BLUE CAPITAL REINSURANCE HOLDINGS LTD. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) General
The following is a discussion and analysis of our results of operations for the
period from June 24, 2013 to December 31, 2013 and our financial condition as of
December 31, 2013. This discussion and analysis should be read in conjunction
with the audited consolidated financial statements and related notes thereto
included elsewhere in this Report on Form 10-K.
This discussion contains forward-looking statements that are not historical
facts, including statements about our beliefs and expectations. These
statements are based upon current plans, estimates and projections. Our actual
results may differ materially from those projected in these forward-looking
statements as a result of various factors. See "Forward Looking Statements"
appearing at the beginning of this report and "Risk Factors" contained in Item
Summary Financial Results
During the period from our formation on June 24, 2013 to December 31, 2013, we:
(i) recorded no revenues; (ii) issued $175.0 million in Common Shares pursuant
to the IPO and the Private Placement; (iii) incurred general and administrative
expenses of $0.7 million; and (iv) incurred $1.0 million of Common Share
issuance costs. As a result, we ended the year with a book value per share
("BVPS") of $19.80 (down $0.20 from our initial BVPS on June 24, 2013), and we
incurred a net loss per Common Share of $0.31.
The following table presents our computation of BVPS at December 31, 2013:
[A] Shareholders' Equity $ 173.3
[B] Ending Common Shares outstanding (in thousands) 8,750
BVPS [A] / [B] $ 19.80
Increase (decrease) in BVPS:
Since June 24, 2013 (1) (1.0 )%
(1) On June 24, 2013 the Company issued 1,000 Common Shares to MRH in
connection with its $20,000 initial capital contribution to the Company, thereby
resulting in an initial BVPS of $20.00.
Our computation of BVPS and the increase or decrease in BVPS are non-GAAP
measures that we believe are important to our investors, analysts and other
interested parties who benefit from having an objective and consistent basis for
comparison with other companies within our industry.
We are a newly-formed Bermuda reinsurance holding company seeking primarily to
offer collateralized reinsurance in the property catastrophe market. Our
principal objective is to maximize the expected total return for our
shareholders, primarily through the payment of dividends, by underwriting a
diversified portfolio of short-tail reinsurance contracts and investing in
insurance-linked securities with what we believe to be attractive risk and
return characteristics. We seek to provide 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.
We earned no revenues during 2013, primarily because the completion of the IPO
occurred subsequent to the key 2013 renewal periods for the reinsurance industry
and prior to the January 1, 2014 annual renewal period.
During the interim period from January 1, 2014 to February 15, 2014, Blue
Capital Re wrote $40.0 million of gross indemnity reinsurance premiums. The
reinsurance business written by Blue Capital Re thus far in 2014, coupled with
the ILW Swap written by Blue Capital Re ILS during the fourth quarter of 2013
(see Note 2 of the Notes to Consolidated Financial Statements) collectively
represents approximately $182.0 million in total reinsurance contract limit, as
well as the deployment of $144.2 million, or 90%, of the Deployable Capital.
Blue Capital Re and Blue Capital Re ILS expect to deploy substantially all of
the remaining Deployable Capital throughout the first half of 2014.
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Subject to the discretion of the Board, we intend to distribute a minimum of 90%
of our Distributable Income in the form of cash dividends to our shareholders.
We intend to make regular quarterly dividend payments for each of the first
three fiscal quarters of each fiscal year, followed by a fourth "special"
dividend after the end of our fiscal year to meet our dividend payout target for
each fiscal year.
We currently intend to declare our first regular cash dividend, in the amount of
$0.30 per Common Share, on or about April 1, 2014. Whereas we currently expect
that we will have sufficient retained earnings at that time to declare a
dividend of this amount, any such dividend will be dependent upon the actual
amount of retained earnings that we have at that time and the approval of the
Board. Further, the actual timing of this payment, if any, will also be subject
to approval by the Board.
