The world of finance is undergoing a revolution as traditional assets are transformed into digital tokens and traded on blockchain networks. From real estate to commodities and beyond, the rise of tokenization is breaking down barriers and providing unprecedented access to a wide range of investment opportunities. With increased liquidity, reduced transaction costs, and the ability to trade 24/7 on a global scale, the tokenization of assets is set to disrupt the traditional financial world and provide a new era of investment opportunities for all.
According to BCG and ADDX, the asset tokenization market is estimated to be a $16.1 trillion opportunity by 2030. The two entities see underlying growth in the industry being driven by demand from investors searching for greater access to private market opportunities.
Oxbridge Re Holdings Ltd. (NASDAQ: OXBR) is among the latest companies entering into the asset tokenization boom after the company recently announced its new wholly-owned subsidiary, SurancePlus, will tokenize its preferred shares representing an indirect interest in reinsurance contracts and sell them as tokenized reinsurance securities to accredited investors. Here is why Oxbridge Re’s plans are a huge opportunity for the company:
Introduction: What is Tokenization?
Tokenization is the process of converting the rights to an asset into a digital token that can be traded on a blockchain network. A token can represent a fractional interest in an underlying asset and can be bought, sold, and traded subject to securities laws.
In tokenization, an asset, such as real estate, art, or commodities is divided into many smaller units, and each unit is represented by a unique token recorded on the blockchain. The ownership of these tokens represents, directly or indirectly a fractional interest in the underlying asset, meaning that the holder of the token receives a claim to a portion of the asset's value or the right to participate in its fortunes.
The benefits of tokenizing assets potentially include increased liquidity, reduced transaction costs, and improved accessibility to a wider range of investors. Tokenized assets can also be traded 24/7 on a global scale, which can increase the market for the asset.
Many technology and financial firms are working on tokenizing assets, including Circle, Anchorage, and Paxos. Major exchanges like Binance and Coinbase (NASDAQ: COIN) are also exploring tokenization opportunities, as they see it as a way to increase the liquidity of traditional assets and provide new investment opportunities for their users.
What is Reinsurance?
Reinsurance is a type of insurance purchased by insurance companies to protect themselves against the financial losses they may incur from their policyholders. The idea behind reinsurance is that an insurance company can transfer some of its risks to a reinsurer, which can help the company manage its exposure to risk and remain financially stable.
An insurance company might seek reinsurance coverage for a variety of reasons, including:
1. To manage its overall exposure to risk: By transferring some of its risks to a reinsurer, an insurance company can reduce the amount of risk it is exposed to, which can help it manage its overall financial stability.
2. To free up capital: Reinsurance can help an insurance company free up capital that would otherwise be tied up in reserves to cover potential losses. This can help the company invest in other areas, such as product development or marketing.
3. To improve its financial stability: By spreading risk across multiple parties, reinsurance can help an insurance company weather the impact of large losses and remain financially stable over time.
The reinsurance market is dominated by a few large, global players. Some of the leading reinsurers include Munich Re, Swiss Re, and Hannover Re, which are headquartered in Germany, Switzerland, and Germany respectively. Other major players include SCOR, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) Re, and Lloyd's of London (NYSE: LYG).
Overall, the reinsurance market is highly competitive and constantly evolving, as reinsurers compete to offer the best coverage and pricing to insurance companies and other clients.
Oxbridge Re & SurancePlus: Understanding the Opportunity
Oxbridge Re Holdings is a Cayman Islands-based company that, through its licensed reinsurance subsidiaries, provides reinsurance solutions and services to property and casualty insurers along the Gulf Coast region of the United States. Founded in 2013, Oxbridge Re specializes in underwriting medium-frequency & high-severity risks that cover property losses from specified catastrophes.
The company’s subsidiary, SurancePlus, was officially formed in December 2022 and will serve as Oxbridge Re’s reinsurance tokenization subsidiary. The reinsurance contracts will be underwritten by Oxbridge Re’s reinsurance subsidiaries, Oxbridge Re NS and Oxbridge Reinsurance Limited and will be funded through the sale of participating notes purchased by SurancePlus using the proceeds from its offering of preferred shares represented by DeltaCat Re tokens.
The DeltaCat Re tokens will be marketed to accredited investors as tokenized reinsurance securities through Rule 506(c) of Regulation D in the U.S. and to non-U.S. investors outside the U.S. under Regulation S. SurancePlus is slated to generate returns that are non-correlated to the capital markets. Token holders will earn a return on their investment based on the performance of the participating notes that fund reinsurance contracts. SurancePlus estimates token holders could, for each profitable year with no or minimal reinsurance losses, receive an annualized return of up to ~20% - ~40% on the original issue price of the DeltaCat Re tokens.
