Item 1. Financial Statements.
BLUE CAPITAL REINSURANCE HOLDINGS LTD.
UNAUDITED CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION
(Liquidation Basis)
|
|
|
|
|
|
|
|
September 30,
|
(In millions of U.S. dollars)
|
|
2019
|
Assets
|
|
|
|
Cash and cash equivalents
|
|
$
|
1.1
|
|
Reinsurance premiums receivable
|
|
7.2
|
|
Funds held by ceding companies
|
|
99.8
|
|
Other assets
|
|
2.5
|
|
Total Assets
|
|
$
|
110.6
|
|
Liabilities
|
|
|
Loss and loss adjustment expense reserves
|
|
$
|
33.7
|
|
Reinsurance balances payable
|
|
1.8
|
|
Other liabilities (See Note 7)
|
|
0.8
|
|
Liability for estimated costs in excess of estimated receipts during liquidation (See Note 2)
|
|
2.4
|
|
Total Liabilities
|
|
38.7
|
|
Net Assets in Liquidation
|
|
$
|
71.9
|
|
See notes to the unaudited consolidated financial statements, including Note 7 which describes certain related party transactions and Note 2 which describes the impact of the liquidation basis of accounting on net assets.
BLUE CAPITAL REINSURANCE HOLDINGS LTD.
CONSOLIDATED BALANCE SHEET
(Going Concern Basis)
|
|
|
|
|
|
|
|
December 31,
|
(In millions of U.S. dollars, except share amounts)
|
|
2018
|
Assets
|
|
|
|
Cash and cash equivalents
|
|
$
|
2.2
|
|
Reinsurance premiums receivable
|
|
8.9
|
|
Deferred reinsurance acquisition costs
|
|
0.1
|
|
Funds held by ceding companies
|
|
150.4
|
|
Other assets
|
|
1.7
|
|
Total Assets
|
|
$
|
163.3
|
|
Liabilities
|
|
|
|
Loss and loss adjustment expense reserves
|
|
$
|
49.9
|
|
Unearned reinsurance premiums
|
|
0.8
|
|
Debt
|
|
4.0
|
|
Reinsurance balances payable
|
|
16.4
|
|
Other liabilities (See Note 7)
|
|
1.5
|
|
Total Liabilities
|
|
72.6
|
|
Shareholders' Equity
|
|
|
|
Common Shares, at par value - 8,767,165 shares issued and outstanding
|
|
8.8
|
|
Additional paid-in capital
|
|
157.8
|
|
Retained deficit
|
|
(75.9
|
)
|
Total Shareholders' Equity
|
|
90.7
|
|
Total Liabilities and Shareholders' Equity
|
|
$
|
163.3
|
|
See notes to the unaudited consolidated financial statements, including Note 7 which describes certain related party transactions.
BLUE CAPITAL REINSURANCE HOLDINGS LTD.
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
(Liquidation Basis)
|
|
|
|
|
|
|
|
Period from August 1, 2019 to September 30, 2019
|
(In millions of U.S. dollars)
|
|
|
|
|
|
Net Assets in Liquidation at beginning of period
|
|
$
|
88.8
|
|
Changes in net assets in liquidation:
|
|
|
|
Changes in liquidation value of reinsurance premiums receivable
|
|
(0.1
|
)
|
Changes in liquidation value of loss and loss adjustment expense reserves
|
|
(2.0
|
)
|
Remeasurement of assets and liabilities
|
|
(1.5
|
)
|
Liquidating distributions to shareholders
|
|
(13.3
|
)
|
Net Assets in Liquidation at end of period
|
|
$
|
71.9
|
|
See notes to the unaudited consolidated financial statements, including Note 2 which describes the impact of the liquidation basis of accounting on net assets.
BLUE CAPITAL REINSURANCE HOLDINGS LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME
(Going Concern Basis)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Month Ended
|
|
Three Months Ended
|
|
Seven Months Ended
|
|
Nine Months Ended
|
|
July 31,
|
|
September 30,
|
|
July 31,
|
|
September 30,
|
(In millions of U.S. dollars, except per share amounts)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenues
|
|
|
|
|
|
|
|
|
|
Reinsurance premiums written
|
$
|
1.5
|
|
|
$
|
4.2
|
|
|
$
|
11.1
|
|
|
$
|
24.1
|
|
Change in net unearned reinsurance premiums
|
—
|
|
|
2.3
|
|
|
0.8
|
|
|
(2.8
|
)
|
Net reinsurance premiums earned
|
1.5
|
|
|
6.5
|
|
|
11.9
|
|
|
21.3
|
|
Net investment income
|
0.2
|
|
|
0.6
|
|
|
1.8
|
|
|
1.5
|
|
Total revenues
|
1.7
|
|
|
7.1
|
|
|
13.7
|
|
|
22.8
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses
|
2.0
|
|
|
10.6
|
|
|
5.7
|
|
|
17.3
|
|
Reinsurance acquisition costs
|
0.5
|
|
|
2.0
|
|
|
3.9
|
|
|
5.9
|
|
General and administrative expenses
|
0.3
|
|
|
1.2
|
|
|
2.4
|
|
|
3.3
|
|
Total expenses
|
2.8
|
|
|
13.8
|
|
|
12.0
|
|
|
26.5
|
|
Net (loss) income and comprehensive (loss) income
|
$
|
(1.1
|
)
|
|
$
|
(6.7
|
)
|
|
$
|
1.7
|
|
|
$
|
(3.7
|
)
|
Per share amounts:
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per Common Share
|
$
|
(0.12
|
)
|
|
$
|
(0.76
|
)
|
|
$
|
0.20
|
|
|
$
|
(0.42
|
)
|
Dividends declared per Common Share and RSU
|
—
|
|
|
0.30
|
|
|
0.30
|
|
|
0.90
|
|
See notes to the unaudited consolidated financial statements, including Note 7, which describes certain related party transactions and Note 1, which describes the transition to the liquidation basis of accounting.
BLUE CAPITAL REINSURANCE HOLDINGS LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Going Concern Basis)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders' equity
|
|
Common
Shares, at par value
|
|
Additional
paid-in capital
|
|
Retained deficit
|
(In millions of U.S. dollars)
|
|
|
|
|
Balance at January 1, 2019
|
|
$
|
90.7
|
|
|
$
|
8.8
|
|
|
$
|
157.8
|
|
|
$
|
(75.9
|
)
|
Net income
|
|
1.8
|
|
|
—
|
|
|
—
|
|
|
1.8
|
|
Dividends declared - Common Shares and RSUs
|
|
(1.3
|
)
|
|
—
|
|
|
(1.3
|
)
|
|
—
|
|
Balance at March 31, 2019
|
$
|
91.2
|
|
|
$
|
8.8
|
|
|
$
|
156.5
|
|
|
$
|
(74.1
|
)
|
Net income
|
|
1.0
|
|
|
—
|
|
|
—
|
|
|
1.0
|
|
Dividends declared - Common Shares and RSUs
|
|
(1.3
|
)
|
|
—
|
|
|
(1.3
|
)
|
|
—
|
|
Balance at June 30, 2019
|
|
90.9
|
|
|
8.8
|
|
|
155.2
|
|
|
(73.1
|
)
|
Net loss
|
|
$
|
(1.1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1.1
|
)
|
Dividends declared - Common Shares and RSUs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at July 31, 2019
|
$
|
89.8
|
|
|
$
|
8.8
|
|
|
$
|
155.2
|
|
|
$
|
(74.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders' equity
|
|
Common
Shares, at par value
|
|
Additional
paid-in capital
|
|
Retained deficit
|
(In millions of U.S. dollars)
|
|
|
|
|
Balance at January 1, 2018
|
|
$
|
127.1
|
|
|
$
|
8.8
|
|
|
$
|
165.6
|
|
|
$
|
(47.3
|
)
|
Net income
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
Dividends declared - Common Shares and RSUs
|
|
(2.6
|
)
|
|
—
|
|
|
(2.6
|
)
|
|
—
|
|
Balance at March 31, 2018
|
|
$
|
125.0
|
|
|
$
|
8.8
|
|
|
$
|
163.0
|
|
|
$
|
(46.8
|
)
|
Net income
|
|
$
|
2.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2.5
|
|
Dividends declared - Common Shares and RSUs
|
|
$
|
(2.7
|
)
|
|
$
|
—
|
|
|
$
|
(2.7
|
)
|
|
$
|
—
|
|
Balance at June 30, 2018
|
|
$
|
124.8
|
|
|
$
|
8.8
|
|
|
$
|
160.3
|
|
|
$
|
(44.3
|
)
|
Net loss
|
|
(6.7
|
)
|
|
—
|
|
|
$
|
—
|
|
|
(6.7
|
)
|
Dividends declared - Common Shares and RSUs
|
|
(2.6
|
)
|
|
—
|
|
|
(2.6
|
)
|
|
—
|
|
Balance at September 30, 2018
|
|
$
|
115.5
|
|
|
$
|
8.8
|
|
|
$
|
157.7
|
|
|
$
|
(51.0
|
)
|
See notes to the unaudited consolidated financial statements, including Note 7, which describes certain related party transactions and Note 1, which describes the transition to the liquidation basis of accounting.
BLUE CAPITAL REINSURANCE HOLDINGS LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Going Concern Basis)
|
|
|
|
|
|
|
|
|
|
|
|
Seven Months Ended
|
|
Nine Months Ended
|
|
|
July 31,
|
|
September 30,
|
(In millions of U.S. dollars)
|
|
2019
|
|
2018
|
Cash flows provided by (used in) operating activities:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1.7
|
|
|
$
|
(3.7
|
)
|
Net change in:
|
|
|
|
|
|
|
Loss and loss adjustment expense reserves
|
|
(20.9
|
)
|
|
(8.7
|
)
|
Unearned reinsurance premiums
|
|
(0.8
|
)
|
|
2.8
|
|
Reinsurance balances payable
|
|
(4.2
|
)
|
|
(6.3
|
)
|
Deferred reinsurance acquisition costs
|
|
0.1
|
|
|
(0.4
|
)
|
Reinsurance premiums receivable
|
|
3.6
|
|
|
4.6
|
|
Funds held by ceding companies
|
|
28.3
|
|
|
11.3
|
|
Other liabilities
|
|
(0.4
|
)
|
|
0.8
|
|
Other assets
|
|
(1.7
|
)
|
|
(1.0
|
)
|
Net cash and cash equivalents provided by (used in) operating activities
|
|
5.7
|
|
|
(0.6
|
)
|
Net cash and cash equivalents from investing activities
|
|
—
|
|
|
—
|
|
Cash flows used in financing activities:
|
|
|
|
|
|
|
Dividends paid - Common Shares and RSUs
|
|
(2.6
|
)
|
|
(5.3
|
)
|
Repayment of Borrowings under the Credit Agreement
|
|
(4.0
|
)
|
|
—
|
|
Net cash and cash equivalents used in financing activities
|
|
(6.6
|
)
|
|
(5.3
|
)
|
Net decrease in cash and cash equivalents during the period
|
|
(0.9
|
)
|
|
(5.9
|
)
|
Cash and cash equivalents - beginning of period
|
|
2.2
|
|
|
6.0
|
|
Cash and cash equivalents - end of period
|
|
$
|
1.3
|
|
|
$
|
0.1
|
|
See notes to the unaudited consolidated financial statements, including Note 7, which describes certain related party transactions and Note 1, which describes the transition to the liquidation basis of accounting.