Whereas we experienced significant competition during the key January 1, 2014
renewal season due to relatively light catastrophe losses experienced by our
industry in 2013, the terms and conditions we were able to achieve were largely
consistent with our expectation of the January 1, 2014 market at the time we
completed the IPO.
Natural Catastrophe Risk Management
We reinsure exposures throughout the world against various natural catastrophe
perils. The Managers manage our net exposure to these perils using a combination
of industry third-party models, CATM®, underwriting judgment and purchases of
outwards reinsurance and/or derivative instruments.
Our multi-tiered risk management approach focuses on tracking exposed contract
limits, estimating the potential net impact of a single natural catastrophe
event and simulating our yearly net operating result to reflect an aggregation
of modeled underwriting, investment and other risks. The Managers and the Board
regularly review the outputs from this process and the Managers routinely seek
to refine and improve our risk management process.
The following discussion should be read in conjunction with the "Risk Factors"
contained in Item 1A herein, particularly 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 Managers monitor our net exposure to a single natural catastrophe occurrence
within certain broadly defined major catastrophe zones. Our February 15, 2014
projected net exposures by zone were in compliance with our underwriting
guidelines. Namely, our projected net exposure to any one zone was below 50% of
our shareholders' equity at December 31, 2013.
These broadly defined major catastrophe zones are currently defined as follows:
North America: Europe:
U.S. - Northeast Western Central Europe (1)
U.S. - Mid-Atlantic Eastern Europe
U.S. - Florida Southern Europe
U.S. - Gulf Northern Europe, Benelux and Scandinavia
U.S. - New Madrid U.K. and Ireland
U.S. - Midwest
U.S. - California
U.S. - Hawaii
Canada - Eastern
Canada - Western
Rest of World:
(1) Consisting of France, Germany, Switzerland and Austria.
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Single Event Losses
For certain defined natural catastrophe region and peril combinations, the
Managers assess the probability and likely magnitude of losses using a
combination of industry third-party models, CATM® and underwriting judgment. The
Managers attempt to model the projected 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.
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, differences in
modeling, modeling assumptions, portfolio composition and concentrations, and
selected event scenarios.
The table that follows details the projected net impact from single event losses
as of February 15, 2014 for selected zones at selected return period levels
using AIR Worldwide Corporation's CLASIC/2 model version 15.0, one of several
industry-recognized third-party vendor models. It is important to note that each
catastrophe model contains its own assumptions as to the frequency and severity
of loss events, and results may vary significantly from model to model.
Since the Managers utilize a combination of third-party models, CATM® and
underwriting judgement to project the net impact from single event losses, our
internal projections may be higher or lower than those presented in the
Net Impact From Single Event Losses at Specified Return Periods
Net Impact Percentage of December 31, 2013
(Millions) Period (1) Shareholders' Equity
U.S. - Florida hurricane 1 in 100
$ 45 year 26 %
U.K. and Ireland hurricane 1 in 100
32 year 19 %
U.S. - Gulf hurricane 1 in 100
30 year 17 %
U.S. - California earthquake 1 in 250
27 year 16 %
All other zones less than 15 %
(1) A "100-year" return period can also be referred to as the 1.0% occurrence
exceedance probability ("OEP"), meaning there is a 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 a 0.4% chance in any given year
that this level will be exceeded.
Our February 15, 2014 single event loss exposures were in compliance with our
underwriting guidelines. Namely, the projected 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 shareholders' equity at December 31,
2013, and the projected 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 shareholders'
equity at December 31, 2013.
Our projections of the net impact from single event losses may vary considerably
within a particular territory depending on the specific characteristics of the
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 February 15, 2014. The
composition of our in-force portfolio may change materially at any time due to
the acceptance of new policies, the expiration of existing policies, and changes
in our outwards reinsurance and derivative protections.
