================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) of THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO ______________
COMMISSION FILE NUMBER 1-15259
PXRE GROUP LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BERMUDA 98-0214719
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
99 FRONT STREET SUITE 231
HAMILTON HM 12 12 CHURCH STREET
BERMUDA HAMILTON HM 11
BERMUDA
(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES) (MAILING ADDRESS)
(441) 296-5858
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
--- ---
As of May 8, 2000, 11,765,053 common shares, $1.00 par value per share,
of the Registrant were outstanding.
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PXRE GROUP LTD.
INDEX
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets at March 31, 2000
and December 31, 1999 3
Consolidated Statements of Operations and Comprehensive Income
for the three months ended March 31, 2000 and 1999 4
Consolidated Statements of Stockholders' Equity for the three
months ended March 31, 2000 and 1999 5
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999 6
Notes to Consolidated Interim Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION 26
2
PXRE CONSOLIDATED BALANCE SHEETS
GROUP LTD. (Unaudited)
- --------------------------------------------------------------------------------
March 31, December 31,
2000 1999
------------- -------------
Assets Investments:
Fixed maturities, available-for-sale, at fair value (amortized
cost $298,502,000 and $329,962,000, respectively) ............... $ 291,310,542 $ 321,247,527
Equity securities, at fair value (cost $15,820,000 and $26,214,000) ..... 14,720,230 24,840,360
Short-term investments .................................................. 46,759,571 50,004,473
Limited partnerships, at equity (cost $100,745,000 and $93,147,000) ..... 126,693,455 113,475,717
------------- -------------
Total investments ............................................... 479,483,798 509,568,077
Cash .................................................................... 36,984,522 14,735,040
Accrued investment income ............................................... 3,991,704 4,186,849
Receivables:
Unreported premiums ................................................... 45,999,294 40,216,340
Balances due from intermediaries and brokers, net ..................... 31,228,358 21,549,113
Other receivables ..................................................... 17,245,944 22,971,088
Reinsurance recoverable ................................................. 106,719,306 106,702,307
Ceded unearned premiums ................................................. 29,873,571 19,582,260
Deferred acquisition costs .............................................. 11,696,925 7,809,971
Current income tax recoverable .......................................... 12,363,359 12,628,414
Deferred tax asset ...................................................... 11,266,865 11,531,000
Other assets ............................................................ 10,178,018 8,699,650
------------- -------------
Total assets .................................................... $ 797,031,664 $ 780,180,109
============= =============
Liabilities Losses and loss expenses ................................................ $ 250,578,533 $ 261,551,353
Unearned premiums ....................................................... 67,111,641 42,218,837
Debt payable ............................................................ 65,000,000 75,000,000
Other liabilities ....................................................... 46,655,411 38,609,857
------------- -------------
Total liabilities ............................................... 429,345,585 417,380,047
------------- -------------
Minority interest in consolidated subsidiary:
Company-obligated mandatorily redeemable capital trust
pass-through securities of subsidiary trust holding solely a
company-guaranteed related subordinated debt .................... 99,522,122 99,521,079
Stockholders' Serial preferred stock, $1.00 par value -- 10,000,000 shares authorized
Equity respectively; 0 shares issued and outstanding .......................... 0 0
Common stock, $1.00 par value - 50,000,000 shares
authorized, 11,758,174 and 11,679,769 shares issued, respectively 11,758,174 11,679.769
Additional paid-in capital .............................................. 174,559,921 173,682,802
Accumulated other comprehensive income:
Net unrealized depreciation on investments, net of deferred
income tax benefit of $2,892,000 and $3,520,000, respectively ... ...... (5,568,595) (6,752,002)
Retained earnings ....................................................... 93,235,211 89,932,620
Restricted stock at cost ( 391,512 and 369,483 shares) .................. (5,820,754) (5,264,206)
------------- -------------
Total stockholders' equity ..................................... 268,163,957 263,278,983
------------- -------------
Total liabilities and stockholders' equity ..................... $ 797,031,664 $ 780,180,109
============= =============
The accompanying notes are an integral part of these statements.