BLUE CAPITAL REINSURANCE HOLDINGS LTD.
Notes to the Unaudited Consolidated Financial Statements
(in millions of United States dollars, except share and per
share amounts or as otherwise indicated)
NOTE 1. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Overview
Blue Capital Reinsurance Holdings Ltd. (the "Company" or the "Registrant") is a Bermuda exempted limited liability company that, through its subsidiaries (collectively "Blue Capital"), offered collateralized reinsurance in the property catastrophe market and invested in various insurance-linked securities. The Company was incorporated under the laws of Bermuda on June 24, 2013, and commenced its operations on November 12, 2013. The Company's headquarters and principal executive offices are located at Waterloo House, 100 Pitts Bay Road, Pembroke, HM 08, Bermuda, which is also our registered office.
On July 25, 2019, after considering strategic alternatives, the Company announced a plan to cease active operations and pursue an orderly run-off of its liabilities and in-force portfolio and return capital to shareholders. As and when capital becomes available after settlement of existing liabilities and expenses and receipt of any necessary regulatory approvals, the Company expects to declare special distributions to shareholders. The Company intends to delist its common shares from the New York Stock Exchange and the Bermuda Stock Exchange prior to March 31, 2020. Following delisting, the Company intends to file a Form 15 with the U.S. Securities and Exchange Commission to terminate the registration of its shares and suspend its reporting obligations under the Securities Exchange Act of 1934, as amended. The Company will remain exposed to the performance of its underlying in-force reinsurance treaties and the future release of collateral held in trust under the terms of underlying expired reinsurance treaties during the run-off of its business. Accordingly, the value and timing of any special distributions to be received by shareholders is inherently difficult to predict. The Company expects that it will complete the liquidation of its net assets and return of capital to shareholders by the end of 2021.
The unaudited consolidated financial statements incorporated in this report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP") for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP. These interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the 2018 Form 10-K. In the opinion of management, these interim unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to fairly present the Company's financial position, results of operations and cash flows. The unaudited consolidated financial statements include the accounts of the Registrant and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. These interim unaudited consolidated financial statements may not be indicative of financial results for the full year. The December 31, 2018 consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all of the disclosures required by GAAP.
As a result of the decision to pursue an orderly run-off and return capital to shareholders, the Company’s basis of accounting transitioned from the going concern basis of accounting (“Going Concern Basis”) to the liquidation basis of accounting in accordance with GAAP (“Liquidation Basis”), effective July 31, 2019. Under the Liquidation Basis, all assets are stated at their estimated liquidation value and liabilities, including estimated costs associated with implementing the run-off and liquidation of the Company, are stated at their estimated settlement amounts over the remaining estimated liquidation period. The liquidation value of the Company's unexpired reinsurance treaties is based on management's estimate of future earned premium net of acquisition expenses together with an estimate for expected loss and loss adjustment expense liabilities to be incurred associated with those earned premiums. Additionally, the liquidation value of the Company's other assets and liabilities includes management's estimate of investment income to be generated from the expected collateral balances supporting our insurance liabilities over the estimated period of run-off and estimates for corporate expenses and management and administrative fees over the period. The estimated liquidation values for assets derived from future revenue streams and liabilities yet to be incurred are reflected on the Statement of Net Assets (Liquidation Basis) as the Liability for Estimated Costs In Excess of Estimated Receipts During Liquidation. The actual amounts realized for assets and settlement of liabilities and the actual costs of liquidation may differ materially from the estimated amounts.
BLUE CAPITAL REINSURANCE HOLDINGS LTD.
Notes to the Unaudited Consolidated Financial Statements
(in millions of United States dollars, except share and per
share amounts or as otherwise indicated)
NOTE 1. Basis of Presentation and Summary of Significant Accounting Policies, cont'd
All financial results and disclosures to July 31, 2019, prior to adopting the Liquidation Basis, are presented on a Going Concern Basis, which presents assets and liabilities in the normal course of business. As a result, the Balance Sheet as of December 31, 2018, the Unaudited Consolidated Statements of Income/(Loss) and Comprehensive Income/(Loss), Unaudited Consolidated Statements of Changes in Shareholders' Equity and the Unaudited Consolidated Statements of Cash Flows for the period January 1, 2019 through July 31, 2019 are presented on a Going Concern Basis, consistent with the Company’s 2018 Form 10-K.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues earned and expenses incurred during the period. Actual results could differ materially from those estimates. The significant estimates reflected in these interim unaudited consolidated financial statements include, but are not limited to, loss and LAE reserves and written and earned reinsurance premiums (including those associated with in-force reinsurance treaties due to expire over the liquidation period), together with estimated investment income to be received and corporate expenses, administrative fees and management fees relating to services to be provided over the liquidation period. Estimates and assumptions are periodically reviewed and the effects of revisions are recorded in the consolidated financial statements in the period that they are determined to be necessary.
Prior to ceasing active operations, the Company has operated as a single business segment through its wholly-owned subsidiaries: (i) Blue Capital Re Ltd. ("Blue Capital Re"), a Bermuda Class 3A insurer which provided collateralized reinsurance; and (ii) Blue Capital Re ILS Ltd. ("Blue Capital Re ILS"), a Bermuda exempted limited liability company which conducted hedging and other investment activities, including entering into industry loss warranties and related instruments, in support of Blue Capital Re's operations. Blue Capital leverages the reinsurance underwriting expertise and infrastructure of Sompo International and its various subsidiaries, including Blue Capital Management Ltd. (the "Manager"), to conduct its business. Sompo Holdings, Inc. is the ultimate beneficial owner of 33.2% of the Company's outstanding Common Shares through its ownership of Sompo International.
NOTE 2. Net Assets in Liquidation
The following is a reconciliation of Shareholders' Equity under the Going Concern Basis to net assets in liquidation under the Liquidation Basis as of July 31, 2019.
|
|
|
|
|
|
($ in millions)
|
|
July 31, 2019
|
Total shareholders' equity as of July 31, 2019 (Going Concern Basis)
|
|
$
|
89.8
|
|
Decrease from write off of prepaid assets
|
|
(0.1
|
)
|
(Decrease) increase from liability for estimated costs in excess of estimated receipts during liquidation:
|
|
|
|
Reinsurance premiums receivable (1)
|
|
6.0
|
|
Loss and loss adjustment expense reserves (2)
|
|
(4.6
|
)
|
Other assets and other liabilities (3)
|
|
(2.3
|
)
|
|
|
(0.9
|
)
|
|
|
|
Net assets in liquidation July 31, 2019
|
|
$
|
88.8
|
|
(1) The Company estimated premium, net of acquisition costs, to be earned and settled over the remaining liquidation period on in-force reinsurance treaties to be $6.0 million;
(2) The Company estimated future liabilities for loss and LAE reserves to be incurred on in-force reinsurance treaties of $4.6 million;
(3) The Company accrued $1.7 million of investment income estimated to be earned on collateral balances over the anticipated period of run-off. In addition, the Company accrued $4.0 million of estimated costs to be incurred over the remaining liquidation period from corporate expenses and management and administrative fees.
BLUE CAPITAL REINSURANCE HOLDINGS LTD.
Notes to the Unaudited Consolidated Financial Statements
(in millions of United States dollars, except share and per
share amounts or as otherwise indicated)
NOTE 2. Net Assets in Liquidation, cont'd
The estimate of net assets in liquidation represents expected future cash outflows related to the orderly run-off of the net assets of the Company. The Liquidation Basis requires the Company to estimate net cash flows from operations and to accrue all costs associated with implementing and completing the orderly run-off. These amounts can vary significantly due to, among other things, the timing and amounts associated with discharging known and contingent liabilities including the Company's loss and loss adjustment expense reserves and the costs associated with the winding-up of operations. These costs are estimated and are anticipated to be paid out over the liquidation period. Changes in estimates and assumptions are periodically reviewed and the effects of revisions are recorded in the consolidated financial statements in the period that they are determined to be necessary. The Company does not expect to incur significant costs related specifically to the disposal of its assets since they are predominantly comprised of highly liquid collateral balances in the form of cash and cash equivalents under the caption ‘funds held by ceding companies’ on the statement of net assets (liquidation basis).
The change in the liability for estimated costs in excess of estimated receipts during liquidation for the period from August 1 to September 30, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
August 1, 2019
|
|
Change in Realizable Net Assets (1)
|
|
Remeasurement of Assets and Liabilities
|
|
September 30, 2019
|
Assets:
|
|
|
|
|
|
|
|
|
Estimated net inflows from reinsurance premiums receivable
|
|
$
|
6.0
|
|
|
$
|
(2.1
|
)
|
|
$
|
(0.4
|
)
|
|
$
|
3.5
|
|
Estimated net inflows from net investment income
|
|
1.7
|
|
|
(0.4
|
)
|
|
(0.1
|
)
|
|
1.2
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense reserves
|
|
(4.6
|
)
|
|
2.1
|
|
|
(1.0
|
)
|
|
(3.5
|
)
|
Other liabilities for general and administrative expenses
|
|
(4.0
|
)
|
|
0.4
|
|
|
—
|
|
|
(3.6
|
)
|
Total liability for estimated costs in excess of estimated receipts during liquidation
|
|
$
|
(0.9
|
)
|
|
$
|
—
|
|
|
$
|
(1.5
|
)
|
|
$
|
(2.4
|
)
|
(1) Represents changes in cash and cash equivalents, reinsurance premiums receivable, loss and loss adjustments reserves, other assets and other liabilities.
