On October 7, 2005, PXRE completed the public offering of 8,843,500 of its common shares, including 1,153,500 shares sold upon exercise of the underwriter’s over-allotment option in full, at a public offering price of $13.25 per share. Net proceeds to the Company from the common share offering, after deducting estimated expenses and underwriter’s discounts and commissions, were approximately $114.7 million.
Pursuant to a Share Purchase Agreement dated as of September 29, 2005, PXRE agreed to issue and sell 375,000 Series D Preferred Shares in a private placement exempt from registration under the Securities Act of 1933. The Series D Preferred Shares were mandatorily exchangeable for common shares upon the shareholders’ approval of the exchange. The private placement closed on October 7, 2005. The gross proceeds from the private placement were $375.0 million, and proceeds net of agents’ discounts and commissions and offering expenses were $359.3 million. The Series D Preferred Shares were mandatorily exchanged into 34,090,906 common shares following the affirmative vote of the Company’s shareholders at a special general meeting held on November 18, 2005 approving the exchange of the Series D Preferred Shares and the authorization of an additional 300.0 million common shares.
PXRE contributed the $474.0 million net proceeds of the public offering and the private placement to PXRE Bermuda to support the underwriting of reinsurance business during subsequent renewal periods.
On November 23, 2004, PXRE completed a public offering of 5.2 million of its common shares at $23.75 per share, consisting of 3.7 million shares offered by the Company and 1.5 million shares offered by certain selling shareholders. On December 2, 2004, the underwriters exercised in-full the overallotment option to purchase 0.8 million additional common shares, consisting of 0.7 million shares from the Company and 0.1 million shares from the selling shareholders. After giving effect to the sale of the overallotment shares, a total of 6.0 million shares were sold in the offering.
The Company did not receive any of the proceeds from the sale of shares by the selling shareholders. The selling shareholders converted 2,208 preferred shares, including accrued dividends, to 1.6 million common shares sold in the public offering, including the overallotment. Net proceeds to the Company from the sale of common shares sold by the Company were approximately $98.2 million, including the overallotment. PXRE used its net proceeds for general corporate purposes, including contributions to the capital of PXRE Bermuda to support growth in its business.
On December 16, 2003, the Company completed an offering of 2.2 million of its common shares at $21.75 per share. Of the 2.2 million shares sold, 1.1 million were offered by PXRE and 1.1 million were offered by Phoenix Life Insurance Company (“Phoenix”), one of the Company’s common shareholders.
The Company did not receive any of the proceeds from the sale of shares by Phoenix. Net proceeds to the Company, from the sale of the common shares sold by the Company, were approximately $20.4 million. We used the net proceeds from the sale of common shares for general corporate purposes, including contributions to the capital of PXRE Bermuda to support growth in its business. On January 22, 2004, the underwriters exercised in-full the overallotment option to purchase 0.3 million additional common shares at $21.75 per share. As a result of the exercise of the option, the Company received additional net proceeds of approximately $6.3 million, resulting in total net proceeds from the offering of approximately $26.7 million. We again used the net proceeds for general corporate purposes, including contributions to the capital of PXRE Bermuda. After giving effect to the sale of the overallotment shares, a total of 2.5 million shares were sold in the offering.
On April 4, 2002, the Company raised $150.0 million of additional capital through the issuance of 15,000 Convertible Voting Preferred Shares (the “Preferred Share Investment”). As of December 31, 2005, 5,813 Preferred Shares were issued and outstanding. The Preferred Shares are entitled to receive, when, as and if declared by our Board of Directors and to the extent of funds legally available for the payment of dividends, cumulative dividends per share at the rate per annum of 8% of the sum of the stated value on each share plus any accrued and unpaid dividends thereon, payable on a quarterly basis. Such dividends were payable in additional Preferred Shares until April 4, 2005 and in cash thereafter. Dividends to preferred shareholders, paid in kind, during 2005 and 2004 amounted to $3.4 million and $14.0 million, respectively, and paid in cash during 2005 amounted to $3.7 million. The expected dividend to be paid in cash at the rate per annum of 8% in 2006 based on convertible preferred shares at December 31, 2005 is $4.7 million. If the Company does not pay the dividend, dividends will accrue at 10% per annum until paid.
On March 31, 2005, 5,840.6 Series A1 convertible voting preferred shares, 3,143.6 Series B1 convertible voting preferred shares and 1,393.6 Series C1 convertible voting preferred shares were mandatorily converted into 4.4 million class A convertible voting common shares, 2.4 million class B convertible voting common shares and 1.0 million class C convertible voting common shares, respectively. The conversion was effected based upon a conversion price of $13.27, which conversion price was agreed between the Company and holders of the Company’s convertible voting preferred shares pursuant to a letter agreement dated as of March 31, 2005. All the remaining convertible preferred shares mandatorily convert on April 4, 2008. At December 31, 2005, there were no A1, B1 and C1 Preferred Shares and 5,813 A2, B2 and C2 Preferred Shares outstanding. As the A2 Preferred Shares, B2 Preferred Shares and C2 Preferred Shares were not voluntarily converted on or prior to the third anniversary of their issuance, an annual 8% dividend, payable in cash, will accrue until these Preferred Shares are converted.
On January 29, 1997, PXRE Capital Trust I (“PXRE Capital Trust”), a Delaware statutory trust and a wholly-owned subsidiary (non-consolidated) of PXRE Delaware, issued $103.1 million principal amount of its 8.85% TRUPS due February 1, 2027 in an institutional private placement. Proceeds from the sale of these securities were used to purchase PXRE Delaware’s 8.85% Junior Subordinated Deferrable Interest Debentures due February 1, 2027 (the “Subordinated Debt Securities”). At December 31, 2005, obligations to PXRE Capital Trust amount to $102.6 million. On April 23, 1997, PXRE Delaware and PXRE Capital Trust completed the registration with the SEC of an exchange offer for these securities and the securities were exchanged for substantially similar securities (the “Capital Securities”). Distributions on the Capital Securities (and interest on the related Subordinated Debt Securities) are payable semi-annually, in arrears, on February 1 and August 1 of each year, commencing August 1, 1997. On or after February 1, 2007, PXRE Delaware has the right to redeem the Subordinated Debt Securities, in whole at any time or in part from time to time, subject to certain conditions, at call prices of 104.180% at February 1, 2007, declining to 100.418% at February 1, 2016, and 100% thereafter.
80
On May 15, 2003, PXRE Capital Statutory Trust II, a Connecticut statutory trust and subsidiary (non-consolidated) of the Company, sold $18.0 million principal amount of capital trust pass-through securities due May 15, 2033. The securities bear interest payable quarterly at an initial rate of 7.35% until May 15, 2008, and thereafter at an annual rate of 3 month LIBOR plus 4.1% reset quarterly. The Company has the right to redeem the securities at any quarterly interest payment date after May 15, 2008 at 100%. The Company used the net proceeds of the sale to repay the balance of $10.0 million outstanding under its credit agreement, and to provide additional capital to PXRE Bermuda.
On May 23, 2003, PXRE Capital Trust III, a Delaware statutory trust and a subsidiary (non-consolidated) of the Company, sold $15.5 million principal amount of capital trust pass-through securities due May 23, 2033. The securities bear interest payable quarterly at a rate of 9.75%. The Company has the right to redeem the securities at call prices of 104.875% on May 23, 2008, declining to 100.975% on May 23, 2012 and 100% on May 23, 2013 or thereafter. The Company used the net proceeds to provide additional capital to PXRE Bermuda.
On October 29, 2003, PXRE Capital Statutory Trust V, a Connecticut statutory trust and a subsidiary (non-consolidated) of the Company, sold $20.6 million principal amount of capital trust pass-through securities due October 29, 2033. The securities bear interest payable quarterly at an initial rate of 7.70% until October 29, 2008, and thereafter at an annual rate of 3 month LIBOR plus 3.85% reset quarterly. The Company has the right to redeem the securities at any quarterly interest payment date after October 29, 2008 at 100%. The Company used the net proceeds to provide additional capital to PXRE Bermuda.
On November 6, 2003, PXRE Capital Trust VI, a Delaware capital trust and a subsidiary (non-consolidated) of the Company, sold $10.3 million principal amount of capital trust pass-through securities due September 30, 2033. The securities bear interest payable quarterly at an initial rate of 7.58% until September 30, 2008, and thereafter at an annual rate of 3 month LIBOR plus 3.90% reset quarterly. The Company has the right to redeem the securities at any quarterly interest payment date after September 30, 2008 at 100%. The Company used the net proceeds to provide additional capital to PXRE Bermuda.
Share Dividends and Book Value
Dividends declared to common shareholders were $16.8 million and $3.4 million in 2005 and 2004, respectively. Book value per common share was $6.01 at December 31, 2005 after considering convertible preferred shares.
81
The Company was incorporated in Bermuda and is subject to the Bermuda Companies Act 1981 (the “Companies Act”). Under the Companies Act, even though we are solvent and able to pay our liabilities as they become due, we may not declare or pay dividends or make distributions from our contributed surplus if there are reasonable grounds for believing either that we are, or would after the payment, be, unable to pay our liabilities as they become due, or that the realizable value of our assets would thereby be less than the sum of our liabilities and our issued share capital (par value) and our share premium account. Under the Companies Act, when a company issues shares, the aggregate paid in par value of the issued shares comprises the Company’s share capital account. When shares are issued at a “premium”, that is, where the actual sum paid for a share exceeds the par value of the share, the amount paid in excess of the par value must be allocated to and maintained in a capital account called the “share premium account.” The Companies Act requires shareholder approval prior to any reduction of our share capital or share premium accounts. Bermuda law also provides that we maintain a contributed surplus account, to which we must allocate, amongst other things, shareholder capital which is unrelated to any share subscription. Currently, there is $325.2 million in our contributed surplus account.
We have a high share premium account due to the significant difference between the $1.00 par value of our common shares and the amounts paid for those shares in recent and historical common share offerings of the Company.
As a result of the losses arising from Hurricanes Katrina, Rita and Wilma, the realizable value of the Company’s assets ($2.1 billion) no longer exceeds the aggregate of its liabilities ($1.7 billion) its issued share capital ($130.4 million) and its share premium account ($550.0 million). As a result of this deficiency, the Company is currently prohibited by Bermuda law from paying dividends or making distributions from its contributed surplus account to its shareholders.
In order that the Company can continue to have the flexibility to pay dividends to shareholders, the Board determined that it is in the best interests of the Company to reduce the share premium account to zero and allocate $550.0 million to the Company’s contributed surplus account. This reduction of our share premium account and reallocation to the contributed surplus account requires the approval of our shareholders to be effective. The Company intends to ask shareholders to approve a proposal to reduce our share premium account and transfer the $550.0 million balance to our contributed surplus account at our next General Meeting of shareholders. Assuming our shareholders give the required approval at the next General Meeting, the reallocated capital will remain part of our capital structure available for the benefit of our creditors and shareholders. Future dividends and distributions may then be made by the Board within the limits prescribed by Bermuda law, without restriction for the value of the historical share premium account.
If shareholders approve the foregoing proposal, the Board of Directors will evaluate whether to resume paying dividends and the appropriate level of such dividends as part of its evaluation of strategic alternatives.
82
Cash Flows
Net cash flows provided by operations were $27.3 million in 2005 compared to $45.3 million in 2004 primarily due to an increase in net paid losses which was mainly attributable to the 2004 Florida hurricanes and Hurricanes Katrina, Rita and Wilma. Partially offsetting these decreases in operating cash flows was an increase in premium collected.
Because of the nature of the coverages we provide, which typically can produce infrequent losses of high severity, it is not possible to accurately predict our future cash flows from operating activities. As a consequence, cash flows from operating activities may fluctuate, perhaps significantly, between individual quarters and years.
Net cash used by investing activities were $490.5 million in 2005 compared to $205.7 million in 2004. This increase was primarily due to the investment of $462.1 million of net cash flows from financing activities received during 2005.
PXRE is subject to large losses, including natural perils such as hurricanes and earthquakes. Since the timing and amount of losses from such exposures is unknown, the Company invests its assets so that should an event occur, it would have sufficient liquidity to pay claims on the underlying contracts. This strategy is evidenced by the overall 1.7 year duration of the Company’s fixed income and short-term investments as of December 31, 2005. Due to this relatively short duration portfolio, the Company does not believe realized losses resulting from selling securities before anticipated will have a material adverse impact on its financial position. Should an event actually occur such as the occurrence of Hurricane Katrina in the third quarter of 2005, PXRE dedicates assets, including cash equivalents and other short-term investments, in such a manner that cash is always on hand to pay claims. In February 2006 we sold approximately $490.5 million of fixed income securities held by PXRE Bermuda, and additionally executed redemption orders for all of the Company’s hedge fund investments. The proceeds of the sales of the fixed income securities were all received by the first week of March 2006 and were reinvested in commercial paper and other short term investments. With respect to the proceeds of the sales of the hedge fund investments, approximately 50% of such proceeds are expected to be received by April 30, 2006, approximately 80% by July 31, 2006, and 100% by March 31, 2007. As a result of these steps, we believe we have sufficient liquidity to meet the currently foreseen need of our counterparties.
PXRE has three letter of credit (“LOC”) facilities that allow it to provide LOCs to its ceding companies if such LOC is required under the terms of the contract. All of the facilities require the Company to provide collateral in the form of fixed maturity securities or cash to the issuing bank as security for outstanding LOCs. The first is a $250.0 million committed facility with Barclays Bank plc under which the Company pays the issuing bank an annual standby commitment fee of 0.15% per annum. The second is a $400.0 million committed facility with Citibank Ireland Financial Services plc under which the Company pays the issuing bank an annual standby commitment fee of 0.10% per annum. The third is an uncommitted facility with Merrill Lynch that allows for LOCs to be issued subject to satisfactory collateral being provided to the issuing bank by the Company. There is no commitment fee for the third facility. The Company must transfer eligible assets to collateral accounts prior to each respective bank issuing an LOC. Since eligible assets include fixed income investments, such securities need not be sold in order to qualify as eligible collateral.
83
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements. We do have the following commitments, contingencies and contractual obligations. Payments due by period in the following table reflect liabilities recorded at December 31, 2005.
Commitments, Contingencies and Contractual Obligations
PAYMENTS DUE BY PERIOD
Contractual Obligations
($000’s) | | Total | | Less Than 1
Year | | 1 – 3
Years | | 3 – 5
Years | | More
Than 5
Years | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
| Long-term debt obligations | | $ | 167,081 | | $ | — | | $ | — | | $ | — | | $ | 167,081 | |
| Interest on debt obligations | | | 340,232 | | | 14,327 | | | 28,653 | | | 28,654 | | | 268,598 | |
| Losses and loss expenses | | | 1,320,126 | | | 747,552 | | | 332,292 | | | 142,788 | | | 97,494 | |
| Capital (finance) lease obligations | | | — | | | — | | | — | | | — | | | — | |
| Operating lease obligations | | | 5,307 | | | 1,244 | | | 2,325 | | | 1,738 | | | — | |
| Purchase obligations | | | 5,035 | | | 3,823 | | | 1,212 | | | — | | | — | |
| Dividends on convertible preferred shares | | | 10,935 | | | 5,070 | | | 5,865 | | | — | | | — | |
| Other long-term liabilities reflected on the balance sheet under GAAP | | | — | | | — | | | — | | | — | | | — | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
| Total | | $ | 1,848,716 | | $ | 772,016 | | $ | 370,347 | | $ | 173,180 | | $ | 533,173 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
Loss and loss expense reserves represent management’s best estimate of the ultimate cost of settling the underlying reinsurance claims. As more fully discussed in “Critical Accounting Policy Disclosures – Estimation of Loss and Loss Expenses” above, the estimation of loss and loss expense reserves is based on various complex and subjective judgments. Actual losses and loss expenses paid may deviate, perhaps substantially, from the reserve estimates reflected in our financial statements. Similarly, the timing for payment of our estimated losses is not fixed and is not determinable on an individual or aggregate basis. The assumptions used in estimating the likely payments due by periods are based on the Company’s historical claims payment experience, but due to the inherent uncertainty in the process of estimating the timing of such payments, there is a risk that the amounts paid in any such period can be significantly different than the amounts disclosed above.
As noted under “– Capital Resources” above, we expect to be able to meet the contractual obligations over 2006 with the dividend paying capacity of the Company’s subsidiary, PXRE Bermuda. PXRE Reinsurance and PXRE Bermuda expect to be able to meet their contractual obligations over 2006 with operating and investing cash flows.
As of December 31, 2005, other commitments and pledged assets include (a) LOCs of $284.3 million which are secured by cash and securities with a fair value of $405.7 million, (b) securities amounting to $9.9 million on deposit with various state insurance departments in order to comply with insurance laws, (c) securities with a fair value of $61.6 million deposited in a trust for the benefit of a cedent in connection with certain finite reinsurance transactions, (d) funding commitments to certain limited partnerships of $0.3 million, (e) a contingent liability amounting to $0.9 million under the Restated Employee Annual Incentive Bonus Plan and other compensation, (f) commitments under the capital trust pass-through securities discussed above, and (g) commitment fees of $0.8 million per annum under the two committed LOC facilities discussed above.
84
In connection with the capitalization of PXRE Lloyd’s Syndicate 1224, PXRE Reinsurance has on deposit $1.3 million par value of securities as collateral for Lloyd’s which are due to be released prior to June 30, 2006, following the sale in 2005 of PXRE Limited, the sole capital provider to PXRE Lloyd’s Syndicate 1224 and reinsurance to close of the liabilities of PXRE Lloyd’s Syndicate 1224 into a Lloyd’s syndicate controlled by Chaucer.
In order to better protect PXRE against the risk of another severe catastrophe event or the occurrence of multiple significant catastrophe events, we sponsored two catastrophe bond transactions that closed during the fourth quarter of 2005. The first transaction was a $300.0 million collateralized reinsurance agreement with A&W I, a Cayman Island reinsurance company. This new reinsurance coverage is designed to protect PXRE from extreme catastrophe losses arising from hurricanes in the Eastern and Gulf coasts of the United States, windstorms in northern Europe and earthquakes in California over the next 5 years. This reinsurance provides two layers of protection over the next 5 years to PXRE. The first layer provides $200.0 million of coverage for losses arising from hurricanes in the Eastern and Gulf coasts of the United States, windstorms in northern Europe and earthquakes in California. The second layer provides $100.0 million of coverage for losses arising from hurricanes in the Eastern and Gulf coasts of the United States and windstorms in northern Europe. The amount of annual disbursements to be made by the Company for this transaction are approximately $26.0 million.
The reinsurance coverage provided by A&W I is based on a modeled loss trigger. PXRE created a series of notional portfolios of reinsurance contracts designed to closely mimic the exposures in PXRE’s assumed reinsurance portfolio. Upon the occurrence of a hurricane, windstorm or earthquake in the covered territories, the parameters of the catastrophe event are determined and modeled against the notional portfolios. If the modeled loss to the notional portfolio exceeds the attachment point for the peril at issue, then PXRE will make a recovery under the reinsurance agreement. The recovery is limited to PXRE’s ultimate net loss from the loss event. PXRE has the right to reset the notional portfolios after three years.
On November 8, 2005, A&W I financed the reinsurance coverage through the issuance of $300.0 million in catastrophe bonds pursuant to Rule 144A under the Securities Act of 1933.
The second transaction was a $250.0 million collateralized transaction with A&W II, a Cayman Island reinsurance company, which is accounted for as a derivative. It is designed to provide coverage to PXRE for second event losses in the same calendar year arising from hurricanes in the Eastern and Gulf coasts of the United States, windstorms in northern Europe and earthquakes in California. The agreement with A&W II provides two tranches of protection to PXRE for the risk that a second significant catastrophe loss arising from a hurricane in the Eastern and Gulf coasts of the United States, a windstorm in northern Europe or earthquake in California occurs following the occurrence of a first significant hurricane, windstorm or earthquake loss. The first tranche provides $125.0 million of protection from January 1, 2006 through December 31, 2006. The second tranche provides $125.0 million of protection from January 1, 2006 through December 31, 2008. The annual premium payments with respect to the A&W II facility are $15.6 million in 2006 and $7.9 million in 2007 and 2008, respectively.
85
The A&W II coverage is based on a modeled loss trigger. PXRE created a series of notional portfolios of reinsurance contracts designed to closely mimic the exposures in PXRE’s assumed reinsurance portfolio. Upon the occurrence of a hurricane, windstorm or earthquake in the covered territories, the parameters of the catastrophe event are determined and modeled against the notional portfolios. If the modeled loss to the notional portfolio exceeds the attachment point for the peril at issue, then the coverage is activated. Upon the occurrence of a second catastrophe event in the covered territories during that calendar year, the parameters of the catastrophe event are determined and modeled against the notional portfolios. If the modeled loss to the notional portfolio for the second event exceeds the attachment point for the peril at issue, then PXRE will make a recovery under the agreement. The recovery is based on modeled losses and is not limited to PXRE’s ultimate net loss from the loss event.
On December 21, 2005, A&W II financed the coverage through the issuance of $250.0 million in catastrophe bonds pursuant to Rule 144A under the Securities Act of 1933.
The reinsurance companies that are counterparties to these transactions are variable interest entities under the provisions of FIN 46R. The Company is not the primary beneficiary of these entities and is therefore not required to consolidate these entities in its consolidated financial statements.
Taxes
PXRE Delaware files U.S. income tax returns for itself and all of its direct or indirect U.S. subsidiaries that satisfy the stock ownership requirements for consolidation. PXRE Delaware is party to a tax allocation agreement concerning filing of consolidated federal income tax returns pursuant to which each of these U.S. subsidiaries makes tax payments to PXRE Delaware in an amount equal to the federal income tax payment that would have been payable by the relevant U.S. subsidiary for the year if it had filed a separate income tax return for that year. PXRE Delaware is required to provide payment of the consolidated federal income tax liability for the entire group. If the aggregate amount of tax payments made in any tax year by one of these U.S. subsidiaries is less than (or greater than) the annual tax liability for that U.S. subsidiary on a stand-alone basis for that year, the U.S. subsidiary will be required to make up the deficiency to PXRE Delaware (or will be entitled to receive a credit if payments exceed the separate return tax liability of that U.S. subsidiary).
Certain Risks and Uncertainties
Factors Affecting Future Results of Operations
Our future results of operations involve a number of risks and uncertainties, some of which are discussed below.
The downgrade in the ratings of our reinsurance subsidiaries by rating agencies will materially and negatively impact our business and results of operations.
86
In the aftermath of Hurricane Katrina, each of the major rating agencies placed the credit ratings of our reinsurance subsidiaries on CreditWatch negative or the equivalent, and S&P and A.M. Best initially downgraded their ratings from “A” to “A-.” On February 16, 2006, A.M. Best downgraded its financial strength rating from “A-” to “B++” with a negative outlook. On February 24, 2006, A.M. Best further downgraded its financial strength rating from “B++” to “B+” with negative implications. On February 16, 2006, S&P downgraded its counterparty credit and financial strength rating on PXRE Reinsurance and PXRE Bermuda from “A-” to “BBB+” and placed these ratings on CreditWatch with negative implications. On February 23, 2006 S&P further downgraded its counterparty credit and financial strength rating on PXRE Reinsurance and PXRE Bermuda from “BBB+” to “BBB-” where they remain on CreditWatch with negative implications. On February 17, 2006, Moody’s downgraded its insurance financial strength rating of PXRE Reinsurance from “Baa1” to “Baa2” and placed this rating under review for possible further downgrade. On February 28, 2006, Moody’s further downgraded its insurance financial strength rating of PXRE Reinsurance from “Baa2” to “Baa3” and placed this rating under review for possible further downgrade.
Our counterparty credit and financial strength ratings have now been downgraded to a level that is generally unacceptable to many of our reinsurance clients. Ratings have become an increasingly important factor in establishing the competitive position of reinsurance companies. Due to these recent ratings downgrades of our reinsurance subsidiaries by A.M. Best, S&P and Moody’s, our competitive position in the reinsurance industry has suffered and it is more difficult for us to retain our existing clients, expand our reinsurance portfolio and renew many of our existing reinsurance agreements, especially since we have been downgraded from the “A” category to the “B” category. This downgrade could result in a substantial loss of business as ceding companies and brokers that place such business move to other reinsurers with higher ratings. We cannot give any assurance regarding whether or to what extent the rating agencies may further downgrade our ratings.
The current financial strength ratings of PXRE Bermuda and PXRE Reinsurance are:
• A.M. Best: “B+” (Very good), sixth highest of fifteen rating levels; and
• S&P: “BBB-”, tenth highest of twenty-one rating levels.
These ratings are not evaluations directed to investors in our securities (including investors in our common shares) or a recommendation to buy, sell or hold our securities (including our common shares). Our ratings may be revised or revoked at the sole discretion of the rating agencies.
The decline in our ratings and reduction in our surplus will allow clients to terminate their contracts with us and, with respect to ceded reinsurance, may require us to transfer premiums retained by us into a beneficiary trust.
It is common for our assumed reinsurance contracts to contain terms that would allow our clients to cancel the contract if we are downgraded below various rating levels by one or more rating agencies or if our surplus is materially reduced.
87
Typically such cancellation clauses are triggered if A.M. Best or S&P were to downgrade us below “A-.” Whether a client will exercise such rights will depend, among other things, on the reasons for such a downgrade, the extent of the downgrade, the prevailing market conditions, the degree of unexpired coverage, and the pricing and availability of replacement reinsurance coverage. We cannot predict in advance whether and how many of our clients would actually exercise such rights or what effect such cancellations would have on our financial condition or future prospects, but such an effect could potentially be materially adverse. The recent downgrade, below “A-” by both S&P and A.M. Best, therefore, could result in a substantial loss of business if insurers, ceding companies and/or brokers that place such business move to other insurers and reinsurers with higher ratings. Based on premium volume, more than 75% of our reinsurance contracts in-force at January 1, 2006 contain such clauses. As of March 13, 2006, we had received notice of cancellation from approximately 33% of our clients, calculated using premiums with respect to in-force business as of January 1, 2006, and it is anticipated that this percentage will increase.
Certain of our ceded excess of loss reinsurance contracts may require us to transfer premiums currently retained by us on a funds withheld basis into a trust for the benefit of the reinsurers if A.M. Best were to downgrade us below “A-.” In addition, certain of our other ceded excess of loss reinsurance contracts contain provisions that give the reinsurer the right to cancel or commute the contract and require us to pay a termination fee. The amount of the termination fee would be dependent upon various factors, including level of loss activity.
We may not be able to identify or implement strategic alternatives for PXRE.
Our counterparty credit and financial strength ratings were downgraded by the major rating agencies in February 2006 to a level that is generally unacceptable to many of our reinsurance clients. This ratings downgrade is expected to have a significant negative impact on our financial condition, future results of operations and profitability. In light of the potential negative consequences of the rating downgrade, our Board of Directors has decided to explore strategic alternatives for PXRE and has retained Lazard as a financial advisor to assist in this process.
There are many possible alternatives that we are exploring which include, among others, a sale of PXRE, a sale of certain or substantially all of our assets, a merger with one or more other companies and a variety of alternate business strategies. Our Board of Directors has not excluded any possibility from consideration. We may not be able to identify or complete any of these alternatives that our Board of Directors finds to be in the shareholders’ best interests. Even if we are successful in identifying and completing a merger or sale of PXRE or one of the other strategic alternatives under consideration, we cannot provide any assurance about the financial impact or timing of the implementation of any such strategic alternatives or that any individual shareholder will determine that such strategic alternative is in his, her or its best interests.
If our Board of Directors concludes that no other strategic alternative would be in the best interests of our shareholders, it may determine that the best course of action is to place the reinsurance operations of PXRE into runoff and eventually commence an orderly winding up and liquidation of PXRE operations over some period of time that is not currently determinable.
88
If our Board of Directors concludes that no other strategic alternative would be in the best interests of our shareholders, it may determine that the best course of action is to place the reinsurance operations of PXRE into runoff. Once in run-off there are various options available to bring PXRE's business to a conclusion including pursuing an arrangement with its policyholders in which it estimates and pays out all existing and contingent liabilities with a view to liquidating PXRE in accordance with a procedure which is approved by a statutory majority of policyholders. Under Bermuda law this is referred to as a solvent scheme of arrangement and is, in effect, a global commutation of PXRE’s business.
Alternatively, a program of individual commutations could be pursued with a similar result. Following either a scheme or individual commutation program, PXRE would be placed into liquidation as a solvent entity (a voluntary liquidation approved by shareholders). In the event that PXRE were to become insolvent, the Company would have to be liquidated under the supervision of the Bermuda Supreme Court during which a court appointed liquidator of PXRE may or may not pursue a scheme of arrangement to shorten the time otherwise required to wind up PXRE’s business.
In a winding up or liquidation as described above, a liquidator would be appointed and would sell or otherwise dispose of our remaining assets, pay our existing liabilities, including contingent obligations (which would have to be estimated in advance of payment) and distribute net proceeds, if any, to our shareholders in one or more liquidating distributions. In a liquidation, we may not receive any material amounts for the sale or other disposition of our assets. Further, in a liquidation, we will have significant obligations, including the costs incurred by the independent liquidator appointed and the work required to estimate liabilities and realize assets. Additionally, if we do not generate sufficient revenue to support our continued operations, we will be required to reduce our cash balance to support our continued operations and the amount of any liquidation proceeds available for distribution to our shareholders would thereby be reduced. Accordingly, the amount and timing of distributions, if any, to shareholders in a liquidation cannot be determined because such would depend on a variety of factors, including the amount of proceeds received from any asset sales or dispositions, the time and amount required to resolve outstanding obligations and the amount of any reserves for future contingencies. If PXRE were to become insolvent, there will be no distributions payable to our shareholders.
If the Board of Directors elects to pursue a strategic alternative that does not involve the continuation of meaningful property catastrophe reinsurance business, there is a risk that the Company could incur material charges or termination fees in connection with our collateralized catastrophe facilities.
As part of its evaluation of potential strategic alternatives, the Board of Directors is also evaluating the continuing utility of PXRE’s two collateralized catastrophe facilities. During the fourth quarter of 2005, PXRE entered into two collateralized catastrophe facilities that provide $550.0 million of aggregate protection against losses arising from hurricanes in the Eastern and Gulf coasts of the United States, windstorms in northern Europe and earthquakes in California.
89
If the Board of Directors elects to pursue a strategic alternative that materially changes PXRE’s catastrophe risk profile, the Board of Directors may elect to explore the assignment or novation of PXRE’s rights and obligations under the collateralized catastrophe facilities to another insurance or reinsurance company. There can be no assurance that any other insurance or reinsurance company would be willing to accept such an assignment or novation, that note holders who funded the facilities would consent to such an assignment or novation, or that the cost of such an assignment or novation would not have a material adverse impact on PXRE. If PXRE was not able to successfully assign or novate its rights and obligations under these collateralized catastrophe facilities, PXRE could incur material termination fees and liabilities.
The first facility, A&W I, provides $300.0 million of collateralized catastrophe protection for a term that commenced on November 9, 2005 and is scheduled to terminate on November 15, 2010, unless terminated earlier. The annual premium payments due with respect to A&W I during its term are approximately $26.0 million. PXRE has the right to terminate the A&W I facility without penalty during the fifth year of the facility’s term. If the A&W I facility is terminated prior to such period, PXRE could be obligated to pay significant early terminations fees that could be as much as $17.5 million.
The second facility, A&W II, provides $250.0 million of collateralized catastrophe protection in two tranches. The first $125.0 million tranche commenced on January 1, 2006 and is scheduled to terminate on December 31, 2006. The second $125.0 million tranche commenced on January 1, 2006 and is scheduled to terminate on December 31, 2008. The annual premium payments with respect to the A&W II facility are $15.6 million in 2006 and $7.9 million in 2007 and 2008, respectively. If the A&W II facility is terminated prior to the end of the scheduled termination date of a tranche, PXRE could be obligated to pay significant early termination fees that could be as much as $11.4 million.
Our ability to continue to operate our business and to identify, evaluate and complete any strategic alternative are dependent on our ability to retain our management and other key employees, and we may not be able to do so.
We may have difficulty retaining our management and other key employees on whom we will depend to continue to operate our business and to assist in identifying, evaluating and completing any strategic alternative. If we are unable to do so for at least the time necessary to identify and implement a selected strategy, our continued business operations and our ability to identify, evaluate and complete a strategic alternative could be materially and adversely affected.
The market price of our common stock has declined and may decline further as a result of our announcements of increased loss estimates for losses due to Hurricanes Katrina, Rita and Wilma and the ratings downgrades we have experienced.
The closing market price of our common stock has declined from a high of $27.11 per common share at February 16, 2005 to a low of $3.01 at March 7, 2006. On March 13, 2006, the closing price per share of our common stock as reported on The New York Stock Exchange was $3.24 per share. We believe that the market price of our common stock has been significantly and adversely affected by the losses due to Hurricanes Katrina, Rita and Wilma and the downgrade in our ratings. We also believe that there is a risk that our common stock price may decline further in the future as a result of our decision to evaluate strategic alternatives. In addition, we believe that many of the other risk factors listed in this report may have a material adverse effect on our results of operations and financial condition and contribute to fluctuations in our common stock price.
90
Recent adverse events have affected the market price of our common shares, which may lead to securities litigation, administrative proceedings or both being brought against us.
