Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Interim Operations.
The following should be read in conjunction
with the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and
Till’s consolidated financial statements for the year ended December 31, 2016 included in Till’s Annual Report on Form
10-K as filed with the SEC (the “2016 Report”).
Cautionary Statement for Forward-Looking
Information
Certain statements in this Quarterly Report
on Form 10-Q (this “Report”) of Till Capital Ltd. ("Till," "we," "us" or "our"),
including statements in this MD&A, are forward-looking statements within the meaning of the Private Securities Litigation Reform
Act of 1995. Any statements that involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives,
assumptions, future events, or performance (often, but not always, using phrases such as “expects” or “does not
expect,” “is expected,” “anticipates”, or “does not anticipate,” “plans,”
“scheduled,” “forecasts,” “estimates,” “believes,” “intends,” or variations
of such words and phrases or stating that certain actions, events, or results “may,” “could,” “would,”
“might,” or “will” be taken, occur or be achieved) are not statements of historical fact and may be forward-looking
statements and are intended to identify forward-looking statements. Those forward-looking statements are based on the beliefs of
our management, as well as on assumptions that such management believes to be reasonable, based on information currently available
at the time such statements were made. Forward-looking statements speak only as of the date they are made, and we assume no duty
to, and do not undertake to, update forward-looking statements.
Any or all forward-looking statements may
turn out to be wrong, and, accordingly, Till cautions readers not to place undue reliance on such statements. Till bases these
statements on current expectations and the current economic environment as of the date of this Report. They involve a number of
risks and uncertainties that are difficult to predict. These statements are not guarantees of future performance; actual results
could differ materially from those expressed or implied in the forward-looking statements. Forward-looking statements can be affected
by inaccurate assumptions or by known or unknown risks and uncertainties that may be important in determining Till’s actual
future results and financial condition.
Factors that could cause actual results
to differ materially from any results projected, forecasted, estimated, or budgeted or that may materially and adversely affect
our actual results include but are not limited to (i) the cyclical nature of the insurance and reinsurance markets, (ii) fluctuations
in the number and severity of insurance claims, (iii) our ability to purchase reinsurance on favorable terms when required, (iv)
changes in the legal and regulatory environment in the U.S., Canada or Bermuda, (v) changes in insurance industry trends and significant
industry developments, (vi) the effect of emerging claim and coverage issues on our business, (vii) any suspension or revocation
of RRL’s or Omega’s reinsurance/insurance license, (viii) fluctuations in interest rates that could have an impact
on our ability to generate investment income, (ix) our ability to access capital when needed, and (x) changes in ratings by ratings
agencies of Till and/or its insurance company subsidiaries. For additional information, see pages 1-3 and Part I, Item
1A. Risk Factors in the 2016 Report.
Overview
Till is an insurance holding company domiciled
in Bermuda. Through Till’s two wholly-owned insurance subsidiaries, RRL and Omega, we provide property and casualty insurance
and reinsurance business. Till operates in a single segment, specifically insurance.
RRL, a Bermuda domiciled company, was organized
to offer reinsurance coverage to a select group of insurance companies, e.g., captive insurers, privately-held insurers, and other
global insurers and reinsurers. RRL entered into its initial reinsurance contracts effective December 31, 2014. Those initial reinsurance
contracts were novated in September 2015. RRL currently does not have any active reinsurance contracts in force. RRL intends to
participate in reinsurance contracts using the Multi-Strat Re platform to underwrite medium- to long-term property and casualty
business, as acceptable opportunities are identified. RRL’s primary sources of income are reinsurance premiums and investment
income. RRL also owns 64% of the outstanding shares of Silver Predator Corp., a Canadian-based junior mineral exploration company
that has historically been engaged in exploring for and developing economically viable silver, gold, and tungsten deposits in Canada
and the United States, with a focus on Nevada and Idaho.