NOTE 3. Loss and LAE Reserve Movements
The following table summarizes Blue Capital's loss and LAE reserve movements for the one and seven months ended July 31, 2019 and the three and nine months ended September 30, 2018, prior to the adoption of the liquidation basis of
BLUE CAPITAL REINSURANCE HOLDINGS LTD.
Notes to the Unaudited Consolidated Financial Statements
(in millions of United States dollars, except share and per
share amounts or as otherwise indicated)
accounting.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Month Ended July 31,
|
|
Three Months Ended September 30,
|
|
Seven Months Ended July 31,
|
|
Nine Months Ended September 30,
|
($ in millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Gross and net unpaid loss and LAE reserves- beginning
|
|
$
|
38.4
|
|
|
$
|
29.9
|
|
|
$
|
49.9
|
|
|
$
|
43.4
|
|
Losses and LAE incurred:
|
|
|
|
|
|
|
|
|
Current year losses
|
|
0.4
|
|
|
4.2
|
|
|
2.3
|
|
|
5.6
|
|
Prior year losses
|
|
1.6
|
|
|
6.4
|
|
|
3.4
|
|
|
11.7
|
|
Total incurred losses and LAE
|
|
2.0
|
|
|
10.6
|
|
|
5.7
|
|
|
17.3
|
|
Losses and LAE paid and approved for payment:
|
|
|
|
|
|
|
|
|
Current year losses
|
|
0.1
|
|
|
0.3
|
|
|
0.1
|
|
|
0.4
|
|
Prior year losses
|
|
11.3
|
|
|
5.5
|
|
|
26.5
|
|
|
25.6
|
|
Total losses and LAE paid and approved for payment
|
|
11.4
|
|
|
5.8
|
|
|
26.6
|
|
|
26.0
|
|
Gross and net unpaid loss and LAE reserves- ending
|
|
$
|
29.0
|
|
|
$
|
34.7
|
|
|
$
|
29.0
|
|
|
$
|
34.7
|
|
NOTE 3. Loss and LAE Reserve Movements, cont'd
Loss and LAE reserves are comprised of case reserves (which are based on claims that have been reported) and incurred but not reported ("IBNR") reserves (which are based on losses that are believed to have occurred but for which claims have not yet been reported and may include a provision for expected future development on existing case reserves). Case reserves are set on the basis of loss reports received from third parties. IBNR reserves are estimated by management using various actuarial methods as well as a combination of the Manager's own loss experience, historical industry loss experience and management and the Manager's professional judgment.
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 loss and LAE reserves ultimately being significantly greater or less than the reserve provided at the end of any given reporting period. Loss and LAE reserve estimates are regularly reviewed and updated as new information becomes known. Any resulting adjustments are reflected in income in the period in which they become known.
Blue Capital Re's reserving process is highly dependent on loss information received from its cedants and the Manager.
During the one and seven months ended July 31, 2019, Blue Capital Re's estimated ultimate loss for prior period accident years was increased by $1.6 million and $3.4 million, respectively, due to the emergence of claims exceeding previous estimates of losses and LAE related to 2018 catastrophe events, primarily Typhoon Jebi.
During the three and nine months ended September 30, 2018, Blue Capital Re's estimated ultimate loss for prior period accident years was increased by $6.4 million and $11.7 million, respectively, due to the emergence of claims exceeding previous estimates of losses and LAE related to 2017 catastrophe events, primarily Hurricane Irma, which made landfall in the U.S. in September 2017.
NOTE 4. Basic and Diluted Earnings per Common Share
Prior to the adoption of the liquidation basis of accounting, the Company applied the two-class method of calculating its earnings per Common Share. In applying the two-class method, any outstanding RSUs are considered to be participating securities. See Note 6. For all periods presented in which RSUs were outstanding, the two-class method was used to determine basic and diluted earnings per Common Share since this method yielded a more dilutive result than the treasury stock method.
For purposes of determining basic and diluted earnings per Common Share, a portion of net income was allocated to outstanding RSUs which served to reduce the Company’s earnings per Common Share numerators. Net losses were not allocated to outstanding RSUs and, therefore, did not impact the Company's per Common Share numerators in any period in which it incurred a net loss.
The following table outlines the Company's computation of its basic and diluted earnings per Common Share for the one and seven months ended July 31, 2019 and the three and nine months ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Month Ended July 31,
|
|
Three Months Ended
September 30,
|
|
Seven Months Ended July 31,
|
|
Nine Months Ended
September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net (loss) income
|
$
|
(1.1
|
)
|
|
$
|
(6.7
|
)
|
|
$
|
1.7
|
|
|
$
|
(3.7
|
)
|
Less: net earnings allocated to participating securities(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Earnings per Common Share numerator
|
$
|
(1.1
|
)
|
|
$
|
(6.7
|
)
|
|
$
|
1.7
|
|
|
$
|
(3.7
|
)
|
Average Common Shares outstanding (in thousands of shares)
|
8,775
|
|
|
8,767
|
|
|
8,769
|
|
|
8,764
|
|
Basic and diluted earnings per Common Share
|
$
|
(0.12
|
)
|
|
$
|
(0.76
|
)
|
|
$
|
0.20
|
|
|
$
|
(0.42
|
)
|
(1) During the one and seven month periods ended July 31, 2019 and the three and nine month periods ended September 30, 2018, the net earnings allocated to participating securities totaled less than $0.1 million.
BLUE CAPITAL REINSURANCE HOLDINGS LTD.
Notes to the Unaudited Consolidated Financial Statements
(in millions of United States dollars, except share and per
share amounts or as otherwise indicated)
NOTE 4. Basic and Diluted Earnings per Common Share, cont'd
Dividends and Distributions to Holders of Common Shares and RSUs
During the one month period ended July 31, 2019, the Company did not declare any regular dividends or special distributions. During the three month period ended September 30, 2018, the Company declared a regular cash dividend of $0.30 per Common Share and RSU. As part of its plan to run-off and return capital to its shareholders, the Company declared and paid a special distribution of $1.51 per share during the two month period ended September 30, 2019. As of September 30, 2019 and December 31, 2018, the Company had no dividends or distributions payable to holders of Common Shares and RSUs.
The total amount of dividends paid to holders of Common Shares and RSUs during the seven month period ended July 31, 2019 and nine month period ended September 30, 2018 was $2.6 million and $5.3 million, respectively. The total amount of special distributions paid to holders of Common Shares and RSUs during the two month period ended September 30, 2019 was $13.3 million.
There are restrictions on the payment of dividends and distributions by the Company, Blue Capital Re and Blue Capital Re ILS. Any future determination to pay dividends and distributions to holders of Common Shares and RSUs will be at the discretion of the Board and will be dependent upon many factors, including the Company's results of operations, cash flows, financial position, capital requirements, general business opportunities, and legal, regulatory and contractual restrictions.
In light of the Company's decision to enter run-off and return capital to its shareholders, on October 25, 2019, the Bermuda Monetary Authority (“BMA”) amended the license of Blue Capital Re to require Blue Capital Re to obtain the written approval of the BMA prior to the declaration and/or payment of any dividends and/or the making of any capital contributions to Blue Capital Re’s parent, shareholders or affiliates. Accordingly, Blue Capital Re will be obligated to seek the BMA’s advance approval in order to provide the Company with the funds required for each distribution to the Company’s shareholders in connection with the run off of the Company. To the extent Blue Capital Re is unable to obtain the BMA’s approval, distributions to the Company's shareholders may be prevented or delayed until such time as Blue Capital Re receives the BMA’s approval.
NOTE 5. Credit Facility
On May 6, 2016, the Company entered into a credit facility (the "2016 Credit Facility") with Endurance Investment Holdings Ltd. (the "Lender"), a wholly-owned subsidiary of Sompo International. The 2016 Credit Facility provided the Company with an unsecured $20.0 million revolving credit facility for working capital and general corporate purposes. Borrowings under the 2016 Credit Facility incurred interest, set at the time of the borrowing, at a rate equal to the applicable LIBOR rate plus 150 basis points. A one-time fee of $20,000 was paid to the Lender in connection with establishing the 2016 Credit Facility. The 2016 Credit Facility was amended on July 31, 2018 to extend its expiry to September 30, 2020 under identical terms. On December 31, 2018, Endurance Investment Holdings Ltd. was merged into its parent, Endurance Specialty Insurance Ltd. ("Endurance Bermuda"), and the obligations of the Lender were assumed by Endurance Bermuda. On July 30, 2019, the parties terminated the 2016 Credit Facility in light of the Company's plan to cease active operations. See Note 1.
The 2016 Credit Facility contained covenants that limited the Company’s ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, or incur debt. Had the Company failed to comply with any of these covenants, the Lender could have revoked the facility and exercised remedies against the Company.
In addition, in the event of a default in the performance of any of the agreements or covenants under certain management agreements with the Manager by the Company, the Lender had the right to terminate the 2016 Credit Facility. As of July 30, 2019, the Company was in compliance with all of its respective covenants associated with the 2016 Credit Facility.
On October 8, 2018, the Company borrowed $3.0 million under the 2016 Credit Facility. On December 21, 2018, the Company borrowed a further $1.0 million under the 2016 Credit Facility to support general corporate expense obligations for the period. As of December 31, 2018, the Company had $4.0 million outstanding borrowings under the 2016 Credit Facility. With respect to the Company's outstanding borrowings, $3.0 million was repaid on April 8, 2019 and while outstanding, was subject to annual interest rates ranging between 3.91% and 4.15% and $1.0 million was repaid on April 18, 2019, and was subject to annual interest rates ranging between 4.07% and 4.11%.
BLUE CAPITAL REINSURANCE HOLDINGS LTD.
Notes to the Unaudited Consolidated Financial Statements
(in millions of United States dollars, except share and per
share amounts or as otherwise indicated)
NOTE 5. Credit Facility, cont'd
During the one and seven month periods ended July 31, 2019, the Company paid interest on its borrowings under the 2016 Credit Facility of nil and less than $0.1 million. During the three and nine month periods ended September 30, 2018, the Company paid no interest under the 2016 Credit Facility.
During the one and seven month periods ended July 31, 2019 and the three and nine month periods ended September 30, 2018, the Company incurred no facility or structuring fees in connection with the 2016 Credit Facility.