Annual Operating Result
In addition to monitoring treaty contract limits and single event accumulation
potential, we attempt to simulate our annual operating result to reflect an
aggregation of modeled underwriting risks. This approach estimates a net
operating result over simulated twelve month periods, including contributions
from certain variables such as aggregate premiums, losses and expenses.
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The Managers view this approach as a supplement to our single event stress test
as it allows for multiple losses from both natural catastrophe and other
circumstances and attempts to take into account certain risks that are unrelated
to our underwriting activities. Through our modeling, we endeavor to take into
account many risks that we face as an enterprise. However, by the very nature of
the insurance and reinsurance business, and due to limitations associated with
the use of models in general, our simulated result does not cover every
I. Results of Operations
Our consolidated financial results for the period from June 24, 2013 to
December 31, 2013, follow:
June 24, 2013
($ in millions) to December 31, 2013
Revenues $ -
General and administrative expenses (0.7 )
Net loss and comprehensive loss $ (0.7 )
We operate as a single business segment through our wholly-owned subsidiaries:
(i) Blue Capital Re, a Bermuda exempted limited liability company registered as
a Class 3A insurer in Bermuda, which offers collateralized reinsurance; and
(ii) Blue Capital Re ILS, a Bermuda exempted limited liability company which
conducts hedging and other investment activities, including entering into
industry loss warranties and purchasing catastrophe bonds, in support of Blue
Capital Re's operations.
Subsidiaries of Montpelier manage our reinsurance underwriting decisions and
provide us with the services of our Chief Executive Officer and our interim
Chief Financial Officer. Through this relationship, we will leverage
Montpelier's reinsurance underwriting expertise and infrastructure to conduct
In December 2013 Blue Capital Re ILS entered into an ILW swap (the "ILW Swap")
with a third-party under which qualifying loss payments are triggered by
reference to the level of losses incurred by the insurance industry as a whole,
rather than by losses incurred by the insured. In return for a fixed payment of
$1.5 million, Blue Capital Re ILS is required to make a floating-rate payment in
the event of certain losses incurred from specified natural catastrophes.
Through December 31, 2013, Blue Capital Re ILS was not aware of any industry
loss event occurring that would have triggered a payment obligation under the
Due to the nature of the underlying exposure, there was no change in the fair
value of the ILS Swap during 2013. Therefore, Blue Capital Re ILS did not
recognize any revenue or expense from the ILW Swap during 2013.
Our general and administrative expenses incurred during the period from June 24,
2013 to December 31, 2013, consisted primarily of $0.4 million and $0.1 million
of expenses pursuant to the Investment Management Agreement and the
Administrative Services Agreement, respectively, for the period from the
completion of the IPO to December 31, 2013. The balance of our general and
administrative expenses incurred during that period, or $0.2 million, consisted
of director fees, corporate insurance premiums, audit fees and other expenses
associated with being a publicly traded company.
During the period from June 24, 2013 to December 31, 2013, we were not subject
to income taxes in any jurisdiction.
II. Liquidity and Capital Resources
The Company raised $174.0 million of net proceeds from the IPO and the Private
Placement. The Company subsequently contributed $160.0 million of such net
proceeds to Blue Capital Re (representing the Deployable Capital) and retained
$14.0 million for its anticipated cash obligations, including its first three
regular quarterly dividend payments to shareholders, for the initial year of its
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The Company has no operations of its own and will rely on dividends and
distributions from its operating subsidiaries to pay its expenses and dividends
to its shareholders beyond the initial year of its operations. There are
restrictions imposed by the BMA on the payment of dividends to the Company from
its operating subsidiaries as described under "Regulation and Capital
Requirements" contained in Item 1 herein. The Company intends to distribute
dividends to shareholders in accordance with our dividend policy as described
under "Dividend Policy" contained in Item 1 herein, but any determination to pay
dividends to our shareholders will be at the discretion of the Board and will
depend on a variety of factors, including: (i) the Company's financial
condition, liquidity, results of operations (including its ability to generate
cash flow in excess of expenses and its expected or actual net income) and
capital requirements; (ii) general business conditions, (iii) legal, tax and
regulatory limitations; (iv) contractual prohibitions and other restrictions;
and (v) any other factors that the Board deems relevant.