Companies that experience material adverse events, such as having their financial strength ratings downgraded by rating agencies or their material contracts terminated, often experience significant market fluctuations that affect the prices of their securities and result in litigation, administrative proceedings or both. We have recently experienced material adverse events, including the downgrading of our ratings in February 2006, and the market price of our common shares has declined materially and may continue to do so, regardless of our financial condition or our ability to meet our contractual and financial obligations. Due to the decline in the market price of our common shares, there is a risk that significant individual lawsuits and securities class action litigation may be brought against us or that regulators may institute administrative proceedings against us, or both. As of March 13, 2006, we are not aware of any such litigation or administrative proceedings. While we would contest vigorously any such action, legal and administrative proceedings of this type are often expensive and can divert management’s attention and other resources away from other matters. Any such diversion of management’s attention or other resources could negatively and materially impact our business. In addition, the existence of significant litigation or administrative proceedings against us, or the perceived probability of such actions, could have a material adverse effect on the market price of our common shares and other securities.
Reserving for losses includes significant estimates, which are also subject to inherent uncertainties.
Our success is dependent upon our ability to accurately assess the risks associated with the businesses that we insure and reinsure. Claim reserves represent estimates involving underwriting, actuarial and statistical projections, at a given point in time, of our expectations of the ultimate settlement and administration costs of claims incurred. We utilize actuarial models as well as historical insurance industry loss development patterns to assist in the establishment of appropriate claim reserves. As a property catastrophe reinsurer, incurred losses are inherently more volatile than those of primary insurers and reinsurers of risks that have an established historical pattern of losses.
In reserving for catastrophe losses, our estimates are influenced by underwriting and loss information provided by our clients, industry catastrophe models and our internal analyses of this information. As an event matures, we rely more and more on our development patterns by type of event as well as contract information to project ultimate losses for the event. This process can cause our ultimate estimates to differ significantly from initial projections.
91
Our estimate of the ultimate incurred gross loss and loss expenses arising from Hurricanes Katrina, Rita and Wilma of $1,014.5 million as of December 31, 2005 is based mainly on modeling, a review of exposed reinsurance contracts, claims notices received from clients, discussions with clients and loss information provided by clients to underwriters as part of the underwriting submissions received in connection with the January 2006 renewal process. Although we have begun to receive loss notices with respect to Hurricanes Katrina, Rita and Wilma, we have paid less than 10% of our net incurred loss with respect to Hurricanes Katrina, Rita and Wilma as of December 31, 2005. In addition, our estimates are subject to a high level of uncertainty arising out of extremely complex and unique causation and coverage issues, including the appropriate attribution of losses to wind or flood damage as opposed to other perils such as fire, business interruption or civil commotion. The underlying policies generally contain exclusions for flood damage; however, water damage caused by wind may be covered. We expect that causation and coverage issues may not be resolved for a considerable period of time and may be influenced by evolving legal and regulatory developments.
Our actual losses from Hurricanes Katrina, Rita and Wilma may exceed our best estimate as a result of, among other things, the receipt of additional information from clients, the attribution of losses to coverages that for the purpose of our estimates we assumed would not be exposed, and inflation in repair costs due to the limited availability of labor and materials, in which case our financial results could be further materially adversely affected.
In developing our best estimate, we have also assumed flood damage exclusions contained in our cedents’ underlying insurance policies will be effective. We understand that various lawsuits have been filed seeking to invalidate such flood damage exclusions on various grounds, including a suit filed by the Attorney General for the State of Mississippi. If such lawsuits were to successfully invalidate the underlying flood damage exclusions, our liabilities for losses and loss expenses relating to Hurricane Katrina could prove to be inadequate, with a consequent adverse impact on our future earnings and shareholders’ equity.
In our casualty and finite business, given our limited experience we do not have established historical loss development patterns that can be used to establish loss liabilities. For these lines of business, we rely on loss development patterns that have been estimated from industry or client data, which may not accurately represent the true development pattern for the business we wrote. For property lines of business, reserves may differ from ultimate settlement values due to the infrequency of some types of catastrophe losses, the incompleteness of information in the wake of a major catastrophe and delay in receiving that information. We may also seek to enter into commutations of reinsurance contracts of exited lines of business. Actual claims and claim expenses paid, including commutations, may deviate, perhaps substantially, from the reserve estimates reflected in our financial statements.
If our claim reserves are determined to be inadequate, we will be required to increase claim reserves at the time of such determination with a corresponding reduction in our net income in the period in which the deficiency is rectified. It is possible that claims in respect of events that have occurred could exceed our claim reserves and have a material adverse effect on our results of operations, in a particular period, or our financial condition in general. As a compounding factor, although most insurance contracts have policy limits, the nature of property and casualty insurance and reinsurance is that losses can exceed policy limits for a variety of reasons and could significantly exceed the premiums received on the underlying policies, thereby further adversely affecting our financial condition.
92
Without the approval by our shareholders of a proposal to reduce our share premium account and reallocate certain capital to our contributed surplus account, we may be restricted by law from declaring or paying dividends to our shareholders in the future.
As a result of the losses arising from Hurricanes Katrina, Rita and Wilma, for Bermuda corporate law purposes, the realizable value of the Company’s assets ($2.1 billion) no longer exceeds the aggregate of our liabilities ($1.7 billion), our issued share capital ($130.4 million) and our share premium account ($550.0 million). As a result of this deficiency, we are currently prohibited by Bermuda corporate law from paying dividends or making distributions from our contributed surplus account to our shareholders.
In order that the Company can continue to have the flexibility to pay dividends to shareholders, the Board determined that it is in the best interests of the Company to reduce the share premium account to zero and allocate $550.0 million to the Company’s contributed surplus account. This reduction of our share premium account and reallocation to the contributed surplus account requires the approval of our shareholders to be effective. At our next Annual General Meeting of Shareholders, the Company intends to ask shareholders to approve a proposal to reduce our share premium account and transfer the $550.0 million balance to our contributed surplus account. If our shareholders do not approve this proposal, we may be restricted by Bermuda corporate law from declaring or paying dividends to our shareholders. Even if our shareholders approve this proposal and we are once again permitted by law to declare and pay dividends, we cannot guarantee that the Company will pay dividends to our shareholders at any time in the future, or that future losses or other events could not once again impair our ability to pay dividends to our shareholders.
Because of exposure to catastrophes, our financial results may vary significantly from period to period.
As a reinsurer of property catastrophe-type coverages in the worldwide marketplace, our operating results in any given period depend to a large extent on the number and magnitude of natural and man-made catastrophes such as hurricanes, windstorms, hailstorms, earthquakes, volcanic eruptions, fires, industrial explosions, freezes, riots and floods. For example, Hurricanes Katrina, Rita and Wilma resulted in a net impact of $806.9 million, after reinsurance recoveries on our outwards reinsurance program and the impact of inwards and outwards reinstatements and additional premiums as of December 31, 2005. While we may, depending on market conditions, purchase catastrophe retrocessional coverage for our own protection, the occurrence of one or more major catastrophes in any given period could nevertheless have a material adverse impact on our results of operations and financial condition and result in substantial liquidation of investments and outflows of cash as losses are paid.
93
We may be overexposed to losses in certain geographic areas for certain types of catastrophe events.
As we underwrite risks from a large number of insurers based on information generally supplied by reinsurance brokers, we may develop a concentration of exposure to loss in certain geographic areas prone to specific types of catastrophes. For example, we are significantly exposed to losses arising from hurricanes in the southeastern United States, earthquakes in California, the midwestern United States and Japan, and to windstorms in northern Europe. We have developed systems and software tools to monitor and manage the accumulation of our exposure to such losses and have established guidelines for maximum tolerable losses from a single event or multiple catastrophic events based on historical data. However, these risk limits were exceeded in Hurricane Katrina and no assurance can be given that these maximums will not be exceeded in some future catastrophe.
We may be overexposed to smaller catastrophe losses and for certain geographic areas and perils due to the cancellations of a substantial portion of our assumed reinsurance contracts following our recent ratings downgrade.
Over 75% of our assumed reinsurance contracts in-force as of January 1, 2006, based on premium volume, contain special termination provisions that allow our clients to cancel such contracts based on our recent ratings downgrade and/or loss of surplus. As of March 13, 2006, we had received notice of cancellation from approximately 33% of our clients, calculated using premiums with respect to in-force business as of January 1, 2006, and it is anticipated that this percentage will increase.
Our risk management program for our 2006 assumed reinsurance portfolio assumed that we would have significant gross premium written during 2006. It was assumed that such premium income would offset losses arising from small or medium catastrophe events. For example, during 2004, we incurred material losses from Hurricanes Charley, Frances, Ivan and Jeanne, but still experienced a loss ratio of 65.9% in our catastrophe and risk excess segment due to the significant volume of premium written during 2004. If many or all of our clients exercise their special cancellation rights, we will have significantly less premium income to offset smaller catastrophe losses.
Moreover, in purchasing reinsurance coverage to protect PXRE during 2006, we assumed that such gross premiums written would be available to offset smaller losses and; as a result most of the reinsurance coverage purchased by PXRE is designed to protect PXRE against larger catastrophe events. Therefore, although our aggregate exposures may be reduced due to widespread cancellations of our assumed reinsurance contracts, we may be overexposed to the risk of losses arising from smaller catastrophe events since our reinsurance protections may not respond to such small catastrophe events.
Finally, in underwriting our 2006 assumed reinsurance portfolio, we sought to build a portfolio that was balanced with respect to geographic region, peril and level of loss exposure. Since we have no control over which of our clients will cancel their reinsurance contracts, there is a significant risk that our remaining reinsurance portfolio will be unbalanced and overexposed to loss for certain geographic areas, perils and loss exposure levels.
94
We operate in a highly competitive environment and no assurance can be given that we will be able to compete effectively in this environment.
We compete with numerous companies, many of whom have higher credit ratings and substantially greater financial, marketing and management resources. Our ability to compete against such companies was substantially impaired when our counterparty credit and financial strength ratings were recently downgraded by the major rating agencies in February 2006 to a level that is generally unacceptable to many of our reinsurance clients. In light of our recent ratings downgrade and the material negative financial impact of the losses arising from Hurricanes Katrina, Rita and Wilma, no assurance can be given that we will be able to continue to compete successfully in the reinsurance markets in which we have historically operated.
We compete with reinsurers that provide property-based lines of reinsurance, such as ACE Tempest Reinsurance Ltd., Arch Reinsurance Ltd., Aspen Insurance Holdings Limited, AXIS Reinsurance Company, Endurance Specialty Insurance Ltd., Everest Reinsurance Company, IPC Re Limited, Lloyd’s of London syndicates, Montpelier Reinsurance Ltd., Munich Reinsurance Company, Partner Reinsurance Company Ltd., Platinum Underwriters Reinsurance, Inc., Renaissance Reinsurance Ltd., Swiss Reinsurance Company and XL Re Ltd. A number of reinsurers were also formed in Bermuda in the wake of Hurricanes Katrina, Rita and Wilma in 2005 and we expect them to provide additional competition.
Reinsurance prices may decline, which could affect our profitability.
Demand for reinsurance depends on numerous factors, including the frequency and severity of catastrophic events, levels of capacity, general economic conditions and underwriting results of primary property insurers. The supply of reinsurance is related to prevailing prices, recent loss experience and levels of surplus capacity. All of these factors fluctuate and may contribute to price declines generally in the reinsurance industry. Premium rates or other terms and conditions of trade may vary in the future. If any of these factors were to cause the demand for reinsurance to fall or the supply to rise, our profitability could be adversely affected.
We may require additional capital in the future.
Our future capital requirements depend on many factors, including our ability to retain our existing business, write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. Our capital needs may also be impacted by the strategic alternative path that the Board of Directors ultimately determines to pursue.
To the extent that the funds generated by our ongoing operations and existing capitalization are insufficient to fund future operating requirements, liquidity needs, growth expectations and cover claim payments, we may need to raise additional funds through financings. Any equity or debt financing, if available at all, may be on terms that are not favorable to us or may be dilutive to our shareholders. In addition, substantial sales of our equity in the public market, or the perception that such sales could occur, could adversely affect the market price of our common shares. If we cannot obtain adequate capital, our business, operating results and financial condition could be adversely affected in a material manner.
Our investment portfolio is subject to significant market and credit risks which could result in an adverse impact on our financial position or results.
Our invested assets consist primarily of debt instruments with fixed maturities, short-term investments, a diversified portfolio of hedge funds and, to a lesser extent, interests in mezzanine bond and equity limited partnerships. At December 31, 2005, 90.8% of PXRE’s investment portfolio consisted of fixed maturities and short-term investments and 9.2% consisted of hedge funds and other investments.
95
In February 2006, $490.5 million of fixed maturity investments were liquidated and the proceeds were invested in cash equivalents. This could have a material negative impact on our future income from our investment portfolio.
Our invested assets are subject to market-wide risks and fluctuations as well as to risks inherent in particular securities. Although we seek to preserve our capital, we have invested in a portfolio of hedge funds and other privately held securities. These investments are designed to provide diversification of risk; however, such investments entail substantial risks. There can be no assurance that our investment objectives will be achieved, and results may vary substantially over time. In addition, although we seek to employ investment strategies that are not correlated with our reinsurance exposures, losses in our investment portfolio may occur at the same time as underwriting losses and, therefore, exacerbate such losses’ adverse effect on us. While our primary objective is capital preservation, all our portfolios have a degree of risk. See “Investments.”
Risks Related to our Fixed Maturity Investments. We are exposed to potential losses from the risks inherent in our fixed maturity investments. The two most significant risks inherent in our fixed income portfolio are interest rate risk and credit risk:
• Interest Rate Risk
Our principal fixed maturity market risk exposure is to changes in U.S. interest rates. Changes in interest rates may affect the fair value of our fixed maturity portfolio and borrowings (in the form of trust preferred securities). Our holdings subject us to exposures in the treasury, municipal, and various asset-backed sectors. Changes in interest rates could also cause a potential underperformance in our exited finite coverages and shortfalls in cash flows necessary to pay fixed rate amounts due to exited finite contract counterparties.
• Credit Risk
We are also exposed to potential losses from changes in probability of default and from defaulting counterparties with respect to our investments. A majority of our investment portfolio consists of fixed maturities and short-term investments rated “A2” or “A” or better by Moody’s or S&P. The average credit rating of the fixed maturities and short-term investments at December 31, 2005 is “AA+.” Our investment portfolio also contains privately held fixed maturities that are not traded on a recognized exchange. A deterioration in the credit quality of our investments or our inability to liquidate any of our privately held investments promptly could have an adverse effect on our financial condition.
Risks Related to our Hedge Fund Investments. We are exposed to potential losses from the risks inherent in our portfolio of hedge funds. Our investment policies with respect to our hedge fund investments generally do not restrict us from participating in particular markets, strategies or investments. Further, our hedge fund investments may generally be deployed and redeployed in whatever investment strategies are deemed appropriate under prevailing economic and market conditions in an attempt to achieve capital appreciation, including, if appropriate, a concentration of investments in a relatively small group of strategies or hedge fund managers.
96
The three most significant risks inherent in our hedge fund portfolio are liquidity risk, credit risk and market risk:
• Liquidity Risk
Liquidity risk exists in the hedge fund portfolio because there are delays between giving notice to redeem a hedge fund investment and receiving proceeds. In February 2006, redemption orders were placed with our hedge funds in the amount of $150.0 million. We estimate that we will receive 50% of the cash by April 30, 2006, 80% by July 31, 2006, and 100% by March 31, 2007. The redemption terms are defined in the offering documents and generally require notice periods and time scales for settlement. We remain at risk during the notice period, which typically specifies a month or quarter end reference point at which to calculate redemption proceeds. The risk also exists that a hedge fund may be unable to meet its redemption obligations. A hedge fund may be faced with excessive redemption notices and illiquid underlying investments.
• Credit Risk
Credit risk exists in the hedge fund portfolio where hedge funds are net long in a particular security, or group of correlated securities. Where a hedge fund is net long in a security that defaults, or suffers an adverse credit event, we are exposed to loss. Our exposure to any individual hedge fund is limited to the carrying value of the investment, and we invest in a diversified portfolio of hedge funds that utilize different strategies and markets to reduce this risk. However, different hedge funds in the portfolio may be net long in the same or correlated securities at the same time, which could have an adverse effect on the value of the portfolio and thus our financial condition.
• Market Risk
We invest in hedge funds that trade in securities using strategies that are generally market neutral. The hedge fund investments do not generally benefit from rising equity or bond markets, and have demonstrated historically low correlation of returns to equity market indices. However, the hedge funds may maintain leveraged net long positions, and this can expose us to market risks.
Because we depend on a few reinsurance brokers for a large portion of revenue, loss of business provided by any one or more of them could adversely affect us.
We market our reinsurance products worldwide exclusively through reinsurance brokers. Four brokerage firms accounted for approximately 80%, 78% and 78% of our gross premiums written in each of the years ended December 31, 2005, 2004 and 2003, respectively. Approximately 31%, 25%, 13% and 11% of gross premiums written in fiscal year 2005 were arranged through Benfield Greig Ltd., the worldwide branch offices of Guy Carpenter & Company, Inc. (a subsidiary of Marsh & McLennan Companies, Inc.), Aon Group Ltd. and Willis Re. Inc., respectively.
97
Each of these brokers have security guidelines that generally impose various limitations and restrictions on the placement of reinsurance contracts with a reinsurer with a financial strength rating of less than “A-,” including requiring a client’s written consent prior to the placement of any reinsurance contract with a reinsurer with a sub-par credit rating. Loss of all or a substantial portion of the business provided by these brokers could have a material adverse effect on our business.
The impact of investigations of broker fee and placement arrangements could adversely impact our ability to write more business.
Investigations of broker placement and compensation practices initiated by the Attorney General’s office of certain states including New York, together with recently filed class action lawsuits initiated against such broker entities and certain reinsurance companies, have challenged the legality of certain activities conducted by these brokers and companies. Various brokers with whom we do business are included within these investigations and lawsuits. The investigations and suits challenge, among other things, the appropriateness of setting fees paid to brokers based on the volume of business placed by a broker with a particular insurer or reinsurer; the payment of contingent fees to brokers by insurers or reinsurers because of an alleged conflict of interest arising from such fee arrangements; the nondisclosure by brokers to their clients of contingent fees paid to them by insurers and reinsurers, bid rigging and tying the receipt of direct insurance to placing reinsurance through the same broker. Because these investigations and suits have not all been completed or resolved, it is not possible to determine their ultimate impact upon the broker reinsurance market and reinsurers, including us. However, because of our reliance on the broker reinsurance market for future business, any governmental actions or judicial decisions which have the effect of impairing the broker reinsurance market could materially impact our ability to underwrite business. In addition, to the extent that any of the arrangements into which we routinely enter with our brokers were determined to be unlawful, we could be fined or otherwise penalized. Further, to the extent that any of the brokers with whom we do business suffer financial difficulties as a result of the investigations or proceedings, we could suffer increased credit risk. See “Our reliance on reinsurance brokers exposes us to their credit risk” below.
We have exited the finite reinsurance business, but claims in respect of finite reinsurance could have an adverse effect on our results of operations.
Finite risk reinsurance contracts are highly customized and typically involve complicated structural elements. GAAP governs whether or not a contract should be accounted for as reinsurance. Contracts that do not meet these GAAP requirements may not be accounted for as reinsurance and are required to be accounted for as deposits. As reported in the past year, certain finite insurance and reinsurance arrangements are coming under scrutiny by the New York Attorney General’s Office, the Securities and Exchange Commission and other governmental authorities. According to the press, investigators have asserted that the contracts in question were accounted for in an improper or fraudulent manner.
98
We sold finite reinsurance prior to June 30, 2004, and from time to time, have purchased finite reinsurance to which we are a party. Although we have received no request for information or documents in connection with the investigations with respect to any finite reinsurance we sold or purchased from time to time, certain of our customers or reinsurers have been asked to provide or have provided documents and information in the framework of these investigations with respect to reinsurance contracts to which we are a party. Any claim challenging the appropriateness of the accounting treatment of the finite contracts we underwrote or purchased could result in negative publicity, costs and, in the event of any regulatory or judicial decision being entered against us, ultimately fines and penalties, all of which could have a material adverse effect on our business and results of operations.
Our reliance on reinsurance brokers exposes us to their credit risk.
In accordance with industry practice, we frequently pay amounts owed on claims under our policies to reinsurance brokers, and these brokers, in turn, pay these amounts over to the insurers that have reinsured a portion of their liabilities with us (we refer to these insurers as ceding insurers). In some jurisdictions, if a broker fails to make such a payment, we might remain liable to the ceding insurer for the deficiency. Conversely, in certain jurisdictions, when the ceding insurer pays premiums for these policies to reinsurance brokers for payment over to us, these premiums are considered to have been paid and the ceding insurer will no longer be liable to us for those amounts, whether or not we have actually received the premiums. We are aware of one instance in recent years, involving an insignificant amount, in which a broker did not forward premiums to us. Consequently, in connection with the settlement of reinsurance balances, we assume a degree of credit risk associated with brokers around the world.
We may be adversely affected by foreign currency fluctuations.
Although our functional currency is the U.S. dollar, premium receivables and loss reserves include business denominated in currencies other than U.S. dollars. We are exposed to the possibility of significant claims in currencies other than U.S. dollars. We may, from time to time, experience losses resulting from fluctuations in the values of these non-U.S. currencies, which could adversely affect our operating results. While we hold positions denominated in foreign currencies to mitigate, in part, the effects of currency fluctuations on our results of operations, we currently do not hedge our currency exposures before a catastrophic event that may produce a claim.
Retrocessional reinsurance subjects us to credit risk and may become unavailable on acceptable terms.
In order to limit the effect of large and multiple losses upon our financial condition, we buy reinsurance for our own account. This type of insurance is known as retrocessional reinsurance. From time to time, market conditions have limited, and in some cases have prevented, reinsurers from obtaining the types and amounts of reinsurance which they consider adequate for their business needs. Accordingly, we may not be able to obtain our desired amounts of retrocessional reinsurance. In addition, even if we are able to obtain such retrocessional reinsurance, we may not be able to negotiate terms as favorable to us as in prior years. In difficult market conditions, pricing for our retrocessional reinsurance products may improve, but conversely, obtaining retrocessional reinsurance for our own account on favorable terms can become more difficult.
99
A retrocessionaire’s insolvency or its inability or unwillingness to make payments under the terms of a retrocessional reinsurance treaty with us could have a material adverse effect on us. Therefore, our retrocessions subject us to credit risks because the ceding of risk to retrocessionaires does not relieve us of our liability to our clients. In the event that we cede business to a retrocessionaire, we must still pay on claims of our cedent even if we are not paid by the retrocessionaire.
We have exhausted our retrocessional coverage with respect to Hurricane Katrina, leaving us exposed to further losses.
Based on our current estimate of losses related to Hurricane Katrina, we have exhausted our retrocessional protection with respect to this event, meaning that we have no retrocessional coverage available should our Hurricane Katrina losses prove to be greater than currently estimated. We cannot be sure that retrocessional coverage will be available to us on acceptable terms, or at all, in the future. Our business, results of operations and financial condition could be materially adversely impacted by additional losses related to Hurricane Katrina.
Recoveries under portions of our collateralized catastrophe facilities are triggered by modeled loss to a notional portfolio, rather than our actual losses arising from a catastrophe event, which creates a potential mismatch between the risks assumed through our inwards reinsurance business and the protection afforded by these facilities.
During the fourth quarter of 2005, PXRE entered into two collateralized facilities that provide $550.0 million of aggregate protection against losses arising from hurricanes in the Eastern and Gulf coasts of the United States, windstorms in northern Europe and earthquakes in California. The coverage under both facilities is based on a modeled loss trigger. PXRE created a series of notional portfolios of reinsurance contracts designed to closely mimic the exposures in PXRE’s assumed reinsurance portfolio. Upon the occurrence of a hurricane, windstorm or earthquake in the covered territories, the parameters of the catastrophe event are determined and modeled against the notional portfolios. If the modeled loss to the notional portfolio exceeds the attachment point for the peril at issue, then PXRE will make a recovery under the agreement. If such a hurricane, windstorm or earthquake were to occur, there is a risk that the actual losses incurred by PXRE could exceed the modeled loss to the notional portfolios and that the actual benefit of these facilities could be substantially less than expected.
Our inability to provide the necessary collateral could affect our ability to offer reinsurance in certain markets.
PXRE Bermuda is not licensed or admitted as an insurer in any jurisdiction other than Bermuda. Because many jurisdictions do not permit insurance companies to take credit for reinsurance obtained from unlicensed or non-admitted insurers on their statutory financial statements unless appropriate security mechanisms are in place, we anticipate that our reinsurance clients will typically require PXRE Bermuda to post a letter of credit or other collateral. If we are unable to arrange for security on commercially reasonable terms, PXRE Bermuda could be limited in its ability to write business for certain of our clients.
100
As of March 1, 2006, we have $650.0 million committed letter of credit facilities and an uncommitted facility that allows for letters of credit to be issued subject to satisfactory collateral being provided to the issuing bank by the Company.
At December 31, 2005, the Company had issued letter of credits in the amount of $284.3 million which are secured by cash and securities with a fair value of $405.7 million.
The insurance and reinsurance business is historically cyclical, and we may experience periods with excess underwriting capacity and unfavorable premium rates; conversely, we may have a shortage of underwriting capacity when premium rates are strong.
Historically, insurers and reinsurers have experienced significant fluctuations in operating results due to competition, frequency and severity of catastrophic events, levels of capacity, general economic conditions and other factors. The supply of insurance and reinsurance is related to prevailing prices, the level of insured losses and the level of industry surplus which, in turn, may fluctuate in response to changes in rates of return on investments being earned in the insurance and reinsurance industry. As a result, the insurance and reinsurance business historically has been a cyclical industry characterized by periods of intense price competition due to excessive underwriting capacity as well as periods when shortages of capacity permitted favorable premium levels. Our recent growth from January 1, 2002 through December 31, 2005 relates in part to improved industry pricing, but the supply of insurance and reinsurance may increase, either by capital provided by new entrants or by the commitment of additional capital by existing insurers or reinsurers, which may cause prices to decrease. Any of these factors could lead to an adverse effect on our profits. In addition to these considerations, changes in the frequency and severity of losses suffered by insureds and insurers may affect the cycles of the insurance and reinsurance business significantly, and we expect to experience the effects of such cyclicality.
Risks Related to Regulation
Regulatory constraints may restrict our ability to operate our business.
General. Our insurance and reinsurance subsidiaries may not be able to obtain or maintain necessary licenses, permits, authorizations or accreditations in locales where we currently engage in business or in new locales, or may be able to do so only at significant cost. In addition, we may not be able to comply fully with, or obtain appropriate exemptions from, the wide variety of laws and regulations applicable to insurance or reinsurance companies or holding companies. Failure to comply with or to obtain appropriate authorizations and/or exemptions under any applicable laws could result in restrictions on our ability to do business or certain activities that are regulated in one or more of the jurisdictions in which we operate and could subject us to fines and other sanctions, which could have a material adverse effect on our business.
101
PXRE Bermuda. PXRE Bermuda is registered as a Class 4 Bermuda insurance and reinsurance company. Among other matters, Bermuda statutes, regulations and policies of the BMA, require PXRE Bermuda to maintain minimum levels of statutory capital, surplus and liquidity, to meet solvency standards, to obtain prior approval of ownership and transfer of shares and to submit to certain periodic examinations of its financial condition. These statutes and regulations may, in effect, restrict PXRE Bermuda’s ability to write insurance and reinsurance policies, to make certain investments and to distribute funds.
The offshore insurance and reinsurance regulatory environment has become subject to increased scrutiny in many jurisdictions, including the United States and various states within the United States. Compliance with any new laws or regulations regulating offshore insurers or reinsurers could have a material adverse effect on our business. In addition, although PXRE Bermuda does not believe it is or will be in violation of insurance laws or regulations of any jurisdiction outside Bermuda, inquiries or challenges to PXRE Bermuda’s insurance or reinsurance activities may still be raised in the future.
PXRE U.S. Subsidiaries. PXRE Delaware and PXRE Reinsurance are subject to regulation under the insurance statutes of various U.S. states, including Connecticut, the domiciliary state of PXRE Reinsurance. The regulation and supervision to which PXRE Reinsurance is subject relates primarily to the standards of solvency that must be met and maintained, licensing requirements for reinsurers, the nature of and limitations on investments, deposits of securities for the benefit of a reinsured, methods of accounting, periodic examinations of the financial condition and affairs of reinsurers, the form and content of reports of financial condition required to be filed, reserves for losses and other matters. In general, such regulation is for the protection of the reinsureds and policyholders rather than investors.
In recent years, the U.S. insurance regulatory framework has come under increased federal scrutiny, and some state legislators have considered or enacted laws that may alter or increase state regulation of insurance and reinsurance companies and holding companies. Moreover, the NAIC, which is an association of the insurance commissioners of all 50 states and the District of Columbia, and state insurance regulators regularly reexamine existing laws and regulations.
Changes in the laws and regulations to which our insurance and reinsurance subsidiaries are subject or the interpretation of these laws and regulations could have a material adverse effect on our business or results of operations.
If PXRE Bermuda becomes subject to insurance statutes and regulations in jurisdictions other than Bermuda or there is a change to Bermuda law or regulations or application of Bermuda law or regulations, there could be a significant and negative impact on our business.
As a registered Bermuda Class 4 insurer, PXRE Bermuda is subject to regulation and supervision in Bermuda. Bermuda insurance statutes, regulations and policies of the BMA require PXRE Bermuda to, among other things:
| | • | maintain a minimum level of capital, surplus and liquidity; |
102
| | • | satisfy solvency standards; |
| | | |
| | • | restrict dividends and distributions; |
| | | |
| | • | obtain prior approval of ownership and transfer of shares; |
| | | |
| | • | appoint an approved loss reserve specialist; |
| | | |
| | • | maintain a principal office and appoint and maintain a principal representative in Bermuda; and |
| | | |
| | • | provide for the performance of certain periodic examinations of PXRE Bermuda and its financial condition. |
These statutes and regulations may, in effect, restrict our ability to write reinsurance policies, to distribute funds and to pursue our investment strategy.
We do not presently intend that PXRE Bermuda will be admitted to do business in any jurisdiction in the United States, the United Kingdom or elsewhere (other than Bermuda). However, we cannot assure you that insurance regulators in the United States, the United Kingdom or elsewhere will not review the activities of PXRE Bermuda, or related companies or its agents and claim that PXRE Bermuda is subject to such jurisdiction’s licensing requirements. If any such claim is successful and PXRE Bermuda must obtain a license, we may be subject to taxation in such jurisdiction. (In certain circumstances, PXRE may be subject to tax in a jurisdiction even if it is not licensed by such jurisdiction. See “Risks Related to Taxation.”) In addition PXRE Bermuda is subject to indirect regulatory requirements imposed by jurisdictions that may limit its ability to provide insurance or reinsurance. For example, PXRE Bermuda’s ability to write insurance or reinsurance may be subject, in certain cases, to arrangements satisfactory to applicable regulatory bodies. Proposed legislation and regulations may have the effect of imposing additional requirements upon, or restricting the market for, alien insurers or reinsurers with whom domestic companies place business.
Generally, Bermuda insurance statutes and regulations applicable to PXRE Bermuda are less restrictive than those that would be applicable if it were governed by the laws of any state in the United States. In the past, there have been congressional and other initiatives in the United States regarding proposals to supervise and regulate insurers domiciled outside the United States. If in the future PXRE Bermuda becomes subject to any insurance laws of the United States or any state thereof or of any other jurisdiction, we cannot assure you that PXRE Bermuda would be in compliance with those laws or that coming into compliance with those laws would not have a significant and negative effect on PXRE Bermuda’s business.
The process of obtaining licenses is very time consuming and costly, and we may not be able to become licensed in a jurisdiction other than Bermuda, should we choose to do so. The modification of the conduct of our business resulting from our becoming licensed in certain jurisdictions could significantly and negatively affect our business. In addition our inability to comply with insurance statutes and regulations could significantly and adversely affect our business by limiting our ability to conduct business as well as subjecting us to penalties and fines.
103
Because we are incorporated in Bermuda, we are subject to changes of Bermuda law and regulation that may have an adverse impact on our operations, including imposition of tax liability or increased regulatory supervision. In addition, we will be exposed to changes in the political environment in Bermuda. The Bermuda insurance and reinsurance regulatory framework recently has become subject to increased scrutiny in many jurisdictions, including in the United States and in various states within the United States. We cannot predict the future impact on our operations of changes in the laws and regulations to which we are or may become subject.
We may be unable to obtain extensions of work permits for our employees, which may cause our business to be adversely affected.
Under Bermuda law, non-Bermudians (other than spouses of Bermudians or holders of permanent residence certificates) may not engage in any gainful occupation in Bermuda without the specific permission of the appropriate government authority. The Bermuda government will issue a work permit for a specific period of time, which may be extended upon showing that, after proper public advertisements, no Bermudian (or spouse of a Bermudian or holder of a permanent residence certificate) is available who meets the minimum standards for the advertised position. The Bermuda government has a policy that limits the duration of work permits to six years, subject to certain exemptions for key employees. A significant number of our key officers, including our Chief Executive Officer, an executive vice president and key reinsurance underwriters are working in Bermuda under work permits that will expire over the next two years. The Bermuda government could refuse to extend these work permits. If any of our senior executive officers were not permitted to remain in Bermuda, our operations could be disrupted and our financial performance could be adversely affected.
