Investor
Presentation
__________
September 30, 2005
Safe Harbor Statement
Cautionary Statement under “Safe Harbor,” Provision of the Private Securities Litigation
Act of 1995: This presentation contains various forward-looking statements and includes
assumptions concerning our operations, future results and prospects. Statements included
herein, as well as statements made by or on our behalf in press releases, written statements
or other documents filed with the Securities and Exchange Commission (the “SEC”), or in
our communications and discussions with investors and analysts at this conference or in the
normal course of business through meetings, phone calls and conference calls, which are not
historical in nature are intended to be, and are hereby identified as, “forward-looking
statements” for purposes of the safe harbor provided by Section 21E of the Securities
Exchange Act of 1934 as amended. These forward-looking statements, identified by words
such as “intend,” “believe,” “anticipate,” or “expects” or variations of such words or similar
expressions are based on current expectations and are subject to risk and uncertainties. In
light of the risks and uncertainties inherent in all future projections, the inclusion of
forward-looking statements in this presentation should not be considered as a representation
by us or any other person that our objectives or plans will be achieved. We caution
investors and analysts that actual results or events could differ materially from those set
forth or implied by the forward-looking statements. For further information regarding
cautionary statements and factors affecting future operating results, please refer to PXRE
Group’s public filings with the SEC.
2
In certain instances when presenting PXRE’s results, management has
included and discussed certain “non-GAAP” financial measures. For
example, operating income excludes after-tax realized investment gains and
losses and foreign exchange gains and losses, as well as other non-recurring
items. These excluded items may be material in a period. Management
believes that providing non-GAAP financial measures such as operating
income provides useful information regarding PXRE’s results of
operations consistent with industry practices which enables investors,
security analysts and rating agencies to make performance comparisons
with PXRE’s competitors. The reconciliation of such non-GAAP financial
measures to the applicable GAAP financial measures is included in PXRE’s
press releases.
Non-GAAP Financial Measures
3
Market Opportunities
PXRE’s franchise is well positioned to take advantage of improved
market conditions and gain market share
Katrina will most likely be largest natural peril industry loss ever,
possibly doubling Hurricane Andrew, the next largest
Feedback from Monte Carlo, Baden Baden and PCI meetings was
very positive
Substantial increases in rates and improvements in terms and
conditions
These rate increases are on top of 2005 strong pricing environment
Proven ability to fully participate in post-event hard market
opportunities
Almost all of PXRE’s lines of business will be positively impacted
4
Recent Hard Markets
Hard market and normalized catastrophe activity should result in low 20s
ROEs and mid 50s combined ratios
1 For example, average of 1993-1997 Net Earned Premium (NEP) less 1992 NEP, divided by 1992 NEP
2 2002 to June 30, 2005; excludes exited lines and impact of Hurricane Katrina; includes $143.7 million and 18.3 loss ratio points related
to impact of 2004 Florida Hurricanes
77.1%
58.5%
Average Combined Ratio
20.6%
18.0%
Average ROE
43.8%
34.8%
Average Loss Ratio
330%
86%
Growth in Average Annual
Net Earned Premium 1
2002 to 2005 2
1993 to 1997
5
The PXRE Franchise
Highly-focused provider of property catastrophe and risk excess
reinsurance to the worldwide marketplace
Established in 1986; the longest tenured short-tail specialist reinsurer
One of the leading property retrocessional writers in the world
Strong underwriting team with proven long-term track record
Operations in Bermuda, Europe and the United States
“A-” rated by both A.M. Best and S&P
Well positioned to benefit from upcoming attractive market conditions
in the property catastrophe reinsurance and retrocessional business
6
Retro Market Leader
PXRE is among the top four retrocessional market participants
worldwide
Retro business is a unique niche with fewer competitors than
traditional reinsurance
Underwriting retrocessional business requires specialized skills
PXRE’s proprietary models and market tenure allow it to
successfully underwrite despite the lack of transparency
Client relationships are critical
Retro business has higher returns than traditional
catastrophe reinsurance
7
Performance Through the Cycle
Cumulative Cat & Risk Loss Ratio 1987 to Sept. 30, 2005 = 71.8%
($ in millions)
Blue shaded years are hard market periods,
grey shaded years are soft market periods.
Cumulative Cat & Risk loss ratio shown
above includes Hurricanes Katrina and Rita.
8
By Geography
By Line of Business
Geographically Diversified
Business Mix
2005 Projected NPW
2006 Rate Expectations
Price Changes
Retro Over 35%
US Cat Over 25%
Risk XS Over 100%
Int’l Cat Over 10%
Coverage Restrictions
Risk Excess – natural perils excluded
Retro - limited territorial scope
U.S. Cat - some will contain punitive
reinstatement provisions, limitation of
territorial scope
Cat on Direct & Facultative - will
contain exposure resets, exclusion of
binder business
9
Superior Underwriting Technology
and Risk Management
Crucible
Risk management system
Combines proprietary retro and other models with 3rd party
models
Capital allocated to each deal based on profitability and
correlation
Allows 3rd party model optimization
Cap on zonal aggregates
Based on contractual limits
Monitored dynamically by Crucible
Set to ensure ability to fully participate after the event
Percent of capital varies with market conditions
10
Katrina Estimate
Estimate of net impact: $330 million
Approximately based on property industry loss of $40 billion
However, process was not market-share based
Methodology
Every contract contains a maximum exposure per event
All contracts with potential exposure in Gulf identified
Stochastic storms selected by AIR as most similar to Katrina and Rita were run
against the portfolio
Underwriters performed ground-up review of all contracts with potential exposure
to these storms, applying judgment and knowledge of client exposure to develop
contract by contract estimates
Modeled loss estimate and ground-up estimate compared for reasonability
Process repeated multiple times with larger stochastic storms implying greater
industry losses
11
Risk Controls Performed as Expected
Katrina validates PXRE risk controls. Our success was achieved by:
A focused, limited book of business
Clarity as to the interrelationship of business lines
Risk management not model based
Recall PXRE’s out-performance in 2004 where loss to premium was half of
peer average
PXRE’s loss at an approximate $40B industry loss estimate is less than:
The stochastic PML’s provided to the ratings agencies
Our stated worst case event loss
Our brokers’ and clients’ expectations
Katrina was a significant loss for PXRE, but our balance sheet and market position
remain strong and ready to capitalize on the current opportunities
Our monoline strategy leads to higher losses as a percent of capital and more
powerful uplift from market conditions
12
Ratings Agencies
A-
“Strong”
7th highest of 22 ratings
Credit Watch Negative
A-
“Excellent”
4th highest of 16 ratings
Under Review with Negative Implications
Rating Today
“Upon the successful exchange to common equity and
after evaluating management’s progress in reducing
prospective earnings and capital volatility, Standard &
Poor's will most likely affirm the current ratings and
assign a stable outlook.”