SurancePlus is currently preparing to launch its token offering in the coming months. It has partnered with several key advisory companies to ensure proper compliance and an opportunity for secondary trading on a registered alternative trading system (ATS). SurancePlus has partnered with Securitize LLC, an SEC-registered transfer agent, Ogier BVI (as BVI counsel), and Bull Blockchain Law LLP (U.S. securities counsel). SurancePlus says it chose its partners based on their expertise in digital securities and tokenization.
“High barriers to entry have traditionally excluded reinsurance-related securities as an alternative investment opportunity for many investors. SurancePlus will democratize access to reinsurance as an alternative investment opportunity by offering a solution that leverages key qualities of blockchain technology to create a well-designed digital security, the performance of which will not be correlated to the financial markets. Instead, the proceeds raised from the offering of the DeltaCat Re tokens will be invested in participating notes relating to reinsurance contracts,” commented Oxbridge Re Holdings President and Chief Executive Officer Jay Madhu. “By complying with applicable U.S. securities laws, we expect to create significant shareholder value by raising additional capital through token issuance and investing these funds in underwriting higher value reinsurance contracts.”
Tokenized Reinsurance Securities vs. Traditional Catastrophe (CAT) Bonds
Oxbridge Re’s SurancePlus approach can be seen as a disruptive alternative to the more traditional catastrophe bonds, or CAT Bonds. A CAT bond is a high-yield debt security that is designed to help raise money for insurance companies in the event of a natural disaster.
CAT bonds typically yield between 6% and 8%, and during profitable years with no major disasters, bondholders collect their interest and realize a profit. Unfortunately, during unprofitable years that are marked by natural disasters and damage, CAT bondholders could lose their entire investment.
In essence, CAT bondholders may be taking a high risk for a reward of only 6% to 8% interest. The risk-reward of CAT bonds may not be an ideal setup for most investors.
Oxbridge Re and SurancePlus want to disrupt the CAT bond market by offering investors a higher rate of return to compensate for the inherent risk. The estimated return range of up to ~20% to ~40% of the initial issue price of the token during a profitable year represents a potentially much more favorable risk-reward for investors than traditional CAT bonds. Unlike CAT bonds, the DeltaCat Re tokens will be tradable and will have a three-year token life.
The Benefits of Tokenizing Reinsurance Contracts for Oxbridge Re
The tokenization of assets is currently a polarizing topic, given the high-profile scandals and scams that have permeated through the adjacent cryptocurrency industry recently. Massive collapses and the associated fallouts from events such as those surrounding FTX and Luna have increased investor risk aversion across the blockchain industry in general.
However, Oxbridge Re can sidestep a lot of these issues and provide investors in SurancePlus tokens with greater peace of mind. For one thing, Oxbridge Re is a publicly traded company on the Nasdaq Capital Market. This means Oxbridge Re is subject to SEC reporting requirements. In addition, Oxbridge Re’s annual consolidated financial statements are audited by a registered independent public accounting firm certified under the Public Company Accounting Oversight Board (PCAOB), a nonprofit organization created under the Sarbanes-Oxley Act of 2002 to oversee the audits of public companies.
Oxbridge is subject to intense regulation. This is important because it demonstrates why Oxbridge Re's DeltaCat Re tokens are expected to be a real viable opportunity for the company, compared to the overall cryptocurrency industry, which is largely still unregulated.
Another major benefit for the company of fractionalizing indirect interests in reinsurance contracts to create tokenized reinsurance securities will be its ability to raise capital without diluting Oxbridge Re’s common stockholders. In addition, it allows the company to raise capital without adding debt on its balance sheet, which is again beneficial to its shareholders.
Overall, Oxbridge Re and SurancePlus are working on a major opportunity to become formidable players in the tokenization of indirect interests in reinsurance contracts. The tokenization growth story is still in the early innings, and high-net-worth investors are increasingly seen as a driving force for adoption as they search for better private investment opportunities.
The DeltaCat Re tokens will also allow Oxbridge Re to access non-dilutive capital, which can be used to help continue to develop SurancePlus and other operations. The non-dilutive and non-debt properties of the DeltaCat Re token are beneficial for both Oxbridge Re and existing shareholders. In the end, accredited investors could have greater confidence in the DeltaCat Re tokens because they are issued by a subsidiary of an SEC-reporting company. With a very high barrier to entry into the reinsurance business and a fully-compliant approach to tokenization, Oxbridge Re is one stock to keep an eye on.
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