Recent adverse events impacting our business that have led us to consider strategic alternatives could lead to regulatory inquiries and adoption of any course of action that resulted in a change of control will require regulatory approval.
We have recently experienced material adverse events, including significant losses in 2005 and the downgrading of our ratings in February 2006. As a result, regulators having jurisdiction over one or more of our insurance subsidiaries could institute inquiries or proceedings against them. Any such regulatory action could impact our ability to write insurance business in some jurisdictions. In addition, the approval of insurance regulators would be required for the implementation of strategic alternatives that we may pursue, particularly any one involving a change of control of such subsidiaries. A significant delay or the denial of any required regulatory approval could negatively impact our ability to put into effect a strategic alternative that we consider beneficial to our business, which could have a material adverse impact on our results of operations and financial condition. In addition, this could have a material adverse effect on the market price of our securities.
104
Risks Related to an Investment in Our Common Shares
Our stock price and trading volume may be subject to significant fluctuations. Our stock price and trading volume may fluctuate in response to a number of events and factors, including:
| | • | the results of the Board of Directors’ exploration of strategic alternatives and the implementation of, or failure to implement, the strategic alternative selected by the Board of Directors; |
| | | |
| | • | potential shareholder litigation and regulatory investigations relating to the recent decline in our share price, ratings downgrade and catastrophe losses; |
| | | |
| | • | natural catastrophes or other events that may impact or be perceived by investors as impacting the insurance industry, generally, and the reinsurance industry, in particular; |
| | | |
| | • | quarterly variations in our operating results; |
| | | |
| | • | changes in the market’s expectations about our future operating results; |
| | | |
| | • | changes in financial estimates and recommendations by securities analysts concerning us or the reinsurance industry generally; |
| | | |
| | • | further changes in the credit rating assigned to our claims-paying ability by S&P, A.M. Best or other similar rating agency; |
| | | |
| | • | operating and stock price performance of other companies that investors may deem comparable; |
| | | |
| | • | news reports relating to our business and trends in our markets; |
| | | |
| | • | changes in the laws and regulations affecting our business; |
| | | |
| | • | acquisitions and financings by us or others in our industry; and |
| | | |
| | • | sales or acquisitions of substantial amounts of our common stock by our directors and executive officers or principal shareholders, or the perception that such sales could occur. |
In addition, in recent years the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance. These broad market fluctuations may materially adversely affect our stock price, regardless of our operating results.
We are a holding company and if our subsidiaries do not make dividend payments to us, we may not be able to pay dividends or other obligations.
105
We are a holding company with no operations or significant assets other than the capital stock of our subsidiaries. We effected an internal reorganization of our subsidiaries on March 15, 2005. The purpose of the reorganization was to consolidate all of our non-Bermudian subsidiaries under a newly formed holding company established in Ireland, PXRE Ireland. PXRE Ireland is a wholly owned subsidiary of PXRE Bermuda. In the reorganization, PXRE Reinsurance (Barbados) Ltd. distributed all of the common shares of PXRE Delaware to PXRE Bermuda. PXRE Bermuda then contributed the common shares of PXRE Delaware and the common shares of PXRE Europe to PXRE Ireland.
We rely primarily on cash dividends from PXRE Reinsurance, PXRE Ireland and PXRE Bermuda to pay our operating expenses, including debt service payments, shareholder dividends, if any, income taxes and other obligations that may arise from time to time. We expect future dividends and other permitted payments from these subsidiaries to be our principal source of funds to pay expenses and dividends. The payment of dividends by our reinsurance subsidiaries to us is limited under Bermuda law, Irish law and under certain insurance statutes of various U.S. states in which they are licensed to transact business. PXRE Reinsurance is subject to state regulatory restrictions that limit the maximum amount of annual dividends or other distributions, including loans or cash advances, available to stockholders without prior approval of the Insurance Commissioner of the State of Connecticut. As of January 1, 2006, PXRE Reinsurance cannot pay any dividends without the prior approval of the Insurance Commissioner of the State of Connecticut.
Bermuda insurance laws require PXRE Bermuda to maintain certain measures of solvency and liquidity, and further limit the amount by which we can reduce surplus without prior regulatory approval. Cash dividend payments to be made by us on our preferred shares and common shares or interest payments on our debt securities may also be affected by any inability to rely on payments from our subsidiaries.
Some aspects of our corporate structure and insurance regulations may discourage third-party takeovers and other transactions and may result in the entrenchment of incumbent management.
Under our bye-laws, subject to certain exceptions and to waiver by our board of directors on a case by case basis, no transfer of our shares is permitted if such transfer would result in a shareholder owning, directly or indirectly, more than 9.9% of the voting power of our outstanding shares, including our common shares, or more than 9.9% of the outstanding shares of any class of our share capital. Ownership is broadly defined in our bye-laws. We may refuse to register any such transfer on our share transfer records. A transferee will be permitted to promptly dispose of any of our shares purchased which violate the restriction and as to the transfer of which registration is refused.
Our bye-laws provide for a classified board of directors. The directors of the class elected at each annual general meeting hold office for a term of three years, with the term of each class expiring at successive annual general meetings of shareholders. Under our bye-laws, the vote of 66 2/3% of the outstanding shares entitled to vote and the approval of a majority of the board is required to amend bye-laws regarding appointment and removal of directors, remuneration, powers and duties of the board, indemnification of directors and officers, director’s interests and the procedures for amending bye-laws.
106
In the event that we become aware of a shareholder owning more than 9.9% of the voting power of our outstanding shares after a transfer of shares has been registered, our bye-laws provide that, subject to the same exceptions and waiver procedures, the voting rights with respect to our shares owned by any such shareholder will be limited to a voting power of 9.9%, subject only to the further limitation that no shareholder allocated any such voting rights may exceed the 9.9% limitation as a result of such limitation. The board of directors may waive this limitation, and has determined to waive this limitation with respect to Capital Z Financial Services Fund II, L.P., Capital Z Financial Services Private Fund II, L.P. (which, together with Capital Z Financial Services Fund II, L.P., we refer to as “Capital Z”) and certain of Capital Z’s affiliates.
In addition, our ownership of U.S. subsidiaries can, under applicable state insurance company laws and regulations, delay or impede a change of control of us. Under applicable insurance regulations, any proposed purchase of 10% or more of our voting securities would require the prior approval of the relevant insurance regulatory authorities.
The provisions described above may have the effect of making more difficult or discouraging unsolicited takeover bids from third parties. To the extent that these effects occur, shareholders could be deprived of opportunities to realize takeover premiums for their shares and the market price of their shares could be depressed. In addition, these provisions could also result in the entrenchment of incumbent management.
U.S. persons who own our common shares may have more difficulty in protecting their interests than U.S. persons who are shareholders of a U.S. corporation.
The Companies Act, which applies to us, differs in certain material respects from laws generally applicable to U.S. corporations and their shareholders. Set forth below is a summary of certain significant provisions of the Companies Act which includes, where relevant, information on modifications thereto adopted pursuant to our bye-laws, applicable to us, which differ in certain respects from provisions of Delaware corporate law. Because the following statements are summaries, they do not discuss all aspects of Bermuda law that may be relevant to us and our shareholders.
Interested Directors.
Under Bermuda law and our bye-laws, a transaction entered into by us, in which a director has an interest, will not be voidable by us, and such director will not be liable to us for any profit realized pursuant to such transaction, provided the nature of the interest is disclosed at the first opportunity at a meeting of directors, or in writing to the directors. In addition, our bye-laws allow a director to be taken into account in determining whether a quorum is present and to vote on a transaction in which that director has an interest following a declaration of the interest pursuant to the Companies Act provided that the director is not disqualified from doing so by the chairman of the meeting. Under Delaware law, such transaction would not be voidable if:
107
| | • | the material facts as to such interested director’s relationship or interests were disclosed or were known to the board of directors and the board of directors in good faith authorized the transaction by the affirmative vote of a majority of the disinterested directors; |
| | | |
| | • | such material facts were disclosed or were known to the shareholders entitled to vote on such transaction and the transaction was specifically approved in good faith by vote of the majority of shares entitled to vote thereon; or |
| | | |
| | • | the transaction was fair as to the corporation as of the time it was authorized, approved or ratified. Under Delaware law, such interested director could be held liable for a transaction in which such director derived an improper personal benefit. |
Certain Transactions with Significant Shareholders.
As a Bermuda company, we may enter into certain business transactions with our significant shareholders, including asset sales, in which a significant shareholder receives, or could receive, a financial benefit that is greater than that received, or to be received, by other shareholders with prior approval from our board of directors but without obtaining prior approval from our shareholders. Amalgamations require the approval of the board of directors and, except in the case of amalgamations with and between wholly-owned subsidiaries, a resolution of shareholders approved by the affirmative vote of shareholders holding a majority of the voting power of the then outstanding shares entitled to vote. If we were a Delaware corporation, we would need, subject to certain exceptions, prior approval from shareholders holding at least two-thirds of our outstanding common stock not owned by such interested shareholder to enter into a business combination (which, for this purpose, includes mergers and asset sales of greater than 10% of our assets that would otherwise be considered transactions in the ordinary course of business) with an interested shareholder for a period of three years from the time the person became an interested shareholder, unless we opted out of the relevant Delaware statute.
Shareholders’ Suits.
The rights of shareholders under Bermuda law are not as extensive as the rights of shareholders in many U.S. jurisdictions. Class actions and derivative actions are generally not available to shareholders under the laws of Bermuda. However, the Bermuda courts ordinarily would be expected to follow English case law precedent, which would permit a shareholder to commence an action in our name to remedy a wrong done to us where an act is alleged to be beyond our corporate power, is illegal or would result in the violation of our memorandum of association or bye-laws. Furthermore, consideration would be given by the court to acts that are alleged to constitute a fraud against the minority shareholders or where an act requires the approval of a greater percentage of our shareholders than actually approved it. The winning party in such an action generally would be able to recover a portion of attorneys’ fees incurred in connection with such action. Our bye-laws provide that shareholders waive all claims or rights of action that they might have, individually or in our right, against any director or officer for any act or failure to act in the performance of such director’s or officer’s duties, except with respect to any fraud or dishonesty of such director or officer. Class actions and derivative actions generally are available to shareholders under Delaware law for, among other things, breach of fiduciary duty, corporate waste and actions not taken in accordance with applicable law. In such actions, the court has discretion to permit the winning party to recover attorneys’ fees incurred in connection with such action.
108
Indemnification of Directors and Officers.
Under Bermuda law and our bye-laws, we may indemnify our directors, officers or any other person appointed to a committee of the board of directors (and their respective heirs, executors or administrators) to the full extent permitted by law against all actions, costs, charges, liabilities, loss, damage or expense incurred or sustained by such person by reason of any act done, concurred in or omitted in the conduct of our business or in the discharge of his/her duties; provided that such indemnification shall not extend to any matter in which any of such persons is found, in a final judgment or decree not subject to appeal, to have committed fraud or dishonesty. Under Delaware law, a corporation may indemnify a director or officer of the corporation against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in defense of an action, suit or proceeding by reason of such position if (i) such director or officer acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and (ii) with respect to any criminal action or proceeding, such director or officer had no reasonable cause to believe his conduct was unlawful.
Committees of the Board of Directors.
Our bye-laws provide, as permitted by Bermuda law, that the board of directors may delegate any of its powers to committees that the board appoints, and those committees may consist partly or entirely of non-directors. Delaware law allows the board of directors of a corporation to delegate many of its powers to committees, but those committees may consist only of directors.
Our shareholders may have difficulty effecting service of process on us or enforcing judgments against us in the United States.
We are incorporated pursuant to the laws of Bermuda and our business is based in Bermuda. In addition, certain of our directors and officers reside outside the United States, and all or a substantial portion of our assets and the assets of such persons are located in jurisdictions outside the United States. As such, we have been advised that there is doubt as to whether:
| | • | a holder of our common shares would be able to enforce, in the courts of Bermuda, judgments of United States courts against persons who reside in Bermuda based upon the civil liability provisions of the United States federal securities laws; |
| | | |
| | • | a holder of our common shares would be able to enforce, in the courts of Bermuda, judgments of United States courts based upon the civil liability provisions of the United States federal securities laws; and |
109
| | • | a holder of our common shares would be able to bring an original action in the Bermuda courts to enforce liabilities against us or our directors or officers, as well as our independent accountants, who reside outside the United States based solely upon United States federal securities laws. |
Further, we have been advised that there is no treaty in effect between the United States and Bermuda providing for the enforcement of judgments of United States courts, and there are grounds upon which Bermuda courts may not enforce judgments of United States courts. Because judgments of United States courts are not automatically enforceable in Bermuda, it may be difficult for our shareholders to recover against us based on such judgments.
The anti-dilution protection afforded to the holders of our outstanding preferred shares could cause substantial dilution to the holders of our common shares. The sale, following conversion, of substantial amounts of our common shares by the holders of the preferred shares could cause the market price of our common shares to decline significantly.
In April 2002, we privately placed Series A, Series B and Series C convertible preferred shares with several private equity investors. These investors have the right to nominate four directors for election to the board of directors, and were granted demand and other registration rights. The interest of the preferred share investors may differ materially from the interests of our common shareholders, and these investors could take actions or make decisions that are not in the best interests of our common shareholders.
The anti-dilution protections afforded to the preferred shareholders could have a material dilutive effect on our common shareholders. Each preferred share, in whole or in part, is convertible at any time at the option of the holder into convertible common shares for that series according to a formula set forth in the description of stock. The convertible common shares are, in turn, convertible into common shares on a one-for-one basis. The number of convertible common shares per preferred shares issuable upon any conversion will be determined by dividing a liquidation preference for the series equal to the aggregate original purchase price of the preferred shares plus accrued but unpaid dividends thereon, by the conversion price then in effect. The conversion price is subject to adjustment to avoid dilution in the event of recapitalization, reclassification, stock split, consolidation, merger, amalgamation or other similar event or an issuance of additional common shares in a private placement below the fair market value or in a registered public offering below 95% of fair market value or without consideration. In addition, the conversion price is subject to adjustment for certain loss and loss expense development on reserves for losses incurred on or before September 30, 2001 and for any liability or loss arising out of pending material litigation on December 10, 2001. As of March 13, 2006, the outstanding convertible common shares and preferred shares were ultimately convertible into 5.1 million common shares, or 6.6% of our outstanding common shares on a fully converted basis. However, because the conversion price for the preferred shares is subject to adjustment for a variety of reasons, including if we have certain types of adverse loss development, the number of our common shares into which the preferred shares are ultimately convertible and, accordingly, the amount of dilution experienced by our common shareholders, could increase.
110
Furthermore, upon conversion, sales of substantial amounts of common shares by these investors, or the perception that these sales could occur, could adversely affect the market price of the common shares, as well as our ability to raise additional capital in the public equity markets at a desirable time and price.
Risks Related to Taxation
We and our Bermuda subsidiaries may become subject to Bermuda taxes after 2016.
Bermuda currently imposes no income tax on corporations. We have obtained an assurance from the Bermuda Minister of Finance, under The Exempted Undertakings Tax Protection Act 1966 of Bermuda, that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to us or our Bermuda subsidiaries until March 28, 2016. We cannot assure you that we or our Bermuda subsidiaries will not be subject to any Bermuda tax after that date.
We and our non-U.S. subsidiaries may be subject to U.S. tax, which may have a material adverse effect on our financial condition and results of operation.
We and our non-U.S. subsidiaries have and intend to continue to operate our business in a manner that will not cause us to be treated as engaged in a trade or business in the United States (and, in the case of those non-U.S. companies qualifying for treaty protection, in a manner that will not cause us to be doing business through a permanent establishment in the United States) and, thus, we and our non-U.S. subsidiaries will not be subject to U.S. federal income taxes or branch profits tax (other than withholding taxes on certain U.S. source investment income and excise taxes on insurance or reinsurance premiums). However, because there is uncertainty as to the activities that constitute being engaged in a trade or business within the United States, and what constitutes a permanent establishment under the applicable tax treaties, there can be no assurances that the IRS will not contend successfully that we or a non-U.S. subsidiary of ours is engaged in a trade or business, or carrying on business through a permanent establishment, in the United States.
Dividends paid by PXRE Delaware to PXRE Ireland may not be eligible for benefits under the U.S.-Ireland income tax treaty.
PXRE Delaware is a Delaware corporation wholly owned by PXRE Ireland. Under U.S. federal income tax law, dividends paid by a U.S. corporation to a non-U.S. shareholder are generally subject to a 30% withholding tax, unless reduced by treaty. The income tax treaty between the Republic of Ireland and the United States (the “Irish Treaty”) reduces the rate of withholding tax on certain dividends to 5%. Were the IRS to contend successfully that PXRE Ireland is not eligible for benefits under the Irish Treaty, any dividends paid by PXRE Delaware to PXRE Ireland would be subject to the 30% withholding tax. Such a result could have a material adverse effect on our financial condition and results of operations.
111
If you acquire 10% or more of our shares and we or our non-U.S. subsidiaries are classified as a controlled foreign corporation (“CFC”), your taxes could increase.
Each United States person (as defined in Section 957(c) of the U.S. Internal Revenue Code of 1986, as amended (the “Code”)) who (i) owns (directly, indirectly through foreign persons, or constructively by application of certain attribution rules (“constructively”)) 10% or more of the total combined voting power of all classes of stock of a foreign corporation at any time during a taxable year (such person, a “10% United States Shareholder”), and (ii) owns (directly or indirectly through foreign persons) shares of such foreign corporation on the last day of such taxable year, must include in its gross income for U.S. federal income tax purposes its pro rata share of the CFC’s “subpart F income,” even if the subpart F income is not distributed, if such foreign corporation has been a CFC for an uninterrupted period of 30 days or more during such taxable year. A foreign corporation is considered a CFC if 10% United States Shareholders own (directly, indirectly through foreign entities, or constructively) more than 50% of the total combined voting power of all classes of voting stock of such foreign corporation or the total value of all stock of such corporation. For purposes of taking into account insurance income, a CFC also includes a foreign insurance company in which more than 25% of the total combined voting power of all classes of stock (or more than 25% of the total value of the stock) is owned (directly, indirectly or constructively) by 10% United States Shareholders, on any day during the taxable year of such corporation, if the gross amount of premiums or other consideration for the reinsurance or the issuing of insurance or annuity contracts exceeds 75% of the gross amount of all premiums or other consideration in respect of all risks. We cannot assure you that we or our non-U.S. subsidiaries will not be classified as CFCs. We believe that because of the anticipated dispersion of our common share ownership, provisions in our organizational documents that limit voting power and other factors, no United States person who (i) owns our shares (directly, indirectly through one or more foreign entities or constructively), (ii) does not own (directly or indirectly through one or more foreign entities or constructively) our preferred shares and (iii) has not received a waiver from our board of directors of provisions in our organizational documents that limit voting power, should be treated as owning (directly, indirectly through foreign entities or constructively) 10% or more of the total voting power of all classes of our shares.
Due to the attribution provisions of the Code regarding determination of beneficial ownership, there is a risk that the IRS could assert that we or one or more of our non-U.S. subsidiaries are CFCs and that U.S. holders of our shares who own 10% or more of the value of our shares should be treated as owning 10% or more of the total voting power of us and/or our non-U.S. subsidiaries, notwithstanding the reduction of voting power discussed above.
If we or a non-U.S. subsidiary is determined to have “related person insurance income” (“RPII”), you may be subject to U.S. taxation on your pro rata share of such income.
If the RPII of any of our non-U.S. insurance subsidiaries were to equal or exceed 20% of such company’s gross insurance income in any taxable year and direct or indirect insureds (and persons related to such insureds) own, directly or indirectly through entities, 20% or more of our voting power or value, then a U.S. person who owns our shares (directly or indirectly through foreign entities) on the last day of the taxable year would be required to include in its income for U.S. federal income tax purposes such person’s pro rata share of such non-U.S. insurance subsidiary’s RPII for the entire taxable year, determined as if such RPII were distributed proportionately only to U.S. persons at that date regardless of whether such income is distributed.
112
In addition, any RPII that is includible in the income of a U.S. tax-exempt organization may be treated as unrelated business taxable income. The amount of RPII earned by the non-U.S. insurance subsidiaries (generally, premium and related investment income from the direct or indirect insurance or reinsurance of any direct or indirect U.S. holder of common shares or any person related to such holder) will depend on a number of factors, including the geographic distribution of the non-U.S. insurance subsidiaries’ business and the identity of persons directly or indirectly insured or reinsured by the non-U.S. insurance subsidiaries. We believe that the gross RPII of each non-U.S. insurance subsidiary did not in prior years of operation and is not expected in the foreseeable future to equal or exceed 20% of such subsidiary’s gross insurance income. Additionally, we do not expect the direct or indirect insureds of our non-U.S. insurance subsidiaries (and persons related to such insureds) to directly or indirectly own 20% or more of either the voting power or value of our shares. No assurance can be given that this will be the case because some of the factors that determine the existence or extent of RPII may be beyond our knowledge and/or control.
The RPII rules provide that if a U.S. person disposes of shares in a foreign insurance corporation in which U.S. persons own 25% or more of the shares (even if the amount of RPII is less than 20% of the corporation’s gross insurance income and the ownership of its shares by direct or indirect insureds and related persons is less than the 20% threshold), any gain from the disposition will generally be treated as ordinary income to the extent of the U.S. person’s share of the corporation’s undistributed earnings and profits that were accumulated during the period that the U.S. person owned the shares (whether or not such earnings and profits are attributable to RPII). In addition, such U.S. person will be required to comply with certain reporting requirements, regardless of the amount of shares owned by the U.S. person. These RPII rules should not apply to dispositions of our shares because we will not ourselves be directly engaged in the insurance business. The RPII provisions, however, have never been interpreted by the courts or the U.S. Treasury Department in final regulations, and regulations interpreting the RPII provisions of the Code exist only in proposed form. It is not certain whether these regulations will be adopted in their proposed form or what changes or clarifications might ultimately be made thereto or whether any such changes, as well as any interpretation or application of RPII by the IRS, the courts or otherwise, might have retroactive effect. The U.S. Treasury Department has authority to impose, among other things, additional reporting requirements with respect to RPII. Accordingly, the meaning of the RPII provisions and the application of those provisions to us and our non-U.S. subsidiaries are uncertain.
If we are classified as a passive foreign investment company (“PFIC”), your taxes would increase.
Although it is not anticipated that we will be classified as a PFIC for U.S. income tax purposes, if we are classified as a PFIC, it would have material adverse tax consequences for U.S. persons that directly or indirectly own our shares, including subjecting such U.S. persons to a greater tax liability than might otherwise apply and subjecting such U.S. persons to tax on amounts in advance of when tax would otherwise be imposed. There are currently no regulations regarding the application of the PFIC provisions to an insurance company. New regulations or pronouncements interpreting or clarifying these rules may be forthcoming. We cannot predict what impact, if any, such guidance would have on persons subject to U.S. federal income tax that directly or indirectly own our shares.
113
The reinsurance agreements between us and our U.S. subsidiaries may be subject to recharacterization or other adjustment for U.S. federal income tax purposes, which may have a material adverse effect on our financial condition and results of operations.
Under Section 845 of the Code, the IRS may allocate income, deductions, assets, reserves, credits and any other items related to a reinsurance agreement among certain related parties to the reinsurance agreement, recharacterize such items, or make any other adjustment, in order to reflect the proper source, character or amount of the items for each party. No regulations have been issued under Section 845 of the Code. Accordingly, the application of such provisions to us and our subsidiaries is uncertain and we cannot predict what impact, if any, such provisions may have on us and our subsidiaries.
Changes in U.S. federal income tax law could be retroactive and may subject us or our non-U.S. subsidiaries to U.S. federal income taxation.
The tax laws and interpretations regarding whether a company is engaged in a U.S. trade or business or whether a company is a CFC or PFIC or has RPII, are subject to change, possibly on a retroactive basis. There are currently no regulations regarding the application of the PFIC rules to an insurance company. Additionally, the regulations regarding RPII are still in proposed form. New regulations or pronouncements interpreting or clarifying such rules will likely be forthcoming from the IRS. We are not able to predict if, when or in what form such guidance will be provided and whether such guidance will be applied on a retroactive basis.
Item 7A.
Investments
As of December 31, 2005, our investment portfolio, at fair value, was allocated 74.9% in fixed maturity debt instruments, 15.9% in short-term investments, 9.0% in hedge funds and 0.2% in other invested assets.
At December 31, 2005, 97.3% of the fair value of our fixed maturities and short-term investments portfolio was in obligations rated “A” or better by Moody’s or S&P. Mortgage and asset-backed securities accounted for 39.5% of fixed maturities and short-term investments or 35.8% of our total investment portfolio based on fair value at December 31, 2005. The average yield to maturity of our fixed maturities and short-term investments at December 31, 2005 and 2004 was approximately 4.7% and 3.4%, respectively.
We had no direct investments in real estate or commercial mortgage loans as of December 31, 2005, other than $7.6 million of notes receivable and $0.9 million of an equity investment in a joint venture, Barr’s Bay Properties Limited, which owns the premises in which the Company’s Bermuda headquarters reside. These amounts are included in Other Assets. We may, however, invest in fixed maturities that are secured by commercial mortgages from time to time.
114
Fixed maturity investments, other than trading securities, are reported at fair value, with the net unrealized gain or loss, net of tax, reported in other comprehensive operations as a separate component of shareholders’ equity. Fixed maturity investments classified as trading securities are reported at fair value, with the net unrealized gain or loss reported as investment income. At December 31, 2005, an unrealized loss of $3.4 million (loss of 4 cents per share, after considering convertible preferred shares) was included in shareholders’ equity.
Short-term investments are carried at amortized cost, which approximates fair value. Our short-term investments, principally treasury bills and agency securities, amounted to $261.1 million at December 31, 2005, compared to $296.3 million at December 31, 2004.
A significant component of our investment strategy is investing a portion of our invested assets in a diversified portfolio of hedge funds. At December 31, 2005, total hedge fund investments amounted to $148.2 million, representing 9.0% of the total investment portfolio. For the year ended December 31, 2005, our hedge funds yielded a return of 8.5% as compared to 7.1% in 2004. As of December 31, 2005, hedge fund investments with fair values ranging from $3.3 million to $18.2 million were administered by eighteen managers.
Our hedge fund managers invest in a variety of markets utilizing a variety of strategies, generally through the medium of private investment companies or other entities. Criteria for the selection of hedge fund managers include, among other factors, the historical performance and/or recognizable prospects of the particular manager and a substantial personal investment by the manager in the investment program. However, managers without past trading histories or substantial personal investment may also be considered. Generally, our hedge fund managers may be compensated on terms that may include fixed and/or performance-based fees or profit participations.
Through our hedge fund managers, we may invest or trade in any securities or instruments including, but not limited to, U.S. and non-U.S. equities and equity-related instruments, currencies, commodities and fixed-income and other debt-related instruments and derivative instruments. Hedge fund managers may use both over-the-counter and exchange traded instruments (including derivative instruments such as swaps, futures and forward agreements), trade on margin and engage in short sales. Substantially all hedge fund managers are expected to employ leverage, to varying degrees, which magnifies both the potential for gain and the exposure to loss, which may be substantial. Leverage may be obtained through margin arrangements, as well as repurchase, reverse repurchase, securities lending and other techniques. Trades may be on or off exchanges and may be in thinly traded securities or instruments, which creates the risk that attempted purchases or sales may adversely affect the price of a particular investment or its liquidation and may increase the difficulty of valuing particular positions.
While we seek capital appreciation with respect to our hedge fund investments, we are also concerned with preservation of capital. Therefore, our hedge fund portfolio is designed to take advantage of broad market opportunities and diversify risk. Nevertheless, our investment policies with respect to our hedge fund investments generally do not restrict us from participating in particular markets, strategies or investments. Further, our hedge fund investments may generally be deployed and redeployed in whatever investment strategies are deemed appropriate under prevailing economic and market conditions in an attempt to achieve capital appreciation, including, if appropriate, a concentration of investments in a relatively small group of strategies or hedge fund managers. Accordingly, the identity and number of hedge fund managers is likely to change over time.
115
Mariner, as investment advisor, allocates assets to the hedge fund managers. Mariner monitors hedge fund performance and periodically reallocates assets in its discretion. Mariner is familiar with a number of hedge fund investment strategies utilized by our hedge fund managers. Mariner has invested in some of these strategies and has a varying level of knowledge of others. New strategies, or strategies not currently known to Mariner, may come to Mariner’s attention and may be adopted from time to time.
As of December 31, 2005, our investment portfolio also included $3.1 million of other invested assets in two mezzanine bond funds. The remaining aggregate cash call commitments in respect of such investments are $0.3 million.
Hedge funds and other limited partnership investments are accounted for under the equity method. Total investment income for the year ended December 31, 2005, included $13.0 million attributable to hedge funds and other investments.
Our hedge fund and other privately held securities program should be viewed as exposing us to the risk of substantial losses, which we seek to reduce through our multi-asset and multi-management strategy. There can be no assurance, however, that this strategy will prove to be successful.
Market Risk
We are exposed to certain market risks, including interest rate and credit risks. The potential for losses exists from changes in interest rates with respect to our investments and borrowings. We are exposed to potential losses from changes in probability of default with respect to our investments. We believe our exposure to foreign exchange risk is not material with respect to our fixed income portfolio.
One of our risk management strategies is to bear market risks that do not correlate with underwriting risks, and limit our exposure to market risks that may prevent us from servicing our insurance obligations. Our Board of Directors approves investment guidelines and the selection of external investment advisors who manage our portfolios. The investment managers make tactical investment decisions within the established guidelines. Management monitors the external advisors through written reports that are reviewed and approved by our Board of Directors or committee thereof. Management also manages diversification strategies across the portfolios in order to limit our potential loss from any single market risk. The performance and risk profiles of the portfolio are reported in various forms throughout the fiscal year to management, our Board of Directors, rating agencies, regulators, and to shareholders.
Our investment portfolio is summarized in Item 1, Business, Item 15, Notes to the Financial Statements and in this Item 7A under the heading “Investments.”
Interest Rate Risk
Our principal fixed maturity market risk exposure is to changes in U.S. interest rates. Changes in interest rates may affect the fair value of our fixed maturity portfolio and subordinated debt. Our holdings subject us to exposures in the treasury, municipal, and various asset-backed sectors. These sectors consist primarily of investment grade securities whose fair value is subject to interest rate, credit, prepayment and extension risk. All fixed maturity investment positions are net long with no “short” or derivative positions.
116
We believe that reinsurance recoverables and payables do not expose us to significant interest rate risk and are excluded from the analysis below.
In order to measure our exposure to changes in interest rates a sensitivity analysis was performed. Potential loss is measured as a change in fair value, net of applicable taxes. The fair value of the fixed maturity portfolio and subordinated debt at year-end was remeasured from the fair values reported in the financial statements assuming a 100 basis point increase in interest rates using various analytics and models. The potential loss in fair value measured as a proportion of total shareholders’ equity, due to interest rate exposure was estimated at 3.0% at December 31, 2005 and 1.2% at December 31, 2004. There was no significant change in net exposure during the year. Should such interest rate increase occur, only the decline in fair value of our fixed maturity investments would be recorded in our consolidated balance sheet; the decrease in the fair value of the subordinated debt would not be recognized.
The estimated potential loss includes declines in the fair value related to prepayment risk associated with the mortgage-related securities. The mortgage sector represents 39.5% of our portfolio of fixed maturities and short-term investments at December 31, 2005. The estimate assumes a similar change in fair value across security sectors with no adjustment for change in value due to credit risk. The interest rate risk related to the short-term investments is not material. The average maturity of these investments is under one year.
Credit Risk
As of December 31, 2005, 90.8% of our investment portfolio, at fair value, consisted of fixed maturities and short-term investments. At December 31, 2005, 97.3% of the fair value of our fixed maturities and short-term investment portfolio was in obligations rated “A” or better by Moody’s or S&P. With respect to diversification, at December 31, 2005 we own 400 individual fixed maturity investments. Non-agency mortgage and asset-backed securities accounted for 25.4% of our investment portfolio based on fair value at December 31, 2005. At December 31, 2005, we had $28.3 million at fair value of privately held fixed maturities that are not traded on a recognized exchange.
Foreign Exchange Risk
Our exposure to foreign exchange risk from our foreign denominated securities is not material. Only a small portion of our investment portfolio is denominated in currencies other than U.S. dollars. Additionally, the carrying value of certain receivables and payables denominated in foreign currencies are carried at fair value. For these reasons, these items have been excluded from the market risk disclosure. We may, however, be exposed to material foreign exchange risks in the event that a significant non-U.S. catastrophe event occurs.
Equity Price Risk
We are not materially exposed to equity price risk other than through our hedge fund investments.
117
Diversification Benefit
Our risk management strategy includes investments that are expected to reflect offsetting changes in fair value in response to various changes in market risks.
We also hold other investments that are excluded from this disclosure that are expected to provide positive returns under most market conditions representing adverse changes in interest rates and other market factors (See Note 4 of Notes to Consolidated Financial Statements).