We believe we will be removed from “credit watch
negative” following the Shareholder Vote on
November 18, 2005.
“Additionally, the group’s A- (Excellent) rating will
remain under review with negative implications pending
PXRE’s successful completion of its capital plan. If the
plan is executed in accordance with A.M. Best’s
expectations, which include the exchange of preferred
shares to common shares, the financial strength ratings
of A- (Excellent) will likely be affirmed.”
We believe we will be removed from “under negative
review” following the Shareholder Vote on
November 18, 2005.
Credit Watch
Negative To
Come Off
“The ratings on PXRE reflect the companies' strong
competitive position in the Bermuda catastrophe
reinsurance and retrocessional market, historically strong
operating performance, and upon the exchange of series
D perpetual preferred to common equity, strong capital
adequacy. The ratings also reflect the relatively high
capital and earnings volatility borne from a monoline
property catastrophe profiles compared with more
diversified, multiline peers.”
“As a global property catastrophe reinsurer, PXRE is
exposed to high severity losses associated with
catastrophic events on a worldwide basis. As a result of
these events in 2005, property catastrophe pricing is
expected to increase, which should benefit returns,
barring any other catastrophic events. A.M. Best expects
PXRE to manage its risk-adjusted capital and financial
leverage ratios within acceptable ranges to support its
new financial strength and debt ratings.”
Comments on
PXRE
Standard & Poor’s
A.M. Best
13
Implications of Rating Agency Shift
S&P and A.M. Best have communicated revised capital adequacy ratios for
monoline catastrophe writers, such as PXRE
The revised CAR ratios make it uneconomic to remain “A” rated
At an “A-” level, the risk/capital ratio is lower than “A” before the change:
Downgrades based on strategy, rather than claims paying ability,
dramatically decreases negative impact in reinsurance market
We disagree with market commentary that the agencies’ change makes
monoline strategy untenable
At an “A-” rating we can attract customers, deliver appropriate operational
leverage and earn an attractive risk-adjusted return on equity
160%
225%
PXRE Minimum Post-Katrina “A-” CAR
180%
250%
PXRE Minimum Pre-Katrina “A” CAR
S&P
A.M. Best
14
Capital Raise
Public: $115 million, common shares
Private: $375 million, Perpetual Preferred Shares, mandatorily
exchangeable upon shareholder vote (expected November 18, 2005)
into common shares
November 18 Vote
“Yes” vote
Mandatory exchange of perpetual preferred into common shares
“No” vote
No voting rights
Pro rata share of common share dividends
PIK dividend of 15% per annum stepping up by 2% per year for three
years if shareholders do not vote to approve conversion to common
shares by April 1, 2006
Senior to common shares
Certain additional consent rights related to corporate actions
15
Strong Capital Position
16
Pro-Forma
Actual
Sept. 30, 2005
1
31-Dec-04
$ Increase
% Increase
Shareholders' Equity
913,963
696,555
217,408
31.2%
Debt
167,080
167,075
5
0.0%
Total Capital
1,081,043
863,630
217,413
25.2%
Surplus (after inter-company eliminations):
PXRE Bermuda
903,500
617,000
286,500
46.4%
PXRE US
138,000
224,926
(86,926)
-38.6%
Total Surplus
1,041,500
841,926
199,574
23.7%
Capital Raise
475,000
Capital Raise as a % of:
Katrina and Rita loss
136%
September 30, 2005 shareholders' equity
2
108%
1
As disclosed in PXRE Group Ltd.'s Form 10-Q for the quarterly period ended September 30, 2005
2
Shareholders' equity was $440 million at September 30, 2005
Prudent Investment Philosophy
Investment Portfolio
Hedge Fund Portfolio
Capital preservation is key goal
High quality, low duration fixed income portfolio
supplemented by a small fund-of-funds hedge
fund portfolio
Very low correlation between underwriting and
financial risks
Detailed portfolio guidelines and controls –
diligent monitoring
Third party investment managers:
Gen Re New England Asset Management
(GRNEAM) – match liabilities with high
quality fixed income securities
Mariner Investments – manages alternative
investments focusing on strategies with better
risk adjusted returns than straight equity or
fixed income portfolios
Fixed Income Portfolio – risk averse to interest
rate and credit risks
AA+
Weighted Average
Credit Rating:
$1.1 billion
Market Value:
1.9 years
Duration:
Fixed Maturities and ST Investment
17
S&P 500
CISDM Index
PXRE Portfolio
Average Annual Return
8.28%
7.80%
10.82%
Standard Deviation
19.33
5.24
6.41
18