3
PXRE CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
GROUP LTD. (Unaudited)
- -------------------------------------------------------------------------------
Three Months Ended March 31,
2000 1999
---- ----
Revenues Net premiums earned ........................................ $35,741,576 $ 23,830,950
Net investment income ...................................... 11,943,818 7,200,592
Net realized investment losses ............................. (535,862) (2,576,011)
Management fees ............................................ 1,794,311 896,616
----------- -------------
48,943,843 29,352,147
----------- -------------
Losses and Losses and loss expenses incurred .......................... 23,695,657 18,898,062
Expenses Commissions and brokerage .................................. 7,861,401 6,406,928
Other operating expenses ................................... 9,805,047 6,237,793
Interest expense ........................................... 1,280,045 831,285
Minority interest in consolidated subsidiary ............... 2,218,632 2,108,441
----------- -------------
44,860,782 34,482,509
----------- -------------
Income (loss) before income taxes .......................... 4,083,061 (5,130,362)
Income tax (provision) benefit ............................. (74,500) 2,368,000
Net income (loss)
----------- -------------
4,008,561 (2,762,362)
Comprehensive Other comprehensive income (loss), net of tax:
Income Net unrealized appreciation (depreciation) on investments .. 1,183,407 (3,435,956)
----------- -------------
Comprehensive income (loss) ................................ $ 5,191,968 $ (6,198,318)
=========== =============
Per Share Basic:
Net income (loss) ........................................ $ 0.35 $ (0.23)
=========== =============
Average shares outstanding ............................... 11,384,248 11,889,636
=========== =============
Diluted:
Net income (loss) ........................................ $ 0.35 $ (0.23)
=========== =============
Average shares outstanding ............................... 11,534,771 11,889,636
=========== =============
The accompanying notes are an integral part of these statements.
4
PXRE CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
GROUP LTD. (Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
2000 1999
---- ----
Common Stock: Balance at beginning of period $ 11,679,769 $ 149,382
Issuance of shares 78,405 1,932
------------- -------------
Balance at end of period $ 11,758,174 $ 151,314
============= =============
Additional Balance at beginning of period $ 173,682,802 $ 259,147,554
Paid-in Capital: Issuance of common shares 1,176,581 3,901,077
Other (299,462) (139,466)
------------- -------------
Balance at end of period $ 174,559,921 $ 262,909,165
============= =============
Treasury Stock: Balance at beginning of period $ 0 $ (61,420,025)
Repurchase of common stock (306,906) (13,906,108)
Cancellation of common stock 306,906
------------- -------------
Balance at end of period $ 0 $ (75,326,133)
============= =============
Unrealized
Appreciation Balance at beginning of period $ (6,752,002) $ 6,253
(Depreciation) Change in fair value for the period 1,183,407 (3,435,956)
on Investments: ------------- -------------
Balance at end of period $ (5,568,595) $ (3,429,703)
============= =============
Retained Balance at beginning of period $ 89,932,620 $ 139,842,939
Earnings: Net income (loss) 4,008,561 (2,762,362)
Dividends paid to common stockholders (705,970) (3,162,862)
------------- -------------
Balance at end of period $ 93,235,211 $ 133,917,715
============ =============
Restricted Stock: Balance at beginning of period $ (5,264,206) $ (3,350,597)
Issuance of restricted stock (1,158,125) (3,750,094)
Amortization of restricted stock 601,577 521,628
------------ -------------
Balance at end of period $ (5,820,754) $ (6,579,063)
============ =============
Total Balance at beginning of period $263,278,983 $ 334,375,506
Stockholders' Issuance of common shares 1,254,986 3,903,009
Equity: Repurchase of common stock (306,906) (13,906,108)
Restricted stock, net (556,548) (3,228,466)
Unrealized appreciation (depreciation)
on investments net of deferred income
tax 1,183,407 (3,435,956)
Net income (loss) 4,008,561 (2,762,362)
Dividends (705,970) (3,162,862)
Other 7,444 (139,466)
------------- -------------
Balance at end of period $ 268,163,957 $ 311,643,295
============= =============
The accompanying notes are an integral part of these statements.