NOTE 6. Share-Based Compensation
The Company's 2013 Long-Term Incentive Plan (the "2013 LTIP"), which was adopted by the Board in September 2013, permits the issuance of up to one percent of the aggregate Common Shares outstanding to participants. Incentive awards that may be granted under the 2013 LTIP include RSUs, restricted Common Shares, incentive share options (on a limited basis), non-qualified share options, share appreciation rights, deferred share units, performance compensation awards, performance units, cash incentive awards and other equity-based and equity-related awards.
At the discretion of the Board's Compensation and Nominating Committee, incentive awards, the value of which are based on Common Shares, may be made to the Company's directors, future employees and consultants pursuant to the 2013 LTIP. For all periods presented, the Company's outstanding share-based incentive awards consisted solely of RSUs.
RSUs are phantom (as opposed to actual) Common Shares which, depending on the individual award, vest in equal tranches over a one to five-year period subject to the recipient maintaining a continuous relationship with the Company through the applicable vesting date. RSUs are payable in Common Shares upon vesting (the amount of which may be reduced by applicable statutory income tax withholdings at the recipient's option). RSUs do not require the payment of an exercise price and are not entitled to voting rights, but they are entitled to receive payments equivalent to any dividends and distributions declared on the Common Shares underlying the RSUs.
During the seven months ended July 31, 2019, the Company awarded a total of 17,995 RSUs to the directors of its Board. The grant date fair value of the RSUs was $0.1 million. During the nine months ended September 30, 2018 the Company awarded a total of 10,640 to directors of its Board. The grant date fair value of the RSUs was $0.1 million. The RSUs earn ratably each year based on continued service as a director over a three-year vesting period.
During the seven months ended July 31, 2019, 7,617 RSUs vested. The fair value of the vesting RSUs was $0.1 million. During the nine months ended September 30, 2018, 5,936 RSUs vested. The fair value of the vesting RSUs $0.1 million.
During the seven months ended July 31, 2019 and the nine months ended September 30, 2018, no RSUs were forfeited.
During each of the one and seven months ended July 31, 2019 and the three and nine months ended September 30, 2018, the Company recognized less than $0.1 million of RSU expense. At July 31, 2019, compensation costs not yet recognized related to unvested RSUs was $0.2 million.
As of September 30, 2019 and December 31, 2018, there were 27,270 and 16,892 RSUs outstanding, respectively, under the 2013 LTIP.
As the Company executes its plan of run-off, consistent with the terms of the 2013 LTIP, management expects all RSUs in issue to vest in the future, either naturally in the course of the standard vesting period or upon any of the holders' services as a director being terminated as part of the plan of run-off.
NOTE 7. Related Party Transactions
As of September 30, 2019 and December 31, 2018, Sompo International and its wholly owned subsidiary, Endurance Bermuda, owned 33.2% of the Company's outstanding Common Shares. See Note 1.
BLUE CAPITAL REINSURANCE HOLDINGS LTD.
Notes to the Unaudited Consolidated Financial Statements
(in millions of United States dollars, except share and per
share amounts or as otherwise indicated)
NOTE 7. Related Party Transactions, cont'd
Through each of the following roles and relationships, Blue Capital leverages Sompo International's reinsurance underwriting expertise and infrastructure to conduct its business: (i) the Manager, a wholly-owned subsidiary of Sompo International, manages Blue Capital Re's and Blue Capital Re ILS's reinsurance underwriting decisions; (ii) Blue Water Re Ltd. ("Blue Water Re") is a significant source of reinsurance business for Blue Capital Re; (iii) Sompo International's Chief Financial Officer is the Manager's Chief Executive Officer and serves as the Company's Chairman of the Board and CEO; (iv) the Manager's Treasurer serves as the Company's CFO; and (v) Sompo International's General Counsel and director of the Manager serves as the Company's Secretary and a director.
All of the compensation that employees of Sompo International are entitled to as directors of the Company is assigned directly to Sompo International.
Services Provided to Blue Capital by Sompo International
Sompo International provides services to Blue Capital through the following arrangements:
BW Retrocessional Agreement. Through a retrocessional contract dated December 31, 2013 (the "BW Retrocessional Agreement"), between Blue Capital Re and Blue Water Re, Blue Water Re has the option to cede to Blue Capital Re up to 100% of its participation in the ceded reinsurance business it writes, provided that such business is in accordance with the Company’s underwriting guidelines.
Pursuant to the BW Retrocessional Agreement, Blue Capital Re may participate in: (i) retrocessional, quota share or other agreements between Blue Water Re and Sompo International or other third-party reinsurers, which provides it with the opportunity to participate in a diversified portfolio of risks on a proportional basis; and (ii) fronting agreements between Blue Water Re and Endurance Bermuda or other well capitalized third-party rated reinsurers, which allows Blue Capital Re to transact business with counterparties who prefer to enter into contracts with rated reinsurers.
For all periods presented, all of the reinsurance business of Blue Capital Re was originated pursuant to the BW Retrocessional Agreement.
Investment Management Agreement. The Company has entered into an Investment Management Agreement (the "Investment Management Agreement") with the Manager. Pursuant to the terms of the Investment Management Agreement, the Manager has full discretionary authority, including the delegation of the provision of its services, to manage the Company's assets, subject to the Company’s underwriting guidelines, the terms of the Investment Management Agreement and the oversight of the Board.
Underwriting and Insurance Management Agreement. The Company, Blue Capital Re and the Manager have entered into an Underwriting and Insurance Management Agreement (the "Underwriting and Insurance Management Agreement"). Pursuant to the Underwriting and Insurance Management Agreement, the Manager provides underwriting, risk management, claims management, ceded retrocession agreements management and actuarial and reinsurance accounting services to Blue Capital Re. The Manager has full discretionary authority to manage the underwriting decisions of Blue Capital Re, subject to the Company's underwriting guidelines, the terms of the Underwriting and Insurance Management Agreement and the oversight of the Company's and Blue Capital Re's boards of directors.
Administrative Services Agreement. The Company has entered into an Administrative Services Agreement with the Manager, as amended on November 13, 2014 (the "Administrative Services Agreement"). Pursuant to the terms of the Administrative Services Agreement, the Manager provides Blue Capital with support services, including the services of our CFO, as well as finance and accounting, internal audit, claims management and policy wording, modeling software licenses, office space, information technology, human resources and administrative support.
BLUE CAPITAL REINSURANCE HOLDINGS LTD.
Notes to the Unaudited Consolidated Financial Statements
(in millions of United States dollars, except share and per
share amounts or as otherwise indicated)
NOTE 7. Related Party Transactions, cont'd
Fees Incurred Pursuant to the Aforementioned Agreements
During the one and seven months ended July 31, 2019, the Company incurred general and administrative expenses of: (i) $0.2 million and $0.8 million pursuant to the Investment Management Agreement; (ii) less than $0.1 million and $0.3 million pursuant to the Administrative Services Agreement; and (iii) nil and nil pursuant to the Underwriting and Insurance Management Agreement.
During the three and nine months ended September 30, 2018, the Company incurred general and administrative expenses of: (i) $0.5 million and $1.4 million pursuant to the Investment Management Agreement; (ii) $0.1 million and $0.4 million pursuant to the Administrative Services Agreement; and (iii) nil and nil pursuant to the Underwriting and Insurance Management Agreement.
During each of the one and seven months ended July 31, 2019 and three and nine months ended September 30, 2018, the Company incurred no fees related to the 2016 Credit Facility. See Note 5.
As of September 30, 2019 and December 31, 2018, the Company owed Sompo International $0.6 million and $1.0 million for the services performed pursuant to the aforementioned agreements, respectively, which are included within "other liabilities" on the Company's Consolidated Balance Sheets at those dates.
NOTE 8. Commitments and Contingent Liabilities
Commitments
As of September 30, 2019 and December 31, 2018, Blue Capital had no commitments for operating leases or capital expenditures and does not expect any material expenditures of this type during the foreseeable future.
The Company and its subsidiaries may not terminate the Investment Management Agreement, the Underwriting and Insurance Management Agreement or the Administrative Services Agreement other than at three year intervals, whether or not the Manager's performance results are satisfactory. Upon any termination or non-renewal of either of the Investment Management Agreement or the Underwriting and Insurance Management Agreement (other than for a material breach by, or the insolvency of, the Manager), the Company must pay a one-time termination fee to the Manager equal to 5% of its GAAP shareholders' equity or net assets in liquidation (approximately $3.6 million as of September 30, 2019). The Company's plan to cease active operations and pursue an orderly run-off does not trigger a termination fee.
Blue Capital Re does not operate with a financial strength rating and, instead, fully collateralizes its reinsurance obligations through cash and cash equivalents held in various trust funds established for the benefit of ceding companies.
Amounts Held in Trust for the Benefit of Ceding Companies
As of September 30, 2019 and December 31, 2018, Blue Capital Re ILS did not have any cash and cash equivalents pledged to trust accounts established for the benefit of third parties.
As of September 30, 2019 and December 31, 2018, Blue Capital had transferred $99.8 million and $150.4 million of its cash and cash equivalents, respectively, to a trust account established by Blue Water Re for its benefit pursuant to the BW Retrocessional Agreement. See Note 7. These amounts are presented on the Company's Consolidated Balance Sheets as "funds held by ceding companies."
Litigation
Blue Capital Re, pursuant to the BW Retrocessional Agreement, previously provided for a reinsurance recovery through its participation in an Industry Loss Warranty protection purchased by Blue Water Re. The counterparty to the Industry Loss Warranty disputed the claim for the recovery, which was based upon the size of an insured industry loss calculated based upon third-party data.
BLUE CAPITAL REINSURANCE HOLDINGS LTD.
Notes to the Unaudited Consolidated Financial Statements
(in millions of United States dollars, except share and per
share amounts or as otherwise indicated)
NOTE 8. Commitments and Contingent Liabilities, cont'd
In June 2018, Blue Capital Re ILS, together with two other vehicles managed by the Manager, commenced legal proceedings against certain parties relating to the purchase by Blue Capital Re ILS of a parametric insurance product called an Industry Parametric Protection that provided coverage if the sustained wind speed during a hurricane or tropical storm exceeded a pre-selected trigger.
In February 2019, the parties involved in the disputes described above reached an agreement to resolve all matters and withdraw the pending claims. The impact of the settlement was considered in the determination of recording the Company's best estimate of loss and LAE reserves as of December 31, 2018.