The primary sources of cash for the Company's operating subsidiaries are capital
contributions, premium collections, investment income, sales of investment
securities, sales of and recoveries from insurance-linked securities and
reinsurance recoveries. The primary uses of cash for the Company's operating
subsidiaries are payments of losses and LAE, acquisition costs, operating
expenses, including fees payable to the Managers, ceded reinsurance, purchases
of insurance-linked securities and dividends and distributions.
Neither the Company nor its operating subsidiaries currently have a revolving
credit facility but any or all or them may enter into a short-term revolving
credit facility in the future in order to meet their short-term liquidity needs.
The Company's total shareholders' equity (or total capital) was $173.3 million
at December 31, 2013, which represents the net proceeds raised from the IPO and
the Private Placement of $174.0 million less the Company's 2013 net loss of $0.7
The Company may need to raise additional capital in the future, including
through a long-term revolving credit facility, a term loan or the issuance of
debt, equity or hybrid securities, in order to permit it or its operating
subsidiaries to, among other things: write new business; enter into other
reinsurance opportunities; cover or pay losses; manage working capital
requirements; repurchase Common Shares; respond to, or comply with, any changes
in the capital requirements, if any, that the BMA or other regulatory bodies may
require; acquire new businesses; or invest in existing businesses. The Company
intends to rely on future offerings of Common Shares to raise additional equity
capital; however, we cannot assure you that the Company will be able to
successfully raise additional capital. In the event the Company incurs
indebtedness for any of these purposes or other purposes, it intends to limit
its borrowing to an amount no greater than 50% of its shareholders' equity at
the time of the borrowing. However, subject to the approval of the Board, the
Company may borrow an amount in excess of 50% of our shareholders' equity at the
time of the borrowing.
The issuance of any new debt, equity or hybrid financial instruments might
contain terms and conditions that are unfavorable to the Company's
shareholders. Any new issuances of equity or hybrid securities could include
the issuance of securities with rights, preferences and privileges that are
senior or otherwise superior to those of Common Shares and could be dilutive to
existing shareholders. Any new debt securities may contain terms that
materially restrict the Company's operations, including its ability to
distribute cash to shareholders. In addition, if the Company cannot obtain
adequate capital on favorable terms, or at all, its business could be adversely
Most of the reinsurance contracts that Blue Capital Re will enter into will be
collateralized by cash or cash equivalents. The collateral will be pledged to
secure Blue Capital Re's obligations under the applicable collateralized
reinsurance contract and this collateral will not be available for any other
purpose until the expiration of the applicable contract (or, in the event of a
covered loss, the resolution of any claims under the applicable contract). The
cash flow from the net premiums in respect of Blue Capital Re's collateralized
reinsurance contracts will not be freely available to Blue Capital Re until the
expiration of the contract (or, in the event of a covered loss, the resolution
of any claims under the applicable contract).
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When Blue Capital Re ILS buys an industry loss warranty, it pays a cash premium
at the inception of the contract and, in return, a cash payout is made if a
catastrophic event causes losses to the insurance industry in excess of a
predetermined trigger amount. When Blue Capital Re ILS buys a catastrophe bond,
an initial cash purchase is made and Blue Capital Re ILS will be entitled to
receive cash interest payments and a repayment of the principal amount in cash
(unless a specified trigger, such as a catastrophe event, occurs).
Contractual Obligations and Commitments
As of December 31, 2013, neither the Company nor its operating subsidiaries had
any commitments for operating leases or capital expenditures 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.