Item 8. | Financial Statements and Supplementary Data |
The following financial statements are filed as part of this Form 10-K:
| | | Page |
| | |
|
| PXRE Group Ltd.: | | |
| | | |
| Management’s Report on Internal Control Over Financial Reporting | | F-1 |
| | | |
| Independent Registered Public Accounting Firm’s Reports | | F-2 |
| | | |
| Consolidated Balance Sheets at December 31, 2005 and 2004 | | F-5 |
| | | |
| Consolidated Statements of Operations and Comprehensive Operations for the years ended December 31, 2005, 2004 and 2003 | | F-6 |
| | | |
| Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2005, 2004 and 2003 | | F-7 |
| | | |
| Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 | | F-8 |
| | | |
| Notes to Consolidated Financial Statements | | F-9 |
Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
Not applicable
Item 9A. | Controls and Procedures |
(a) Evaluation of Disclosure Controls and Procedures
PXRE’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were designed and functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
118
We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Management’s Report on Internal Control Over Financial Reporting
PXRE’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of PXRE’s management, including PXRE’s Chief Executive Officer and Chief Financial Officer, PXRE conducted an evaluation of the effectiveness of PXRE’s internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on PXRE’s evaluation under the framework in Internal Control – Integrated Framework, PXRE’s management concluded that our internal control over financial reporting was effective as of December 31, 2005. PXRE’s management’s assessment of the effectiveness of PXRE’s internal control over financial reporting as of December 31, 2005 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Item 9B. | Other Information |
Not applicable
PART III
Item 10. | Directors and Executive Officers of the Registrant |
The information required with respect to our directors and executive officers is incorporated herein by reference to the information contained in the section of our definitive proxy statement for our annual meeting of shareholders to be held May 9, 2006, to be filed with the Securities and Exchange Commission, entitled “Information Concerning Directors and Executive Officers.”
The information with respect to our Audit Committee (including our Audit Committee financial expert) is incorporated herein by reference to the information contained in the section of the proxy statement entitled “The Board of Directors and its Committees and Director Compensation.” We have undertaken to provide to any person, without charge and upon request, a copy of our code of ethics applicable to our chief executive officer and senior financial officers as well as some of our other corporate governance documents. See “Available Information” in the Business section of this Form 10-K.
119
The information regarding filings under Section 16(a) of the Exchange Act is incorporated herein by reference to the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” of the proxy statement.
Item 11. | Executive Compensation |
The information required by Item 11 of Form 10-K is incorporated by reference to the information contained in the section of the proxy statement entitled “Executive Compensation.”
Item 12. | Security Ownership of Certain Beneficial Owners and Management |
The stock ownership information required by Item 12 of Form 10-K is incorporated by reference to the information contained in the proxy statement in the sections entitled “Outstanding Stock and Voting Rights”, “Information Concerning Directors and Executive Officers” and “Aggregated Stock Option Exercises in the Last Fiscal Year and Stock Option Values at December 31, 2005.”
The information about our equity compensations plans required by Item 12 of Form 10-K is incorporated by reference to the information contained in the proxy statement in the section entitled “Equity Compensation Plan Information.”
Item 13. | Certain Relationships and Related Transactions |
The information required by Item 13 of Form 10-K is incorporated by reference to the information contained in the proxy statement in the sections entitled “Executive Compensation” and “Certain Relationships and Related Party Transactions.”
Item 14. | Principal Accountants’ Fees and Services |
The information required by Item 14 of Form 10-K is incorporated by reference to the information contained in the proxy statement in the section entitled “Reappointment of Independent Auditors – Fees Paid to Independent Auditors.”
120
PART IV
Item 15. | Exhibits, Financial Statement Schedules and Reports on Form 8-K |
| | |
| (a) | The following documents are filed as part of this Form 10-K: |
| | |
| | (1) Financial Statements. |
| | | Page |
| | |
|
| PXRE Group Ltd.: | | |
| | | |
| Management’s Report on Internal Control Over Financial Reporting | | F-1 |
| | | |
| Independent Registered Public Accounting Firm’s Reports | | F-2 |
| | | |
| Consolidated Balance Sheets at December 31, 2005 and 2004 | | F-5 |
| | | |
| Consolidated Statements of Operations and Comprehensive Operations for the years ended December 31, 2005, 2004 and 2003 | | F-6 |
| | | |
| Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2005, 2004 and 2003 | | F-7 |
| | | |
| Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 | | F-8 |
| | | |
| Notes to Consolidated Financial Statements | | F-9 |
| | (2) Financial Statements Schedules. |
| | | Page |
| | |
|
| Schedule I – Summary of Investments (The information required by this Schedule is presented in the financial statements and the notes thereto included in this Form 10-K.) | | - |
| | | |
| Schedule II – Condensed Financial Information of Registrant | | F-46 |
| | | |
| Schedule III – Supplementary Insurance Information | | F-47 |
| | | |
| Schedule IV – Reinsurance (The information required by this Schedule is presented in the financial statements and the notes thereto included in this Form 10-K.) | | - |
| | | |
| Schedule V – Valuation and Qualifying Accounts and Reserves | | F-48 |
| | | |
| Schedule VI – Supplementary Information Concerning Property/Casualty Insurance Operations | | F-49 |
| | | |
| Consent of Independent Registered Public Accounting Firm | | F-50 |
| | | |
| All other financial statement schedules have been omitted as inapplicable. | | |
121
A list of exhibits required to be filed as a part of this report is set forth in the Exhibit Index of this Form 10-K, which immediately precedes such exhibits, and is incorporated herein by reference.
| (b) | Exhibits |
| | |
| | See Item 15(a)(3) above. |
| | |
| (d) | Financial Statements |
| | |
| | See Item 15(a)(2) above. |
122
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, PXRE Group Ltd. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | PXRE GROUP LTD. |
| | | |
| | By: | /s/ Jeffrey L. Radke |
| | |
|
| | | Jeffrey L. Radke |
| | | Its President and Chief Executive Officer |
| | | |
| | Date: | March 16, 2006 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of PXRE Group Ltd. and in the capacity and on the dates indicated:
| By: | /s/ Jeffrey L. Radke | | By: | /s/ Robert P. Myron |
| |
| | |
|
| | Jeffrey L. Radke | | | Robert P. Myron |
| | President and Chief Executive Officer | | | Executive Vice President, Chief |
| | (Principal Executive Officer) | | | Financial Officer and Treasurer |
| | | | | (Principal Financial Officer and |
| | | | | Principal Accounting Officer) |
| | | | | |
| Date: | March 16, 2006 | | Date: | March 16, 2006 |
| | | | | |
| *By: | /s/ Gerald L. Radke | | *By: | /s/ F. Sedgwick Browne |
| |
| | |
|
| | Gerald L. Radke | | | F. Sedgwick Browne |
| | Director | | | Director |
| | | | | |
| Date: | March 15, 2006 | | Date: | March 15, 2006 |
| | | | | |
| *By: | /s/ Bradley E. Cooper | | *By: | /s/ Craig A. Huff |
| |
| | |
|
| | Bradley E. Cooper | | | Craig A. Huff |
| | Director | | | Director |
| | | | | |
| Date: | March 15, 2006 | | Date: | March 15, 2006 |
| | | | | |
| *By: | /s/ Mural R. Josephson | | *By: | /s/ Jonathon Kelly |
| |
| | |
|
| | Mural R. Josephson | | | Jonathon Kelly |
| | Director | | | Director |
| | | | | |
| Date: | March 15, 2006 | | Date: | March 15, 2006 |
123
| *By: | /s/ Wendy Luscombe | | *By: | /s/ Philip R. McLoughlin |
| |
| | |
|
| | Wendy Luscombe | | | Philip R. McLoughlin |
| | Director | | | Director |
| | | | | |
| Date: | March 15, 2006 | | Date: | March 15, 2006 |
| | | | | |
| *By: | /s/ Robert M. Stavis | | | |
| |
| | | |
| | Robert M. Stavis | | | |
| | Director | | | |
| | | | | |
| Date: | March 15, 2006 | | | |
| | *By | /s/ Jeffrey L. Radke | |
| | |
| |
| | | Jeffrey L. Radke | |
| | | Attorney-in-Fact | |
124
Management’s Report on Internal Control Over Financial Reporting
To the Board of Directors and Shareholders
PXRE Group Ltd.:
PXRE’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of PXRE’s management, including PXRE’s Chief Executive Officer and Chief Financial Officer, PXRE conducted an evaluation of the effectiveness of PXRE’s internal control over financial reporting based on the framework inInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on PXRE’s evaluation under the framework inInternal Control – Integrated Framework, PXRE’s management concluded that our internal control over financial reporting was effective as of December 31, 2005. PXRE’s management’s assessment of the effectiveness of PXRE’s internal control over financial reporting as of December 31, 2005 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.
| /s/ JEFFREY L. RADKE | | /s/ ROBERT P. MYRON |
| |
|
| Jeffrey L. Radke | | Robert P. Myron |
| President and Chief Executive Officer | | Executive Vice President, Chief |
| | | Financial Officer and Treasurer |
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
PXRE Group Ltd.:
We have audited management's assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting,that PXRE Group Ltd. maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).PXRE Group Ltd.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
F-2
In our opinion, management's assessment that PXRE Group Ltd. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, PXRE Group Ltd. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of PXRE Group Ltd., and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations and comprehensive operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated March 15, 2006, expressed an unqualified opinion on those consolidated financial statements.
As discussed in Note 2 to the consolidated financial statements, PXRE Group Ltd. adopted FASB Interpretation No. 46R “Consolidation of Variable Interest Entities,” during 2004.
As discussed in Note 15 to the consolidated financial statements, PXRE Group Ltd. and subsidiaries was downgraded at various times by rating agencies with regards to financial strength during February 2006.
New York, New York
March 15, 2006
F-3
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
PXRE Group Ltd.:
We have audited the accompanying consolidated balance sheets of PXRE Group Ltd., and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations and comprehensive operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2005. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedules listed in Item 15 (a) (2) of this Form 10-K. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PXRE Group Ltd. as of December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of PXRE Group Ltd.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2006, expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
As discussed in Note 2 to the consolidated financial statements, PXRE Group Ltd. adopted FASB Interpretation No. 46R “Consolidation of Variable Interest Entities,” during 2004.
As discussed in Note 15 to the consolidated financial statements, PXRE Group Ltd. and subsidiaries was downgraded at various times by rating agencies with regards to financial strength during February 2006.
/s/ KPMG LLP
New York, New York
March 15, 2006
F-4
| PXRE | Consolidated Balance Sheets | | |
| Group Ltd. | (Dollars in thousands, except par value per share) | | |
| | | | |
| | | December 31, | |
| |
| |
| | | 2005 | | 2004 | |
| | |
|
| |
|
| |
| Assets | Investments: | | | | | | |
| | Fixed maturities, at fair value: | | | | | | |
| | Available-for-sale (amortized cost $1,212,299 and $705,204, respectively) | $ | 1,208,248 | | $ | 701,798 | |
| | Trading (cost $28,225 and $13,725, respectively) | | 25,796 | | | 15,483 | |
| | Short-term investments, at fair value | | 261,076 | | | 296,318 | |
| | Hedge funds, at fair value (cost $132,690 and $86,549, respectively) | | 148,230 | | | 129,118 | |
| | Other invested assets, at fair value (cost $2,806 and $5,663, respectively) | | 3,142 | | | 6,823 | |
| |
|
| |
|
| |
| | Total investments | | 1,646,492 | | | 1,149,540 | |
| | Cash | | 14,504 | | | 15,668 | |
| | Accrued investment income | | 10,809 | | | 8,054 | |
| | Premiums receivable, net | | 217,446 | | | 93,116 | |
| | Other receivables | | 17,000 | | | 35,315 | |
| | Reinsurance recoverable on paid losses | | 4,223 | | | 8,003 | |
| | Reinsurance recoverable on unpaid losses | | 107,655 | | | 61,215 | |
| | Ceded unearned premiums | | 1,379 | | | 3,500 | |
| | Deferred acquisition costs | | 5,487 | | | 1,745 | |
| | Income tax recoverable | | 6,295 | | | 31,594 | |
| | Other assets | | 84,757 | | | 46,666 | |
| |
|
| |
|
| |
| | Total assets | $ | 2,116,047 | | $ | 1,454,416 | |
| |
|
| |
|
| |
| | | | | | | |
| | | | | | | | |
| Liabilities | Losses and loss expenses | $ | 1,320,126 | | $ | 460,084 | |
| | Unearned premiums | | 32,512 | | | 15,952 | |
| | Subordinated debt | | 167,081 | | | 167,075 | |
| | Reinsurance balances payable | | 30,244 | | | 10,937 | |
| | Deposit liabilities | | 68,270 | | | 72,143 | |
| | Other liabilities | | 32,496 | | | 31,670 | |
| |
|
| |
|
| |
| | Total liabilities | | 1,650,729 | | | 757,861 | |
| |
|
| |
|
| |
| | | | | | | |
| | | | | | | | |
Shareholders'
| Serial convertible preferred shares, $1.00 par value, $10,000 stated | | | | | | |
| Equity | value – 30 million shares authorized, 0.01 million and 0.02 million | | | | | | |
| | shares issued and outstanding, respectively | | 58,132 | | | 163,871 | |
| | Common shares, $1.00 par value – 350 million shares | | | | | | |
| | authorized, 72.3 million and 20.5 million shares | | | | | | |
| | issued and outstanding, respectively | | 72,281 | | | 20,469 | |
| | Additional paid-in capital | | 875,224 | | | 329,730 | |
| | Accumulated other comprehensive loss net of deferred income | | | | | | |
| | tax benefit of $0 and $1,616, respectively | | (5,468 | ) | | (4,855 | ) |
| | (Accumulated deficit)/retained earnings | | (527,349 | ) | | 194,081 | |
| | Restricted shares at cost (0.5 million and 0.4 million shares, respectively) | | (7,502 | ) | | (6,741 | ) |
| |
|
| |
|
| |
| | Total shareholders' equity | | 465,318 | | | 696,555 | |
| |
|
| |
|
| |
| | Total liabilities and shareholders' equity | $ | 2,116,047 | | $ | 1,454,416 | |
| |
|
| |
|
| |
| The accompanying notes are an integral part of these statements. | | | | | | |
| | | | | | | |
F-5
| PXRE | Consolidated Statements of Operations and Comprehensive Operations | | |
| Group Ltd. | (Dollars in thousands, except per share amounts) | | |
| | | |
| | Year Ended December 31, | |
| |
|
|
|
|
|
|
|
| |
| | 2005 | | 2004 | | 2003 | |
| | | | | | | | | | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| Revenues | Net premiums earned | $ | 388,324 | | $ | 308,072 | | $ | 320,933 | |
| | Net investment income | | 45,292 | | | 26,178 | | | 26,931 | |
| | Net realized investment (losses) gains | | (14,736 | ) | | (150 | ) | | 2,447 | |
| | Fee income | | 941 | | | 1,785 | | | 5,014 | |
| | |
|
| |
|
| |
|
| |
| | | | 419,821 | | | 335,885 | | | 355,325 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| Losses and | | | | | | | | | | |
| Expenses | Losses and loss expenses incurred | | 1,011,523 | | | 226,347 | | | 157,598 | |
| | Commission and brokerage | | 49,900 | | | 36,111 | | | 47,360 | |
| | Other reinsurance related expense | | 936 | | | — | | | — | |
| | Operating expenses | | 36,208 | | | 41,293 | | | 39,701 | |
| | Foreign exchange (gains) losses | | (1,547 | ) | | 80 | | | 143 | |
| | Interest expense | | 14,452 | | | 14,389 | | | 2,506 | |
| | Minority interest in consolidated subsidiaries | | — | | | — | | | 10,528 | |
| | |
|
| |
|
| |
|
| |
| | | | 1,111,472 | | | 318,220 | | | 257,836 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| | (Loss) income before income taxes, cumulative effect of accounting | | | | | | | | | |
| | change and convertible preferred share dividends | | (691,651 | ) | | 17,665 | | | 97,489 | |
| | Income tax provision (benefit) | | 5,907 | | | (6,234 | ) | | 841 | |
| | |
|
| |
|
| |
|
| |
| | (Loss) income before cumulative effect of accounting change and | | | | | | | | | |
| | convertible preferred share dividends | | (697,558 | ) | | 23,899 | | | 96,648 | |
| | Cumulative effect of accounting change, net of $0.2 million tax benefit | | — | | | (1,053 | ) | | — | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| | Net (loss) income before convertible preferred share dividends | $ | (697,558 | ) | $ | 22,846 | | $ | 96,648 | |
| | |
|
| |
|
| |
|
| |
| | Convertible preferred share dividends | | 7,040 | | | 14,018 | | | 13,113 | |
| | |
|
| |
|
| |
|
| |
| | Net (loss) income to common shareholders | $ | (704,598 | ) | $ | 8,828 | | $ | 83,535 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| Comprehensive | Net (loss) income before convertible preferred share dividends | $ | (697,558 | ) | $ | 22,846 | | $ | 96,648 | |
| Operations, | Net change in unrealized depreciation on investments | | (12,061 | ) | | (5,465 | ) | | (4,760 | ) |
| Net of Tax | Reclassification adjustments for losses (gains) included in net (loss) gain | | 12,164 | | | 247 | | | (1,636 | ) |
| | Minimum additional pension liability | | (716 | ) | | (1,329 | ) | | — | |
| | Net unrealized appreciation on cash flow hedge | | — | | | — | | | 946 | |
| | |
|
| |
|
| |
|
| |
| | Comprehensive (loss) income | $ | (698,171 | ) | $ | 16,299 | | $ | 91,198 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| Per Share | Basic: | | | | | | | | | |
| | (Loss) income before cumulative effect of accounting change | | | | | | | | | |
| | and convertible preferred share dividends | $ | (21.43 | ) | $ | 1.65 | | $ | 8.06 | |
| | Cumulative effect of accounting change | | — | | | (0.07 | ) | | — | |
| | Convertible preferred share dividends | | (0.22 | ) | | (0.97 | ) | | (1.09 | ) |
| | |
|
| |
|
| |
|
| |
| | Net (loss) income to common shareholders | $ | (21.65 | ) | $ | 0.61 | | $ | 6.97 | |
| | |
|
| |
|
| |
|
| |
| | Average shares outstanding (000's) | | 32,541 | | | 14,433 | | | 11,992 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| | Diluted: | | | | | | | | | |
| | Net (loss) income before cumulative effect of accounting change | $ | (21.65 | ) | $ | 0.86 | | $ | 4.10 | |
| | Cumulative effect of accounting change | | — | | | (0.04 | ) | | — | |
| | |
|
| |
|
| |
|
| |
| | Net (loss) income | $ | (21.65 | ) | $ | 0.82 | | $ | 4.10 | |
| | |
|
| |
|
| |
|
| |
| | Average shares outstanding (000's) | | 32,541 | | | 27,745 | | | 23,575 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| | The accompanying notes are an integral part of these statements. | | | | | | | | | |
F-6
| PXRE | Consolidated Statements of Shareholders' Equity | |
| Group Ltd. | (Dollars in thousands) | |
| | | |
| | Years Ended December 31, 2005, 2004 and 2003 | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| | Convertible
Preferred
Shares | | Common
Shares | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive
Operations | | (Accumulated
Deficit)/
Retained
Earnings | | Restricted
Shares | | Total
Shareholders'
Equity | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Balance at December 31, 2002 | $ | 159,077 | | $ | 12,030 | | $ | 168,866 | | $ | 7,142 | | $ | 108,062 | | $ | (1,713 | ) | $ | 453,464 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Net income before convertible preferred share dividends | | | | | | | | | | | | | | 96,648 | | | | | | 96,648 | |
| Unrealized depreciation on investments, net | | | | | | | | | | | (6,396 | ) | | | | | | | | (6,396 | ) |
| Unrealized appreciation on cash flow hedge, net | | | | | | | | | | | 946 | | | | | | | | | 946 | |
| Issuance of common shares | | | | | 1,247 | | | 25,084 | | | | | | | | | | | | 26,331 | |
| Repurchase/cancellation of common shares | | | | | | | | (2,058 | ) | | | | | | | | | | | (2,058 | ) |
| Issuance of restricted shares | | | | | | | | | | | | | | | | | (4,582 | ) | | (4,582 | ) |
| Amortization of restricted shares | | | | | | | | | | | | | | | | | 2,904 | | | 2,904 | |
| Dividends to convertible preferred shareholders | | 13,113 | | | | | | | | | | | | (13,113 | ) | | | | | — | |
| Dividends to common shareholders | | | | | | | | | | | | | | (2,927 | ) | | | | | (2,927 | ) |
| Tax effect of stock options exercised | | | | | | | | 186 | | | | | | | | | | | | 186 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Balance at December 31, 2003 | | 172,190 | | | 13,277 | | | 192,078 | | | 1,692 | | | 188,670 | | | (3,391 | ) | | 564,516 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Net income before convertible preferred share dividends | | | | | | | | | | | | | | 22,846 | | | | | | 22,846 | |
| Unrealized depreciation on investments, net | | | | | | | | | | | (5,218 | ) | | | | | | | | (5,218 | ) |
| Minimum additional pension liability, net | | | | | | | | | | | (1,329 | ) | | | | | | | | (1,329 | ) |
| Conversion of convertible preferred shares | | (22,337 | ) | | | | | | | | | | | | | | | | | (22,337 | ) |
| Issuance of common shares | | | | | 7,192 | | | 137,331 | | | | | | | | | | | | 144,523 | |
| Repurchase/cancellation of common shares | | | | | | | | (1,254 | ) | | | | | | | | | | | (1,254 | ) |
| Issuance of restricted shares | | | | | | | | | | | | | | | | | (7,291 | ) | | (7,291 | ) |
| Amortization of restricted shares | | | | | | | | | | | | | | | | | 3,941 | | | 3,941 | |
| Dividends to convertible preferred shareholders | | 14,018 | | | | | | | | | | | | (14,018 | ) | | | | | — | |
| Dividends to common shareholders | | | | | | | | | | | | | | (3,417 | ) | | | | | (3,417 | ) |
| Tax effect of stock options exercised | | | | | | | | 1,575 | | | | | | | | | | | | 1,575 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Balance at December 31, 2004 | | 163,871 | | | 20,469 | | | 329,730 | | | (4,855 | ) | | 194,081 | | | (6,741 | ) | | 696,555 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Net loss before convertible preferred share dividends | | | | | | | | | | | | | | (697,558 | ) | | | | | (697,558 | ) |
| Unrealized depreciation on investments | | | | | | | | | | | 103 | | | | | | | | | 103 | |
| Minimum additional pension liability | | | | | | | | | | | (716 | ) | | | | | | | | (716 | ) |
| Conversion of convertible preferred shares | | (109,108 | ) | | | | | | | | | | | | | | | | | (109,108 | ) |
| Issuance of common shares | | | | | 51,812 | | | 546,580 | | | | | | | | | | | | 598,392 | |
| Repurchase/cancellation of common shares | | | | | | | | (2,150 | ) | | | | | | | | | | | (2,150 | ) |
| Issuance of restricted shares, net | | | | | | | | | | | | | | | | | (4,566 | ) | | (4,566 | ) |
| Amortization of restricted shares | | | | | | | | | | | | | | | | | 3,805 | | | 3,805 | |
| Dividends to convertible preferred shareholders | | 3,369 | | | | | | | | | | | | (7,040 | ) | | | | | (3,671 | ) |
| Dividends to common shareholders | | | | | | | | | | | | | | (16,832 | ) | | | | | (16,832 | ) |
| Tax effect of stock options exercised | | | | | | | | 1,064 | | | | | | | | | | | | 1,064 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Balance at December 31, 2005 | $ | 58,132 | | $ | 72,281 | | $ | 875,224 | | $ | (5,468 | ) | $ | (527,349 | ) | $ | (7,502 | ) | $ | 465,318 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | |
| The accompanying notes are an integral part of these statements. | |
F-7
| PXRE | Consolidated Statements of Cash Flows | | |
| Group Ltd. | (Dollars in thousands) | |
| | | |
| | | Year Ended December 31, |
| | |
|
|
|
|
|
|
|
|
| | | 2005 | | 2004 | | 2003 |
| | |
|
|
|
|
|
|
| | | | | | | | | | | |
| Cash Flows | Premiums collected, net of reinsurance | $ | 301,982 | | $ | 253,361 | | $ | 248,857 | |
| from Operating | Loss and loss adjustment expenses paid, net of reinsurance | | (229,295 | ) | | (123,698 | ) | | (80,113 | ) |
| Activities | Commission and brokerage paid, net of fee income | | (28,727 | ) | | (56,518 | ) | | (31,011 | ) |
| | Operating expenses paid | | (31,666 | ) | | (38,189 | ) | | (34,346 | ) |
| | Net investment income received | | 37,788 | | | 15,894 | | | 13,719 | |
| | Interest paid | | (14,338 | ) | | (15,138 | ) | | (11,229 | ) |
| | Income taxes recovered (paid) | | 18,328 | | | (6,271 | ) | | (15,680 | ) |
| | Trading portfolio purchased | | (17,685 | ) | | — | | | (21,607 | ) |
| | Trading portfolio disposed | | 3,369 | | | 6,965 | | | 25,183 | |
| | Deposit (paid) received | | (3,873 | ) | | (8,440 | ) | | 45,434 | |
| | Other | | (8,608 | ) | | 17,361 | | | 15,045 | |
| | |
|
| |
|
| |
|
| |
| | Net cash provided by operating activities | | 27,275 | | | 45,327 | | | 154,252 | |
| | |
|
| |
|
| |
|
| |
| Cash Flows | Fixed maturities available for sale purchased | | (733,076 | ) | | (496,986 | ) | | (527,249 | ) |
| from Investing | Fixed maturities available for sale disposed or matured | | 209,763 | | | 405,393 | | | 378,996 | |
| Activities | Hedge funds purchased | | (129,388 | ) | | (13,123 | ) | | (35,000 | ) |
| | Hedge funds disposed | | 123,219 | | | 15,149 | | | 40,009 | |
| | Other invested assets purchased | | — | | | — | | | (314 | ) |
| | Other invested assets disposed | | 3,738 | | | 4,417 | | | 1,673 | |
| | Net change in short-term investments | | 35,242 | | | (120,547 | ) | | (42,453 | ) |
| | Receivable for securities | | — | | | 24 | | | 5 | |
| | Payable for securities | | — | | | (18 | ) | | (4 | ) |
| | |
|
| |
|
| |
|
| |
| | Net cash used by investing activities | | (490,502 | ) | | (205,691 | ) | | (184,337 | ) |
| | |
|
| |
|
| |
|
| |
| Cash Flows | Proceeds from issuance of common shares | | 483,169 | | | 114,701 | | | 21,538 | |
| from Financing | Cash dividends paid to common shareholders | | (16,832 | ) | | (3,417 | ) | | (2,927 | ) |
| Activities | Cash dividends paid to preferred shareholders | | (3,671 | ) | | — | | | — | |
| | Proceeds from issuance of minority interest in consolidated subsidiaries | | — | | | — | | | 62,500 | |
| | Repayment of debt | | — | | | — | | | (30,000 | ) |
| | Cost of shares repurchased | | (603 | ) | | (1,060 | ) | | (1,848 | ) |
| | |
|
| |
|
| |
|
| |
| | Net cash provided by financing activities | | 462,063 | | | 110,224 | | | 49,263 | |
| | |
|
| |
|
| |
|
| |
| | Net change in cash | | (1,164 | ) | | (50,140 | ) | | 19,178 | |
| | Cash, beginning of year | | 15,668 | | | 65,808 | | | 46,630 | |
| | |
|
| |
|
| |
|
| |
| | Cash, end of year | $ | 14,504 | | $ | 15,668 | | $ | 65,808 | |
| | |
|
| |
|
| |
|
| |
| | Reconciliation of net (loss) income to net cash provided by operating activities: | | | | | | | | | |
| | Net (loss) income before convertible preferred share dividends | $ | (697,558 | ) | $ | 22,846 | | $ | 96,648 | |
| | Adjustments to reconcile net (loss) income to net cash | | | | | | | | | |
| | provided by operating activities: | | | | | | | | | |
| | Losses and loss expenses | | 860,041 | | | 9,449 | | | 2,807 | |
| | Unearned premiums | | 18,681 | | | 1,340 | | | (42,148 | ) |
| | Deferred acquisition costs | | (3,742 | ) | | 750 | | | 20,226 | |
| | Receivables | | (106,015 | ) | | (18,258 | ) | | (5,860 | ) |
| | Reinsurance balances payable | | 19,307 | | | (42,436 | ) | | (27,717 | ) |
| | Reinsurance recoverable | | (42,661 | ) | | 93,201 | | | 74,678 | |
| | Income taxes | | 24,507 | | | (12,787 | ) | | (14,808 | ) |
| | Equity in earnings of limited partnerships | | (13,000 | ) | | (10,744 | ) | | (13,373 | ) |
| | Trading portfolio purchased | | (17,685 | ) | | — | | | (21,607 | ) |
| | Trading portfolio disposed | | 3,369 | | | 6,965 | | | 25,183 | |
| | Deposit liability | | (3,873 | ) | | (8,440 | ) | | 45,434 | |
| | Receivable on commutation | | (35,154 | ) | | — | | | — | |
| | Other | | 21,058 | | | 3,441 | | | 14,789 | |
| | |
|
| |
|
| |
|
| |
| | Net cash provided by operating activities | $ | 27,275 | | $ | 45,327 | | $ | 154,252 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | |
| | The accompanying notes are an integral part of these statements. | | | | | | | |
F-8
| PXRE | Notes to Consolidated Financial Statements | | |
| Group Ltd. | Years Ended December 31, 2005, 2004 and 2003 | |
| | | | |
PXRE Group Ltd. (the “Company” or collectively with its subsidiaries, “PXRE”) is an insurance holding company organized in Bermuda. PXRE provides reinsurance products and services to a worldwide marketplace through its subsidiary operations located in Bermuda, Europe and the United States. PXRE’s primary focus is providing property catastrophe reinsurance and retrocessional coverage. PXRE also provides marine, aviation and aerospace products and services. Subsequent to December 31, 2005, the Company’s counterparty credit and financial strength ratings were downgraded by three rating agencies. See further discussion in Note 15.
| 2. | Significant Accounting Policies |
| | |
| | Basis of Presentation and Consolidation |
The consolidated financial statements have been prepared in U.S. dollars in conformity with U.S. generally accepted accounting principles (“GAAP”). These statements reflect the consolidated operations of the Company and its wholly owned subsidiaries, including PXRE Reinsurance Ltd. (“PXRE Bermuda”), PXRE Corporation (“PXRE Delaware”), PXRE Reinsurance Company (“PXRE Reinsurance”), PXRE Holding (Ireland) Limited (“PXRE Ireland”) and PXRE Reinsurance (Barbados) Ltd. (“PXRE Barbados”). All intercompany transactions have been eliminated in preparing these consolidated financial statements.
GAAP requires management to make estimates and assumptions that affect the (i) reported amount of assets and liabilities; (ii) disclosure of contingent assets and liabilities at the date of the financial statements; and (iii) the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
| | Premiums Assumed and Ceded |
Premiums on assumed and ceded reinsurance business are recorded as earned evenly over the contract period based on estimated subject premiums. Adjustments based on actual subject premiums are recorded in the period in which they are determined. The portion of assumed and ceded premiums written relating to unexpired coverages at the end of the period is recorded as unearned premiums and ceded unearned premiums, respectively.
Assumed reinstatement premiums that reinstate coverage are written and earned at the time the associated loss event occurs. The original premium is earned over the remaining exposure period of the contract. Reinstatement premiums are estimated based upon contract terms for reported losses and estimated for incurred but not reported losses (“IBNR”). Certain of our ceded reinsurance contracts include additional premiums with provisions that adjust premiums based upon the loss experience under the contracts. For these contracts, additional premiums are written and earned following the loss event after considering the remaining coverage.
F-9
Assumed reinsurance and retrocessional contracts that do not both transfer significant insurance risk and result in the reasonable possibility that PXRE or its retrocessionaires may realize a significant loss from the insurance risk assumed are accounted for as deposits with interest income or expense credited or charged to the contract deposits and included in net investment income or fee income. These contract deposits are included in other assets and deposit liabilities in the Consolidated Balance Sheets.
Deferred Acquisition Costs
Acquisition costs consist primarily of commission and brokerage expenses incurred in connection with contract issuance, net of acquisition costs ceded and fee income. These costs are deferred and amortized to income over the period in which the related premiums are earned. Deferred acquisition costs are reviewed to determine that they do not exceed recoverable amounts, after considering investment income.
Fee income is recorded as earned evenly over the contract period under various arrangements whereby PXRE acts as underwriting manager for other insurers and reinsurers. These fees are initially based on premium volume, but are adjusted in some cases through contingent profit commissions related to underwriting results. In addition, fees are earned from certain finite contracts accounted for as deposits.
A reserve for losses and loss expenses is established equal to an amount estimated to settle ultimate incurred losses. The reserve for losses and loss expenses includes an estimate of individual case reserves for reported losses for known events and an estimate of incurred but not reported losses. Individual case reserve estimates are initially based on loss reports received from third parties. The reserve for incurred but not reported losses consists of a provision for additional development in excess of the case reserves reported by ceding companies and a provision for claims which have occurred but which have not yet been reported to the Company and is based on actuarial methods. For certain catastrophic events there is considerable uncertainty underlying the assumptions used to estimate the reserve for losses and loss expenses. Accordingly, ultimate losses and loss expenses may vary materially from the amounts provided in the consolidated financial statements. These estimates are reviewed regularly, and as experience develops and new information becomes known the reserves are adjusted as necessary. Such adjustments, if any, are recorded in the Consolidated Statements of Operations and Comprehensive Operations in the period in which they become known.