Omega, a Canada domiciled company, underwrites
direct and reinsurance business. As a reinsurer, Omega provides assumption reinsurance to insurance companies that want to exit
the Canadian market, and to insurance companies that want to transfer all of their remaining claim liabilities on particular books
of business; those arrangements are commonly referred to as “run-off” or “loss portfolio transfer” assumption
business. Omega also is a primary insurer, direct writer, for insurance companies looking to write Canadian business, but lacking
the appropriate Canadian insurance licenses. In that capacity, Omega acts as the direct writer, or fronting company, for a specific
insurance company and typically will cede most or all of that fronted business to that insurer. Omega has three sources of revenue,
namely, (i) premiums on portfolio transfer transactions and fees related to managing Canadian branch offices in “run-off”,
(ii) assumption reinsurance, including servicing fees in certain transactions, and (iii) premiums on direct business.
Till’s other subsidiaries include
Till Management Company (“TMC”), Golden Predator US Holding Corp. (“GPUS”), and Focus. TMC provides investment
advisory and investment management services, and GPUS provides personnel services, financial accounting, corporate and compliance,
and other back-office support to Till and its subsidiaries, and Focus provides management services to Omega and consulting and
management services to third-party insurers.
The discussion of Till's financial condition
and results of operations that follows is intended to provide summarized information to assist the reader in understating Till's
condensed consolidated financial statements, as well as to provide explanations as regards the primary factors that accounted for
those financial statement changes from year to year and quarter to quarter. This discussion should be read in conjunction with
Till's condensed consolidated financial statements that appear in Part I, Item 1 of this Report.
Critical Accounting Estimates
When Till prepares its condensed consolidated
financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States of
America ("GAAP"), Till must make estimates and assumptions about future events that affect the amounts reported. Certain
of those estimates result from judgments that can be subjective and complex. As a result of that subjectivity and complexity, and
because Till continuously evaluates those estimates and assumptions based on a variety of factors, actual results could materially
differ from Till's estimates and assumptions if changes in one or more factors require Till to make accounting adjustments. During
the three months ended March 31, 2017, Till reassessed its critical accounting policies and estimates as disclosed within the 2016
Report; Till has made no material changes or additions with regard to such policies and estimates.
Results of Operations - Three month
period ended March 31, 2017 compared with three month period ended March 31, 2016.
The following table summarizes Till’s
consolidated results of operations for the quarters indicated:
|
|
|
Three Months Ended March 31
|
|
|
|
2017
|
|
2016
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Insurance premiums written
|
|
$
|
19,833,312
|
|
|
$
|
9,942,138
|
|
|
Insurance premiums ceded to reinsurers
|
|
|
(18,434,476
|
)
|
|
|
(9,617,102
|
)
|
|
Change in unearned premiums
|
|
|
(1,105,436
|
)
|
|
|
(177,392
|
)
|
|
Net premiums earned
|
|
|
293,400
|
|
|
|
147,644
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net
|
|
|
965,351
|
|
|
|
45,288
|
|
|
Gain on sale of property, plant, and equipment
|
|
|
4,500
|
|
|
|
43,000
|
|
|
Other revenue
|
|
|
160,170
|
|
|
|
169,774
|
|
|
Total Revenue
|
|
|
1,423,421
|
|
|
|
405,706
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses, net
|
|
|
318,031
|
|
|
|
211,338
|
|
|
General and administrative expenses
|
|
|
581,164
|
|
|
|
465,658
|
|
|
Salaries and benefits
|
|
|
295,845
|
|
|
|
555,861
|
|
|
Stock-based compensation
|
|
|
19,751
|
|
|
|
8,326
|
|
|
Mining related expenses and property impairment
|
|
|
11,032
|
|
|
|
11,417
|
|
|
Foreign exchange gain
|
|
|
(4,359
|
)
|
|
|
(235,010
|
)
|
|
Interest and other expense
|
|
|
2,565
|
|
|
|
5,550
|
|
|
Total Expenses
|
|
|
1,224,029
|
|
|
|
1,023,140
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and equity loss on equity method investment
|
|
|
199,392
|
|
|
|
(617,434
|
)
|
|
Current income tax expense
|
|
|
(10,946
|
)
|
|
|
(55,761
|
)
|
|
Deferred income tax benefit
|
|
|
46,449
|
|
|
|
82,736
|
|
|
Loss on equity method investment
|
|
|
(15,686
|
)
|
|
|
(8,581
|
)
|
|
Net income (loss)
|
|
$
|
219,209
|
|
|
$
|
(599,040
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to:
|
|
|
|
|
|
|
|
|
|
Shareholders of Till Capital Ltd.