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 Managers. A summary of our
obligations pursuant to each of these agreements follows:
Investment Management Agreement. Pursuant to the Investment Management
Agreement, we are obligated to pay the Investment Manager the Management Fee
which is equal to 1.5% of our average total shareholders' equity per annum,
calculated and payable in arrears in cash each quarter (or part thereof) that
the Investment Management Agreement is in effect. Our average total
shareholders' equity for purposes of calculating the Management Fee is outlined
on page 15 herein.
As of December 31, 2013, our total shareholders' equity was $173.3 million.
Assuming that our average total shareholders' equity remains at this level in
future periods, we would expect to pay the Investment Manager a Management Fee
of approximately $2.6 million per year pursuant to this agreement.
Underwriting and Insurance Management Agreement. Pursuant to the Underwriting
and Insurance Management Agreement, we are obligated to pay the Reinsurance
Manager the Performance Fee which is calculated and payable in arrears in cash
each quarter that such agreement is in effect in an amount, as outlined on
page 15 herein.
Since the Underwriting and Insurance Management Agreement is dependent on our
future performance, we are unable to determine the amount of Performance Fees we
would expect to pay the Reinsurance Manager in future periods pursuant to this
Administrative Services Agreement. Pursuant to the Administrative Services
Agreement, we are obligated to reimburse the Investment 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 interim Chief
Financial Officer, modeling software licenses and finance, legal and
We currently expect to pay the Investment Manager approximately $0.7 million per
year in future periods pursuant to this agreement, which is inclusive of the fee
that we are currently paying for the services of our interim Chief Financial
Officer. We expect to hire a permanent Chief Financial Officer, who will not be
an employee of Montpelier, within 24 months of the IPO. Once we hire a
permanent Chief Financial Officer, we expect to pay the Investment Manager
approximately $0.3 million per year in future periods pursuant to this
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 for five
years after the completion of the IPO, whether or not the Managers' 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
applicable Manager), we must pay a one-time termination fee to either the
Investment Manager or the Reinsurance Manager, as applicable, equal to 5% of our
GAAP shareholders' equity, calculated as of the most recently completed quarter
prior to the date of termination.
As of December 31, 2013, if we were to terminate either the Investment
Management Agreement or the Underwriting and Insurance Management Agreement, we
would be required to pay the Managers a one-time termination fee of
approximately $8.7 million.
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Off-Balance Sheet Arrangements
As of December 31, 2013, we were not subject to any off-balance sheet
arrangement that we believe is material to our investors.
During the period from June 24, 2013 to December 31, 2013, we experienced a net
increase in cash and cash equivalents of 173.8 million, representing our net
proceeds from the IPO and the Private Placement of $174.0 million, less $0.2
million in routine operating cash outflows. We had no investing cash flows
during this period.
Detailed information regarding our financing cash flows during 2013 follows:
† we received $1.0 million from Montpelier connection with our initial
† we received $117.8 million from third-party investors in connection
with the IPO, which is net of $7.2 million of Common Share issuance costs;
† we received $50.0 million from Montpelier Re in connection with the
† we received $6.2 million from Montpelier as reimbursement of the
underwriting discounts and commissions we incurred in the IPO; and
† we repurchased $1.0 million shares from Montpelier.
In addition, Montpelier incurred and paid (on our behalf) a $1.3 million
structuring fee to Deutsche Bank Securities Inc., equal to one percent of the
gross IPO proceeds that we received from third-parties.
Repatriation of Cash
We do not have any operations outside of Bermuda, and we do not expect to
repatriate any cash to any other jurisdiction.
III. Summary of Critical Accounting Policies and Estimates
Our Consolidated Financial Statements have been prepared in accordance with
GAAP. The preparation of our financial statements requires us to make estimates
and assumptions that will 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. We believe the items
that will require the most subjective and complex estimates are: (1) our loss
and LAE reserves; (2) our written and earned reinsurance premiums; and (3) the
implications of being an emerging growth company under the JOBS Act. Our
accounting policies for these items will be of critical importance to our
consolidated financial statements.