Reinsurance recoverables on paid and unpaid losses are reported as assets. Reinsurance recoverable on paid losses represents amounts recoverable from retrocessionaires at the end of the period for assumed losses previously paid. Reinsurance recoverables are recognized in a manner consistent with the underlying loss and loss expense reserve. Provisions are established for all reinsurance recoveries that are considered doubtful.
F-10
Liabilities on assumed retroactive reinsurance contracts are established for the estimated loss PXRE ultimately expects to pay out. If such losses are greater than the related assumed earned premium, a deferred charge is recorded and included in other assets in the Consolidated Balance Sheets. Reinsurance recoverables on ceded retroactive reinsurance contracts are recorded for the estimated recovery that PXRE ultimately expects to receive. If such recoverables are greater than the related ceded earned premium, a deferred gain is recorded and included in other liabilities in the Consolidated Balance Sheets. The deferred charge or gain is amortized over the estimated remaining settlement periods using the interest method. When changes in the amount or the timing of payments on retroactive balances occur, a cumulative amortization adjustment is recognized in earnings in the period of the change.
Fixed maturity investments are considered available-for-sale or trading and are reported at fair value. Fixed maturity investments are stated at fair value as determined by the quoted market price of these securities as provided by either independent pricing services or, when such prices are not available, by reference to broker or underwriter bid indications. Unrealized gains and losses associated with the available-for-sale portfolio, as a result of temporary changes in fair value during the period such investments are held, are reflected net of income taxes and reported in other comprehensive operations as a separate component of shareholders’ equity. Unrealized losses associated with the available-for-sale portfolio that are deemed other than temporary, are charged to operations in the period they are determined. Unrealized gains and losses associated with the trading portfolio are recognized in net investment income.
Short-term investments, which have an original maturity of one year or less, are carried at amortized cost, which approximates fair value.
Investments in limited partnership hedge funds and other limited partnerships are reported under the equity method, which includes the cost of the investment and subsequent proportional share of the partnership earnings. Under the equity method, earnings are recorded in net investment income.
Realized gains or losses on disposition of investments are determined on the basis of specific identification. The amortization of premiums and accretion of discounts for fixed maturity investments are computed utilizing the interest method. The effective yield under the interest method is adjusted for anticipated prepayments and extensions. Such adjustments, if any, are included in net investment income in the period in which they are determined.
Fair Value of Financial Instruments
Fair values of certain assets and liabilities are based on published market values, if available, or estimates based upon fair values of similar issues. Fair values are reported in Notes 4, 5 and 6.
The fair value of Other Assets and Other Liabilities approximates their carrying value due to their relative short term nature. The estimates of fair value are subjective in nature and are not necessarily indicative of the amounts that the Company would actually realize in a current market exchange. However, any differences would not be expected to be material. Certain financial instruments such as insurance contracts are excluded from fair value disclosure, therefore the total fair value amounts cannot be aggregated to determine the underlying economic value of the Company.
F-11
Debt issuance costs of $4.5 million associated with the issuance of the $103.1 million 8.85% PXRE Capital Trust Pass-through Securities (trust preferred securities), the $18.0 million 7.35% PXRE Capital Statutory Trust II trust preferred securities, the $15.5 million 9.75% PXRE Capital Trust III trust preferred securities, the $20.6 million 7.70% PXRE Capital Statutory Trust V trust preferred securities, and the $10.3 million 7.58% PXRE Capital Trust VI trust preferred securities are being amortized over the term of the related outstanding debt using the interest method.
Foreign currency monetary assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Resulting foreign exchange gains and losses are reflected in operations for the period.
Deferred tax assets and liabilities reflect the expected future tax consequences of temporary differences between carrying amounts and the tax bases of PXRE’s assets and liabilities.
Comprehensive operations is comprised of net (loss) income before convertible preferred share dividends and other comprehensive operations. Other comprehensive operations consists of the after-tax change in the net unrealized appreciation or depreciation of investments, the change in fair value of derivative instruments that qualify for hedge accounting and a portion of the change in pension liabilities.
Basic earnings per share is determined by dividing net earnings by the weighted average number of common shares outstanding for the period. On a diluted basis, both net earnings and shares outstanding are adjusted to reflect the potential dilution that could occur if securities convertible into common shares or other contracts to issue common shares were exercised or converted into common shares or resulted in the issuance of common shares that then shared in the earnings of the entity, unless the effect of the assumed conversion is anti-dilutive.
Certain contracts underwritten by the Company have been determined to be derivatives and are therefore recorded at fair value with the changes in fair value reported in other reinsurance related (income) expense in the Consolidated Statements of Operations and Comprehensive Operations.
F-12
At December 31, 2005, PXRE has share option plans, which are accounted for under the recognition and measurement principles of the Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. No share-based compensation cost related to the options granted under the plans is reflected in net (loss) income, as the options granted had an exercise price equal to the market value of the underlying common shares on the date of grant. In December 2004, the Financial Accounting Standards Board (“FASB”) issued the Statement of Financial Accounting Standards No. 123R “Share-Based Payment” (“SFAS 123R”). SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services and for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R requires that, prospectively, compensation costs be recognized for the fair value of all share options granted over their remaining vesting period, including the cost related to the unvested portion of all outstanding share options as of December 31, 2004.
The following table illustrates the effects on net (loss) income and (loss) income per share as a result of PXRE’s applying the “fair value” method to all share option grants under the provisions of SFAS 123R for the years ended December 31, 2005, 2004 and 2003:
| ($000’s, except per share data) | 2005 | | 2004 | | 2003 | |
| |
|
| |
|
| |
|
| |
| Net (loss) income before convertible preferred share | | | | | | | | | |
| dividends: | | | | | | | | | |
| As reported | $ | (697,558 | ) | $ | 22,846 | | $ | 96,648 | |
| Deduct: | | | | | | | | | |
| Total share-based compensation expense | | | | | | | | | |
| determined under fair value based method, | | | | | | | | | |
| net of related tax effects | | (1,170 | ) | | (2,180 | ) | | (2,927 | ) |
| |
|
| |
|
| |
|
| |
| Pro-forma | $ | (698,728 | ) | $ | 20,666 | | $ | 93,721 | |
| |
|
| |
|
| |
|
| |
| Basic (loss) income per share: | | | | | | | | | |
| As reported | $ | (21.65 | ) | $ | 0.61 | | $ | 6.97 | |
| Pro-forma | $ | (21.69 | ) | $ | 0.46 | | $ | 6.72 | |
| Diluted (loss) income per share: | | | | | | | | | |
| As reported | $ | (21.65 | ) | $ | 0.82 | | $ | 4.10 | |
| Pro-forma | $ | (21.69 | ) | $ | 0.74 | | $ | 3.98 | |
In April 2005, the Securities and Exchange Commission (“SEC”) adopted a new rule that allows SEC registrants to implement SFAS 123R as of January 1, 2006. The SEC’s new rule does not change the accounting required by SFAS 123R; it delays the date for compliance with the standard. Previously under SFAS 123R, the Company would have been required to implement the standard as of July 1, 2005. The Company plans to adopt the provisions of the SFAS 123R in the first quarter of 2006, and such adoption is expected to reduce net income in 2006 by less than $1.0 million.
F-13
Debt and Equity Classification
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within the scope of the statement as a liability or an asset in some circumstances. PXRE adopted this statement during the quarter ended September 30, 2003, however, due to certain parts of this statement being deferred by the FASB, the adoption of this statement did not have any impact on PXRE’s Consolidated Financial Statements, financial position or results of operations until the quarter ended March 31, 2004. Accordingly, as of 2004, PXRE’s capital trust pass-through securities were reclassified on its Consolidated Balance Sheet to liabilities and entitled “Subordinated debt.” In PXRE’s Consolidated Statements of Operations and Comprehensive Operations for the years ended 2005 and 2004, the interest expense related to these securities was included with “Interest expense,” whereas for the year ended 2003 it was included with “Minority interest in consolidated subsidiaries” as SFAS 150 did not permit these changes to be made retroactively.
Consolidation of Variable Interest Entities
In January 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46R”), which requires consolidation of all “Variable Interest Entities” (“VIEs”) by the “primary beneficiary,” as these terms are defined in FIN 46R. The adoption of this statement, during the quarter ended March 31, 2004, resulted in PXRE deconsolidating the five special purpose trusts which issued PXRE’s trust preferred securities. As a result, the subordinated loans from the trusts are reflected as liabilities under the caption “Subordinated debt” on PXRE’s December 31, 2005 and 2004 Consolidated Balance Sheets, while PXRE’s minority investments of approximately $5.2 million in such trusts in the form of equity, which prior to March 31, 2004 were eliminated on consolidation, are reflected as assets under the caption “Other assets” with a corresponding increase in liabilities under the caption “Subordinated debt.” FIN 46R did not permit these changes to be made retroactively. In addition, gains on the repurchase of $5.2 million of PXRE’s trust preferred securities in prior periods of $1.1 million, net of tax, that were previously accounted for as extinguishments of debt, were reversed during the quarter ended March 31, 2004 and presented as a cumulative effect of an accounting change in PXRE’s Consolidated Statements of Operations and Comprehensive Operations during 2004. These repurchased securities are reflected in PXRE’s December 31, 2005 and 2004 Consolidated Balance Sheets under the caption “Fixed maturities: Available-for-sale.”
Consolidated Statements of Cash Flows
In the first quarter of 2004, the Company changed the presentation of its Consolidated Statements of Cash Flows to the direct cash flow method, replacing the indirect cash flow method as previously presented. Amounts presented for the year ended December 31, 2003 were reclassified to be consistent with the new presentation.
F-14
Certain reclassifications have been made for 2003 and 2004 to conform to the 2005 presentation. Such reclassifications had no effect on the Company’s net operating results or shareholders’ equity.
Premiums written and earned for the years ended December 31, 2005, 2004 and 2003 are as follows:
| ($000’s) | 2005 | | 2004 | | 2003 | |
| |
|
| |
|
| |
|
| |
| Premiums written | | | | | | | | | |
| Gross premiums written | $ | 542,325 | | $ | 346,035 | | $ | 339,140 | |
| Ceded premiums written | | (135,320 | ) | | (36,248 | ) | | (60,729 | ) |
| |
|
| |
|
| |
|
| |
| Net premiums written | $ | 407,005 | | $ | 309,787 | | $ | 278,411 | |
| |
|
| |
|
| |
|
| |
| Premiums earned | | | | | | | | | |
| Gross premiums earned | $ | 525,765 | | $ | 351,274 | | $ | 381,705 | |
| Ceded premiums earned | | (137,441 | ) | | (43,202 | ) | | (60,772 | ) |
| |
|
| |
|
| |
|
| |
| Net premiums earned | $ | 388,324 | | $ | 308,072 | | $ | 320,933 | |
| |
|
| |
|
| |
|
| |
Premiums written were assumed principally through reinsurance brokers or intermediaries. In each of 2005, 2004 and 2003, four reinsurance intermediaries individually accounted for more than 10% of gross premiums written, and collectively accounted for approximately 80%, 78% and 78% of gross premiums written, respectively.
The increase in both gross premiums written and gross premiums earned for the year ended December 31, 2005 were primarily driven by reinstatement premiums of $159.5 million, including $151.7 million of reinstatement premiums related to Hurricanes Katrina, Rita and Wilma.
The increase in both ceded premiums written and ceded premiums earned for the year ended December 31, 2005 were driven by $107.8 million of ceded reinstatement and ceded additional premiums related to Hurricanes Katrina, Rita and Wilma.
PXRE purchases catastrophe retrocessional coverage for its own protection, depending on market conditions. PXRE purchases reinsurance primarily to reduce its exposure to severe losses related to any one event or catastrophe. PXRE currently has reinsurance treaties in place with several different coverages, territories, limits and retentions that serve to reduce a large gross loss emanating from any one event. PXRE also purchases clash reinsurance protection which allows PXRE to recover losses ceded by more than one reinsured related to any one particular property, primarily related to PXRE’s exposure assumed on per-risk treaties. In 2005, PXRE also entered into two collateralized bond transactions to protect the Company against a severe catastrophe event and the occurrence of multiple significant catastrophe events during the same year.
Included in Other Assets as of December 31, 2005 is a net receivable of $35.1 million associated with the commutation of one reinsurance contract prior to December 31, 2005. This amount was paid to the Company subsequent to December 31, 2005.
F-15
In addition, as a result of the Company’s downgrade in ratings subsequent to year end, the Company received notifications from reinsurers exercising their rights claimed under two of the Company’s reinsurance contracts to cancel and commute these contracts based on ratings downgrades and material changes to the Company. The effect of these cancellations and commutations has been recorded in the Company’s financial statements as of December 31, 2005.
In November 2005, PXRE purchased $300.0 million of reinsurance protection through a collaterized catastrophe bond transaction. The reinsurance coverage provides the Company with reinsurance protection from extreme catastrophe losses arising from hurricanes in Eastern and Gulf coasts of the United States, windstorms in northern Europe and earthquakes in California over five years. The reinsurance coverage is based on a modeled loss trigger which closely resembles PXRE’s assumed reinsurance exposures. If the modeled loss exceeds the attachment point, PXRE will make a recovery under the reinsurance agreement. The recovery is limited to PXRE’s ultimate net loss from the loss event. Coverage incepted on November 8, 2005 and continues until November 8, 2010, unless terminated earlier. There were no reinsurance recoveries under this reinsurance agreement in 2005.
In addition, in December 2005 PXRE also entered into a second agreement that provides $250.0 million of protection through an additional collateralized catastrophe bond transaction. This coverage is effective January 1, 2006 and provides the Company with second event coverage arising from hurricanes in the Eastern and Gulf coasts of the United States, windstorms in northern Europe and earthquakes in California. The coverage is based on a modeled loss trigger. Upon the occurrence of a loss event, if the modeled loss exceeds the attachment point for the peril, the coverage is activated. Upon the occurrence of a second loss event during the same calendar year, if the modeled loss exceeds the attachment point, PXRE will make recovery under the agreement. The recovery is based on modeled losses and is not limited to PXRE’s ultimate net loss from the event. The coverage provides $125.0 million of protection for the period from January 1, 2006 to December 31, 2006 and $125.0 million for the period from January 1, 2006 to December 31, 2008. This contract has been determined to be a derivative and will therefore be recorded at fair value with the changes in fair value reported in other reinsurance related expense (income). See further discussion in Note 5.
The reinsurance companies that are the counterparties to both of the above noted transactions are variable interest entities under the provisions of FIN 46R. The Company is not the primary beneficiary of these entities and is therefore not required to consolidate them in its consolidated financial statements.
In the event that retrocessionaires are unable to meet their contractual obligation, PXRE would remain liable for the underlying covered claims and therefore the Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk. The Company records a provision for uncollectible underlying reinsurance recoverable when collection becomes unlikely.
At December 31, 2005, PXRE had balances with an insurer, Legion Insurance Company (“Legion”), which has been in liquidation, amounting to $8.2 million of premiums receivable net of contingent commission. PXRE also had losses and loss expense liabilities due to Legion of $18.0 million at December 31, 2005. PXRE’s reinsurance contracts with Legion contain offset clauses whose enforceability is subject to Pennsylvania law.
F-16
PXRE has both ceded and assumed reinsurance contracts that involve the withholding of premiums by the cedent or PXRE, as the case may be. On assumed reinsurance contracts, cedents held premiums and accrued investment income for which we have recognized $0.9 million and $1.7 million of investment income for the years ended December 31, 2004 and 2003, respectively. On ceded reinsurance contracts, PXRE held premiums and accrued investment income of $86.4 million due to reinsurers as of both December 31, 2005 and 2004. These amounts are included, net of related receivables, under the caption, “Reinsurance balances payable” in the Company’s Consolidated Balance Sheets. PXRE owes fixed rates of interest to the retrocessionaires for these funds withheld arrangements, and on a weighted average basis such rates during the years ended December 31, 2005, 2004 and 2003 were 7.7%, 7.4% and 6.8%, respectively. Under these arrangements, PXRE reduced investment income during the years ended December 31, 2005, 2004 and 2003 by $6.7 million, $8.0 million and $9.1 million, respectively.
Activity in losses and loss expenses for the years ended December 31, 2005, 2004 and 2003 is as follows:
| ($000’s) | 2005 | | 2004 | | 2003 | |
| |
|
| |
|
| |
|
| |
| Net balance at January 1 | $ | 398,869 | | $ | 303,711 | | $ | 240,385 | |
| Incurred related to: | | | | | | | | | |
| Current year | | 987,647 | | | 214,316 | | | 112,917 | |
| Prior years | | 23,876 | | | 12,031 | | | 44,681 | |
| |
|
| |
|
| |
|
| |
| Total incurred | | 1,011,523 | | | 226,347 | | | 157,598 | |
| |
|
| |
|
| |
|
| |
| Recovered (paid) related to: | | | | | | | | | |
| Current year | | (7,643 | ) | | (12,628 | ) | | (26,058 | ) |
| Prior years | | (184,632 | ) | | (119,493 | ) | | (66,957 | ) |
| |
|
| |
|
| |
|
| |
| Total paid | | (192,275 | ) | | (132,121 | ) | | (93,015 | ) |
| |
|
| |
|
| |
|
| |
| Retroactive reinsurance assumed | | — | | | (1,037 | ) | | (5,571 | ) |
| Foreign exchange adjustments | | (5,646 | ) | | 1,969 | | | 4,314 | |
| |
|
| |
|
| |
|
| |
| Net balance at December 31 | | 1,212,471 | | | 398,869 | | | 303,711 | |
| Reinsurance recoverable on unpaid losses | | 107,655 | | | 61,215 | | | 146,924 | |
| |
|
| |
|
| |
|
| |
| Gross balance at December 31 | $ | 1,320,126 | | $ | 460,084 | | $ | 450,635 | |
| |
|
| |
|
| |
|
| |
As the business written by PXRE is characterized by high severity and relatively low frequency, this may result in volatility in its financial results. Current year net losses incurred of $987.6 million is mainly due to the 2005 hurricanes which amounted to $638.0 million from Hurricane Katrina, $68.9 million from Hurricane Rita and $143.9 million from Hurricane Wilma.
F-17
Our loss estimates for Hurricanes Katrina, Rita and Wilma are subject to a high level of uncertainty due to the short period of time that has passed since Hurricanes Katrina, Rita and Wilma occurred, and the extremely complex and unique causation and coverage issues associated with Hurricane Katrina, including the appropriate attribution of losses to wind or flood damage as opposed to other perils such as fire, business interruption or civil commotion. The underlying personal lines policies generally contain exclusions for flood damage; however, water damage caused by wind may be covered. We expect that causation and coverage issues may not be resolved for a considerable period of time and may be influenced by evolving legal and regulatory developments.
During 2005, PXRE experienced net adverse development of $23.9 million for prior-year losses and loss expenses, consisting of $17.3 million of adverse development in the catastrophe and risk excess segment and $6.6 million of adverse development in the exited lines segment. The $17.3 million of prior year development in the catastrophe and risk excess segment was primarily related to re-estimation of the 2004 storm losses following additional claim reports from cedents. Prior year losses in the exited lines segment increased because of higher than expected reported claims.
During 2004, PXRE experienced net adverse development of $12.0 million for prior-year losses and loss expenses, comprised of $11.4 million catastrophe and risk excess net favorable development and $23.4 million exited lines net adverse development. The favorable development in the catastrophe and risk excess business was primarily related to case reserve takedowns from past significant catastrophes, such as the 2002 European floods. The $23.4 million net adverse development related to exited lines was due primarily to $13.7 million of adverse loss development on an aggregate excess of loss contract with Lumbermens Mutual Casualty Company (“LMC”). During the fourth quarter of 2004, this contract was commuted. The Company also experienced $19.7 million of adverse development on exited direct casualty reinsurance operations. The primary cause of the adverse development was higher than expected reported losses in 2004. Favorable development in other exited lines partially offset the adverse development experienced on the contract with LMC and direct casualty reinsurance operations. During the third and fourth quarters of 2004, the Company completed commutations of two exited direct general liability reinsurance programs, the first resulting in a $2.0 million reduction in incurred losses and the second in a $1.0 million increase in incurred losses.
During 2003, PXRE incurred net adverse development of $44.7 million for prior-year loss and loss expenses, $21.8 million of which was due to loss development on exited direct casualty reinsurance operations, $8.8 million adverse development from aerospace claims arising to a significant degree from the first receipt of notice that the increase in industry losses related to a 1998 air crash had resulted in the exhaustion of deductibles under three aerospace contracts between PXRE and Reliance Insurance Company and $8.2 million of development from finite contracts, $7.3 million of which related to the contract with LMC mentioned above.
F-18
The book value, gross unrealized gains, gross unrealized losses and estimated fair value of investments in fixed maturities as of December 31, 2005 and 2004 are shown below:
| ($000’s) | | Book
Value | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Estimated
Fair Value | |
| |
|
| |
|
| |
|
| |
|
| |
| 2005 | | | | | | | | | | | | |
| Available for sale: | | | | | | | | | | | | |
| United States government securities | $ | 58,715 | | $ | 16 | | $ | (1,316 | ) | $ | 57,415 | |
| United States government sponsored agency debentures | | 191,646 | | | 33 | | | (1,088 | ) | | 190,591 | |
| United States government sponsored agency mortgage-backed securities | | 171,635 | | | 121 | | | (557 | ) | | 171,199 | |
| Other mortgage and asset-backed securities | | 420,068 | | | 356 | | | (1,595 | ) | | 418,829 | |
| Obligations of states and politicalsubdivisions | | 1,554 | | | — | | | (28 | ) | | 1,526 | |
| Corporate securities | | 368,681 | | | 1,855 | | | (1,848 | ) | | 368,688 | |
|
|
| |
|
| |
|
| |
|
| |
| | 1,212,299 | | | 2,381 | | | (6,432 | ) | | 1,208,248 | |
| |
|
| |
|
| |
|
| |
|
| |
| Trading: | | | | | | | | | | | | |
| Foreign denominated securities | | 25,796 | | | — | | | — | | | 25,796 | |
| |
|
| |
|
| |
|
| |
|
| |
| Total fixed maturities | $ | 1,238,095 | | $ | 2,381 | | $ | (6,432 | ) | $ | 1,234,044 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| ($000’s) | | Book
Value | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Estimated
Fair Value | |
| |
|
| |
|
| |
|
| |
|
| |
| 2004 | | | | | | | | | | | | |
| Available for sale: | | | | | | | | | | | | |
| United States government securities | $ | 62,212 | | $ | 120 | | $ | (323 | ) | $ | 62,009 | |
| United States government sponsored agency debentures | | 122,297 | | | 451 | | | (794 | ) | | 121,954 | |
| United States government sponsored agency mortgage-backed securities | | 99,653 | | | 419 | | | (161 | ) | | 99,911 | |
| Other mortgage and asset-backed securities | | 172,927 | | | 588 | | | (3,502 | ) | | 170,013 | |
| Obligations of states and politicalsubdivisions | | 2,056 | | | 6 | | | (8 | ) | | 2,054 | |
| Corporate securities | | 246,059 | | | 2,685 | | | (2,887 | ) | | 245,857 | |
|
|
| |
|
| |
|
| |
|
| |
| | 705,204 | | | 4,269 | | | (7,675 | ) | | 701,798 | |
|
|
| |
|
| |
|
| |
|
| |
| Trading: | | | | | | | | | | | | |
| Foreign denominated securities | | 15,483 | | | — | | | — | | | 15,483 | |
|
|
| |
|
| |
|
| |
|
| |
| Total fixed maturities | $ | 720,687 | | $ | 4,269 | | $ | (7,675 | ) | $ | 717,281 | |
| |
|
| |
|
| |
|
| |
|
| |
F-19
PXRE regularly monitors the difference between the estimated fair values of investments and their cost or book values to identify underperforming investments and whether declines in value are temporary in nature, or “other than temporary.” If a decline in the value of a particular investment is deemed to be temporary, the decline is recorded as an unrealized loss, net of tax, in shareholders’ equity. If the decline is “other than temporary,” the carrying value of the investment is written down and a realized loss is recorded on the statement of operations. The Company formally reviews each quarter the unrealized losses by value, and all investments that have been in an unrealized loss position for more than six months. In assessing whether an investment is suffering a decline in value that is other than temporary, particular attention is paid to those trading at 80% or less of original cost, and those investments that have been downgraded by any of the major ratings agencies, general market conditions, and the status of principal and interest payments, and our ability and intent to hold such securities to maturity. If a decline is deemed to be other than temporary, a realized investment loss is recognized for the impairment.
The following table summarizes fixed maturity investments with unrealized losses at fair value by length of continuous unrealized loss position as of December 31, 2005:
| | One Year or Less | | Over One Year | |
| |
|
|
|
|
| |
|
|
|
|
| |
| ($000’s) | | Fair Value | | | Unrealized
Loss | | | Fair Value | | | Unrealized
Loss | |
| |
|
| |
|
| |
|
| |
|
| |
| United States government securities | $ | 41,260 | | $ | (1,116 | ) | $ | 6,286 | | $ | (200 | ) |
| United States government sponsored agency debentures | | 50,736 | | | (499 | ) | | 19,832 | | | (589 | ) |
| United States government sponsored agency mortgage-backed securities | | 15,950 | | | (404 | ) | | 2,791 | | | (153 | ) |
| Other mortgage and asset-backed securities | | 40,781 | | | (532 | ) | | 32,862 | | | (1,063 | ) |
| Obligations of states and political subdivisions | | 560 | | | (8 | ) | | 966 | | | (20 | ) |
| Corporate securities | | 32,385 | | | (566 | ) | | 36,924 | | | (1,282 | ) |
|
|
| |
|
| |
|
| |
|
| |
| Total temporarily impaired securities | $ | 181,672 | | $ | (3,125 | ) | $ | 99,661 | | $ | (3,307 | ) |
| |
|
| |
|
| |
|
| |
|
| |
During the year ended December 31, 2005, PXRE recorded $11.8 million (2004 - $0.1 million) in other than temporary impairment charges. The other than temporary impairment charges recorded in the current year relate to investments that the Company may not have the ability to hold to maturity or have sold subsequent to year end to pay claims and meet the Company’s short term obligations as a result of the ratings downgrade of PXRE that occurred subsequent to year end. See further discussion in Note 15.
Unrealized losses amounting to $1.2 million of the total unrealized loss on fixed maturity investments as of December 31, 2005 relate to investments that PXRE has deposited in a trust for the benefit of a cedent in connection with certain finite reinsurance transactions. The remaining unrealized losses are primarily due to increases in interest rates and relate primarily to investments held to meet the Company’s obligations associated with its exited lines.
The following table summarizes fixed maturity investments with unrealized losses at fair value by length of continuous unrealized loss position as of December 31, 2004:
F-20
| | | One Year or Less | | | Over One Year | |
|
|
|
| ($000’s) | | | Fair Value | | | Unrealized
Loss | | Fair Value | | | Unrealized
Loss |
| | |
|
| |
|
|
|
| |
|
|
| United States government securities | | $ | 49,213 | | $ | (323 | ) | $ | — | | $ | — | |
| United States government sponsored agency debentures | | | 90,815 | | | (794 | ) | | — | | | — | |
| United States government sponsored agency mortgage-backed securities | | | 13,025 | | | (11 | ) | | 6,519 | | | (150 | ) |
| Other mortgage and asset-backed securities | | | 112,257 | | | (2,999 | ) | | 12,253 | | | (504 | ) |
| Obligations of states and political subdivisions | | | 1,242 | | | (8 | ) | | — | | | — | |
| Corporate securities | | | 149,412 | | | (2,220 | ) | | 26,014 | | | (666 | ) |
| |
|
| |
|
| |
|
| |
|
| |
| Total temporarily impaired securities | | $ | 415,964 | | $ | (6,355 | ) | $ | 44,786 | | $ | (1,320 | ) |
| | |
|
| |
|
| |
|
| |
|
| |
The unrealized losses shown in the table above are primarily due to increases in interest rates.
Proceeds, gross realized investment gains, and gross realized investment losses from sales of fixed maturity investments before maturity or securities that prepay and from sales of equity securities were as follows:
| ($000’s) | | | | | | | 2005 | | | 2004 | | | 2003 | |
| | |
|
|
|
|
|
|
| Proceeds from sales | | | | | | | | | | |
| Fixed maturities | | $ | 52,066 | | $ | 341,911 | | $ | 348,884 | |
| | |
|
| |
|
| |
|
| |
| Equity securities | | $ | — | | $ | 21 | | $ | 328 | |
| | |
|
| |
|
| |
|
| |
| Gross realized gains | | | | | | | | | | |
| Fixed maturities | | $ | 83 | | $ | 2,954 | | $ | 6,546 | |
| Equity securities | | | — | | | 21 | | | — | |
| | |
|
| |
|
| |
|
| |
| | | 83 | | | 2,975 | | | 6,546 | |
| | |
|
| |
|
| |
|
| |
| Gross realized losses | | | | | | | | | | |
| Fixed maturities | | | (12,248 | ) | | (2,834 | ) | | (3,956 | ) |
| Other | | | (2,571 | ) | | (291 | ) | | (143 | ) |
| | |
|
| |
|
| |
|
| |
| | | (14,819 | ) | | (3,125 | ) | | (4,099 | ) |
| | |
|
| |
|
| |
|
| |
| Net realized investment (losses) gains | | $ | (14,736 | ) | $ | (150 | ) | $ | 2,447 | |
| | |
|
| |
|
| |
|
| |
Included in gross realized losses are other than temporary write downs of investment securities of $11.8 million, $0.1 million and $0.2 million in 2005, 2004 and 2003, respectively.
In the fourth quarter of 2005, we sold PXRE Limited, the sole corporate capital provider to PXRE Lloyd’s Syndicate 1224, to Chaucer Holdings PLC (“Chaucer”) and agreed to terms for the reinsurance to close of the liabilities of PXRE Lloyd’s Syndicate 1224 into a Lloyd’s syndicate controlled by Chaucer. The Company’s loss on this sale was $2.5 million and such loss is reflected under “Other” in the table above.
F-21
The components of net investment income were as follows:
| ($000’s) | | | 2005 | | | 2004 | | | 2003 | |
| |
|
| |
|
| |
|
| |
| Fixed maturity investments | | $ | 35,511 | | $ | 25,986 | | $ | 23,325 | |
| Hedge funds and other limited partnerships | | | 11,892 | | | 10,744 | | | 13,373 | |
| Cash, short-term investments and other | | | 9,424 | | | 4,527 | | | 3,313 | |
| |
|
| |
|
| |
|
| |
| | | 56,827 | | | 41,257 | | | 40,011 | |
| Less investment expenses | | | (2,213 | ) | | (2,800 | ) | | (2,316 | ) |
| Less interest expense on funds held and deposit liabilities | | | (9,322 | ) | | (12,279 | ) | | (10,764 | ) |
| | |
|
| |
|
| |
|
| |
| Net investment income | | $ | 45,292 | | $ | 26,178 | | $ | 26,931 | |
| | |
|
| |
|
| |
|
| |
Investment expenses principally represent fees paid to General Re-New England Asset Management,Inc., Mariner Investment Group (“Mariner”), financing costs, and bank charges.
Investment Maturity Distributions
The book value and estimated fair value of fixed maturity investments at December 31, 2005 by expected maturity date are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| | | | | | Estimated | |
| Book | Fair |
| ($000’s) | Value | Value |
| | |
|
| |
|
| |
| Fixed Maturity: | | | | | | | |
| One year or less | | $ | 199,469 | | $ | 199,359 | |
| Over 1 through 5 years | | | 888,533 | | | 883,594 | |
| Over 5 through 10 years | | | 146,282 | | | 145,891 | |
| Over 20 years | | | 3,811 | | | 5,200 | |
| | |
|
| |
|
| |
| Total fixed maturities | | $ | 1,238,095 | | $ | 1,234,044 | |
| | |
|
| |
|
| |
In addition to fixed maturities, PXRE held $261.1 million and $296.3 million of short-term investments at December 31, 2005 and 2004, respectively, comprised principally of treasury bills and agency securities.
Cash and short-term investments approximates fair value because of the short maturity of those instruments.