|
|
|
210,103
|
|
|
|
(641,955
|
)
|
|
Non-controlling interests
|
|
|
9,106
|
|
|
|
42,915
|
|
|
Net income (loss)
|
|
$
|
219,209
|
|
|
$
|
(599,040
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per share of Till Capital Ltd.
|
|
$
|
0.06
|
|
|
$
|
(0.19
|
)
|
|
Weighted average number of shares outstanding
|
|
|
3,350,284
|
|
|
|
3,429,284
|
|
Revenue
Insurance premiums written
Insurance premiums written increased from
$9.9 million for the three months ended March 31, 2016 to $19.8 million for the three months ended March 31, 2017. That increase
in insurance premiums relates primarily to a new insurance program at Omega during the three months ended March 31, 2017, as well
as growth in another of Omega's insurance programs.
Insurance premiums ceded to reinsurers
Insurance premiums ceded to reinsurers
increased from $9.6 million for the three months ended March 31, 2016 to $18.4 million for the three months ended March 31, 2017.
That increase in insurance premiums ceded to reinsurers relates primarily to a new insurance program at Omega during the three
months ended March 31, 2017, as well as growth in another of Omega's insurance programs.
Change in unearned premiums
Change in unearned premiums increased from
$0.2 million for the three months ended March 31, 2016 to $1.1 million for the three months ended March 31, 2017. That increase
in change in unearned premiums relates primarily to a new insurance program at Omega during the three months ended March 31, 2017,
as well as growth in another of Omega's insurance programs.
Investment income, net
Investment income, inclusive of net realized
investment gains and losses, increased from $0.05 million for the three months ended March 31, 2016 to $0.97 million for the three
months ended March 31, 2017. That increase in net investment income was due to trading of futures and options strategies, and an
increase in the market value of a legacy natural resource investment that was liquidated during 2017 as part of Till’s ongoing
business strategy to focus on the insurance industry.
Gain on sale of property, plant, and
equipment
Gain on sale of property, plant, and equipment
decreased from $43,000 for the three months ended March 31, 2016 to $4,500 for the three months ended March 31, 2017. That decrease
in gain on sale of property, plant, and equipment was due to fewer sales of property, plant, and equipment during the three months
ended March 31, 2017 compared to the three months ended March 31, 2016.
Total revenue
Total revenue increased from $0.4 million
for the three months ended March 31, 2016 to $1.4 million for the three months ended March 31, 2017. That increase in total revenue
was due principally to increased investment income as well as increased net premiums earned for the three months ended March 31,
2017 compared to the three months ended March 31, 2016.
Expenses
Losses and loss adjustment expenses,
net
Losses and loss adjustment expenses net
of amounts ceded to reinsurers increased from $0.2 million for the three months ended March 31, 2016 to $0.3 million for the three
months ended March 31, 2017. That increase in loss and loss adjustment expenses net of amounts ceded to reinsurers was due to higher
adverse development on prior-year claims incurred in the three months ended March 31, 2017 as compared to the three months ended
March 31, 2016.
General and administrative expenses
General and administrative expenses increased
from $0.5 million for the three months ended March 31, 2016 to $0.6 million for the three months ended March 31, 2017. That increase
in general and administrative expenses was due to higher professional fees for the three months ended March 31, 2017 compared to
the three months ended March 31, 2016.
Salaries and benefits
Salaries and benefits decreased from $0.6
million for the three months ended March 31, 2016 to $0.3 million for the three months ended March 31, 2017. That decrease in salaries
and benefits resulted principally from a one-time payment to Till's former CFO during the three months ended March 31, 2016.
Foreign exchange gain
Foreign exchange gain decreased from $0.24
million for the three months ended March 31, 2016 to $4,359 for the three months ended March 31, 2017. That decrease in foreign
exchange gain is due to less strengthening of the Canadian dollar compared to the U.S. dollar for the three months ended March
31, 2017 compared to the three months ended March 31, 2016.