In addition to the disputes described above, Blue Capital Re, as a reinsurer, is subject to litigation and arbitration proceedings in the normal course of its business. Such proceedings often involve reinsurance contract disputes which are typical for the reinsurance industry. Blue Capital Re's estimates of possible losses incurred in connection with such legal proceedings are provided for as "loss and loss adjustment expenses" on its Unaudited Consolidated Statements of Income/(Loss) and Comprehensive Income/(Loss) and are included within "loss and loss adjustment expense reserves" on its Consolidated Balance Sheet and Unaudited Consolidated Statement of Net Assets in Liquidation.
We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. We assess our potential liability by analyzing our litigation and regulatory matters using available information. We develop our views on estimated losses in consultation with outside counsel handling our defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. Should developments in any of these matters cause a change in our determination as to an unfavorable outcome and result in the need to recognize a material accrual, or should any of these matters result in a final adverse judgment or be settled for significant amounts, they could have a material adverse effect on our results of operations, cash flows and financial position in the period or periods in which such change in determination, judgment or settlement occurs.
Concentrations of Credit and Counterparty Risk
Blue Water Re markets retrocessional and reinsurance policies worldwide through brokers. Credit risk exists at Blue Capital Re, pursuant to the BW Retrocessional Agreement, to the extent that any of these brokers is unable to fulfill its contractual obligations to Blue Water Re. For example, Blue Water Re is required to pay amounts owed on claims under policies to brokers, and these brokers, in turn, pay these amounts to the ceding companies that have reinsured a portion of their liabilities with Blue Water Re. In some jurisdictions, if a broker fails to make such a payment, Blue Water Re and Blue Capital Re might remain liable to the ceding company for the deficiency. In addition, in certain jurisdictions, when the ceding company pays premiums for these policies to brokers, these premiums are considered to have been paid and the ceding insurer is no longer liable to Blue Water Re for those amounts, whether or not the premiums have actually been received.
Blue Capital Re remains liable for losses it incurs to the extent that any third-party reinsurer is unable or unwilling to make timely payments under reinsurance agreements. Blue Capital Re would also be liable in the event that its ceding companies were unable to collect amounts due from underlying third-party reinsurers.
NOTE 9. Fair Value of Financial Instruments
GAAP requires disclosure of fair value information for certain financial instruments. Where the Company holds financial instruments in which quoted market prices are not available, fair values are estimated by discounting future cash flows using current market rates or quoted market prices for similar obligations. Such estimates are not necessarily indicative of amounts that could be realized in a current market exchange.
At September 30, 2019, Blue Capital had no financial instruments on its Consolidated Statement of Net Assets . At December 31, 2018, Blue Capital had no financial instruments on its Consolidated Balance Sheet, with the exception of the $4.0 million in outstanding borrowings under the 2016 Credit Facility, which are not carried at fair value. See Note 5.
BLUE CAPITAL REINSURANCE HOLDINGS LTD.
Notes to the Unaudited Consolidated Financial Statements
(in millions of United States dollars, except share and per
share amounts or as otherwise indicated)
NOTE 10. Subsequent Event
On October 12, 2019, Typhoon Hagibis made landfall in Japan causing flooding and property damage. In addition, California wildfires have spread across multiple localities threatening the destruction of properties in October and November 2019. In accordance with the Liquidation Basis of accounting, management has included estimates for losses related to Typhoon Hagibis and the California wildfires in the Company's valuation of net assets in liquidation at September 30, 2019. The Company’s actual losses may ultimately differ materially from estimated losses due to the recent timing of those events, the nature of the risks assumed, the complexity of the assessment of damages and the number of reported claims received to date.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
General
The following is a discussion and analysis of our results of operations for the one and seven month periods ended July 31, 2019 and the three and nine month periods ended September 30, 2018, our plan of run-off subsequent to July 31, 2019, and our financial condition as of September 30, 2019 and December 31, 2018. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes thereto included in Part I, Item 1 of this report and with our audited consolidated financial statements and related notes thereto contained in the 2018 Form 10-K, as filed with the SEC.
Overview
We are a Bermuda reinsurance holding company which offered collateralized reinsurance in the property catastrophe market. Our principal objective was to maximize the expected total return for our shareholders by underwriting a diversified portfolio of short-tail reinsurance contracts and investing in insurance-linked securities with what we believed to be attractive risk and return characteristics. We provided our shareholders with the opportunity to own an alternative asset class whose returns we believe have historically been largely uncorrelated to those of other asset classes, such as global equities, bonds and hedge funds.
On July 25, 2019, after considering strategic alternatives, the Company announced a plan to cease active operations and pursue an orderly run-off of its liabilities and in-force portfolio and return capital to shareholders. As and when capital becomes available after settlement of existing liabilities and expenses and receipt of any necessary regulatory approvals, the Company expects to declare special distributions to shareholders.
During the one and seven months ended July 31, 2019, we recorded a net loss of $1.1 million and net income of $1.7 million, respectively; compared to net losses of $6.7 million and $3.7 million in the three and nine months ended September 30, 2018.
The results were impacted by significantly lower premium income as compared to the prior period, due to a smaller available capital base which limited deployment in the 2019 renewal seasons. In addition, the Company did not write any business in the key June renewal period in the current year. This was partially offset by lower loss and loss adjustment expenses compared to those reported a year ago which were elevated due to an increase in estimated losses related to Hurricane Irma. During the January 1, 2019 renewal period we maintained our close partnership with Sompo International and deployed all of our available capital into quota share contract business with attractive risk adjusted return potential.
During the one month ended July 31, 2019, the Company did not declare any regular dividends or special distributions. During the seven months ended July 31, 2019, the Company declared regular dividends of $0.30 per Common Share and RSU. During the three and nine months ended September 30, 2018, the Company declared a regular cash dividends of $0.30 and $0.90 per Common Share and RSU, respectively.
Review of Orderly Run-Off
As part of its plan to run-off and return capital to its shareholders, the Company declared and paid a special distribution of $1.51 per share during the two month period ended September 30, 2019.
In the two month period ended September 30, 2019, we recognized $2.0 million of net adverse loss and LAE reserve development, primarily driven by a deterioration in losses incurred related to Typhoon Jebi, which occurred in 2018, and to a lesser extent, 2017 catastrophe events Hurricane Irma and Hurricane Maria.
Net Assets in Liquidation as at September 30, 2019 of $71.9 million include a negative liquidation valuation adjustment of $2.4 million as an estimate of future cashflows expected from revenues and expenses. This adjustment includes management's estimate of future premium, net of acquisition expenses, to be earned on the in-force contract through the remainder of the contract period of $3.5 million and estimated future investment income to be earned of $1.2 million, less estimated future liabilities for loss and LAE reserves of $3.5 million and $3.6 million of estimated future general and administrative expenses. The Company does not expect to incur significant costs related specifically to the disposal of its assets since they are predominantly comprised of highly liquid collateral balances in the form of cash and cash equivalents under the caption ‘funds held by ceding companies’ on the statement of net assets (liquidation basis).
As required under the liquidation basis of accounting, estimated future liabilities for loss and LAE reserves include loss estimates for claims related to events that occur after the end of the period reported, such as Typhoon Hagibis and the California wildfires, which are still ongoing. The Company’s loss estimates for Typhoon Hagibis and the California wildfires have been derived from the utilization of proprietary catastrophe modeling, standard industry models, an in-depth review of in-force contracts and initial indications from clients and brokers. The Company’s actual losses may ultimately differ materially from estimated losses due to the nature of the risks assumed, the complexity of the assessment of damages and the number of reported claims received to date. The Company’s actual losses from Typhoon Hagibis and the California wildfires might prove to be more costly than initial estimated losses and could impact net assets in future reporting periods.
Review of Consolidated Results of Operations
Prior to ceasing active operations we operated as a single business segment through the Company and its wholly-owned subsidiaries: (i) Blue Capital Re, a Bermuda exempted limited liability company registered as a Class 3A insurer in Bermuda, which offered collateralized reinsurance; and (ii) Blue Capital Re ILS, a Bermuda exempted limited liability company which conducted hedging and other investment activities in support of Blue Capital Re’s operations.
In light of the adoption of the liquidation basis of accounting as of July 31, 2019 and the plan of run-off, the results of operations for periods after July 31, 2019 are not comparable to prior year periods.
Our consolidated results of operations for the one and seven month periods ended July 31, 2019 and the three and nine month periods ended September 30, 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Month Ended July 31,
|
|
Three Months Ended September 30,
|
|
Seven Months Ended July 31,
|
|
Nine Months Ended September 30,
|
($ in millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Reinsurance premiums written
|
|
$
|
1.5
|
|
|
$
|
4.2
|
|
|
$
|
11.1
|
|
|
$
|
24.1
|
|
Change in net unearned reinsurance premiums
|
|
—
|
|
|
2.3
|
|
|
0.8
|
|
|
(2.8
|
)
|
Net reinsurance premiums earned
|
|
1.5
|
|
|
6.5
|
|
|
11.9
|
|
|
21.3
|
|
Net investment income
|
|
0.2
|
|
|
0.6
|
|
|
1.8
|
|
|
1.5
|
|
Total revenues
|
|
1.7
|
|
|
7.1
|
|
|
13.7
|
|
|
22.8
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE - current year losses
|
|
0.4
|
|
|
4.2
|
|
|
2.3
|
|
|
5.6
|
|
Loss and LAE - prior year losses
|
|
1.6
|
|
|
6.4
|
|
|
3.4
|
|
|
11.7
|
|
Reinsurance acquisition costs
|
|
0.5
|
|
|
2.0
|
|
|
3.9
|
|
|
5.9
|
|
General and administrative expenses
|
|
0.3
|
|
|
1.2
|
|
|
2.4
|
|
|
3.3
|
|
Total expenses
|
|
2.8
|
|
|
13.8
|
|
|
12.0
|
|
|
26.5
|
|
Net (loss) income and comprehensive (loss) income
|
|
$
|
(1.1
|
)
|
|
$
|
(6.7
|
)
|
|
$
|
1.7
|
|
|
$
|
(3.7
|
)
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio
|
|
134.0
|
%
|
|
164.3
|
%
|
|
47.1
|
%
|
|
81.6
|
%
|
Reinsurance acquisition cost ratio
|
|
34.9
|
%
|
|
30.2
|
%
|
|
32.9
|
%
|
|
27.4
|
%
|
General and administrative expense ratio
|
|
17.3
|
%
|
|
18.1
|
%
|
|
20.5
|
%
|
|
15.7
|
%
|
GAAP combined ratio
|
|
186.2
|
%
|
|
212.6
|
%
|
|
100.5
|
%
|
|
124.7
|
%
|
Reinsurance Premiums Written and Earned
Written premiums represent business bound from ceding companies and net earned premiums represent the portion of net written premiums (gross written premiums less any ceded reinsurance) which is recognized as revenue over the period of time that coverage is provided.