Loss and LAE Reserves
Our loss and LAE reserves will represent our best estimate of future amounts
needed to pay our claims and related expenses (such as claim adjusters' fees and
litigation expenses) for insured losses that have occurred. The process of
estimating these reserves involve a considerable degree of judgment, and our
estimates as of any given date will be inherently uncertain. The Reinsurance
Manager will provide us with assistance in establishing, maintaining and
settling our loss and LAE reserves.
Estimating loss and LAE reserves will require us to make assumptions regarding
reporting and development patterns, frequency and severity trends, claims
settlement practices, potential changes in legal environments, inflation, loss
amplification and other factors. These estimates and judgments will be based on
numerous considerations and will be revised as: (i) we receive changes in loss
amounts reported by ceding companies and brokers; (ii) we obtain additional
information, experience or other data; (iii) new or improved methodologies are
developed; or (iv) laws change.
The timeliness of loss reporting can be affected by such factors as the nature
of the event causing the loss, the location of the loss and where our exposure
falls within the cedant's overall reinsurance program. Our reserving process
will be highly dependent on the loss information we receive from ceding
companies and brokers. Furthermore, during the loss settlement period, which may
last several years, additional facts regarding individual claims and trends
often will become known, and case law may change, all of which can affect our
ultimate expected losses.
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Our loss and LAE reserves will be comprised of case reserves (which are based on
claims that have been reported to us) and incurred but not reported, which we
refer to as "IBNR" reserves (which are based on losses that we believe to have
occurred but for which claims have not yet been reported to us and which may
include a provision for expected future development on our case reserves).
Our case reserve estimates will initially be determined on the basis of loss
reports we will receive from our cedants. Our IBNR reserve estimates will be
determined using various actuarial methods as well as a combination of
historical insurance industry loss experience, estimates of pricing adequacy
trends and our professional judgment. The process we will use to estimate our
IBNR reserves will involve projecting our estimated ultimate loss and LAE
reserves and then subtracting paid claims and case reserves as notified by the
ceding company, to arrive at our IBNR reserves.
Most of our reinsurance contracts will be comprised of business that will have
both a low frequency of claims occurrence and a high potential severity of loss,
primarily from claims arising from natural and man-made catastrophes. Given the
high-severity, low-frequency nature of these events, the losses typically
generated therefrom do not lend themselves to traditional actuarial reserving
methods, such as statistical calculations of a range of estimates surrounding
the best point estimate of our loss and LAE reserves. Therefore, our reserving
approach for these types of coverages will be to estimate the ultimate cost
associated with a single loss event rather than to analyze the historical
development patterns of past losses as a means of estimating ultimate losses for
an entire accident year. We will estimate our reserves for these large events on
a contract-by-contract basis by means of a review of policies with known or
potential exposure to a particular loss event.
The two primary bases we will use for estimating the ultimate loss associated
with a large event are: (i) actual and precautionary claims advice received from
the cedant; and (ii) the nature and extent of the impact the event is estimated
to have on the industry as a whole and the affected underlying contracts.
Immediately after a loss event, the estimated industry market loss will be the
primary driver of our ultimate loss from such event. In order to estimate the
nature and extent of the event, we will rely on output provided by commercially
available catastrophe models, as well as proprietary models developed by
Montpelier and utilized by the Reinsurance Manager. The exposure of each cedant
potentially affected by the event will be analyzed on the basis of this output.
As the amount of information received from cedants increases during the period
following an event, so will our reliance on this information.
While the approach we will use in reserving for large events will be applied
with consistency, at any point in time the specific reserving assumptions may
vary among contracts. The assumptions for a specific contract may depend upon
the class of business, historical reporting patterns of the cedant (if any),
whether or not the cedant provides an IBNR estimate, how much of the loss has
been paid, the number of underlying claims still open and other factors. For
example, the expected loss development for a contract with one percent of its
claims still open would likely be less than for a contract with 50% of its
claims still open.