Income tax benefit
Income tax benefit increased from $26,975
for the three months ended March 31, 2016 to $35,503 for the three months ended March 31, 2017. That increase in income tax benefit
was due to a decrease in current income tax expense from $55,761 for the three months ended March 31, 2016 to $10,946 for the three
months ended March 31, 2017; partially offset by the smaller increase in the deferred tax asset at Omega for the three months ended
March 31, 2017 of $46,449 compared to $82,736 for the three months ended March 31, 2016.
Net income (loss)
Net income increased from a net loss of
$0.6 million for the three months ended March 31, 2016 to net income of $0.2 million for the three months ended March 31, 2017.
That increase in net income was due principally to increased investment income and net premiums earned for the three months ended
March 31, 2017 compared to the three months ended March 31, 2016, and decreased salaries and benefits for the three months ended
March 31, 2017 compared to the three months ended March 31, 2016. The increase in net income was partially offset by higher net
losses and loss adjustment expenses and general and administrative expenses, and decreased gain on foreign exchange for the three
months ended March 31, 2017 compared to the three months ended March 31, 2016.
Financial Condition - March 31, 2017
compared with December 31, 2016.
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Cash and cash equivalents
|
|
$
|
9,081,806
|
|
|
$
|
5,320,208
|
|
|
Investments
|
|
|
15,452,267
|
|
|
|
16,769,265
|
|
|
Unpaid losses and loss adjustment expenses ceded
|
|
|
7,458,031
|
|
|
|
7,058,004
|
|
|
Unearned premiums ceded
|
|
|
9,067,488
|
|
|
|
1,614,803
|
|
|
Premiums receivable and reinsurance recoverables
|
|
|
9,579,875
|
|
|
|
2,391,427
|
|
|
Deferred policy acquisition costs
|
|
|
1,335,685
|
|
|
|
498,889
|
|
|
Assets held for sale
|
|
|
4,548,191
|
|
|
|
4,543,239
|
|
|
Promissory note receivable
|
|
|
1,464,591
|
|
|
|
2,410,494
|
|
|
Other assets
|
|
|
1,848,985
|
|
|
|
1,848,801
|
|
|
Deferred income tax asset
|
|
|
629,602
|
|
|
|
583,153
|
|
|
Goodwill
|
|
|
3,007,022
|
|
|
|
2,980,819
|
|
|
Total assets
|
|
$
|
63,473,543
|
|
|
$
|
46,019,102
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for unpaid losses and loss adjustment expenses
|
|
$
|
13,696,995
|
|
|
$
|
13,212,366
|
|
|
Unearned premiums
|
|
|
10,793,169
|
|
|
|
2,283,118
|
|
|
Reinsurance payables
|
|
|
10,518,520
|
|
|
|
3,193,409
|
|
|
Accounts payable and accrued liabilities
|
|
|
1,488,417
|
|
|
|
1,143,825
|
|
|
Other liabilities
|
|
|
1,396,136
|
|
|
|
397,103
|
|
|
Total liabilities
|
|
$
|
37,893,237
|
|
|
$
|
20,229,821
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
$
|
25,580,306
|
|
|
$
|
25,789,281
|
|
Cash and cash equivalents and investments
Cash and cash equivalents ($9.1 million)
and investments ($15.5 million) totaled $24.6 million at March 31, 2017 as compared to cash and cash equivalents ($5.3 million)
and investments ($16.8 million) that totaled $22.1 million at December 31, 2016. That increase in cash and cash equivalents resulted
from the sale of investments and the receipt of a payment on a note receivable. The decline in investments resulted from maturities
in investments in the normal course of business and sales of natural resource investments.
Unearned premiums ceded
Unearned premiums ceded totaled $9.1 million
at March 31, 2017 as compared to $1.6 million at December 31, 2016. That increase in unearned premiums ceded relates primarily
to a new insurance program at Omega during the three months ended March 31, 2017, growth in another of Omega's insurance programs,
and fluctuations resulting from renewals occurring during the three months ended March 31, 2017 for insurance policies renewed
under Omega's other insurance programs.
Premiums receivable and reinsurance
recoverables
Premiums receivable and reinsurance recoverables
totaled $9.6 million at March 31, 2017 as compared to $2.4 million at December 31, 2016. That increase in premiums receivable and
reinsurance recoverables relates primarily to a new insurance program at Omega during the three months ended March 31, 2017, and
growth in another of Omega's insurance programs.