PXRE also held $148.2 million and $129.1 million of limited partnership hedge fund assets, including funds managed by Mariner, at December 31, 2005 and 2004, respectively, that are accounted for under the equity method, as follows:
F-22
| | | 2005 | | | 2004 | |
| | |
|
|
|
|
| |
|
|
|
|
| |
| | | | | | | Ownership | | | | | | Ownership | |
| ($000’s) | | | $ | | | % | | | $ | | | % | |
| | |
|
| |
|
| |
|
| |
|
| |
| Mariner Atlantic Ltd. (2004 - Mariner Partners, L.P.) | | $ | 18,239 | | | 2.0 | | $ | 17,235 | | | 3.5 | |
| Mariner Select International, Ltd. (2004 - Mariner Select, L.P.) | | | 15,926 | | | 4.5 | | | 14,783 | | | 2.5 | |
| Mariner Opportunities, L.P. | | | 7,077 | | | 4.5 | | | 8,863 | | | 8.1 | |
| Caspian Capital Partners International, Ltd. (2004 - Caspian CapitalPartners, L.P.) (a Mariner fund) | | | 7,070 | | | 3.4 | | | 9,501 | | | 2.2 | |
| Wexford Offshore Spectrum Fund, Ltd. (2004 - Wexford Spectrum Fund, L.P.) | | | 10,495 | | | 1.3 | | | 8,121 | | | 2.2 | |
| Triage Offshore Fund, Ltd. (2004 -Triage Capital Management, L.P.) | | | 8,122 | | | 3.9 | | | 7,769 | | | 3.5 | |
| Other | | | 81,301 | | | 0.4 to 13.8 | | | 62,846 | | | 1.5 to 9.6 | |
| | |
|
| | | | |
|
| | | | |
| Total hedge funds | | $ | 148,230 | | | | | $ | 129,118 | | | | |
| | |
|
| | | | |
|
| | | | |
During 2005, PXRE Reinsurance redeemed approximately $103.1 million of hedge funds and PXRE Bermuda subsequently invested $103.1 million in the offshore counterparts of those funds.
Under the terms of certain reinsurance agreements, irrevocable letters of credit in the amount of $284.3 million were issued at December 31, 2005 in respect of reported loss reserves and unearned premiums. Cash and investments with a fair value of $405.7 million have been pledged as collateral with issuing banks. In addition, securities amounting to $9.9 million in par value were on deposit with various state insurance departments in order to comply with insurance laws at December 31, 2005.
PXRE, in connection with the capitalization of PXRE’s Lloyd’s Syndicate 1224, has placed on deposit $1.3 million par value of securities as collateral for Lloyd’s of London (“Lloyd’s”) which are due to be released in 2006.
PXRE has outstanding commitments for funding investments in a limited partnership of $0.3 million at December 31, 2005.
At December 31, 2005, PXRE has deposited securities with a fair value of $61.6 million in a trust for the benefit of a cedent in connection with certain finite reinsurance transactions.
F-23
5. Derivative Instruments
As discussed in Note 3, PXRE entered into an agreement that provides $250.0 million of collateralized catastrophe protection with Atlantic & Western Re Limited II, a special purpose Cayman Islands reinsurance company which was funded through a catastrophe bond transaction. This coverage is effective January 1, 2006 and provides the Company with second event coverage arising from hurricanes in the Eastern and Gulf coasts of the United States, windstorms in northern Europe and earthquakes in California. The coverage is based on a modeled loss trigger. Upon the occurrence of a loss event, if the modeled loss exceeds the attachment point for the peril, the coverage is activated. Upon the occurrence of a second loss event during the same calendar year, if the modeled loss exceeds the attachment point, PXRE will make recovery under the agreement. The recovery is based on modeled losses and is not limited to PXRE’s ultimate net loss from the loss event. The coverage provides $125.0 million of protection for the period from January 1, 2006 to December 31, 2006 and $125.0 million for the period from January 1, 2006 to December 31, 2008.
PXRE records this contract at fair value with any changes in the value reflected in other reinsurance related expense (income) in the Consolidated Statements of Operations and Comprehensive Operations. At December 31, 2005, included in other reinsurance related expense (income) was $0.9 million which consists solely of upfront transaction costs. The reinsurance company that is the counterparty to this transaction is a variable interest entity under the provisions of FIN 46R. The Company is not the primary beneficiary of this entity and is therefore not required to consolidate it in its consolidated financial statements.
On December 30, 1998, PXRE Delaware entered into a Credit Agreement with Wachovia Bank, National Association (“Wachovia”), to arrange and syndicate for it a revolving credit facility of up to $75.0 million. Commitments under this credit facility terminated on May 16, 2003 following a repayment of $20.0 million on March 31, 2003 and the final payment of $10.0 million on May 16, 2003. PXRE Delaware entered into a cash flow hedge interest rate swap agreement with Wachovia that had the intended effect of converting floating rate borrowings by PXRE Delaware to a fixed rate borrowing at an annual rate of 7.34% . The fair value of the interest rate swap agreement at December 31, 2003 was approximately $0.9 million, and on November 30, 2004 PXRE terminated the agreement by paying $0.3 million. Following the repayments under PXRE’s credit facility with Wachovia in 2003 this interest rate swap, previously accounted for as a cash flow hedge, was no longer effective. Consequently $1.1 million has been charged as interest expense in 2003. This charge did not impact shareholders’ equity because it was previously recorded as a component of other comprehensive operations.
Trust preferred securities are mandatorily redeemable subordinated debt securities issued to separate special purpose trusts holding solely those securities. The subordinated debt securities at December 31, 2005 and 2004 are as follows:
F-24
| ($000’s) | 2005 | | 2004 | |
| | |
|
| |
|
| |
| 8.85% fixed rate due February 1, 2027 | | $ | 102,646 | | $ | 102,640 | |
| 7.35% fixed/floating rate due May 15, 2033 | | | 18,042 | | | 18,042 | |
| 9.75% fixed rate due May 23, 2033 | | | 15,464 | | | 15,464 | |
| 7.70% fixed/floating rate due October 29, 2033 | | | 20,619 | | | 20,619 | |
| 7.58% fixed/floating rate due September 30, 2033 | | | 10,310 | | | 10,310 | |
| |
|
| |
|
| |
| | $ | 167,081 | | $ | 167,075 | |
| |
|
| |
|
| |
The 8.85% fixed rate capital trust pass-through securities pay interest semi-annually and are redeemable by PXRE from February 1, 2007 at 104.180% declining to 100.418% at February 1, 2016, and at par thereafter.
The 7.35% fixed/floating rate capital trust pass-through securities initially pay interest quarterly at a fixed rate of 7.35% for 5 years and then at a floating rate of 3 month LIBOR plus 4.1% reset quarterly thereafter, and are redeemable by PXRE at par on or after May 15, 2008.
The 9.75% fixed rate capital trust pass-through securities pay interest quarterly and are redeemable by PXRE from May 23, 2008 at 104.875% declining to 100.975% at May 23, 2013, and at par thereafter.
The 7.70% fixed/floating rate capital trust pass-through securities initially pay interest quarterly at a rate of 7.70% for 5 years and then at a floating rate of 3 month LIBOR plus 3.85% reset quarterly thereafter, and are redeemable by PXRE at par on or after October 29, 2008.
The 7.58% fixed/floating rate capital trust pass-through securities initially pay interest quarterly at a rate of 7.58% for 5 years and then at a floating rate of 3 month LIBOR plus 3.90% reset quarterly thereafter, and are redeemable by PXRE at par on or after September 30, 2008.
PXRE has the option to defer interest payments on the capital trust pass-through securities and redeem them earlier than the due dates, subject to limits and penalties as set out in the relevant indentures.
PXRE is incorporated under the laws of Bermuda and, under current Bermuda law, is not obligated to pay any taxes in Bermuda based upon income or capital gains. PXRE has received an undertaking from the Supervisor of Insurance in Bermuda pursuant to the provisions of the Exempted Undertakings Tax Protection Act, 1966, which exempts PXRE from any Bermuda taxes computed on profits, income or any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, at least until the year 2016.
PXRE does not consider itself to be engaged in a trade or business in the United States and, accordingly, does not expect to be subject to direct United States income taxation.
The United States subsidiaries of PXRE file a consolidated U.S. federal income tax return.
F-25
(Loss) income before income taxes and cumulative effect of accounting change for the years ended December 31, 2005, 2004 and 2003 was as follows under the following jurisdictions:
| ($000’s) | | | 2005 | | | 2004 | | | 2003 | |
| | |
|
| |
| |
|
|
| U.S. | | $ | (118,902 | ) | $ | (21,147 | ) | $ | 1,868 | |
| Bermuda and subsidiary | | | (572,897 | ) | | 34,384 | | | 90,104 | |
| Barbados | | | 148 | | | 4,428 | | | 5,517 | |
| | |
|
| |
|
| |
|
| |
| Total | | $ | (691,651 | ) | $ | 17,665 | | $ | 97,489 | |
| | |
|
| |
| |
| |
The components of the provision (benefit) for income taxes for the years ended December 31, 2005, 2004 and 2003 are as follows:
| ($000’s) | | | 2005 | | | 2004 | | | 2003 | |
| | |
|
| |
| |
| |
| Current | | | | | | | | | | |
| U.S. | | $ | (4,948 | ) | $ | (15,242 | ) | $ | 12,125 | |
| Foreign | | | 181 | | | 4,180 | | | 566 | |
| | |
|
| |
|
| |
|
| |
| Subtotal | | | (4,767 | ) | | (11,062 | ) | | 12,691 | |
| Deferred U.S. | | | 10,674 | | | 4,828 | | | (11,850 | ) |
| | |
|
| |
|
| |
|
| |
| Income tax provision (benefit) before change in accounting | | | 5,907 | | | (6,234 | ) | | 841 | |
| Income tax benefit from change inaccounting | | | — | | | (240 | ) | | — | |
| | |
|
| |
|
| |
|
| |
| Income tax provision (benefit) | | $ | 5,907 | | $ | (6,474 | ) | $ | 841 | |
| | |
|
| |
| |
| |
The significant components of the net deferred income tax asset (liability) are as follows:
| ($000’s) | | | 2005 | | | 2004 | |
| | |
|
| |
|
| |
| Deferred income tax asset: | | | | | | | |
| Net operating loss carryforward | | $ | 32,156 | | $ | — | |
| Discounted reserves and unearned premiums | | | 13,035 | | | 10,101 | |
| AMT carryforward | | | 2,586 | | | — | |
| Excess tax over book basis in invested assets | | | 1,524 | | | 900 | |
| Deferred compensation and benefits | | | 1,396 | | | 1,149 | |
| Allowance for doubtful accounts | | | 746 | | | 995 | |
| Additional minimum pension liability | | | 716 | | | 716 | |
| Investments and unrealized foreign exchange | | | 71 | | | — | |
| Other, net | | | 18 | | | 871 | |
| | |
|
| |
|
| |
| Total deferred income tax asset | | $ | 52,248 | | $ | 14,732 | |
| | |
|
| |
|
| |
| Deferred income tax liability: | | | | | | | |
| Excess book over tax basis in limited partnerships | | $ | (837 | ) | $ | (2,187 | ) |
| Market discount | | | — | | | (138 | ) |
| Investments and unrealized foreign exchange | | | — | | | (704 | ) |
| Deferred acquisition costs | | | (16 | ) | | (61 | ) |
| Other, net | | | — | | | (177 | ) |
| | |
|
| |
|
| |
| Total deferred income tax liability | | $ | (853 | ) | $ | (3,267 | ) |
| | |
|
| |
|
| |
| Valuation allowance | | | (51,395 | ) | | — | |
| | |
|
| |
|
| |
| Net deferred income tax asset | | $ | — | | $ | 11,465 | |
| | |
|
| |
|
| |
F-26
Management has reviewed PXRE’s deferred tax asset and due to uncertainty with respect to the amount of future taxable income that will be generated, have concluded that a valuation allowance of $51.4 million is required for the entire deferred tax asset. Included in the deferred tax asset is a net operating loss which will expire in 2026.
Income tax recoverable consists of the following:
| ($000’s) | 2005 | | 2004 | |
| | |
|
| |
|
| |
| Current tax asset | | $ | 6,295 | | $ | 20,129 | |
| Deferred tax asset | | | — | | | 11,465 | |
| | |
|
| |
|
| |
| Income tax recoverable | | $ | 6,295 | | $ | 31,594 | |
| | |
|
| |
|
| |
The provision (benefit) for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate of 35% to pretax income from operations as a result of the following differences:
| ($000’s) | | | 2005 | | | 2004 | | | 2003 | |
| | |
|
| |
|
| |
|
| |
| | | |
| Statutory U.S. rate | | $ | (242,078 | ) | $ | 6,183 | | $ | 34,122 | |
| Tax exempt interest | | | (6 | ) | | (100 | ) | | (678 | ) |
| Bermuda and subsidiary income | | | 200,514 | | | (12,034 | ) | | (31,537 | ) |
| Foreign income – Barbados | | | (51 | ) | | (1,550 | ) | | (1,931 | ) |
| Barbados tax | | | 109 | | | 4,112 | | | 516 | |
| Reserve for prior-year taxes | | | (1,896 | ) | | (2,600 | ) | | — | |
| Valuation allowance | | | 48,915 | | | — | | | — | |
| Other, net | | | 400 | | | (245 | ) | | 349 | |
| | |
|
| |
|
| |
|
| |
| Income tax provision (benefit) | | $ | 5,907 | | $ | (6,234 | ) | $ | 841 | |
| | |
|
| |
|
| |
|
| |
On October 7, 2005, PXRE completed the public offering of 8.8 million of its common shares, including 1.2 million shares sold upon exercise of the underwriter’s over-allotment option in full, at a public offering price of $13.25 per share. Net proceeds to the Company from the common stock offering, after deducting estimated expenses and underwriter’s discounts and commissions, were approximately $114.7 million.
Pursuant to a Share Purchase Agreement dated as of September 29, 2005, PXRE agreed to issue and sell 375,000 Series D Perpetual Non-Voting Preferred Shares (the “Series D Preferred Shares”) in a private placement exempt from registration under the Securities Act of 1933. The Series D Preferred Shares were mandatorily exchangeable for common shares upon the shareholders’ approval of the exchange. The private placement closed on October 7, 2005. The gross proceeds from the private placement were $375.0 million, and proceeds net of agents' discounts and commissions and offering expenses were $359.3 million. The Series D Preferred Shares were mandatorily exchanged into 34.1 million common shares following the affirmative vote of the Company’s shareholders at a special general meeting held on November 18, 2005 approving the exchange of the Series D Preferred Shares and the authorization of an additional 300.0 million common shares.
F-27
PXRE has contributed the $474.0 million net proceeds of the public offering and the private placement to PXRE Bermuda to support the underwriting of reinsurance business during subsequent renewal periods.
On November 23, 2004, PXRE completed a public offering of 5.2 million of its common shares at $23.75 per share, consisting of 3.7 million shares offered by the Company and 1.5 million shares offered by certain selling shareholders. The underwriters were given an option to purchase up to an additional 0.8 million common shares, 0.7 million from the Company and 0.1 million from the selling shareholders, solely to cover overallotments, if any, which option they exercised on December 2, 2004.
The Company did not receive any of the proceeds from the sale of shares by the selling shareholders. The selling shareholders converted 2,208 preferred shares, including accrued dividends to 1.6 million common shares sold in the public offering, including the overallotment. Net proceeds to the Company from the sale of common shares sold by the Company were approximately $98.2 million, including the overallotment. PXRE used the net proceeds for general corporate purposes, including contributions to the capital of PXRE Bermuda to support growth in its business.
On December 16, 2003, PXRE completed a public offering of 2.2 million of its common shares at $21.75 per share. Of the 2.2 million shares sold, 1.1 million were offered by PXRE and 1.1 million were offered by Phoenix Life Insurance Company (“Phoenix”), one of the Company's common shareholders. The underwriters were given an option to purchase up to an additional 0.3 million common shares from the Company, solely to cover overallotments, if any, which option they exercised on January 22, 2004.
The Company did not receive any of the proceeds from the sale of shares by Phoenix. Net proceeds to the Company from the sale of the common shares sold by the Company were approximately $20.4 million and $6.3 million for the overallotment. PXRE used the net proceeds from the sale of common shares for general corporate purposes, including contributions to the capital of PXRE Bermuda to support growth in its business.
Absent a specific waiver by PXRE’s Board of Directors, the Company’s Bye-Laws restrict the ownership and voting rights of any shareholder who directly or indirectly would own more than 9.9% of the outstanding common shares of the Company. The restriction requires the prompt disposition of any shares held in violation of the provision and limits the voting power of a shareholder with more than 9.9% of the outstanding shares to the voting power of a shareholder with 9.9% of the outstanding common shares.
On April 4, 2002, the Company raised $150.0 million of additional capital by issuing 15,000 convertible voting preferred shares in a private placement not involving a public offering under Section 4(2) of the Securities Act of 1933, as amended. The convertible preferred share investment occurred pursuant to a share purchase agreement, dated as of December 10, 2001, between the Company and certain investors. On February 12, 2002, the shareholders approved the sale and issuance of three series of convertible preferred shares pursuant to the share purchase agreement, including 7,500 Series A convertible preferred shares, 5,000 Series B convertible preferred shares, and 2,500 Series C convertible preferred shares. Proceeds of the offering of the convertible preferred shares, net of offering expenses of $9.1 million, amounted to $140.9 million.
F-28
On March 31, 2005, 5,840.6 Series A1 convertible voting preferred shares, 3,143.6 Series B1 convertible voting preferred shares and 1,393.6 Series C1 convertible voting preferred shares were mandatorily converted into 4.4 million class A convertible voting common shares, 2.4 million class B convertible voting common shares and 1.0 million class C convertible voting common shares, respectively. The conversion was effected based upon a conversion price of $13.27, which conversion price was agreed between the Company and holders of the Company’s convertible voting preferred shares pursuant to a letter agreement dated as of March 31, 2005. All the remaining convertible preferred shares mandatorily convert by April 4, 2008.
Each convertible voting common share converts into one common share upon sale to a third party.
The convertible preferred shares accrue cumulative dividends per share at the rate per annum of 8% of the sum of the stated value of each share plus any accrued and unpaid dividend thereon payable on a quarterly basis. Commencing in the second quarter of 2005, the dividends paid on such convertible voting preferred shares are paid in cash, rather than in additional convertible voting preferred shares.
As of December 31, 2005, 5,813 convertible preferred shares were outstanding, which were convertible into 5.1 million common shares. Convertible preferred shares are convertible into convertible common shares at the option of the holder at any time at a conversion price equal to the original conversion price, subject to certain dilution adjustments. The number of convertible common shares issued upon the conversion of each convertible preferred share would be equal to the sum of the original purchase price ($10,000) of such convertible preferred share plus accrued but unpaid dividends divided by the adjusted conversion price. The conversion price is subject to adjustment to avoid dilution in the event of recapitalization, reclassification, stock split, consolidation, merger, amalgamation or other similar event or an issuance of additional common shares in a private placement below the fair market value or in a registered public offering below 95% of fair market value (in each case, fair market value being the value immediately prior to the date of announcement of such issuance) or without consideration. As a result of the issuance of 8.8 million common shares in October 2005 at the price of $13.25 per share pursuant to a public offering of common shares and the issuance of 34.1 million common shares upon the exchange of the Series D Perpetual Preferred Shares at the exchange price of $11.00 per share, the conversion price on the Preferred Shares was adjusted downwards by $1.75 in accordance with the terms of the underlying share purchase agreement.
In addition, the conversion price is subject to adjustment, for certain loss and loss expense development on reserves for losses incurred on or before September 30, 2001 (and loss adjustment expenses related thereto) and for any liability or loss arising out of pending material litigation (other than legal fees and expenses), on an after-tax basis, equal to an amount computed in accordance with a formula as set forth in the Description of Stock. Adjustments occur if the development exceeds a deductible after-tax threshold of $7.0 million and, with respect to all reserves other than reserves for certain discontinued operations and the events of September 11, 2001 and liability arising out of pending litigation, the adjustment is limited to $12.0 million of further development. At December 31, 2005, PXRE has incurred $37.4 million of net adverse development above this $7.0 million threshold. As a result of this, and the anti-dilution adjustment discussed above, as of December 31, 2005, the adjusted conversion price was $11.43.
F-29
Under the terms of the preferred shares, the payment of dividends on the Company’s common shares is subject to the following limitations: (i) no dividend may be paid upon the common shares if the dividends payable upon the preferred shares are overdue; (ii) the amount of dividends paid with respect to the common shares may not be increased by a cumulative annualized rate of more than 10% at any time prior to April 4, 2005 (the “Permitted Dividend Amount”) without the consent of the majority of holders of the preferred shares; and (iii) at any time on or after April 4, 2005, no dividend may be paid that would result in payment of any dividend or other distribution with respect to common shares or result in a redemption, offer to purchase, tender offer or other acquisition of capital stock of the Company involving consideration having an aggregate fair value in excess of the greater of the Permitted Tender Offer Amount and the Permitted Dividend Amount. For this purpose, the term “Permitted Tender Offer Amount” means an amount equal to 20% of the cumulative amount by which consolidated net income in any calendar year commencing with the year ended December 31, 2002 exceeds $50.0 million minus the sum of all cash and the fair value of all non-cash consideration paid in respect of redemptions, offers to purchase, tender offers or other acquisitions of capital stock on or after December 10, 2001.
At a Special General Meeting held November 18, 2005 the shareholders of PXRE approved certain changes to the Share Capital of the Company, including the authorization of additional common shares. This approval increased the authorized share capital from $60.0 million to $360.0 million and increased the number of authorized common shares from 50.0 million to 350.0 million.
Further, the shareholders approved an increase in the authorized share capital by $20.0 million and an increase in the number of authorized Preferred Shares by an additional 20.0 million shares to 30.0 million.
The shareholders also approved the division of 30.0 million of PXRE’s 300.0 million newly authorized common shares into three pre-existing classes of common shares (collectively, “Convertible Common Shares”): 10.0 million additional Class A Convertible Voting Common Shares (“Class A Convertible Common Shares”); 10.0 million additional Class B Convertible Voting Common Shares (“Class B Convertible Common Shares”) and 10.0 million additional Class C Convertible Voting Common Shares (“Class C Convertible Common Shares”). These Convertible Common Shares are to be automatically redesignated as common shares upon, and to the extent of, the exercise of conversion rights attaching to such Convertible Common Shares on a one-for-one basis. As a result, 50.0 million of the 350.0 million of the Company’s authorized common shares are divided into 20.0 million Class A convertible voting common shares, 16.7 million Class B convertible voting common shares and 13.3 million Class C convertible voting common shares.
F-30
The Company was incorporated in Bermuda and is subject to the Bermuda Companies Act 1981 (the “Companies Act”). Under the Companies Act, even though the Company is solvent and able to pay its liabilities as they become due, we may not declare or pay dividends or make distributions from our contributed surplus if there are reasonable grounds for believing either that we are, or would after the payment, be, unable to pay our liabilities as they become due, or that the realizable value of our assets would thereby be less than the sum of our liabilities and our issued share capital (par value) and our share premium account. Under the Companies Act, when a company issues shares, the aggregate paid in par value of the issued shares comprises the Company’s share capital account. When shares are issued at a "premium", that is, where the actual sum paid for a share exceeds the par value of the share, the amount paid in excess of the par value must be allocated to and maintained in a capital account called the "share premium account." The Companies Act requires shareholder approval prior to any reduction of our share capital or share premium accounts. Bermuda law also provides that we maintain a contributed surplus account, to which we must allocate, amongst other things, shareholder capital which is unrelated to any share subscription. Currently, there is $325.2 million in our contributed surplus account.
We have a high share premium account due to the significant difference between the $1.00 par value of our common shares and the amounts paid for those shares in recent and historical common share offerings of the Company.
As a result of the losses arising from Hurricanes Katrina, Rita and Wilma, the realizable value of the Company’s assets ($2.1 billion) no longer exceeds the aggregate of its liabilities ($1.7 billion), its issued share capital ($130.4 million) and its share premium account ($550.0 million). As a result of this deficiency, the Company is currently prohibited by Bermuda law from paying dividends or making distributions from its contributed surplus account to its shareholders. See further discussion in Note 15.
The Bermuda Monetary Authority and the Insurance Department of the State of Connecticut, by which PXRE Bermuda and PXRE Reinsurance, respectively, are regulated, recognize as net income and surplus those amounts determined in conformity with statutory accounting principles (“SAP”) prescribed or permitted by those departments, which differ in certain respects from U.S. GAAP.
The amounts of statutory capital and surplus at December 31, and statutory net income for the years ended December 31, 2005, 2004 and 2003, as filed with insurance regulatory authorities are as shown in the table below:
| ($000’s) | | 2005 | | | 2004 | | | 2003 | |
| |
|
| |
|
| |
|
| |
| PXRE Bermuda | | | | | | | | | |
| Statutory capital and surplus | $ | 530,775 | | $ | 749,084 | | $ | 425,839 | |
| Statutory net (loss) income | $ | (563,895 | ) | $ | 47,309 | | $ | 93,497 | |
| PXRE Reinsurance | | | | | | | | | |
| Statutory capital and surplus | $ | 126,991 | | $ | 224,926 | | $ | 425,210 | |
| Statutory net (loss) income | $ | (98,244 | ) | $ | 3,206 | | $ | 32,838 | |
F-31
During the year ended December 31, 2003, the Company contributed 42.6% of its ownership of PXRE Barbados to PXRE Bermuda, and during the year ended December 31, 2004, contributed the remaining portion. During 2005, PXRE Ireland assumed ownership of all company subsidiaries that were previously owned by PXRE Barbados. PXRE Ireland is a wholly owned subsidiary of PXRE Bermuda. As of December 31, 2005, PXRE Bermuda has assets on its statutory balance sheet equal to $21.3 million which consists of investments in subsidiaries as well as amounts due from its parent company, PXRE Group Ltd. The balance of the decrease in statutory capital and surplus of PXRE Bermuda at December 31, 2005 was due to the net loss for the year and changes in other statutory surplus, offset, in part, by contributions of capital from its parent.
The payment of dividends by PXRE Bermuda is limited under Bermuda insurance laws, which require PXRE Bermuda to maintain certain measures of solvency and liquidity. As of December 31, 2005, the statutory capital and surplus of PXRE Bermuda was estimated to be $530.8 million and the amount required to be maintained was estimated to be $201.2 million.
PXRE Reinsurance is subject to state regulatory restrictions, which limit the maximum amount of annual dividends or other distributions, including loans or cash advances, available to shareholders without prior approval of the Insurance Commissioner of the State of Connecticut.
In the wake of losses incurred as a result of Hurricanes Katrina, Rita and Wilma, PXRE Reinsurance has an accumulated deficit and, therefore, may not declare and pay any dividends without regulatory approval during 2006.
The decrease in statutory capital and surplus of PXRE Reinsurance at December 31, 2005 was primarily due to a full limit loss of $80.0 million under an excess of loss protection for PXRE Bermuda.
F-32
A reconciliation of (loss) income before cumulative effect of accounting change and convertible preferred share dividends to (loss) income, and shares, which affect basic and diluted (loss) income per share, is as follows:
| ($000’s, except per share data) | | 2005 | | | 2004 | | | 2003 | |
| |
|
| |
|
| |
|
| |
| Net (loss) income to common shareholders: | | | | | | | | | |
| (Loss) income before cumulative effect of accounting | | | | | | | | | |
| change and convertible preferred share dividends | $ | (697,558 | ) | $ | 23,899 | | $ | 96,648 | |
| Cumulative effect of accounting change, net of tax | | — | | | (1,053 | ) | | — | |
| |
|
| |
|
| |
|
| |
| Net (loss) income before convertible preferred share dividends | $ | (697,558 | ) | $ | 22,846 | | $ | 96,648 | |
| |
|
| |
|
| |
|
| |
| Convertible preferred share dividends | | 7,040 | | | 14,018 | | | 13,113 | |
| |
|
| |
|
| |
|
| |
| Net (loss) income to common shareholders | $ | (704,598 | ) | $ | 8,828 | | $ | 83,535 | |
| |
|
| |
|
| |
|
| |
| Weighted average common shares outstanding: | | | | | | | | | |
| Weighted average common shares outstanding(basic) | | 32,541 | | | 14,433 | | | 11,992 | |
| Equivalent shares of underlying options | | 178 | | | 376 | | | 287 | |
| Equivalent number of restricted shares | | 191 | | | 180 | | | 132 | |
| Equivalent number of perpetual preferred shares | | 3,923 | | | — | | | — | |
| Equivalent number of convertible preferred shares | | 6,684 | | | 12,756 | | | 11,164 | |
| |
|
| |
|
| |
|
| |
| Weighted average common equivalent shares(diluted) | | 43,517 | | | 27,745 | | | 23,575 | |
| |
|
| |
|
| |
|
| |
| Weighted average common equivalent shares when anti-dilutive | | 32,541 | | | 27,745 | | | 23,575 | |
| |
|
| |
|
| |
|
| |
| Per share amounts: | | | | | | | | | |
| Basic: | | | | | | | | | |
| Net (loss) income before cumulative effect of | | | | | | | | | |
| accounting change and convertible preferred share dividends | $ | (21.43 | ) | $ | 1.65 | | $ | 8.06 | |
| Net (loss) income to common shareholders | $ | (21.65 | ) | $ | 0.61 | | $ | 6.97 | |
| | | | | | | | | | |
| Diluted: | | | | | | | | | |
| Net (loss) income before cumulative effect of accounting change | $ | (21.65 | ) | $ | 0.86 | | $ | 4.10 | |
| Net (loss) income | $ | (21.65 | ) | $ | 0.82 | | $ | 4.10 | |
PXRE has a non-contributory defined benefit pension plan covering all U.S. employees with one year or more of service and who had attained age 21. Benefits are generally based on years of service and compensation. PXRE funds the plan in amounts not less than the minimum statutory funding requirement nor more than the maximum amount that can be deducted for U.S. income tax purposes.
PXRE also sponsors a supplemental executive retirement plan. This plan is non-qualifiedand provides certain key employees with benefits in excess of normal pension benefits.
F-33
Effective March 31, 2004, PXRE curtailed these pension plans and employees no longer accrue additional benefits thereunder.
The investment policy of the fund for the retirement plan seeks to manage the fund with a long-term objective, of seven years or more, and achieve the highest practicable long-term rate of return without taking excessive risk that could jeopardize PXRE’s funding policy or subject PXRE to undue funding volatility. The objective of the investment policy is for the assets funded to achieve a rate of return over any seven-year period that exceeds the rate of inflation by 5% after the cost of managing and administering the plan.
Asset allocations of the fund at December 31, 2005 and 2004 and the target allocation are as follows:
| | 2005 | | 2004 | | Target | |
| |
| |
| |
| |
| Equity assets | 100 | % | 97 | % | 80%-100 | % |
| Fixed income assets | — | | 3 | | 0%-20 | % |
| |
| |
| | | |
| | 100 | % | 100 | % | | |
| |
| |
| | | |
The components of net pension expense for the company-sponsored plans for the years ended December 31, 2005, 2004 and 2003 based on a January 1 valuation date (the latest actuarial estimate) are as follows:
| ($000’s) | 2005 | | 2004 | | 2003 | |
| |
|
| |
|
| |
|
| |
| Components of net periodic cost: | | | | | | | | | |
| Service cost | $ | — | | $ | 303 | | $ | 978 | |
| Interest cost | | 357 | | | 354 | | | 555 | |
| Expected return on assets | | (324 | ) | | (352 | ) | | (430 | ) |
| Amortization of prior service costs | | — | | | 50 | | | 201 | |
| Recognized net actuarial costs | | 106 | | | 17 | | | (44 | ) |
| Curtailments | | — | | | (486 | ) | | — | |
| Settlements | | 46 | | | 666 | | | 598 | |
| |
|
| |
|
| |
|
| |
| Net periodic benefit costs | $ | 185 | | $ | 552 | | $ | 1,858 | |
| |
|
| |
|
| |
|
| |
The following table sets forth the funded status of the plans and amounts recognized in the Consolidated Balance Sheets:
F-34
| ($000’s) | 2005 | | 2004 | |
| |
|
| |
|
| |
| Reconciliation of benefit obligation | | | | | | |
| Benefit obligation as of January 1 | $ | (6,253 | ) | $ | (8,371 | ) |
| Service cost | | — | | | (303 | ) |
| Interest cost | | (357 | ) | | (354 | ) |
| Actuarial gain (loss) | | 41 | | | (2,408 | ) |
| Benefit payments and expected expenses | | 113 | | | — | |
| Curtailments | | — | | | 2,470 | |
| Settlements | | 207 | | | 2,713 | |
| |
|
| |
|
| |
| Benefit obligation as of December 31 | $ | (6,249 | ) | $ | (6,253 | ) |
| |
|
| |
|
| |
| Reconciliation of plan assets | | | | | | |
| Fair value of plan assets as of January 1 | $ | 4,052 | | $ | 5,317 | |
| Return on plan assets | | 254 | | | 663 | |
| Employer contributions | | 206 | | | 785 | |
| Benefits paid and actual expenses | | (114 | ) | | (2,713 | ) |
| Settlements | | (206 | ) | | — | |
| |
|
| |
|
| |
| Fair value of plan assets as of December 31 | $ | 4,192 | | $ | 4,052 | |
| |
|
| |
|
| |
| Reconciliation of funded status | | | | | | |
| Funded status | $ | (2,057 | ) | $ | (2,201 | ) |
| Unrecognized prior service cost | | — | | | — | |
| Unrecognized net loss | | 1,922 | | | 2,045 | |
| |
|
| |
|
| |
| Accrued cost | $ | (135 | ) | $ | (156 | ) |
| |
|
| |
|
| |
| Weighted average assumptions as of December 31: | | | | | | |
| Discount rate | | 5.75 | % | | 5.75 | % |
| Expected return on plan assets | | 8.00 | % | | 8.00 | % |
| Rate of compensation increase | | NA | | | NA | |
The following table sets forth the expected future benefit payments.
| ($000’s) | | |
| | | | | |
| 2006 | | $ | 114 | |
| 2007 | | | 1,444 | |
| 2008 | | | 29 | |
| 2009 | | | 391 | |
| 2010 | | | 6 | |
| Years 2011 - 2015 | | | 3,078 | |
The Company expects no significant contributions during 2006.
