes paid on new reinsurance contracts have increased. Additionally, our initial reinsurance contracts were effective from June 1, 2013, and as such, acquisition costs and underwriting expenses for the six months ended June 30, 2013 represents only one month of acquisition costs, when compared to six months of acquisition costs for the six-month period ended June 30, 2014. General and Administrative Expenses. General and administration expenses for the quarter ended June 30, 2014 increased $175 thousand or 330%, to $228 thousand, from $53 thousand for the quarter ended June 30, 2013. The increase is due primarily to the fact that we commenced operations in June 2013, and as such, general and administrative expenses for the quarter ended June 30, 2013 represent only one month of general and administrative expenses, compared to three months of general and administrative expenses for the quarter ended June 30, 2014. Additionally, following our initial public offering in March 2014, we saw a significant increase in our general and administrative expenses over the quarter ended June 30, 2014 because of an increase in business activities and operations following the initial public offering. General and administration expenses for the six months ended June 30, 2014 increased $387 thousand, or 730%, to $440 thousand, from $53 thousand for the six months ended June 30, 2013. The increase is due primarily to the fact that we commenced operations in June 2013, and as such, general and administrative expenses for the six months ended June 30, 2013 represent only one month of general and administrative expenses, when compared to six months of general and administrative expenses for the six-month period ended June 30, 2014. Additionally, following our successful initial public offering in March 2014, we saw a significant increase in our general and administrative expenses over the quarter ended June 30, 2014 because of an increase in business activities and operations following the initial public offering.



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. 21



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Premiums Assumed. We use gross premiums assumed to measure our sales of reinsurance products. Gross premiums assumed also correlates to our ability to generate net premiums earned. Refer to analysis above relating to growth in premiums assumed.

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 and six-month periods ended June 30, 2014 and 2013. 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 increased from 7% for the quarter ended June 30, 2013 to 14% for the quarter ended June 30, 2014. The acquisition cost ratio also increased from 7% for the six months ended June 30, 2013 to 11% for the six months ended June 30, 2014. These increases are due primarily to the recording of an underwriting consulting expense of $75 thousand. 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 increased from 32% for the three-month and six-month periods ended June 30, 2013 to 40% for the three-month and six-month periods ended June 30, 2014. The increase is consistent with our expectation that our general and administrative expenses will increase given that we are now subject to additional reporting requirements applicable to public companies. 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 and expense ratio is the same, given that we have not experienced losses for the three-month and six-month periods ended June 30, 2014 and 2013, and consequently, our loss ratio is 0%.



FINANCIAL CONDITION - JUNE 30, 2014 COMPARED TO DECEMBER 31, 2013

Cash and cash equivalents & restricted cash and cash equivalents. As of June 30, 2014, our cash and cash equivalents increased by $27.2 million or 3,922%, to $27.9 million, from $695 thousand as of December 31, 2013. The increase is primarily a result of the successful completion of our initial public offering on March 26, 2014, resulting in net proceeds of approximately $27 million. As of June 30, 2014, restricted cash and cash equivalents decreased by $1.2 million or 12%, to $8.9 million from $10.1 million at December 31, 2013. The decrease was due primarily to a partial return of collateral in February 2014 with respect to one of our initial reinsurance contracts. Premiums receivable. There were no premiums receivable at December 31, 2013, as under the terms of our initial reinsurance contacts underwritten in June 2013, all premiums were 22



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due to be paid upfront and were received during the period prior to December 31, 2013. As of June 30, 2014, we had $13.5 million in premium receivable, for which the majority represents premiums under our new reinsurance contracts for the treaty year commencing June 1, 2014. Loss experience refund payable. As of June 30, 2014, our loss experience refund payable increased by $1.6 million or 121%, to $3 million, from $1.4 million at December 31, 2013. The increase is due primarily to the recording of a pro-rated liability over the six-month period ended June 30, 2014, because the absence of loss experience under two of our reinsurance contracts obligates us to refund premium to two of our ceding reinsurers. Unearned premiums reserve. As of June 30, 2014, our unearned premiums reserve increased by $10.6 million or 521%, to $12.6 million, from $2 million at December 31, 2013. The increase is due primarily the successful placement of additional and larger reinsurance contracts for the treaty year effective June 1, 2014. Ordinary Share Capital and Additional paid-in capital. As of June 30, 2014, ordinary share capital and additional paid in capital increased by approximately $26.9 million or 409%, to $33.5 million, from $6.6 million at December 31, 2013. The increase is due to the net proceeds received upon 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.



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 cash and highly liquid securities, which can be liquidated, if necessary, to meet current liabilities. We believe that we will have sufficient flexibility to liquidate any 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 six 23



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months ended June 30, 2014, our cash positions increased by approximately $27.2 million primarily as a result of the completion of our initial public offering on March 26, 2014. We have used 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 will be sufficient to cover our cash outflows for at least the next 12 months. Operating activities For the six months ended June 30, 2014 and 2013, the net cash provided by (used in) operating activities was $633 thousand and $(98) thousand, respectively. The increase in operating cash was primarily driven by our continuous operating profitability over the six-month period ended June 30, 2014, compared with only one month of operations for the six month period ended June 30, 2013.



Investing activities

For the six months ended June 30, 2014 and 2013, the net cash used in investing activities was $54 thousand and $0, respectively. The net cash used in investing activities was primarily due to the purchase of property and equipment for our new corporate office under an operating lease effective March 1, 2014.



Financing activities

For the six months ended June 30, 2014 and 2013, the net cash provided by financing activities was $26.7 million and $6.6 million, respectively. The increase in net cash provided by financing activities was due to the proceeds we received 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 June 30, 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 June 30, 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. 24



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Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of June 30, 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) $ 17 17 - - - Operating Lease (2) 24 24 - - - Total $ 41$ 41 - - -



(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 under this lease for the three-month and six-month periods ended

June 30, 2014 were $12,600 and $25,200 respectively, and lease commitments at

June 30, 2014 were $16,800.

(2) 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 one year which commenced on March 1, 2014. Rent expense

under this lease for the three-month and six-month period ended June 30, 2014

were $9,000 and $12,000 respectively, and lease commitments at June 30, 2014

were $24,000.

OFF-BALANCE SHEET ARRANGEMENTS

As of June 30, 2014, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

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 25



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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.



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. 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. Under such contracts, the Company expects to recognize aggregate liabilities payable to the ceding insurers assuming no losses occur during the contract period. 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 contract. 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 term, will reduce the liability should a catastrophic loss event covered by the Company occur. 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.



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

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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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