Deferred policy acquisition costs ("DPAC")
DPAC totaled $1.3 million at March 31,
2017 as compared to $0.5 million at December 31, 2016. That increase in DPAC relates primarily to a new insurance program at Omega
during the three months ended March 31, 2017, and growth in Omega's other insurance programs.
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Balance, beginning of period
|
|
$
|
498,889
|
|
|
$
|
465,472
|
|
|
Acquisition costs deferred
|
|
|
3,731,169
|
|
|
|
11,110,040
|
|
|
Amortization of DPAC
|
|
|
(2,894,373
|
)
|
|
|
(11,076,623
|
)
|
|
Balance, end of period
|
|
$
|
1,335,685
|
|
|
$
|
498,889
|
|
Reserve for unpaid losses and loss adjustment
expenses
Reserve for unpaid losses and loss adjustment
expenses totaled $13.7 million at March 31, 2017 as compared to $13.2 million at December 31, 2016. That increase in reserve for
unpaid losses and loss adjustment expenses is in the normal course of business and was due to incurred claims being higher than
paid claims during the three months ended March 31, 2017.
Unearned premiums
Unearned premiums totaled $10.8 million
at March 31, 2017 as compared to $2.3 million at December 31, 2016. That increase in unearned premiums relates primarily a new
insurance program at Omega during the three months ended March 31, 2017, significant growth in another of Omega's insurance programs,
and fluctuations resulting from renewals occurring during the three months ended March 31, 2017 for insurance policies renewed
under Omega's other insurance programs.
Reinsurance payables
Reinsurance payables totaled $10.5 million
at March 31, 2017 as compared to $3.2 million at December 31, 2016. That increase in reinsurance payables relates primarily to
a new insurance program at Omega during the three months ended March 31, 2017, and growth in Omega's other insurance programs.
Accounts payable and accrued liabilities
Accounts payable and accrued liabilities
totaled $1.5 million at March 31, 2017 as compared to $1.1 million at December 31, 2016. That increase in accounts payable and
accrued liabilities relates primarily to increased securities sold-short as of March 31, 2017 compared to December 31, 2016.
Other liabilities
Other liabilities totaled $1.4 million
at March 31, 2017 as compared to $0.4 million at December 31, 2016 and is comprised mostly of unearned premiums at Omega. That
increase in other liabilities related primarily to a new insurance program at Omega during the three months ended March 31, 2017,
and growth in Omega's other insurance programs.
Liquidity and Capital Resources
Cash Flows
|
|
|
Three Months Ended March 31
|
|
|
|
2017
|
|
2016
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
1,094,716
|
|
|
$
|
139,445
|
|
|
Investing activities
|
|
|
1,676,805
|
|
|
|
(550,565
|
)
|
|
Financing activities
|
|
|
913,879
|
|
|
|
—
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
3,685,400
|
|
|
|
(411,120
|
)
|
|
Effects of foreign exchange
|
|
|
76,198
|
|
|
|
536,367
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
5,320,208
|
|
|
|
1,519,881
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
9,081,806
|
|
|
$
|
1,645,128
|
|
Operating activities
Net cash provided by operating activities
was $1.1 million for the three months ended March 31, 2017 as compared to $0.1 million for the three months ended March 31, 2016,
a change of $1.0 million. That increase in cash provided by operating activities in the three months ended March 31, 2017 compared
to the three months ended March 31, 2016 is primarily due an increase in unearned premiums for the three months ended March 31,
2017.
Investing activities
Net cash provided by investing activities
was $1.7 million for the three months ended March 31, 2017 as compared to cash used of $0.6 million for the three months ended
March 31, 2016. That increase is primarily the result of net sales of investments that contributed $1.8 million in positive cash
flow for the three months ended March 31, 2017 and in the cash outflow of $0.7 million for the three months ended March 31, 2016
from net purchases of investments.
Financing activities
Net cash provided by financing activities
amounted to $0.9 million for the three months ended March 31, 2017 as compared to $-0- for the three months ended March 31, 2016.
The source of cash for the three months ended March 31, 2017 was the receipt of $0.9 million on a note receivable.
Off-Balance Sheet Arrangements
As of March 31, 2017, Till did not have
any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
Contractual Obligations
Not applicable.