5
PXRE CONSOLIDATED STATEMENTS OF CASH FLOWS
GROUP LTD. (Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended March 31,
2000 1999
---- ----
Cash Flows Net (loss) income $ 4,008,561 $ (2,762,362)
from Operating Adjustments to reconcile net income to net cash
Activities provided by operating activities:
Losses and loss expenses (10,972,820) (11,184,503)
Unearned premiums 14,601,493 14,996,805
Deferred acquisition costs (3,886,954) (3,206,029)
Receivables (4,695,559) (31,892,979)
Reinsurance balances payable 5,267,097 6,242,372
Reinsurance recoverable (5,203,215) 7,577,324
Income tax recoverable 247,071 7,895,000
Equity in earnings of limited partnerships (6,686,075) (23,638,098)
Other 4,662,437 33,374,680
---------- ----------
Net cash used by operating activities (2,657,964) (2,597,790)
---------- ----------
Cash Flows Cost of fixed maturity investments (8,792,522) (43,314,511)
from Investing Fixed maturity investments matured/disposed 39,261,086 37,505,132
Activities Payable for securities (2,024,150) 10,800,088
Cost of equity securities (1,269,612) (5,904,399)
Equity securities disposed 11,921,100 20,695,859
Net change in short-term investments 4,211,348 (15,358,055)
Limited partnerships disposed 750,808 (4,304,740)
Limited partnerships purchased (8,227,623) 11,022,716
---------- ----------
Net cash provided by investing activities 35,830,435 11,142,090
---------- ----------
Cash Flows Proceeds from issuance of common stock 89,887 152,915
from Financing Cash dividends paid to common stockholders (705,970) (3,162,862)
Activities Proceeds of debt (10,000,000) 0
Cost of stock repurchased (306,906) (13,906,108)
----------- -----------
Net cash used by financing activities (10,922,989) (16,916,055)
----------- -----------
Net change in cash 22,249,482 (8,371,755)
Cash, beginning of period 14,735,040 16,117,473
----------- -----------
Cash, end of period $36,984,522 $ 7,745,718
=========== ===========
The accompanying notes are an integral part of these statements.
6
PXRE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
GROUP LTD.
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
On October 5, 1999, PXRE completed a reorganization that involved the
formation of PXRE Group Ltd., a Bermuda-based holding company which became the
holding company for PXRE Corporation and its other operations. The
reorganization also involved the establishment of a Bermuda-based reinsurance
subsidiary, PXRE Reinsurance Ltd., and operations in Barbados through PXRE
(Barbados) Ltd. The accompanying consolidated financial statements have been
prepared in U.S. dollars in conformity with generally accepted accounting
principles ("GAAP") in the United States. These statements reflect the
consolidated operations of PXRE Group Ltd. (collectively referred to as "PXRE"),
and its subsidiaries PXRE Corporation, PXRE Reinsurance Company ("PXRE
Reinsurance"), PXRE Solutions Inc., PXRE Direct Underwriting Managers, Inc.,
Transnational Insurance Company ("Transnational"), PXRE Trading Corporation,
TREX Trading Corporation, Cat Fund L.P., PXRE Capital Trust I, PXRE Limited,
PXRE Managing Agency Limited, PXRE Reinsurance Ltd., and PXRE (Barbados) Ltd.
The financial statements for the three months ended March 31, 1999, reflect the
financial position and results of operations of PXRE Corporation and
subsidiaries.
In the fourth quarter of 1999, PXRE changed the reporting period for
its U.K. operations from a fiscal year ending September 30, to a calendar year
ending December 31. The U.K. operations are included in the consolidated results
on a one-quarter lag basis through the end of the third quarter of 1999.