To the extent we rely on industry data to aid us in our reserve estimates, there
will be a risk that the data may not match our risk profile or that the
industry's overall reserving practices differ from our own and those of our
cedants. In addition, reserving may prove to be especially difficult should a
significant loss take place near the end of a reporting period, particularly if
the loss involves a catastrophic event. These factors will further contribute to
the degree of uncertainty in our reserving process.
As a reinsurer, we will rely on loss information reported to brokers by primary
insurers who, in turn, must estimate their own losses at the policy level, often
based on incomplete and changing information. The information we receive will
vary by cedant and may include paid losses, estimated case reserves and an
estimated provision for IBNR reserves. Reserving practices and the quality of
data reporting will vary among ceding companies, which will add further
uncertainty to the estimation of our ultimate losses. The nature and extent of
information we receive from ceding companies and brokers will also vary widely
depending on the type of coverage, the contractual reporting terms (which are
affected by market conditions and practices) and other factors. Due to the lack
of standardization of the terms and conditions of reinsurance contracts, the
wide variability of coverage provided to individual clients and the tendency of
those coverages to change rapidly in response to market conditions, the ongoing
economic impact of such uncertainties and inconsistencies cannot be reliably
measured. Additional risks to us involved in the reporting of retrocessional
contracts will include varying reserving methodologies used by the original
cedants and an additional reporting lag due to the time required for the
retrocedant to aggregate its assumed losses before reporting them to us.
Additionally, the number of contractual intermediaries will normally be greater
for retrocessional business than for insurance and reinsurance business, thereby
further increasing the time lag and imprecision associated with loss reporting.
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Since we will rely on ceding company estimates of case and IBNR reserves in the
process of establishing our own loss and LAE reserves, we will maintain certain
procedures designed to mitigate the risk that this information is incomplete or
inaccurate. These procedures may include: (i) comparisons of expected premiums
to reported premiums, which will help us to identify delinquent client periodic
reports; (ii) ceding company audits to facilitate loss reporting and identify
inaccurate or incomplete claim reporting; and (iii) underwriting reviews to
ascertain that the losses ceded are covered as provided under the contract
terms. We will also utilize catastrophe model outputs and industry market share
information to evaluate the reasonableness of reported losses, which will also
be compared to loss reports received from other cedants. These procedures will
be incorporated in our internal controls processes on an ongoing basis and will
be regularly evaluated and amended as market conditions, risk factors and
unanticipated areas of exposure develop.
We do not expect to experience any significant claims processing backlogs,
although such backlogs may occur following a major catastrophic event.
The uncertainties inherent in the reserving process, together with the potential
for unforeseen developments, including changes in laws and the prevailing
interpretation of policy terms, may result in our loss and LAE reserves being
significantly greater or less than the loss and LAE reserves we initially
established. Any adjustments to our loss and LAE reserves will be reflected in
our financial results during the period in which they are determined.
GAAP will not permit us to record or carry contingency reserves for catastrophe
losses that are expected to occur in the future. Therefore, during periods in
which significant catastrophe loss events occur, our underwriting results are
likely to be adverse, and during periods in which significant catastrophe loss
events do not occur, our underwriting results are likely to be favorable.
Written and Earned Reinsurance Premiums
Reinsurance contracts can be written on a risks-attaching or losses-occurring
basis. Under risks-attaching reinsurance contracts, all claims from cedants'
underlying policies incepting during the contract period are covered, even if
they occur after the expiration date of the reinsurance contract. In contrast,
losses-occurring reinsurance contracts cover all claims occurring during the
period of the contract, regardless of the inception dates of the underlying
policies. Any losses occurring after the expiration of the losses-occurring
contract are not covered.