During 2005 and 2004, there were settlements with four and three former employees, respectively, with respect to their vested benefits in which lump sum cash payments were made to these plan participants in exchange for their rights to receive specified pension benefits.
PXRE sponsors a defined contribution plan covering all employees with three months or more of service. PXRE matches 100% of each employee’s contribution, subject to a maximum of 5% of salary. In addition, PXRE may contribute profit-sharing up to 3% of each employee’s salary. During 2005, 2004 and 2003 PXRE incurred expenses from this plan of $0.7 million, $0.7 million and $0.5 million, respectively.
F-35
Employee Share Purchase Plan
PXRE maintains an Employee Share Purchase Plan under which it has reserved 0.1 million common shares for issuance to PXRE personnel. On the first Monday of each calendar quarter (the “Grant Date”), plan participants can enter into an agreement to purchase shares on the first Monday of the next calendar quarter (the “Exercise Date”). The purchase price is the lesser of 85% of the fair market value of PXRE’s common shares on the Grant Date or the Exercise Date.
In February 2004, the Board of Directors approved the adoption of the PXRE Group’s Annual Incentive Bonus Compensation Plan (the “2004 Bonus Plan”). As approved by PXRE’s shareholders, awards will be granted under the Bonus Plan with respect to performance on a number of criteria compared to target criteria, including return on equity, certain expense ratios and reserve adequacy as well as a discretionary component related to individual performance. Under the 2004 Bonus Plan, bonuses are paid in cash up to the amount of each employee’s target bonus. For certain senior executives and above, 30% of any bonus amount in excess of target bonus is paid in restricted shares which cliff vest after 3 years.
Prior to the adoption of the 2004 Bonus Plan, the Company provided annual bonus compensation to employees through the Restated Employee Annual Incentive Bonus Plan (the “Terminated Bonus Plan”). Under the Terminated Bonus Plan, incentive compensation to employees was based in part on return on equity compared to a target return on equity and in part at the discretion of the Restated Bonus Plan Committee. The Restated Employee Annual Incentive Bonus Plan was terminated effective December 31, 2003. The maximum compensation paid in any year was limited to 150% of target bonuses under the Plan. Amounts incurred above 150% of target up to a maximum award at 240% of target represented contingent incentive compensation. In each of 2003 and 2002, the bonus percentage under the Restated Employee Annual Incentive Bonus Plan exceeded 150% and the portion of the bonus in excess of 150% of the target bonus was deferred in accordance with the terms of such plan. Commencing in March 2004, the Human Resources Committee determined to pay out such deferred amounts in three equal annual installments to officers and in a single lump sum for non-officers. At December 31, 2005, the amount of the contingent liability was $0.1 million. In addition, 30% of all bonus amounts paid to officers under the Terminated Bonus Plan were paid in restricted shares that cliff vest after 3 years.
The Company awards long-term equity compensation pursuant to its 1992 Officer Incentive Plan and 2002 Officer Incentive Plan, which provides for the grant of incentive share options, non-qualified share options and awards of shares subject to certain restrictions. Options granted under the plan have a term of 10 years and generally become exercisable in four equal annual installments commencing one year from the date of grant. The exercise price for the incentive share options must be equal to or exceed the fair market value of the common shares on the date the option is granted. The exercise price for the non-qualified options may not be less than the fair market value of the common stock on the date of grant. At December 31, 2005 and 2004, options for 907,886 and 1,172,306 shares, respectively, were exercisable under these plans.
F-36
In 2005, 2004 and 2003, $6.2 million, $6.5 million, and $7.4 million, respectively were incurred under these plans, including bonuses granted to certain levels of employees paid in restricted shares, which vest at the end of 3 years or at each annual anniversary date over 4 years. The restricted shares are expensed prorata from the grant date to the final anniversary date of the grant.
Information regarding the employee option plans described above is as follows:
| | | Number of
Shares | | Range – Option Price per
Share | |
| | |
| |
| |
| | Outstanding at December 31, 2002 | 1,980,699 | | | |
| | Options granted | 374,773 | | $19.88 - $23.78 | |
| | Options exercised | (60,625 | ) | $12.50 - $19.80 | |
| | Options forfeited | (47,248 | ) | $12.50 - $32.94 | |
| | |
| | | |
| | Outstanding at December 31, 2003 | 2,247,599 | | | |
| | |
| | | |
| | Options granted | — | | N/A | |
| | Options exercised | (530,468 | ) | $ 12.50 - $26.69 | |
| | Options forfeited | (48,759 | ) | $15.95 - $32.94 | |
| | |
| | | |
| | Outstanding at December 31, 2004 | 1,668,372 | | | |
| | |
| | | |
| | Options granted | — | | N/A | |
| | Options exercised | (409,573 | ) | $12.50 - $24.88 | |
| | Options forfeited | (63,594 | ) | $17.45 - $32.94 | |
| | |
| | | |
| | Outstanding at December 31, 2005 | 1,195,205 | | | |
| | |
| | | |
PXRE has adopted a non-employee Director Stock Plan, which provides for an annual grant of 5,000 options and 1,000 restricted shares per non-employee director from 2000 to 2003 and 5,000 options and 2,500 restricted shares per director from 2004. Restricted shares vest at each annual anniversary date over 3 years. Options granted under the plan have a term of 10 years from the date of grant and are exercisable in three equal annual installments commencing one year from the date of grant. The exercise price of the options is the fair market value on the date of grant. As of December 31, 2005, options for 500,000 shares were authorized, 244,667 were outstanding and 152,567 were exercisable, at exercise prices between $14.79 and $31.11.
PXRE allows its directors to elect to convert their Board of Directors retainer fee to options under the Directors Equity and Deferred Compensation Plan. At December 31, 2005, options for 250,000 shares were authorized and 82,906 were outstanding at prices ranging from $12.81 to $33.46 which are 100% vested and immediately exercisable for a period of 10 years.
As of December 31, 2005, total authorized common shares reserved for grants of employee and director share options and restricted shares under the above plans are 2,723,353 shares. Total shares of 1,143,359 relate to share options which are vested and exercisable at December 31, 2005 at exercise prices between $12.50 and $33.46. All options become exercisable upon a change of control of PXRE as defined by the plans.
As permitted by SFAS No. 123, PXRE has elected to continue to account for its share option plans under the accounting rules prescribed by APB 25, under which no compensation costs are recognized as an expense. Had compensation costs for the share options been determined using the fair value method of accounting as recommended by SFAS No. 123, net (loss) income and earnings per share for 2005, 2004 and 2003 would have been reduced to the following pro-forma amounts:
F-37
| | ($000’s, except per share data) | | 2005 | | | 2004 | | | 2003 | |
| | |
|
| |
|
| |
|
| |
| | Net (loss) income before convertible preferred share | | | | | | | | | |
| | dividends: | | | | | | | | | |
| | As reported | $ | (697,558 | ) | $ | 22,846 | | $ | 96,648 | |
| | Deduct: | | | | | | | | | |
| | �� Total share-based compensation expense | | | | | | | | | |
| | determined under fair value based method, net | | | | | | | | | |
| | of related tax effects | | (1,170 | ) | | (2,180 | ) | | (2,927 | ) |
| | |
|
| |
|
| |
|
| |
| | Pro-forma | $ | (698,728 | ) | $ | 20,666 | | $ | 93,721 | |
| | |
|
| |
|
| |
|
| |
| | Basic (loss) income per share: | | | | | | | | | |
| | As reported | $ | (21.65 | ) | $ | 0.61 | | $ | 6.97 | |
| | Pro-forma | $ | (21.69 | ) | $ | 0.46 | | $ | 6.72 | |
| | Diluted (loss) income per share: | | | | | | | | | |
| | As reported | $ | (21.65 | ) | $ | 0.82 | | $ | 4.10 | |
| | Pro-forma | $ | (21.69 | ) | $ | 0.74 | | $ | 3.98 | |
The fair value of each option granted in 2005, 2004 and 2003 was estimated on the date of grant using a modified Black-Scholes option pricing model with the following weighted average assumptions:
| | | 2005 | | 2004 | | 2003 | |
| | |
| |
| |
| |
| | Risk-free rate | 3.92 | % | 3.73 | % | 2.94 | % |
| | Dividend yield | 2.02 | % | 0.99 | % | 1.06 | % |
| | Volatility factor | 36.92 | % | 40.72 | % | 40.49 | % |
| | Expected life (in years) | 5 | | 5 | | 5 | |
A summary of the status of the employee and director share option plans at December 31, 2005 and 2004 and changes during the years then ended is presented below:
| | | 2005 | | 2004 | |
|
|
| | | Shares | | Weighted
Average
Exercise Price | | Shares | | | Weighted
Average
Exercise Price | |
| | |
| |
| |
| |
|
| |
| | Options outstanding at beginning of year | 2,029,216 | | $19.93 | | 2,606,649 | | | $19.19 | |
| | Options granted | 55,000 | | 23.74 | | 51,095 | | | 24.20 | |
| | Options exercised | (478,412 | ) | 17.88 | | (579,769 | ) | | 16.83 | |
| | Options forfeited | (83,026 | ) | 25.13 | | (48,759 | ) | | 21.83 | |
| | |
| | | |
| | | | |
| | Options outstanding at end of year | 1,522,778 | | 20.43 | | 2,029,216 | | | 19.93 | |
| | |
| | | |
| | | | |
| | Options exercisable at end of year | 1,143,359 | | 20.17 | | 1,437,700 | | | 19.78 | |
| | |
| | | |
| | | | |
| | Weighted average fair value of options granted | | | 9.02 | | | | | 9.19 | |
F-38
Employee and director options outstanding at December 31, 2005 included:
| | | Range of
Exercise Prices | | Number
Outstanding at
December 31,
2005 | | Weighted
Average
Remaining Life | | Weighted
Average
Exercise Price | | Number
Exercisable at
December 31,
2005 | | Weighted
Average
Exercise Price | |
|
|
|
|
|
|
| | | $12.50 to $33.46 | | 1,522,778 | | 5.74 | | $20.43 | | 1,143,359 | | $20.17 | |
PXRE also had adopted a non-employee Director Deferred Share Plan granting 2,000 shares to each non-employee Board member prior to 2003 at the times specified in the plan. This plan was terminated effective January 1, 2003. At December 31, 2005, the 12,000 shares granted to eligible non-employee Board members will be issued to Board members at their termination.
PXRE operates in two reportable property and casualty segments – (i) catastrophe and risk excess and (ii) exited lines – based on PXRE’s approach to managing the business. Commencing with the 2004 underwriting renewal season, PXRE is reporting its previously existing “other lines” segment, which in the past has consisted of a single pro rata treaty, with its catastrophe and risk excess segment. In addition, PXRE is reporting its previously existing “finite business” segment with its exited lines segment to reflect its decision to run-off the in-force finite business and not enter into any new finite transactions subsequent to March 31, 2004. PXRE’s segments for 2003 were restated to be comparable to the two segments discussed above. As a result of the above, the exited lines segment now includes business previously written and classified by the Company as direct casualty, Lloyd’s of London (“Lloyd’s”), international casualty and finite. In addition, PXRE operates in two geographic segments – North American, representing North American based risks written by North American based clients, and International (principally worldwide risks including the United States, United Kingdom, Continental Europe, Latin America, the Caribbean, Bermuda, Australia and Asia), representing all other premiums written.
There are no differences among the accounting policies of the segments as compared to PXRE’s consolidated financial statements.
PXRE does not maintain separate balance sheet data for each of its operating segments nor does it allocate net investment income, net realized investment gains or losses, other reinsurance related expense, operating expenses, foreign exchange gains and losses or interest expense to these segments. Accordingly, PXRE does not review and evaluate the financial results of its operating segments based upon balance sheet data and these other income statement items.
The following tables summarize the net premiums written and net premiums earned by PXRE’s business segments. The amounts shown for the North American and International geographic segments are presented net of proportional reinsurance and allocated excess of loss reinsurance cessions, but gross of corporate catastrophe excess of loss reinsurance cessions, which are separately itemized where applicable.
F-39
Net Premiums Written
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| | 2005 | | 2004 | | 2003 | |
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
| ($000’s except percentages) | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | |
| |
|
| |
| |
|
| |
| |
|
| |
| |
| Catastrophe and Risk Excess | | | | | | | | | | | | | | | |
| International | $ | 378,583 | | | | $ | 250,505 | | | | $ | 225,469 | | | |
| North American | | 159,101 | | | | | 85,661 | | | | | 72,976 | | | |
| Excess of Loss Cessions | | (129,413 | ) | | | | (28,729 | ) | | | | (32,222 | ) | | |
| |
|
| | | |
|
| | | |
|
| | | |
| | | 408,271 | | 100 | % | | 307,437 | | 99 | % | | 266,223 | | 96 | % |
| |
|
| | | |
|
| | | |
|
| | | |
| Exited Lines | | | | | | | | | | | | | | | |
| International | | (272 | ) | | | | (119 | ) | | | | 3,127 | | | |
| North American | | (994 | ) | | | | 2,469 | | | | | 9,061 | | | |
| |
|
| | | |
|
| | | |
|
| | | |
| | | (1,266 | ) | — | | | 2,350 | | 1 | | | 12,188 | | 4 | |
| |
|
| |
| |
|
| |
| |
|
| |
| |
| Total | $ | 407,005 | | 100 | % | $ | 309,787 | | 100 | % | $ | 278,411 | | 100 | % |
| |
|
| |
| |
|
| |
| |
|
| |
| |
Net Premiums Earned
| | Year Ended December 31, | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| | 2005 | | 2004 | | 2003 | |
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
| ($000’s except percentages) | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | |
| |
|
| |
| |
|
| |
| |
|
| |
| |
| Catastrophe and Risk Excess | | | | | | | | | | | | | | | |
| International | $ | 372,433 | | | | $ | 249,365 | | | | $ | 222,112 | | | |
| North American | | 148,506 | | | | | 87,109 | | | | | 72,178 | | | |
| Excess of Loss Cessions | | (131,357 | ) | | | | (34,655 | ) | | | | (32,227 | ) | | |
| |
|
| | | |
|
| | | |
|
| | | |
| | | 389,582 | | 100 | % | | 301,819 | | 98 | % | | 262,063 | | 82 | % |
| |
|
| | | |
|
| | | |
|
| | | |
| Exited Lines | | | | | | | | | | | | | | | |
| International | | (268 | ) | | | | (121 | ) | | | | 3,199 | | | |
| North American | | (990 | ) | | | | 6,374 | | | | | 55,671 | | | |
| |
|
| | | |
|
| | | |
|
| | | |
| | | (1,258 | ) | — | | | 6,253 | | 2 | | | 58,870 | | 18 | |
| |
|
| |
| |
|
| |
| |
|
| |
| |
| Total | $ | 388,324 | | 100 | % | $ | 308,072 | | 100 | % | $ | 320,933 | | 100 | % |
| |
|
| |
| |
|
| |
| |
|
| |
| |
The following table summarizes the underwriting (loss) income by segment. The amounts shown in the North American and International geographic segments are presented net of proportional reinsurance and allocated excess of loss reinsurance cessions, but gross of corporate catastrophe excess of loss reinsurance cessions, which are separately itemized where applicable. Underwriting (loss) income includes premiums earned, losses incurred and commission and brokerage net of fee income, but does not include investment income, net realized investment gains or losses, other reinsurance related expense, operating expenses, foreign exchange gains or losses or interest expense.
F-40
Underwriting (Loss) Income
| | Year Ended December 31, | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| | 2005 | | 2004 | | 2003 | |
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
| ($000’s, except percentages) | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | |
| |
|
| |
| |
|
| |
| |
|
| |
| |
| Catastrophe and Risk Excess | | | | | | | | | | | | | | | |
| International | $ | (391,226 | ) | | | $ | 63,686 | | | | $ | 152,950 | | | |
| North American | | (295,985 | ) | | | | 36,793 | | | | | 41,702 | | | |
| Excess of Loss Cessions | | 22,766 | | | | | (30,287 | ) | | | | (34,663 | ) | | |
| |
|
| | | |
|
| | | |
|
| | | |
| | | (664,445 | ) | 99 | % | | 70,192 | | 148 | % | | 159,989 | | 132 | % |
| |
|
| | | |
|
| | | |
|
| | | |
| Exited Lines | | | | | | | | | | | | | | | |
| International | | 3,727 | | | | | 4,080 | | | | | (7,146 | ) | | |
| North American | | (11,440 | ) | | | | (26,873 | ) | | | | (31,834 | ) | | |
| |
|
| | | |
|
| | | |
|
| | | |
| | | (7,713 | ) | 1 | | | (22,793 | ) | (48 | ) | | (38,980 | ) | (32 | ) |
| |
|
| |
| |
|
| |
| |
|
| |
| |
| Total | $ | (672,158 | ) | 100 | % | $ | 47,399 | | 100 | % | $ | 121,009 | | 100 | % |
| |
|
| |
| |
|
| |
| |
|
| |
| |
The following table reconciles the underwriting (loss) income for the operating segments to (loss) income before taxes, cumulative effect of accounting change and convertible preferred share dividends as reported in the Consolidated Statements of Operations and Comprehensive Operations:
| ($000’s) | 2005 | | 2004 | | 2003 | |
| |
|
| |
|
| |
|
| |
| Net underwriting (loss) income | $ | (672,158 | ) | $ | 47,399 | | $ | 121,009 | |
| Net investment income | | 45,292 | | | 26,178 | | | 26,931 | |
| Net realized investment (losses) gains | | (14,736 | ) | | (150 | ) | | 2,447 | |
| Operating expenses | | (36,208 | ) | | (41,293 | ) | | (39,701 | ) |
| Other reinsurance related expense | | (936 | ) | | — | | | — | |
| Foreign exchange gains (losses) | | 1,547 | | | (80 | ) | | (143 | ) |
| Interest expense | | (14,452 | ) | | (14,389 | ) | | (2,506 | ) |
| Minority interest in consolidated subsidiaries | | — | | | — | | | (10,528 | ) |
| Other loss | | — | | | — | | | (20 | ) |
| |
|
| |
|
| |
|
| |
| (Loss) income before income taxes, cumulative | | | | | | | | | |
| effect of accounting change and convertible | | | | | | | | | |
| preferred share dividends | $ | (691,651 | ) | $ | 17,665 | | $ | 97,489 | |
| |
|
| |
|
| |
|
| |
F-41
| 14. | Quarterly Consolidated Results of Operations (Unaudited) |
The following are unaudited quarterly results of operations on a consolidated basis for the years ended December 31, 2005 and 2004. Quarterly results necessarily rely heavily on estimates. This and certain other factors, such as catastrophic losses, call for caution in drawing specific conclusions from quarterly results. Due to changes in the number of average shares outstanding, quarterly earnings per share may not add to the total for the year.
| | Three Months Ended | |
| |
|
|
|
|
|
|
|
|
|
|
| |
| ($000’s, except per share data) | March 31 | | June 30 | | September 30 | | December 31 | |
| |
|
| |
|
| |
|
| |
|
| |
| 2005 | | | | | | | | | | | | |
| Net premiums written | $ | 113,605 | | $ | 63,454 | | $ | 99,281 | | $ | 130,665 | |
| |
|
| |
|
| |
|
| |
|
| |
| Revenues: | | | | | | | | | | | | |
| Net premiums earned | $ | 79,434 | | $ | 83,420 | | $ | 68,817 | | $ | 156,653 | |
| Net investment income | | 10,442 | | | 6,681 | | | 13,526 | | | 14,643 | |
| Net realized investment losses | | (107 | ) | | (225 | ) | | (34 | ) | | (14,370 | ) |
| Fee income | | 211 | | | 206 | | | 353 | | | 171 | |
| |
|
| |
|
| |
|
| |
|
| |
| Total revenues | | 89,980 | | | 90,082 | | | 82,662 | | | 157,097 | |
| |
|
| |
|
| |
|
| |
|
| |
| Losses and expenses: | | | | | | | | | | | | |
| Losses and loss expenses incurred | | 44,438 | | | 25,125 | | | 408,958 | | | 533,002 | |
| Commission and brokerage | | 9,278 | | | 9,789 | | | 12,945 | | | 17,888 | |
| Other reinsurance related expense | | — | | | — | | | — | | | 936 | |
| Operating expenses | | 9,377 | | | 10,471 | | | 7,255 | | | 9,105 | |
| Foreign exchange losses (gains) | | 598 | | | (1,414 | ) | | (237 | ) | | (494 | ) |
| Interest expense | | 3,610 | | | 3,612 | | | 3,615 | | | 3,615 | |
| |
|
| |
|
| |
|
| |
|
| |
| Total losses and expenses | | 67,301 | | | 47,583 | | | 432,536 | | | 564,052 | |
| |
|
| |
|
| |
|
| |
|
| |
| Income (loss) before income taxes and | | | | | | | | | | | | |
| convertible preferred share dividends | | 22,679 | | | 42,499 | | | (349,874 | ) | | (406,955 | ) |
| Income tax (benefit) provision | | (64 | ) | | (1,008 | ) | | (32,531 | ) | | 39,510 | |
| |
|
| |
|
| |
|
| |
|
| |
| Net income (loss) before convertible | | | | | | | | | | | | |
| preferred share dividends | $ | 22,743 | | $ | 43,507 | | $ | (317,343 | ) | $ | (446,465 | ) |
| |
|
| |
|
| |
|
| |
|
| |
| Convertible preferred share dividends | | 3,369 | | | 1,268 | | | 1,241 | | | 1,162 | |
| |
|
| |
|
| |
|
| |
|
| |
| Net income (loss) to common shareholders | $ | 19,374 | | $ | 42,239 | | $ | (318,584 | ) | $ | (447,627 | ) |
| |
|
| |
|
| |
|
| |
|
| |
| Basic earnings per common share: | | | | | | | | | | | | |
| Net income (loss) to common shareholders | $ | 0.96 | | $ | 1.50 | | $ | (11.17 | ) | $ | (8.45 | ) |
| |
|
| |
|
| |
|
| |
|
| |
| Average shares outstanding (000’s) | | 20,200 | | | 28,179 | | | 28,529 | | | 52,987 | |
| |
|
| |
|
| |
|
| |
|
| |
| Diluted earnings per common share: | | | | | | | | | | | | |
| Net income (loss) | $ | 0.69 | | $ | 1.30 | | $ | (11.17 | ) | $ | (8.45 | ) |
| |
|
| |
|
| |
|
| |
|
| |
| Average shares outstanding (000’s) | | 32,980 | | | 33,359 | | | 28,529 | | | 52,987 | |
| |
|
| |
|
| |
|
| |
|
| |
| Dividends paid per common share | $ | 0.06 | | $ | 0.12 | | $ | 0.12 | | $ | 0.12 | |
F-42
| | | | Three Months Ended | |
| |
|
| |
| ($000’s, except per share data) | March 31 | | June 30 | | September 30 | | December 31 | |
| |
|
| |
|
| |
|
| |
|
| |
| 2004 | | | | | | | | | | | | |
| Net premiums written | $ | 89,712 | | $ | 51,224 | | $ | 112,591 | | $ | 56,260 | |
| |
|
| |
|
| |
|
| |
|
| |
| Revenues: | | | | | | | | | | | | |
| | Net premiums earned | $ | 68,952 | | $ | 69,565 | | $ | 89,799 | | $ | 79,756 | |
| | Net investment income | | 6,869 | | | 4,915 | | | 5,157 | | | 9,237 | |
| | Net realized investment gains (losses) | | 89 | | | (38 | ) | | (40 | ) | | (161 | ) |
| | Fee income | | 599 | | | 262 | | | 695 | | | 229 | |
| | | |
|
| |
|
| |
|
| |
|
| |
| | | Total revenues | | 76,509 | | | 74,704 | | | 95,611 | | | 89,061 | |
| |
|
| |
|
| |
|
| |
|
| |
| Losses and expenses: | | | | | | | | | | | | |
| | Losses and loss expenses incurred | | 18,139 | | | 18,077 | | | 156,335 | | | 33,796 | |
| | Commission and brokerage | | 9,172 | | | 10,214 | | | 8,900 | | | 7,825 | |
| | Operating expenses | | 12,620 | | | 9,868 | | | 8,272 | | | 10,533 | |
| | Foreign exchange losses (gains) | | 266 | | | 94 | | | (382 | ) | | 102 | |
| | Interest expense | | 3,675 | | | 3,455 | | | 3,817 | | | 3,442 | |
| | | |
|
| |
|
| |
|
| |
|
| |
| | | Total losses and expenses | | 43,872 | | | 41,708 | | | 176,942 | | | 55,698 | |
| |
|
| |
|
| |
|
| |
|
| |
| Income (loss) before income taxes, | | | | | | | | | | | | |
| | cumulative effect of accounting change | | | | | | | | | | | | |
| | and convertible preferred share dividends | | 32,637 | | | 32,996 | | | (81,331 | ) | | 33,363 | |
| Income tax provision (benefit) | | 653 | | | 660 | | | (8,157 | ) | | 610 | |
| |
|
| |
|
| |
|
| |
|
| |
| Income (loss) before cumulative effect of | | | | | | | | | | | | |
| | accounting change and convertible | | | | | | | | | | | | |
| | preferred share dividends | | 31,984 | | | 32,336 | | | (73,174 | ) | | 32,753 | |
| Cumulative effect of accounting change, net | | | | | | | | | | | | |
| | of $0.2 million tax benefit | | (1,053 | ) | | — | | | — | | | — | |
| |
|
| |
|
| |
|
| |
|
| |
| Net income (loss) before convertible | | | | | | | | | | | | |
| | preferred share dividends | $ | 30,931 | | $ | 32,336 | | $ | (73,174 | ) | $ | 32,753 | |
| |
|
| |
|
| |
|
| |
|
| |
| Convertible preferred share dividends | | 3,444 | | | 3,513 | | | 3,583 | | | 3,478 | |
| |
|
| |
|
| |
|
| |
|
| |
| Net income (loss) to common shareholders | $ | 27,487 | | $ | 28,823 | | $ | (76,757 | ) | $ | 29,275 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
| Basic earnings per common share: | | | | | | | | | | | | |
| | Net income (loss) to common | | | | | | | | | | | | |
| | | shareholders | $ | 2.04 | | $ | 2.09 | | $ | (5.48 | ) | $ | 1.78 | |
| | |
|
| |
|
| |
|
| |
|
| |
| | Average shares outstanding (000’s) | | 13,417 | | | 13,822 | | | 13,995 | | | 16,444 | |
| |
|
| |
|
| |
|
| |
|
| |
| Diluted earnings per common share: | | | | | | | | | | | | |
| | Net income (loss) | $ | 1.18 | | $ | 1.20 | | $ | (5.48 | ) | $ | 1.09 | |
| | |
|
| |
|
| |
|
| |
|
| |
| | Average shares outstanding (000’s) | | 26,282 | | | 27,021 | | | 13,995 | | | 29,938 | |
| |
|
| |
|
| |
|
| |
|
| |
| Dividends paid per common share | $ | 0.06 | | $ | 0.06 | | $ | 0.06 | | $ | 0.06 | |
On February 16, 2006, Standard & Poor’s Ratings Services (“S&P”), a division of the McGraw-Hill Companies, Inc., downgraded the counterparty credit and financial strength ratings for PXRE Reinsurance and PXRE Bermuda from “A-” to “BBB+” and placed these ratings on CreditWatch with negative implications. A.M. Best Company (“A.M. Best”), an independent insurance industry rating organization, also downgraded the financial strength ratings for these entities from “A-” to “B++” with a negative outlook. On February 17, 2006, Moody’s Investor Services (“Moody’s”) downgraded the insurance financial strength rating of PXRE Reinsurance from “Baa1” to “Baa2” and placed this rating under review for possible further downgrade.
F-43
On February 23, 2006, S&P further downgraded the counterparty credit and financial strength ratings for PXRE Reinsurance and PXRE Bermuda from “BBB+” to “BBB-” where they remain on CreditWatch with negative implications. On February 24, 2006, A.M. Best further downgraded the financial strength ratings for these entities from “B++” to “B+” with a negative implication. On February 28, 2006, Moody’s further downgraded its insurance financial strength rating of PXRE Reinsurance from “Baa2” to “Baa3” and placed this rating under review for possible further downgrade.
Ratings have become an increasingly important factor in establishing the competitive position of reinsurance companies. Due to these recent ratings downgrades of the Company’s reinsurance subsidiaries by A.M. Best, S&P and Moody’s, PXRE’s competitive position in the reinsurance industry has been impaired and it is more difficult for the Company to retain its reinsurance portfolio and renew many of its existing reinsurance agreements. This downgrade will result in a substantial loss of business as ceding companies and brokers that place such business move to other reinsurers with higher ratings.
It is common for PXRE’s assumed reinsurance contracts to contain terms that would allow cedents to cancel the contract if its reinsurance subsidiaries are downgraded below various rating levels by one or more rating agencies. Whether a cedent would exercise such rights would depend, among other things, on the reasons for such a downgrade, the extent of the downgrade, the prevailing market conditions, and the pricing and availability of replacement reinsurance coverage. Management cannot predict in advance how many of the Company’s clients will actually exercise such rights or the effect such cancellations will have on our financial condition or future prospects, but, depending on the number of contracts involved, such an effect could be materially adverse. As of January 1, 2006, more than 75% of PXRE’s business (by premium volume) is subject to contractual provisions allowing clients additional rights, such as cancellation as discussed above, upon a decline in PXRE's ratings or capital. As of March 13, 2006, the Company had received notice of cancellation from approximately 33% of its clients, calculated using premiums with respect to in-force business as of January 1, 2006, and it is anticipated that this percentage will increase. PXRE may be overexposed to losses in certain geographic areas for cetain types of catastrophe events and this risk could be increased by the number of cancelled contracts.
These ratings downgrades are expected to have a significant negative impact on the Company’s future results of operations and profitability. As a result of the potential negative consequences of the rating downgrade, the Company’s Board of Directors has decided to explore strategic alternatives for PXRE and has retained financial advisors to assist it in this process.
PXRE’s future capital requirements depend on many factors, including the Company’s ability to retain its existing business, write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. The Company’s capital needs may also be impacted by the frequency and severity of catastrophic events in 2006 as well as the strategic alternative path that the Board of Directors ultimately determines to pursue.
PXRE faces significant potential regulatory and litigation risks as a result of the magnitude of its losses related to the 2005 hurricanes and recent ratings downgrades, including potential investigations by regulatory authorities and potential shareholder and securities litigation, for which the potential liability is currently unquantifiable. As of March 13, 2006 the Company is not aware of any such litigation or administrative proceedings.
F-44
At December 31, 2005, PXRE Bermuda’s solvency and liquidity margins and statutory capital and surplus were substantially in excess of the minimum levels required by Bermuda insurance laws. Also at December 31, 2005, PXRE Reinsurance’s statutory capital and surplus substantially exceeded its calculated risk-based capital authorized control level. As a result of these factors, PXRE’s management believes that it will be able to meet regulatory compliance requirements for 2006 and future periods.
PXRE depends on a few reinsurance brokers for a large portion of revenue, and therefore loss of business provided by any one or more of them due to the ratings downgrades, could adversely affect the Company’s ability to retain its existing business and write new business.
Subsequent to year end, and as a result of, the downgrades in ratings, the Company sold approximately $490.5 million of fixed income securities held by PXRE Bermuda, and executed redemption orders for all of the Company’s hedge fund investments. The proceeds from the sales of the fixed income securities were all received by the first week of March 2006 and were reinvested in commercial paper and other short term investments that had a duration of less than one month. As there are delays between giving notice to redeem a hedge fund investment and receiving the proceeds, approximately 50% of such proceeds from the sale of hedge funds are expected to be received by April 30, 2006, approximately 80% by July 31, 2006, and 100% by March 31, 2007. As a result of these steps, management believes that the Company has sufficient liquidity to meet the currently foreseen needs of PXRE’s counterparties. However, the liquidation of a significant portion of the Company’s investment portfolio subsequent to year end could have a material negative impact on the Company’s future investment income.
As discussed in Note 8, the Company is currently prohibited by Bermuda law from paying dividends or making distributions from its contributed surplus account to its shareholders.
In order that the Company can continue to have the flexibility to pay dividends to shareholders, the Board determined that it is in the best interests of the Company to reduce its share premium account to zero and allocate $550.0 million to the Company’s contributed surplus account. This reduction of our share premium account and reallocation to the contributed surplus account is subject to the approval of our shareholders at our next General Meeting of Shareholders. If the shareholders approve this proposal at the next General Meeting, the reallocated capital will remain part of our capital structure available for the benefit of our creditors and shareholders. Future dividends and distributions may then be made by the Board within the limits prescribed by Bermuda law, without restriction for the value of the historical share premium account.
If shareholders approve this proposal, the Board of Directors will evaluate, subject to compliance with the test detailed in Note 8, whether to resume paying dividends to its common shareholders and the appropriate level of such dividend.