During the one month ended July 31, 2019 and three months ended September 30, 2018, we wrote $1.5 million and $4.2 million of reinsurance premiums, respectively, all of which represented indemnity reinsurance contracts relating to property catastrophe risks. The decrease in reinsurance premiums written during the current period of 2019 versus that of the comparable 2018 period was due to the current period reflecting one month of activity, as the company transferred to the liquidation basis of accounting on July 31, 2019. In addition, all premium written was derived solely from quota share contract business which incepted on January 1, as no new business was written in the current period.
During the seven months ended July 31, 2019 and the nine months ended September 30, 2018, we wrote $11.1 million and $24.1 million of reinsurance premiums, respectively, all of which represented indemnity reinsurance contracts relating to property catastrophe risks. The decrease in reinsurance premiums written during the current period of 2019 versus that of the comparable 2018 period was due to the current period reflecting seven months of activity, as the company transferred to the liquidation basis of accounting on July 31, 2019. In addition, in the current year there was a smaller capital base available for deployment to underwriting activity at January 1 and a subsequent curtailment of underwriting activity.
Our reinsurance premiums written and earned include $nil and $0.4 million in reinstatement premium accruals for the one and seven month periods ended July 31, 2019. Our reinsurance premiums written and earned included $0.4 million and $0.9 million in reinstatement premium accruals for the three and nine months ended September 30, 2018.
Net premiums earned during the one and seven month period ended July 31, 2019 were lower than that of the first nine months of 2018 mainly due to the lower gross written premium base.
Blue Capital has sought to diversify its exposure across geographic zones around the world in order to obtain a prudent spread of risk. The spread of these exposures is also a function of market conditions and opportunities.
The following table sets forth a breakdown of Blue Capital's gross premiums written by geographic area of underlying risks insured during the one and seven month periods ended July 31, 2019 and the three and nine month periods ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Month Ended July 31, 2019
|
|
Three Months Ended September 30,
|
|
Seven Months Ended July 31, 2019
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Worldwide(1)
|
|
$
|
0.1
|
|
|
7
|
%
|
|
$
|
0.9
|
|
|
22
|
%
|
|
$
|
0.8
|
|
|
7
|
%
|
|
$
|
5.9
|
|
|
25
|
%
|
USA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nationwide
|
|
0.8
|
|
|
53
|
%
|
|
1.6
|
|
|
37
|
%
|
|
4.7
|
|
|
42
|
%
|
|
7.1
|
|
|
29
|
%
|
Florida
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
0.1
|
|
|
1
|
%
|
|
4.2
|
|
|
17
|
%
|
Gulf region
|
|
—
|
|
|
—
|
%
|
|
0.2
|
|
|
4
|
%
|
|
—
|
|
|
—
|
%
|
|
0.5
|
|
|
2
|
%
|
California
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
0.1
|
|
|
1
|
%
|
|
0.2
|
|
|
1
|
%
|
Midwest region and other
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
0.5
|
|
|
2
|
%
|
Northeast
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Southeast
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
0.1
|
|
|
—
|
%
|
Asia
|
|
0.2
|
|
|
13
|
%
|
|
0.3
|
|
|
7
|
%
|
|
1.0
|
|
|
9
|
%
|
|
1.1
|
|
|
5
|
%
|
Australia
|
|
0.1
|
|
|
7
|
%
|
|
—
|
|
|
—
|
%
|
|
0.9
|
|
|
8
|
%
|
|
0.5
|
|
|
2
|
%
|
Canada
|
|
—
|
|
|
—
|
%
|
|
0.1
|
|
|
2
|
%
|
|
0.2
|
|
|
2
|
%
|
|
0.3
|
|
|
1
|
%
|
Europe
|
|
0.3
|
|
|
20
|
%
|
|
1.1
|
|
|
28
|
%
|
|
3.3
|
|
|
30
|
%
|
|
3.1
|
|
|
13
|
%
|
Worldwide, excluding U.S.(2)
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
0.6
|
|
|
3
|
%
|
Total premiums written
|
|
$
|
1.5
|
|
|
100
|
%
|
|
$
|
4.2
|
|
|
100
|
%
|
|
$
|
11.1
|
|
|
100
|
%
|
|
$
|
24.1
|
|
|
100
|
%
|
(1) "Worldwide" comprises reinsurance contracts that cover risks in more than one geographic area and do not specifically exclude the U.S.
(2) "Worldwide, excluding U.S." comprises reinsurance contracts that cover risks in more than one geographic area but specifically exclude the U.S.
Loss and LAE
The following table summarizes the components of our consolidated loss and LAE incurred and our loss and LAE ratios for the one and seven month periods ended July 31, 2019 and the three and nine month periods ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Month Ended July 31,
|
|
Three Months Ended September 30,
|
|
Seven Months Ended July 31,
|
|
Nine Months Ended September 30,
|
($ in millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Loss and LAE incurred - current year
|
|
$
|
0.4
|
|
|
$
|
4.2
|
|
|
$
|
2.3
|
|
|
$
|
5.6
|
|
Loss and LAE incurred - prior year
|
|
1.6
|
|
|
6.4
|
|
|
3.4
|
|
|
11.7
|
|
Total loss and LAE incurred
|
|
$
|
2.0
|
|
|
$
|
10.6
|
|
|
$
|
5.7
|
|
|
$
|
17.3
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio - current year
|
|
33.7
|
%
|
|
23.2
|
%
|
|
18.0
|
%
|
|
26.4
|
%
|
Loss and LAE ratio - prior year
|
|
100.3
|
%
|
|
141.1
|
%
|
|
29.1
|
%
|
|
55.2
|
%
|
Loss and LAE ratio
|
|
134.0
|
%
|
|
164.3
|
%
|
|
47.1
|
%
|
|
81.6
|
%
|
During the one and seven month periods ended July 31, 2019, we established $0.4 million and $2.3 million of loss and LAE reserves, respectively, for the current year, nearly all of which constituted IBNR reserves. There were no individually significant loss events that impacted us during the one and seven month periods ended July 31, 2019.
During the three and nine month periods ended September 30, 2018, we established $4.2 million and $5.6 million of loss and LAE reserves, respectively, driven primarily by the catastrophe events summarized in the following table, nearly all of which constituted IBNR reserves.
|
|
|
|
|
|
|
|
|
|
Event Date
|
Event
|
Loss and Loss Adjustment Expenses
|
|
($ in millions)
|
Three Months Ended September 30, 2018
|
|
Nine Months Ended September 30, 2018
|
September 2018
|
Typhoon Jebi
|
$
|
2.0
|
|
|
$
|
2.0
|
|
September 2018
|
Hurricane Florence
|
1.3
|
|
|
1.3
|
|
|
|
$
|
3.3
|
|
|
$
|
3.3
|
|
The decrease in current year losses in 2019 compared to 2018 for the seven months ended July 31, 2019 was from a lower loss reserve provision in respect of attritional losses.
During the one and seven months ended July 31, 2019, we recognized $1.6 million and $3.4 million of net adverse loss and LAE reserve development primarily driven by a deterioration in losses incurred related to Typhoon Jebi. During the three and nine months ended September 30, 2018 we recognized $6.4 million and $11.7 million of net adverse loss and LAE reserve development for estimated losses, as reported losses and claims settlements in the period, related primarily to Hurricane Irma, exceeded our previous estimates.
Reinsurance Acquisition Costs
The following table summarizes our consolidated reinsurance acquisition costs and our reinsurance acquisition cost ratios for the one and seven month periods ended July 31, 2019 and the three and nine month periods ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Month Ended July 31,
|
|
Three Months Ended September 30,
|
|
Seven Months Ended July 31,
|
|
Nine Months Ended September 30,
|
($ in millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Commissions, brokerage costs, fronting fees and other
|
|
$
|
0.5
|
|
|
$
|
2.0
|
|
|
$
|
3.9
|
|
|
$
|
5.8
|
|
Profit commissions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
Total reinsurance acquisition costs
|
|
$
|
0.5
|
|
|
$
|
2.0
|
|
|
$
|
3.9
|
|
|
$
|
5.9
|
|
Reinsurance acquisition cost ratio
|
|
34.9
|
%
|
|
30.2
|
%
|
|
32.9
|
%
|
|
27.4
|
%
|
Our reinsurance acquisition costs, which we normally recognize over the underlying risk period of the related contracts, include commissions, brokerage costs, fronting fees, premium taxes and excise taxes, in each case, when applicable, and are normally a set percentage of gross premiums written. Our reinsurance acquisition costs may also include profit commissions, which are paid to ceding companies in the event of favorable loss experience.
Our reinsurance acquisition costs relating to commissions, brokerage costs, fronting fees and related costs for the one and seven months ended July 31, 2019, reduced compared to the costs incurred during the 2018 period due to the lower volume of business written. The increase in the reinsurance acquisition ratio compared to 2018 is mainly due to the higher concentration of quota share business which incurs higher override commissions.
General and Administrative Expenses
The following table summarizes our consolidated general and administrative expenses and our general and administrative expense ratios for the one and seven month periods ended July 31, 2019 and the three and nine month periods ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Month Ended July 31,
|
|
Three Months Ended September 30,
|
|
Seven Months Ended July 31,
|
|
Nine Months Ended September 30,
|
($ in millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Investment Management Agreement fees
|
|
$
|
0.2
|
|
|
$
|
0.5
|
|
|
$
|
0.8
|
|
|
$
|
1.4
|
|
Administrative Services Agreement fees
|
|
—
|
|
|
0.1
|
|
|
0.3
|
|
|
0.4
|
|
Public company expenses
|
|
0.1
|
|
|
0.6
|
|
|
1.3
|
|
|
1.5
|
|
Total general and administrative expenses
|
|
$
|
0.3
|
|
|
$
|
1.2
|
|
|
$
|
2.4
|
|
|
$
|
3.3
|
|
General and administrative expense ratio
|
|
17.3
|
%
|
|
18.1
|
%
|
|
20.5
|
%
|
|
15.7
|
%
|
See Note 7 of the Notes to the Unaudited Consolidated Financial Statements for further information regarding the nature of the expenses that we incur pursuant to the agreements with the Manager and other affiliates of Sompo International.