Premiums written will be recognized as revenues, net of any applicable
underlying reinsurance coverage. For losses-occurring contracts, the earnings
period will be the same as the reinsurance contract. For risks-attaching
contracts, the earnings period will be based on the terms of the underlying
Reinsurance contracts are typically written prior to the time the underlying
direct policies are written by cedants and accordingly they must estimate these
premiums when purchasing reinsurance coverage. For the majority of
excess-of-loss contracts, a deposit or minimum premium will be defined in the
contract's wording. The deposit or minimum premium will be based on the ceding
company's estimated premiums, and this estimate will be recorded as written
premium in the period the underlying risks incept. This premium will often be
adjustable at the end of the contract period to reflect the changes in
underlying risks in force during the contract period. Subsequent adjustments,
based on reports by the ceding companies of actual premium, will be recorded in
the period they are determined, which is normally within six months to one year
subsequent to the expiration of the policy.
For pro-rata contracts and excess-of-loss contracts where no deposit or minimum
premium will be specified in the contract, written premium will be recognized
based on estimates of ultimate premiums provided by ceding companies and the
Reinsurance Manager. Initial estimates of written premium will be recognized in
the period in which the underlying risks incept. Subsequent adjustments, based
on reports of actual premium by the ceding companies or revisions in estimates,
will be recorded in the period in which they are determined. Such adjustments
are generally determined after the associated risk periods have expired, in
which case the premium adjustments are fully earned when written. Unearned
premiums represent the portion of premiums written that are applicable to future
insurance or reinsurance coverage provided by policies or contracts in force.
Some of our reinsurance contracts may include contract terms that require an
automatic reinstatement of coverage in the event of a loss. The associated
reinstatement premium will normally be calculated on the basis of: (i) a fixed
percentage (normally 100%) of the deposit or minimum premium; and (ii) the
proportion of the original limit exhausted. In a year of large loss events,
reinstatement premiums will be higher than in a year in which there are no such
events. Reinstatement premiums will be fully earned or expensed as applicable
when a triggering loss event occurs and losses are recorded. We will record
reinstatement premiums on a basis consistent with our estimates of losses and
Table of Contents
The JOBS Act contains provisions that, among other things, reduce certain
reporting requirements for an emerging growth company. As an emerging growth
company, we are electing not to take advantage of the extended transition period
afforded by the JOBS Act for the implementation of new or revised accounting
standards, and as a result, we will comply with new or revised accounting
standards on the relevant dates on which adoption of such standards is required
for non-emerging growth companies. Section 107 of the JOBS Act provides that our
decision not to take advantage of the extended transition period is irrevocable.
We have also determined that, as an emerging growth company, we will not:
(i) provide an auditor's attestation report on our system of internal controls
over financial reporting pursuant to Section 404(b); (ii) provide all of the
compensation disclosure that may be required of non-emerging growth public
companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act;
(iii) comply with any requirement that may be adopted by the Public Company
Accounting Oversight Board regarding mandatory audit firm rotation or a
supplement to the auditor's report providing additional information about the
audit and the financial statements; or (iv) disclose certain executive
compensation-related items such as the correlation between executive
compensation and performance and comparisons of our Chief Executive Officer's
compensation to median employee compensation.
We will continue to be an emerging growth company until the earliest of: (i) the
last day of the fiscal year during which we had total annual gross revenues of
at least $1 billion (as indexed for inflation); (ii) the last day of the fiscal
year following the fifth anniversary of the date of the IPO; (iii) the date on
which we have, during the previous three-year period, issued more than $1.0
billion in non-convertible debt; and (iv) the date on which we are deemed to be
a "large accelerated filer," as defined under the Exchange Act.
Since we have elected not to take advantage of the extended transition period
afforded by the JOBS Act for the implementation of new or revised accounting
standards, our consolidated financial statements may not be comparable to those
emerging growth companies that have chosen not to take advantage of the extended
transition period afforded by the JOBS Act.
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