PXRE, through its wholly-owned subsidiaries, principally provides
property and casualty reinsurance products and services through broker-based and
direct-writing distribution capabilities. PXRE also provides marine and
aerospace reinsurance products and services. All material transactions between
the consolidated companies have been eliminated in preparing these consolidated
financial statements.
Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The interim consolidated financial statements are unaudited; however,
in the opinion of management, the foregoing consolidated financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods. These
interim statements should be read in conjunction with the 1999 audited
consolidated financial statements and related notes. The preparation of interim
consolidated financial statements relies significantly upon estimates. Use of
such estimates, and the seasonal nature of a portion of the reinsurance
business, necessitates caution in drawing specific conclusions from interim
results.
Certain amounts in 1999 were reclassified to be consistent with the
2000 presentation.
7
PXRE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
GROUP LTD.
- --------------------------------------------------------------------------------
2. REINSURANCE
PXRE purchases catastrophe retrocessional coverage for its own
protection, depending on market conditions. In the event that retrocessionaires
are unable to meet their contractual obligations, PXRE would be liable for such
defaulted amounts. The effects of reinsurance on premiums written and earned are
as follows:
THREE MONTHS ENDED MARCH 31,
-----------------------------
2000 1999
---- ----
($000's)
Premiums written
Assumed $ 82,067 $ 61,650
Direct 277 558
-------- --------
Gross premiums written 82,344 62,208
Ceded premiums written (25,459) (23,380)
-------- --------
Net premiums written $ 56,885 $ 38,828
======== ========
Premiums earned
Assumed $ 56,781 $ 35,454
Direct 67 181
Ceded (21,107) (11,804)
-------- --------
Net premiums earned $ 35,741 $ 23,831
======== ========
3. EARNINGS PER SHARE
The table below presents the computation of basic and diluted earnings
per share:
THREE MONTHS ENDED MARCH 31,
2000 1999
---- ----
Net income (loss) available to
common stockholders $ 4,008,561 $ (2,762,362)
Weighted average shares of common
stock outstanding:
Weighted average shares of common
outstanding (basic) 11,384,248 11,889,636
Equivalent shares of stock options 55,866 0
Equivalent shares of restricted stock 94,657 0
------------ ------------
Weighted average common
equivalent shares (diluted) 11,534,771 11,889,636
============ ============
Weighted average common
equivalent shares when anti-
dilutive
Per share amounts:
Basic net income (loss) $ 0.35 $ (0.23)
Diluted net income (loss) $ 0.35 $ (0.23)
8
PXRE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
GROUP LTD.
- --------------------------------------------------------------------------------
4. INCOME TAXES
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. The company has received an undertaking from the Minister of
Finance in Bermuda pursuant to the provisions of the Exempted Undertakings Tax
Protection Act, 1966, which exempts the company, 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.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
PXRE Group Ltd. ("PXRE" or the "Company") - with operations principally
in Bermuda, Barbados, the United States, the United Kingdom and Europe -
provides reinsurance products and services to a worldwide market place. The
Company primarily emphasizes commercial and personal property and casualty
reinsurance risks and it offers both broker based and direct-writing
distribution capabilities. PXRE also provides marine and aerospace reinsurance
products and services. The Company's shares trade on the New York Stock Exchange
under the symbol PXT. On October 5, 1999 PXRE Corporation, a Delaware holding
company ("PXRE Delaware") completed a reorganization that resulted in the
formation of the Company which became the ultimate parent holding company of
PXRE Delaware. Holders of PXRE Delaware common stock automatically became
holders of the same number of PXRE common shares. The reorganization also
involved the establishment of a Bermuda based reinsurance company, PXRE
Reinsurance Ltd. ("PXRE Bermuda"), and operations in Barbados through PXRE
(Barbados) Ltd. ("PXRE Barbados").