The expenses incurred pursuant to the Investment Management Agreement have decreased moderately from prior year, due to the decrease in the equity base of the Company.
Our public company expenses incurred during the periods presented consisted of director fees, corporate insurance premiums, audit fees, share-based compensation and other expenses associated with being a publicly traded company. These expenses increased modestly in 2019 compared to 2018 as a result of higher legal and professional expenses in connection with the consideration of strategic alternatives by the Company prior to the decision to pursue an orderly run-off of the Company.
Income Taxes
We were not subject to income taxes in any jurisdiction during the periods presented.
Exposure Management
The following discussion should be read in conjunction with Item 1A "Risk Factors" included in the 2018 Form 10-K and this Form 10-Q, as filed with the SEC, in particular the risk factor entitled "Our stated catastrophe and enterprise-wide risk management exposures are based on estimates and judgments which are subject to significant uncertainties."
The Manager monitors our net exposure to any one catastrophe loss event in any single zone within certain broadly defined major catastrophe zones at each treaty renewal date. The last major treaty renewal date was January 1, 2019. Our January 1, 2019 estimated net exposures by zone were in compliance with our underwriting guidelines. Namely, our estimated net exposure from any one catastrophe loss event in any individual zone was at or below 50% of our then-projected September 30, 2019 shareholders' equity (now net assets in liquidation).
These broadly defined major catastrophe zones are currently defined as follows:
|
|
|
|
|
|
North America:
|
|
Europe:
|
|
Rest of World:(1)
|
|
|
|
|
|
U.S. - Northeast
|
|
Europe
|
|
Australia
|
U.S. - Southeast
|
|
|
|
New Zealand
|
U.S. - Florida
|
|
|
|
Japan
|
U.S. - Gulf
|
|
|
|
South America
|
U.S. - New Madrid
|
|
|
|
|
U.S. - Midwest
|
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U.S. - California
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U.S. - Hawaii
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Canada
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(i) The Company to the best of its knowledge has not made and does not have current plans to have any contacts with any governments or entities targeted by U.S. sanctions including those applicable to Sudan, Syria, Iran.
Single Event Losses
For certain defined natural catastrophe region and peril combinations, the Manager assesses the probability and likely magnitude of losses using a combination of industry third-party models, proprietary models and underwriting judgment. The Manager attempts to model the estimated net impact from a single event, taking into account contributions from property catastrophe reinsurance (including retrocessional business), property pro-rata reinsurance and event-linked derivative securities, offset by the net benefit of any reinsurance or derivative protections we purchase and the benefit of premiums.
On June 1, 2019, our estimated single event loss exposures were within our underwriting guidelines. Namely, the estimated net impact from any one catastrophe loss event (excluding earthquake) at the 1 in 100 year return period for any one zone did not exceed 35% of our then-projected September 30, 2019 shareholders' equity, and the estimated net impact from any one earthquake loss event at the 1 in 250 year return period for any zone did not exceed 35% of our then-projected September 30, 2019 shareholders' equity.
There is no single standard methodology or set of assumptions utilized industry-wide in estimating property catastrophe losses. As a result, it may be difficult to accurately compare estimates of risk exposure among different insurance and reinsurance companies due to, among other things, underwriting judgment, differences in modeling, modeling assumptions, portfolio composition and concentrations, and selected event scenarios.
Single Event Loss Projections
The table that follows details our estimated net impact from single event losses as of June 1, 2019 for selected zones at specified return periods. It is important to note that each catastrophe model we use contains its own assumptions as to the frequency and severity of loss events, and results may vary significantly from model to model.
Net Impact from Single Event Losses at Specified Return Periods
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Net Impact
(Millions)
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Return Period(1)
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Percentage of September 30, 2019
Net Assets in Liquidation
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U.S. - Florida hurricane
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$
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13
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1 in 100 year
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18
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%
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Japan earthquake
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9
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1 in 250 year
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12
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%
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Europe windstorm
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8
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1 in 100 year
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10
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%
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All other zones
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less than 10%
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(1) A "100-year" return period can also be referred to as the 1.0% occurrence exceedance probability ("OEP"), meaning there is an estimated 1.0% chance in any given year that this level will be exceeded. A "250-year" return period can also be referred to as the 0.4% OEP, meaning there is an estimated 0.4% chance in any given year that this level will be exceeded.
Our estimates of the net impact from single event losses may vary considerably within a particular territory depending on the specific characteristics of the event. Given the limited availability of reliable historical data, there is a great deal of uncertainty with regard to the accuracy of any catastrophe model, especially when contemplating longer return periods.
Our single event loss estimates represent snapshots as of the time of such estimates. The composition of our in-force portfolio may change materially at any time due to the acceptance of new policies, losses incurred, the expiration of existing policies and changes in our ceded reinsurance and derivative protections. There were no changes made to the composition of our in-force portfolio from June 1, 2019 to September 30, 2019 in light of the Company ceasing active operations.
Liquidity and Capital Resources
Liquidity
The Company has no operations of its own and relies on dividends and distributions from Blue Capital Re to pay its expenses and dividends or special distributions to its shareholders and to repay any outstanding borrowings under the 2016 Credit Facility.
The ability of Blue Capital Re to pay dividends is dependent on its ability to meet the requirements of applicable Bermuda law and regulations. Under Bermuda law, Blue Capital Re may not declare or pay a dividend to the Company if there are reasonable grounds for believing that Blue Capital Re is, or would after the payment be, unable to pay its liabilities as they become due, or the realizable value of Blue Capital Re's assets would thereby be less than the aggregate of its liabilities and its issue share capital and share premium accounts. Further, Blue Capital Re, as a regulated insurance company in Bermuda, is subject to additional regulatory restrictions on the payment of dividends or distributions. In light of the Company's decision to enter run-off and return capital to its shareholders, on October 25, 2019, the BMA amended the license of Blue Capital Re to require Blue Capital Re to obtain the written approval of the BMA prior to the declaration and/or payment of any dividends and/or the making of any capital contributions to Blue Capital Re’s parent, shareholders or affiliates. Accordingly, Blue Capital Re will be obligated to seek the BMA’s advance approval in order to provide the Company with the funds required for each distribution to the Company’s shareholders in connection with the run off of the Company. To the extent Blue Capital Re is unable to obtain the BMA’s approval, distributions to the Company's shareholders may be prevented or delayed until such time as Blue Capital Re receives the BMA’s approval.
The primary sources of cash for Blue Capital Re are capital contributions, premium collections, releases of collateral from trust accounts and investment income. The primary uses of cash for the Blue Capital Re are payments of loss and LAE reserves, reinsurance acquisition costs, general and administrative expenses, and dividends or distributions.
As of September 30, 2019, we held $1.1 million of cash and cash equivalents, which was entirely unencumbered cash on hand.
On May 6, 2016, the Company entered into a credit facility (the "2016 Credit Facility") with Endurance Investment Holdings Ltd. (the "Lender"), a wholly-owned subsidiary of Sompo International. The 2016 Credit Facility provided the Company with an unsecured $20.0 million revolving credit facility for working capital and general corporate purposes. Borrowings under the 2016 Credit Facility incurred interest, set at the time of the borrowing, at a rate equal to the applicable LIBOR rate plus 150 basis points. A one-time fee of $20,000 was paid to the Lender in connection with establishing the 2016 Credit Facility. The 2016 Credit Facility was amended on July 31, 2018 to extend its expiry to September 30, 2020 under identical terms. On December 31, 2018, Endurance Investment Holdings Ltd. was merged into its parent, Endurance Specialty Insurance Ltd. and the obligations of the Lender were assumed by Endurance Specialty Insurance Ltd. On July 30, 2019, the parties terminated the 2016 Credit Facility in light of the Company's plan to cease active operations. See Note 5 of the Notes to the Unaudited Consolidated Financial Statements.
With respect to the Company's outstanding borrowings of $4.0 million at December 31, 2018, $3.0 million was repaid on April 8, 2019 and while outstanding, was subject to annual interest rates ranging between 3.91% and 4.15% and $1.0 million was repaid on April 18, 2019, and was subject to annual interest rates ranging between 4.07% and 4.11%.
The 2016 Credit Facility contained covenants that limited the Company’s ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, or incur debt. Had the Company failed to comply with any of these covenants, the Lender could have revoked the facility and exercised remedies against the Company. In addition, in the event of a default in the performance of any of the agreements or covenants under certain management agreements with the Manager by the Company, the Lender had the right to terminate the 2016 Credit Facility.
In accordance with our plan to cease active operations and return capital to shareholders, on August 30, 2019 we declared a special distribution of $1.51 per common share which was paid on September 30, 2019 to shareholders on record as of September 16, 2019. During the seven month period ended July 31, 2019, we declared (i) a first quarter 2019 regular dividend of $0.15 per Common Share and RSU which was paid on April 15, 2019; and (ii) a second quarter 2019 regular dividend of $0.15 per Common Share and RSU, which was paid on July 15, 2019. The total dollar amount of dividends paid during the seven month period ended July 31, 2019 was $2.6 million.