F-45
| PARENT COMPANY INFORMATION | Schedule II |
PXRE Group Ltd.’s summarized financial information (parent company only) is as follows:
| ($000’s) | December 31,
2005 | | December 31,
2004 | |
| |
| |
| |
| BALANCE SHEETS | | | | | | |
| Assets: | | | | | | |
| Cash | $ | 308 | | $ | 214 | |
| Receivable from subsidiaries | | — | | | 1,774 | |
| Equity in subsidiaries | | 543,062 | | | 756,697 | |
| Other assets | | 6,262 | | | 5,345 | |
| |
| |
| |
| Total assets | $ | 549,632 | | $ | 764,030 | |
| |
| |
| |
| Liabilities: | | | | | | |
| Liabilities to subsidiary | $ | 16,399 | | $ | — | |
| Other liabilities | | 3,480 | | | 3,040 | |
| Subordinated debt | | 64,435 | | | 64,435 | |
| |
| |
| |
| Total liabilities | | 84,314 | | | 67,475 | |
| |
| |
| |
| Shareholders’ equity | | 465,318 | | | 696,555 | |
| |
| |
| |
| Total liabilities and shareholders’ equity | $ | 549,632 | | $ | 764,030 | |
| |
| |
| |
| | Years Ended December 31, | |
| |
| |
| ($000’s) | 2005 | | 2004 | | 2003 | |
| |
| |
| |
| |
| STATEMENTS OF OPERATIONS | | | | | | | | | |
| Net investment income | $ | 193 | | $ | 131 | | $ | 3,662 | |
| Fee income | | — | | | — | | | 22 | |
| Minority interest in consolidated subsidiaries | | — | | | — | | | (1,795 | ) |
| Interest expense | | (5,289 | ) | | (5,289 | ) | | — | |
| Operating expenses | | (7,479 | ) | | (8,015 | ) | | (5,725 | ) |
| |
| |
| |
| |
| (Loss) income before equity in (loss) earnings of subsidiary and cumulative effect of | | | | | | | | | |
| accounting change | | (12,575 | ) | | (13,173 | ) | | (3,836 | ) |
| Equity in (loss) earnings of subsidiary | | (684,983 | ) | | 37,072 | | | 100,484 | |
| |
| |
| |
| |
| (Loss) income before cumulative effect of accounting change | | (697,558 | ) | | 23,899 | | | 96,648 | |
| Cumulative effect of accounting change, net of tax | | — | | | (1,053 | ) | | — | |
| |
| |
| |
| |
| Net (loss) income | $ | (697,558 | ) | $ | 22,846 | | $ | 96,648 | |
| |
| |
| |
| |
| | | | | | | | | | |
| CASH FLOW STATEMENTS | | | | | | | | | |
| Cash flows from operating activities: | | | | | | | | | |
| Net (loss) income | $ | (697,558 | ) | $ | 22,846 | | $ | 96,648 | |
| Adjustments to reconcile net (loss) income to cash provided (used) by operating | | | | | | | | | |
| activities: | | | | | | | | | |
| Equity in (loss) earnings of subsidiaries | | 684,983 | | | (37,072 | ) | | (100,484 | ) |
| Inter-company accounts | | 18,173 | | | (2,066 | ) | | 3,332 | |
| Other | | 3,328 | | | 6,006 | | | 874 | |
| |
| |
| |
| |
| Net cash provided (used) by operating activities | | 8,926 | | | (10,286 | ) | | 370 | |
| |
| |
| |
| |
| Cash flows from investing activities: | | | | | | | | | |
| Net change in short-term investments | | — | | | 1,099 | | | 2,174 | |
| Fixed maturities disposed or matured | | — | | | — | | | 505 | |
| Contribution of capital to subsidiaries | | (470,895 | ) | | (100,982 | ) | | (177,249 | ) |
| Notes to subsidiaries | | — | | | 4 | | | 94,752 | |
| |
| |
| |
| |
| Net cash used by investing activities | | (470,895 | ) | | (99,879 | ) | | (79,818 | ) |
| |
| |
| |
| |
| Cash flows from financing activities: | | | | | | | | | |
| Proceeds from issuance of common shares | | 483,169 | | | 114,701 | | | 21,538 | |
| Proceeds from issuance of minority interest in consolidated subsidiaries | | — | | | — | | | 62,500 | |
| Cash dividends paid to common shareholders | | (16,832 | ) | | (3,417 | ) | | (2,927 | ) |
| Cash dividends paid to preferred shareholders | | (3,671 | ) | | — | | | — | |
| Cost of shares repurchased | | (603 | ) | | (1,060 | ) | | (1,848 | ) |
| |
| |
| |
| |
| Net cash provided by financing activities | | 462,063 | | | 110,224 | | | 79,263 | |
| |
| |
| |
| |
| Net change in cash | | 94 | | | 59 | | | (185 | ) |
| Cash, beginning of year | | 214 | | | 155 | | | 340 | |
| |
| |
| |
| |
| Cash, end of year | $ | 308 | | $ | 214 | | $ | 155 | |
| |
| |
| |
| |
| Supplemental disclosure of non cash flow information: | | | | | | | | | |
| Reduction of note receivable from subsidiary and contribution to capital of subsidiary | $ | — | | $ | — | | $ | 43,393 | |
| |
| |
| |
| |
| Deconsolidation increase of subordinated debt investments – Other assets and | | | | | | | | | |
| subordinated debt | $ | — | | $ | 1,935 | | $ | — | |
| |
| |
| |
| |
| Convertible preferred share dividends | $ | 3,369 | | $ | 14,018 | | $ | 13,133 | |
| |
| |
| |
| |
F-46
Schedule III
PXRE GROUP LTD. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
| | | ($000’s) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Column A | | Column B | | | Column C | | | Column D | | | Column E | | | Column F | | | Column G | | | Column H | | | Column I | | | Column J | | | Column K | |
Segment-
property
and
casualty
insurance | Deferred
policy
acquisition
cost
(caption 7) | Future
policy
benefits,
losses,
claims and
loss
expenses
(caption
13-a-1) | Assumed
unearned
premiums
(caption
13-a-2) | Other
policy
claims and
benefits
payable
(caption
13-a-3) | Premium
revenue
(caption 1) | Net
investment
income
(caption 2) | Benefits,
claims,
losses and
settlement
expenses
(caption 4) | Amortization
of
deferred
policy
acquisition
costs | Other
operating
expense | Premiums
written |
| | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2005 | | North American | | | | | | | | | | | | | $ | 147,516 | | | | | $ | 438,949 | | $ | 15,992 | | | | | $ | 158,107 | |
| | | International | | | | | | | | | | | | | | 372,165 | | | | | | 733,737 | | | 25,927 | | | | | | 378,311 | |
| | | Corporate Wide | | | | | | | | | | | | | | (131,357 | ) | | | | | (161,163 | ) | | 7,040 | | | | | | (129,413 | ) |
| | | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | Total | $ | 5,487 | | $ | 1,320,126 | | $ | 32,512 | | $ | — | | $ | 388,324 | | $ | 45,292 | | $ | 1,011,523 | | $ | 48,959 | | $ | 36,208 | | $ | 407,005 | |
| 2004 | | North American | | | | | | | | | | | | | $ | 93,483 | | | | | $ | 71,833 | | $ | 11,730 | | | | | $ | 88,130 | |
| | | International | | | | | | | | | | | | | | 249,244 | | | | | | 159,163 | | | 22,315 | | | | | | 250,386 | |
| | | Corporate Wide | | | | | | | | | | | | | | (34,655 | ) | | | | | (4,649 | ) | | 281 | | | | | | (28,729 | ) |
| | | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | Total | $ | 1,745 | | $ | 460,084 | | $ | 15,952 | | $ | — | | $ | 308,072 | | $ | 26,178 | | $ | 226,347 | | $ | 34,326 | | $ | 41,293 | | $ | 309,787 | |
| 2003 | | North American | | | | | | | | | | | | | $ | 127,849 | | | | | $ | 98,996 | | $ | 18,985 | | | | | $ | 82,037 | |
| | | International | | | | | | | | | | | | | | 225,311 | | | | | | 59,228 | | | 20,279 | | | | | | 228,596 | |
| | | Corporate Wide | | | | | | | | | | | | | | (32,227 | ) | | | | | (626 | ) | | 3,062 | | | | | | (32,222 | ) |
| | | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | Total | $ | 2,495 | | $ | 450,635 | | $ | 21,566 | | $ | — | | $ | 320,933 | | $ | 26,931 | | $ | 157,598 | | $ | 42,326 | | $ | 39,701 | | $ | 278,411 | |
F-47
Schedule V
PXRE GROUP LTD. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
($000’s)
Column A | | Column B | | Column C
Additions | | Column D | | Column E | |
| | | | |
|
|
|
|
| | | | | | | |
| Description | | Balance at
beginning of
year | | (1)
Charged to
costs
and expenses | | (2)
Charged to
other
accounts -
describe | | Deductions
- - describe | | Balance at
end of
year | |
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
| Allowance for doubtful accounts | | | | | | | | | | | | | | | | |
| 2005 | | $ | 3,044 | | $ | (330 | ) | $ | — | | $ | — | | $ | 2,714 | |
| 2004 | | $ | 2,500 | | $ | 544 | | $ | — | | $ | — | | $ | 3,044 | |
| 2003 | | $ | 1,600 | | $ | 900 | | $ | — | | $ | — | | $ | 2,500 | |
F-48
Schedule VI
PXRE GROUP LTD. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
| | | ($000 ’s)
Column A | | Column B | | Column C | | Column D | | Column E | | Column F | | Column G | | Column H | | Column I | | Column J | | Column K | |
| | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | Affiliation
with
registrant | | Deferred
policy
acquisition
costs | | Reserves for
unpaid
claims
and claim
adjustment
expenses | | Discount,
if any
deducted
in
Column
C | | Assumed
unearned
premiums | | Earned
premiums | | | | | Claims and claim
adjustment expenses
incurred related to | | Amortization
of
deferred
policy
acquisition
costs | | Paid
claims
and claim
adjustment
expenses | | Premiums
written | |
Net
investment
Income | | (1)
Current
year | | (2)
Prior
years |
| | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2005 | | Consolidated | | $ | 5,487 | | $ | 1,320,126 | | $ | — | | $ | 32,512 | | $ | 388,324 | | $ | 45,292 | | $ | 987,647 | | $ | 23,876 | | $ | 48,959 | | $ | 192,275 | | $ | 407,005 | |
| 2004 | | Consolidated | | | 1,745 | | | 460,084 | | | — | | | 15,952 | | | 308,072 | | | 26,178 | | | 214,316 | | | 12,031 | | | 34,326 | | | 132,121 | | | 309,787 | |
| 2003 | | Consolidated | | | 2,495 | | | 450,635 | | | — | | | 21,566 | | | 320,933 | | | 26,931 | | | 112,917 | | | 44,681 | | | 42,326 | | | 93,015 | | | 278,411 | |
F-49
Consent of Independent Registered Public Accounting Firm
The Board of Directors
PXRE Group Ltd.:
We consent to the incorporation by reference in the registration statement (No. 333-85451) on Form S-4 of PXRE Group Ltd. of our report dated March 15, 2006, with respect to the consolidated balance sheets of PXRE Group Ltd., and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations and comprehensive operations, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2005, and all related financial statement schedules, management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 and the effectiveness of internal control over financial reporting as of December 31, 2005, which reports appear in the December 31, 2005 annual report on Form 10-K of PXRE Group Ltd.
As discussed in Note 2 to the consolidated financial statements, PXRE Group Ltd. adopted FASB Interpretation No. 46R “Consolidation of Variable Interest Entities,” during 2004.
As discussed in Note 15 to the consolidated financial statements, PXRE Group Ltd. and subsidiaries was downgraded at various times by rating agencies with regards to financial strength during February 2006.
/s/ KPMG LLP
New York, New York
March 15, 2006
F-50
EXHIBIT INDEX
Certain of the following exhibits, as indicated parenthetically, were previously filed as exhibits to registration statements filed by PXRE Group Ltd. or its predecessor companies under the Securities Act of 1933, as amended, or to reports filed by PXRE Group Ltd. or its predecessor companies under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are hereby incorporated by reference to such statements or reports. PXRE Group Ltd.’s Exchange Act file number is 1-15259. Prior to the reorganization that resulted in the formation of PXRE Group Ltd., PXRE Corporation’s Exchange Act file numbers were 1-12595 and 0-15428.
| 3.1 | Memorandum of Association of PXRE Group Ltd. (Exhibit 3.1 to PXRE Group Ltd.’s Form S-4 Registration Statement dated August 18, 1999). |
| | |
| 3.2 | Amended Bye-laws of PXRE Group Ltd., dated as of November 18, 2005.* |
| | |
| 3.3 | Description of Stock of PXRE Group Ltd. (Appendix II to PXRE Group Ltd.’s Proxy Statement for the February 12, 2002 Special Meeting of Shareholders). |
| | |
| 4.1 | Form of Specimen Common Share certificate, par value $1.00 per share, of PXRE Group Ltd. (Exhibit 4.1 to PXRE Group Ltd.’s Form S-4 Registration Statement dated August 18, 1999). |
| | |
| 4.2 | Description of Stock of Series D Perpetual Non-Voting Preferred Shares of PXRE Group Ltd. (Appendix II to PXRE Group Ltd.’s Proxy Statement dated October 20, 2005). |
| | |
| 4.3 | Indenture, dated as of January 29, 1997, between PXRE Corporation and First Union National Bank, as Trustee, in respect of PXRE Corporation’s 8.85% Junior Subordinated Deferrable Interest Debentures due 2027 (Exhibit 4.3 to PXRE Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996). |
| | |
| 4.4 | First Supplemental Indenture, dated as of January 29, 1997, between PXRE Corporation and First Union National Bank, as Trustee, in respect of PXRE Corporation’s 8.85% Junior Subordinated Deferrable Interest Debentures due 2027 (Exhibit 4.4 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996). |
| | |
| 4.5 | Amended and Restated Declaration of Trust of PXRE Capital Trust I, dated as of January 29, 1997, among PXRE Corporation, as Sponsor, the Administrators thereof, First Union Bank of Delaware, as Delaware Trustee, First Union National Bank, as Institutional Trustee, and the holders from time to time of undivided interests in the assets of PXRE Capital Trust I (Exhibit 4.5 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996). |
| 4.6 | Capital Securities Guarantee Agreement, dated as of January 29, 1997, between PXRE Corporation and First Union National Bank, as Guarantee Trustee (Exhibit 4.6 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996). |
| | |
| 4.7 | Common Securities Guarantee Agreement, dated as of January 29, 1997, executed by PXRE Corporation (Exhibit 4.7 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996). |
| | |
| 4.8 | Registration Rights Agreement dated as of January 29, 1997, among PXRE Corporation, PXRE Capital Trust I and Salomon Brothers Inc, as Representative of the Initial Purchasers (Exhibit 10.1 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996). |
| | |
| 4.9 | Investment Agreement, dated as of April 4, 2002 between PXRE Group Ltd. and certain Investors named therein (Appendix III to PXRE Group Ltd.’s Proxy Statement for the February 12, 2002 Special Meeting of Shareholders). |
| | |
| 4.10 | Amended and Restated Declaration of Trust of PXRE Capital Statutory Trust II, dated as of May 15, 2003, among PXRE Group Ltd., as Sponsor, the Administrators thereof, U.S. Bank National Association, as Institutional Trustee, and the holders from time to time of undivided beneficial interests in the assets of PXRE Capital Statutory Trust II (Exhibit 10.1 to PXRE Group Ltd.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003). |
| | |
| 4.11 | Indenture for Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures due 2033, dated as of May 15, 2003, among PXRE Group Ltd. as Issuer, and U.S. Bank National Association, as Trustee (Exhibit 10.2 to PXRE Group Ltd.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003). |
| | |
| 4.12 | Guarantee Agreement, dated as of May 15, 2003, executed and delivered by PXRE Group Ltd., as Guarantor, and U.S. Bank National Association, as Trustee, for the benefit of the holders from time to time of the Capital Securities of PXRE Capital Statutory Trust II (Exhibit 10.3 to PXRE Group Ltd.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003). |
| | |
| 4.13 | Amended and Restated Declaration of Trust of PXRE Capital Trust III, dated as of May 22, 2003, among PXRE Group Ltd., as Sponsor, the Administrators thereof, Wilmington Trust Company, as Delaware and Institutional Trustee, and the holders from time to time of undivided beneficial interests in the assets of PXRE Capital Trust III (Exhibit 10.6 to PXRE Group Ltd.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003). |
| | |
| 4.14 | Indenture for Fixed Rate Junior Subordinated Debt Securities due 2033, dated as of May 22, 2003, among PXRE Group Ltd. as Issuer, and Wilmington Trust Company, as Trustee (Exhibit 10.7 to PXRE Group Ltd.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003). |
| 4.15 | Guarantee Agreement, dated as of May 22, 2003, executed and delivered by PXRE Group Ltd., as Guarantor, and Wilmington Trust Company, as Trustee, for the benefit of the holders from time to time of the Capital Securities of PXRE Capital Trust III (Exhibit 10.8 to PXRE Group Ltd.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003). |
| | |
| 4.16 | Amended and Restated Declaration of Trust of PXRE Capital Statutory Trust V, dated as of October 29, 2003, among PXRE Group Ltd., as Sponsor, the Administrators thereof, U.S. Bank National Association, as Institutional Trustee, and the holders, from time to time, of undivided beneficial interests in the assets of PXRE Capital Statutory Trust V (Exhibit 4.23 to PXRE Group Ltd.’s Annual Report on Form 10-K for the year ended December 31, 2003). |
| | |
| 4.17 | Indenture for Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures, Series D, due 2033, dated as of October 29, 2003, among PXRE Group Ltd. as Issuer, and U.S. Bank National Association, as Trustee (Exhibit 4.24 to PXRE Group Ltd.’s Annual Report on Form 10-K for the year ended December 31, 2003). |
| | |
| 4.18 | Guarantee Agreement, dated as of October 29, 2003, executed and delivered by PXRE Group Ltd., as Guarantor, and U.S. Bank National Association, as Guarantee Trustee, for the benefit of the holders from time to time of the Capital Securities of PXRE Capital Statutory Trust V (Exhibit 4.25 to PXRE Group Ltd.’s Annual Report on Form 10-K for the year ended December 31, 2003). |
| | |
| 4.19 | Amended and Restated Trust Agreement of PXRE Capital Trust VI, dated as of November 6, 2003, among PXRE Group Ltd., as Depositor, the Administrators thereof, JPMorgan Chase Bank, as Property Trustee, Chase Manhattan Bank USA, National Association, as Delaware Trustee, and the several Holders as defined therein (Exhibit 4.28 to PXRE Group Ltd.’s Annual Report on Form 10-K for the year ended December 31, 2003). |
| | |
| 4.20 | Junior Subordinated Indenture, dated as of November 6, 2003, among PXRE Group Ltd. and JPMorgan Chase Bank, as Trustee (Exhibit 4.29 to PXRE Group Ltd.’s Annual Report on Form 10-K for the year ended December 31, 2003). |
| | |
| 4.21 | Guarantee Agreement for PXRE Capital Trust VI, dated as of November 6, 2003, among PXRE Group Ltd., as Guarantor, and JPMorgan Chase Bank, as Guarantee Trustee (Exhibit 4.30 to PXRE Group Ltd.’s Annual Report on Form 10-K for the year ended December 31, 2003). |
| | |
| 4.22 | Agreement, dated as of March 31, 2005, between PXRE Group Ltd. and the holders of the Series A Convertible Voting Preferred Shares, Series B Convertible Preferred Shares and Series C Convertible Preferred Shares (Exhibit 10.1 to PXRE Group Ltd.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005). |
| | |
| 4.23 | Agreement, dated as of June 20, 2005, between PXRE Group Ltd. and the holders of the Series A Convertible Voting Preferred Shares, Series B Convertible Preferred Shares, Series C Convertible Preferred Shares, Class A Convertible Voting Common Shares, Class B Convertible Voting Common Shares and Class C Convertible Voting Common (Exhibit 10.1 to PXRE Group Ltd.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005). |
| 10.1 | Commutation Agreement, effective January 1, 2005, between PXRE Reinsurance Ltd. and Select Reinsurance Ltd. (Exhibit 10.11 to PXRE Group Ltd.’s Annual Report on Form 10-K for the year ended December 31, 2004). |
| | |
| 10.2 | Aggregate Excess of Loss Agreement effective October 1, 1999 between PXRE Reinsurance Ltd. and PXRE Reinsurance Company (Exhibit 10.25 to the Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended December 31, 1999). |
| | |
| 10.3 | Annex IV to Aggregate Excess of Loss Agreement effective January 1, 2003 between PXRE Reinsurance Company and PXRE Reinsurance Ltd. (Exhibit 10.6 to the Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended December 31, 2002). |
| | |
| 10.4 | Annex V to Aggregate Excess of Loss Agreement effective September 12, 2005 between PXRE Reinsurance Ltd. and PXRE Reinsurance Company. * |
| | |
| 10.5 | Aggregate Excess of Loss Agreement, effective as of September 13, 2005 between PXRE Reinsurance Company and PXRE Reinsurance Ltd. * |
| | |
| 10.6 | Excess of Loss Agreement effective January 1, 2006 between PXRE Reinsurance Ltd. and PXRE Reinsurance Company. * |
| | |
| 10.7 | Deed Poll Guarantee of PXRE Group Ltd. in respect of PXRE Reinsurance Ltd., dated as of September 1, 2002 (Exhibit 10.3a to PXRE Group Ltd.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002). |
| | |
| 10.8 | Amended and Restated Agreement Concerning Filing of Consolidated Federal Income Tax Returns, dated as of August 23, 1993, between PXRE Corporation and PXRE Reinsurance Company (Exhibit 10.8 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1993); Addendum No. 2, dated November 10, 1994, to the PXRE Corporation Amended and Restated Agreement Concerning Filing of Consolidated Federal Income Tax Returns (Exhibit 10.22 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1994); Addendum No. 3, dated as of December 11, 1996 to the PXRE Corporation Amended and Restated Agreement Concerning Filing of Consolidated Federal Income Tax Returns (Exhibit 10.22 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996); and Addendum No. 4 to the PXRE Group Amended and Restated Agreement Concerning Filing of Consolidated Federal Income Tax Return between PXRE Corporation and Transnational Insurance Company (Exhibit 10.9 to the Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended December 31, 2000). |
| 10.9 | Investment Advisory Services Agreement between PXRE Reinsurance Ltd. and Mariner Investment Group, Inc., dated October 1, 1999 (Exhibit 10.10 to the Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended December 31, 1999). |
| | |
| 10.10 | Investment Advisory Services Agreement, dated March 14, 2000, between PXRE Corporation and Mariner Investment Group, Inc., (Exhibit 10.34 to the Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended December 31, 1999). |
| | |
| 10.11 | NEAM Investment Management Agreement, dated April 8, 2002, between General Re-New England Asset Management, Inc. and PXRE Reinsurance Company; Investment Management Agreement, dated April 8, 2002, between General Re-New England Asset Management, Inc. and PXRE Group Ltd.; Investment Management Agreement, dated April 8, 2002 between General Re-New England Asset Management, Inc. and PXRE Reinsurance Ltd. (Exhibit 10.1 to PXRE Group Ltd.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). |
| | |
| 10.12 | PXRE Group Ltd. Employee Stock Purchase Plan as amended and restated February 13, 2002 (Appendix B to PXRE Group Ltd.’s Proxy Statement for the 2002 Annual General Meeting of Shareholders). (M) |
| | |
| 10.13 | Amended and Restated Executive Severance Plan for Certain Executives of PXRE Group Ltd. dated May 5, 2004. (Exhibit 10.24 to PXRE Group Ltd.’s Annual Report on Form 10-K for the year ended December 31, 2004). (M) |
| | |
| 10.14 | 1988 Stock Option Plan as amended (Exhibit A to the first Prospectus forming part of PXRE Corporation’s Form S-8 and S-3 Registration Statement dated June 21, 1990). (M) |
| | |
| 10.15 | Restated Employee Annual Incentive Bonus Plan, as amended and restated (Appendix A to PXRE Group Ltd.’s Proxy Statement for the 2000 Annual General Meeting of Shareholders). (M) |
| | |
| 10.16 | 1992 Officer Incentive Plan as amended (Appendix B to PXRE Group Ltd.’s Proxy Statement for the 2000 Annual General Meeting of Shareholders). (M) |
| | |
| 10.17 | 2002 Officer Incentive Plan as amended (Appendix A to PXRE Group Ltd.’s Proxy Statement for the 2002 Annual Meeting of Shareholders). (M) |
| | |
| 10.18 | Director Stock Plan (Appendix C to PXRE Group Ltd.’s Proxy Statement for the 2004 Annual General Meeting of Shareholders). (M) |
| | |
| 10.19 | Director Equity and Deferred Compensation Plan (Appendix E to PXRE Group Ltd.’s Proxy Statement for the 2000 Annual General Meeting of Shareholders). (M) |
|
| (M) Indicates a management contract or compensation plan or arrangement in which the directors and/or executive or PXRE participate. |
| 10.20 | Non-Employee Director Deferred Stock Plan (Exhibit 10.17 to the Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended December 31, 2000). (M) |
| | |
| 10.21 | 2004 Incentive Bonus Compensation Plan (Appendix B to PXRE Group Ltd.’s Proxy Statement for the 2004 Annual Meeting of Shareholders). (M) |
| | |
| 10.22 | Lease, dated May 9, 1994, between Thornall Associates, L.P. and PXRE Corporation (Exhibit 10.24 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1994); Lease, dated November 1, 1999, between Thornall Associates, L.P. and PXRE Corporation (Exhibit 10.26 to the Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended December 31, 1999); Sublease, dated July 1, 2000, between I-many, Inc. and PXRE Corporation (Exhibit 10.23 to the Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended December 31, 2000); and Sublease dated February, 2005 between PXRE Corporation and The Lincoln National Life Insurance Company.* |
| | |
| 10.23 | Lease, dated February 23, 2005, between Barr’s Bay Properties Limited and PXRE Reinsurance Ltd. (Exhibit 10.34 to PXRE Group Ltd.’s Annual Report on Form 10-K for the year ended December 31, 2004). |
| | |
| 10.24 | Lloyd’s Deposit Trust Deed (Third Party Deposit) dated November 29, 1996 between PXRE Limited and PXRE Reinsurance Company (Exhibit 10.32 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1997). |
| | |
| 10.25 | Lloyd’s Security and Trust Deed (Letter of Credit and Bank Guarantee) dated November 29, 1997, between PXRE Limited and Lloyd’s of London (Exhibit 10.34 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1997). |
| | |
| 10.26 | Consulting Services Agreement, dated as of May 28, 2003 by and among PXRE Group Ltd., and Gerald L. Radke (Exhibit 10.1 to PXRE Group Ltd.’s Current Report on Form 8-K dated June 4, 2003). (M) |
| | |
| 10.27 | Employment Agreement, dated August 27, 2004, by and between PXRE Group Ltd. and John M. Modin, Executive Vice President & Chief Financial Officer of PXRE Group Ltd. (Exhibit 99.2 to PXRE Group Ltd.’s Current Report on Form 8-K dated August 31, 2004). (M) |
| | |
| 10.28 | Employment Agreement, dated August 27, 2004, by and between PXRE Reinsurance Company and Bruce J. Byrnes, General Counsel & Secretary of PXRE Reinsurance Company (Exhibit 99.3 to PXRE Group Ltd.’s Current Report on Form 8-K dated August 31, 2004).(M) |
| | |
| 10.29 | Employment Agreement, dated September 1, 2004, by and between PXRE Reinsurance Ltd. and John T. Daly, Executive Vice President of PXRE Reinsurance Ltd. (Exhibit 99.1 to PXRE Group Ltd.’s Current Report on Form 8-K dated September 2, 2004). (M) |
|
| (M) Indicates a management contract or compensation plan or arrangement in which the directors and/or executive or PXRE participate. |
| 10.30 | Employment Agreement, dated June 23, 2005, by and between PXRE Group Ltd. and Jeffrey L. Radke (Exhibit 10.2 to PXRE Group Ltd.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005). (M) |
| | |
| 10.31 | Employment Agreement, dated December 27, 2005, by and between PXRE Group Ltd. and Robert P. Myron (incorporated by reference to Exhibit 99.1 of PXRE Group Ltd.’s Current Report on Form 8-K dated December 27, 2005). (M) |
| | |
| 10.32 | Employment Agreement, dated January 16, 2006, by and between PXRE Group Ltd. and Guy D. Hengesbaugh (incorporated by reference to Exhibit 99.1 of PXRE Group Ltd.’s Current Report on Form 8-K dated January 16, 2006). (M) |
| | |
| 10.33 | Letter of Credit Facility Agreement, dated June 25, 2004, between PXRE Reinsurance Ltd., as Borrower, and Barclays Bank PLC, as Issuer (Exhibit 10.1 to PXRE Group Ltd.’s Current Report on Form 8-K filed June 25, 2004). |
| | |
| 10.34 | Security Agreement, dated June 25, 2004, between Barclays Bank PLC, as Secured Party, and PXRE Reinsurance Ltd., as Borrower (Exhibit 10.2 to PXRE Group Ltd.’s Current Report on Form 8-K filed June 25, 2004). |
| | |
| 10.35 | Global Amendment Agreement to the Letter of Credit Facility Agreement, dated January 28, 2005, between PXRE Reinsurance Ltd., as Borrower, and Barclays Bank PLC, as Issuer (Exhibit 99.1 to PXRE Group Ltd.’s Current Report on Form 8-K filed January 28, 2005). |
| | |
| 10.36 | Amendment Agreement dated December 31, 2005 between PXRE Reinsurance Ltd and Barclays Bank PLC increasing Letter of Credit capacity to $250 million (incorporated by reference to Exhibit 99.1 of PXRE Group Ltd.’s Current Report on Form 8-K dated January 9, 2006). |
| | |
| 10.37 | Letter of Credit Facility Agreement, dated August 2, 2005, by and between Citibank Ireland Financial Services plc and PXRE Reinsurance Ltd. (Exhibit 10.1 to PXRE Group Ltd.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005). |
| | |
| 10.38 | Insurance Letters of Credit – Master Agreement, dated August 2, 2005, by and between Citibank Ireland Financial Services plc and PXRE Reinsurance Ltd. (Exhibit 10.2 to PXRE Group Ltd.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005). |
|
| (M) Indicates a management contract or compensation plan or arrangement in which the directors and/or executive or PXRE participate. |
| 10.39 | Pledge Agreement, dated August 2, 2005, by and between Citibank Ireland Financial Services plc and PXRE Reinsurance Ltd (Exhibit 10.3 to PXRE Group Ltd.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005). |
| | |
| 10.40 | Additional Agreement dated January 19, 2006 between PXRE Reinsurance Ltd and Citibank Ireland Financial Services PLC adding a second Letter of Credit facility of $200 million. (incorporated by reference to Exhibit 99.1 of PXRE Group Ltd.’s Current Report on Form 8-K dated January 19, 2006). |
| | |
| 10.41 | Underwriting Agreement, dated October 3, 2005, between PXRE Group Ltd. and Credit Suisse First Boston LLC, as the underwriter (Exhibit 10.5 to PXRE Group Ltd.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005). |
| | |
| 10.42 | Share Purchase Agreement, dated September 30, 2005, by and among PXRE Group Ltd. and the investors named on the signature pages thereto (including exhibits B and C thereto) Ltd (Exhibit 10.4 to PXRE Group Ltd.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005). |
| | |
| 10.43 | Reinsurance Agreement, dated October 8, 2005, by and between PXRE Group Ltd. as cedent and Atlantic and Western Re Limited, as reinsurer (incorporated by reference to Exhibit 99.1 of PXRE Group Ltd.’s Current Report on Form 8-K dated November 8, 2005). |
| | |
| 10.44 | Stop Loss Reinsurance Agreement between PXRE Reinsurance Limited, Lloyd’s Syndicate 1224 and Omni Whittington Capital Management Limited (incorporated by reference to Exhibit 99.2 of PXRE Group Ltd.’s Current Report on Form 8-K dated November 29, 2005). |
| | |
| 10.45 | Reinsurance Agreement, dated December 21, 2005, by and between PXRE Group Ltd. as cedent and Atlantic and Western Re II Limited, as reinsurer (incorporated by reference to Exhibit 99.1 of PXRE Group Ltd.’s Current Report on Form 8-K dated December 21, 2005). |
| | |
| 10.46 | PXRE Group Ltd. Code of Business Conduct and Ethics for Directors, Officers and Employees, February 10, 2004. * |
| | |
| 11 | Statement setting forth computation of earnings per share. The information required by this Exhibit is presented in the financial statements and the notes thereto included in this Form 10-K. |
| | |
| 12 | Statement setting forth computation of ratios. Attached hereto as Exhibit 12. |
| | |
| 21 | List of Subsidiaries. Attached hereto as Exhibit 21. |
| | |
| 23 | Consents of Experts and Counsel. The consent of KPMG LLP, independent accountants to PXRE, is included as part of Item 14(a)(2) of this Form 10-K. |
| 24 | Power of Attorney. Copies of the powers of attorney executed by each of Gerald L. Radke, F. Sedgwick Browne, Bradley E. Cooper, Craig A. Huff, Mural R. Josephson, Jonathon Kelly, Wendy Luscombe, Philip R. McLoughlin, and Robert M. Stavis are attached hereto as Exhibit 24. |
| | |
| 31.1 | Certification by the Chief Executive Officer Relating to a Periodic Report Containing Financial Statements pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| 31.2 | Certification by the Chief Financial Officer Relating to a Periodic Report Containing Financial Statements Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| 32.1 | Certification of Periodic Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