We intend to make further special distributions to shareholders from time to time pursuant to our plans to effect an orderly run-off of the Company. Any future determination to make distributions will remain at the discretion of the Board and will be dependent upon many factors, including: (i) our financial condition, liquidity, results of operations (including our ability to generate cash flow in excess of our expenses) and capital requirements; (ii) general business conditions, (iii) legal, tax and regulatory limitations; (iv) contractual prohibitions and other restrictions; (v) regulatory approval of Blue Capital Re's dividend payments to the Company; and (vi) any other factors that the Board deems relevant. Subject to the "passive foreign investment company" ("PFIC") rules discussed below for U.S. federal income tax purposes, it is expected that U.S. Holders (as defined below) of our common shares generally will recognize gain or loss equal to the difference between (i) the sum of the amount of cash and the fair market value (determined at the time of the distribution) of property, if any, distributed to them and (ii) their adjusted tax basis in our common shares. Such gain or loss generally will be computed on a per-share basis. Accordingly, if a U.S. Holder acquired our common shares at different prices or at different times, the amount that such shareholder receives on each liquidating distribution will be allocated to each different block of our common shares based on the number of shares in each block. Within each block, a cost recovery approach will generally be applied, and a U.S. Holder’s full tax basis of a block will generally be recovered before any gain is recognized with respect to it. When a distribution is one in a series of distributions in complete liquidation, as is expected, these basis recovery rules will apply to the aggregate basis of all of the U.S. Holder's common shares, and any loss generally will be recognized by a U.S. Holder only in the tax year in which the shareholder receives our final liquidating distribution. For these purposes, a “U.S. Holder” is any beneficial owner of our common shares that, for U.S. federal income tax purposes, is (i) a citizen or individual resident of the United States; (ii) a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States or any state thereof, including the District of Columbia; (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source; or (iv) a trust if such trust has validly elected to be treated as a United States person for U.S. federal income tax purposes or if (1) a court within the United States is able to exercise primary supervision over its administration and (2) one or more United States persons have the authority to control all of the substantial decisions of such trust. Holders of our common shares should consult their tax advisors regarding the tax consequences to them of the receipt of any distributions from us.
Capital Resources
Our total net assets in liquidation (formerly shareholders' equity) was $71.9 million and $90.7 million as of September 30, 2019 and December 31, 2018, respectively. The decrease in our total net assets in liquidation was mostly attributable the declaration of a special distribution of $1.51 to holders of Common Shares and RSUs. It is unlikely that we will need to raise additional capital in the future following our decision to pursue an orderly run-off and we anticipate that our capital resources will be sufficient to meet all future obligations.
Collateral Requirements and Restrictions
Each of the reinsurance contracts that Blue Capital Re has written is required to be fully-collateralized by cash and cash equivalents or funds held by reinsurance companies. This collateral is not available to Blue Capital Re for any other purpose until the expiration of the applicable reinsurance contract (or, in the event of a covered loss, the resolution of such loss under the applicable contract). As a result of the significant losses incurred from the catastrophe events of 2017 and 2018, in line with the contractual requirements for buffer loss provisions in the treaties that the Company enters into, collateral that we would typically expect to be available following the expiry of the applicable reinsurance contracts will remain encumbered for a longer period impacting the time it will take to run-off the Company.
Contractual Obligations and Commitments
The Company and its operating subsidiaries have entered into the Investment Management Agreement, the Underwriting and Insurance Management Agreement and the Administrative Services Agreement with the Manager and the 2016 Credit Facility with the Lender.
Investment Management Agreement. Pursuant to the Investment Management Agreement, we are obligated to pay the Manager a management fee (the "Management Fee") equal to 1.5% of our average total shareholders' equity (as defined in the Investment Management Agreement) per annum, calculated and payable in arrears in cash each quarter (or part thereof) that the Investment Management Agreement is in effect.
As of September 30, 2019, our total shareholders' equity (now net assets in liquidation) was $71.9 million. Assuming that our average total shareholders' equity remains at this level in future periods, we would expect to pay the Manager a Management Fee of approximately $1.1 million per year pursuant to this agreement. However, as we return capital to our shareholders in accordance with the run-off of the Company, the Management Fee paid to the Manager will decline with the expected reduction in shareholders' equity.
Underwriting and Insurance Management Agreement. Pursuant to the Underwriting and Insurance Management Agreement, we are obligated to pay the Manager a performance fee (the "Performance Fee") which is equal to 20% of our pre-tax, pre-Performance Fee income over a hurdle amount (as defined in the Underwriting and Insurance Management Agreement) and payable in arrears in cash each quarter (or part thereof) that such agreement is in effect.
As a result of the net loss recorded in the years ended December 31, 2018 and 2017, the Company did not incur a Performance fee in 2018, and management estimates that the Company will not pay any future Performance Fee due to the rolling three year high water mark provision and the decision to pursue an orderly run-off of the Company.
Administrative Services Agreement. Pursuant to the Administrative Services Agreement, we are obligated to reimburse the Manager for various fees, expenses and other costs in connection with the services provided under the terms of this agreement, including the services of our CFO, modeling software licenses and finance, legal and administrative support.
We currently expect to pay the Manager approximately $0.6 million per year in future periods pursuant to this agreement.
Credit Facility Agreement. The 2016 Credit Facility provided the Company with an unsecured $20.0 million revolving credit facility for working capital and general corporate purposes and was terminated on July 30, 2019.
Borrowings under the 2016 Credit Facility incurred interest, set at the time of the borrowing, at a rate equal to the LIBOR rate plus 150 basis points. Upon consummation of the 2016 Credit Facility, a one-time fee of $20,000 was paid to the Lender in connection with the set-up of the facility.
Certain Termination Provisions Associated with the Foregoing Agreements. We may not terminate the Investment Management Agreement, the Underwriting and Insurance Management Agreement or the Administrative Services Agreement other than at three year intervals, whether or not the Manager’s performance results are satisfactory. Upon any termination or non-renewal of either of the Investment Management Agreement or the Underwriting and Insurance Management Agreement (other than for a material breach by, or the insolvency of, the Manager), we must pay a one-time termination fee to the Manager equal to 5% of our GAAP shareholders' equity, calculated as of the most recently completed quarter prior to the date of termination.
As of September 30, 2019, if we were to terminate either the Investment Management Agreement or the Underwriting and Insurance Management Agreement, we would be required to pay the Manager a one-time termination fee of approximately $3.6 million. The Company's plan to cease active operations and pursue an orderly run-off does not trigger a termination fee.
Neither the Company nor its operating subsidiaries had any commitments for operating leases or capital expenditures at September 30, 2019 and neither the Company nor its operating subsidiaries expect any material expenditures of this type during the next 12 months or for the foreseeable future.
Off-Balance Sheet Arrangements
As of September 30, 2019, we were not subject to any off-balance sheet arrangements that we believe are material to our investors.
Cash Flows
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Seven Months Ended July 31,
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Nine months ended September 30,
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($ in millions)
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2019
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2018
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Net cash from operating activities
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$
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5.7
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$
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(0.6
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)
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Net cash used in financing activities
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(6.6
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)
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(5.3
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)
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Net decrease in cash and cash equivalents
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(0.9
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)
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(5.9
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)
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Cash and cash equivalents, beginning of period
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2.2
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6.0
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Cash and cash equivalents, end of period
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$
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1.3
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$
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0.1
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We experienced a net decrease of $0.9 million and $5.9 million in our cash and cash equivalents during the seven months ended July 31, 2019 and the nine months ended September 30, 2018, respectively.
During the seven months ended July 31, 2019, releases of cash from funds held by ceding companies partially offset by payments of general and administrative expenses was the primary contributor to the cash from operating activities of $5.7 million. In addition, we also paid $2.6 million in dividends to holders of Common Shares and RSUs, and repaid outstanding debt of $4.0 million.
During the nine months ended September 30, 2018, our net releases of cash and cash equivalents from trusts established by Blue Water Re and cash inflows from other operating activities were exceeded by our payments of general and administrative expenses by $0.6 million. We also paid $5.3 million in dividends to holders of Common Shares and RSUs.
Summary of Critical Accounting Policies and Estimates
Our Unaudited Consolidated Financial Statements have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported and disclosed amounts of our assets and liabilities as of the balance sheet dates and the reported amounts of our revenues and expenses during the reporting periods.
As a result of the decision to pursue an orderly run-off and return capital to shareholders, the Company’s basis of accounting transitioned from the going concern basis of accounting to the liquidation basis of accounting in accordance with GAAP, effective July 31, 2019. The liquidation basis of accounting requires that certain of our assets are based on estimates of future revenue streams and certain of our liabilities are based on estimates of losses and expenses yet to be incurred.
Prior to the transition to the liquidation basis of accounting, we believe the items that required the most subjective and complex estimates were: (i) our loss and LAE reserves; and (ii) our written and earned reinsurance premiums. Our accounting policies for these items are of critical importance to our Unaudited Consolidated Financial Statements.
Loss and LAE Reserves
As of September 30, 2019 our best estimate for gross and net unpaid loss and LAE reserves was $33.7 million, with IBNR representing approximately 35% of such reserves.
Our reserving methodology does not lend itself well to a statistical calculation of a range of estimates surrounding the best point estimate of our loss and loss adjustment expense reserves. Due to the low frequency and high severity nature of claims within much of our business, our reserving methodology principally involves arriving at a specific point estimate for the ultimate expected loss on a contract by contract basis, and our aggregate loss reserves are the sum of the individual loss reserves established.
Further information regarding our loss and LAE reserve estimates is included in the section entitled "Summary of Critical Accounting Policies and Estimates" in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the 2018 Form 10-K, as filed with the SEC.
Written and Earned Reinsurance Premiums
During the seven month periods ended July 31, 2019 and the nine months ended September 30, 2018, we wrote $11.1 million and $24.1 million in reinsurance premiums, respectively, and earned reinsurance premiums of $11.9 million and $21.3 million, respectively.
For reinsurance contracts which incorporate minimum premium amounts, we typically write the entire premium at inception, and earn the associated premium after the premium is written over the term of the contract. For reinsurance contracts which do not incorporate minimum premium amounts, we typically write the premium over the term of the contract, and earn the associated premium in the same periods that the premium is written.
Subsequent adjustments of written premium, 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 written when earned.
Detailed information regarding our written and earned reinsurance premiums is included in the section entitled "Summary of Critical Accounting Policies and Estimates" in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the 2018 Form 10-K, as filed with the SEC.
Liquidation Basis of Accounting
Subsequent to the adoption of the liquidation basis of accounting, all assets are stated at their estimated liquidation value and liabilities, including estimated costs associated with implementing the run-off and liquidation of the Company, are stated at their estimated settlement amounts over the remaining estimated liquidation period. The liquidation value of the Company's unexpired reinsurance treaties is based on management's estimate of future earned premium net of acquisition expenses together with an estimate for expected loss and loss adjustment expense liabilities to be incurred associated with those earned premiums. Additionally, the liquidation value of the Company's other assets and liabilities includes management's estimate of investment income to be generated from the expected collateral balances supporting our insurance liabilities over the estimated period of run-off and estimates for corporate expenses and management and administrative fees over the period.
The actual amounts realized for assets and settlement of liabilities and the actual costs of liquidation may differ materially from the estimated amounts.