The Company conducts its business primarily through its principal
operating subsidiaries, PXRE Delaware, PXRE Reinsurance Company ("PXRE
Reinsurance"), PXRE Solutions Inc. ("PXRE Solutions"), PXRE Bermuda, PXRE
Barbados, PXRE Managing Agency Limited ("PXRE Managing Agency"), PXRE Limited,
the sole member of PG Butler Syndicate 1224 ("PXRE Lloyd's Syndicate"), and
Transnational Insurance Company ("Transnational Insurance"). The term "PXRE" as
used herein, refers to one or more of PXRE Delaware, PXRE Reinsurance, PXRE
Solutions, PXRE Bermuda, PXRE Barbados, PXRE Managing Agency, PXRE Lloyd's
Syndicate and Transnational Insurance in discussions of these entities'
businesses and refers to PXRE Group Ltd. in all other circumstances.
The property and casualty reinsurance industry has been experiencing an
extended period of soft market conditions characterized by inadequate pricing.
The industry is also consolidating through mergers and other acquisitions. PXRE
competes with numerous companies, many of which have substantially greater
financial, marketing and management resources.
Since its formation more than a decade ago, PXRE has specialized in
property reinsurance, including a strong focus on catastrophe-type products.
Coverage terms for these products have deteriorated in recent years, and PXRE
has reduced commitments on marginally priced business.
Meanwhile, PXRE has adopted an ambitious diversification strategy
involving:
o the establishment of a direct presence in the Lloyd's market;
10
o the addition of a reinsurance platform offering primarily casualty
products directly to customers;
o the enhancement of its international broker market reinsurance platform
to include additional lines of business including casualty risks;
o an acceleration of business offerings to one of its managed business
participants;
o the formation of a finite reinsurance unit; and
o the establishment of a direct presence in the Bermuda market.
At March 31, 2000, PXRE was a party to retrocessional arrangements with
a number of insurers and reinsurers. Under these arrangements, PXRE cedes some
of its underwritten risks to the participants, subject to maximum aggregate
liabilities per reinsurance program. PXRE receives a management fee or
commission, initially based on premium volume, adjusted in some cases through
contingent profit commissions related to underwriting results measured over a
period of years. Future management fee income is dependent upon the amount of
business ceded to the participants and the profitability of that business.
Another arrangement with Select Reinsurance Ltd. ("Select Re"), a Bermuda
reinsurer, formerly Investors Reinsurance Ltd., involves a multi-year fee based
undertaking by PXRE through the year ending December 31, 2003 to produce and
underwrite business with Select Re. Gerald Radke (Chairman, President and Chief
Executive Officer of PXRE) and Jeffrey Radke (Executive Vice President of PXRE
and President of PXRE Bermuda) are on the Board of Directors of Select Re and
are shareholders of Select Re. Gerald Radke is Co-Vice Chairman of Select Re and
Jeffrey Radke was formerly the President of Select Re.
PXRE also purchases catastrophe retrocessional coverage for its own
protection, depending on market conditions. PXRE significantly increased its
purchases of such coverage in 1999 in light of the continued general
deterioration in catastrophe reinsurance pricing and the opportunity to buy
protection at more favorable terms than in previous years.
CERTAIN RISKS AND UNCERTAINTIES
As a reinsurer of property catastrophe-type coverages in the worldwide
market place, PXRE's 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, floods, earthquakes, spells of severely cold weather,
fires and explosions. While PXRE may, depending on market conditions, purchase
catastrophe retrocessional coverage for its own protection, the occurrence of
one or more major catastrophes in any given period could nevertheless have a
material adverse impact on PXRE's results of operations and financial condition
and result in substantial liquidation of investments and outflows of cash as
losses are paid.
The estimation of losses for catastrophe reinsurers is inherently less
reliable than for reinsurers of risks which have an established historical
pattern of losses. In addition, insured events which occur near the end of a
reporting period, as well as with respect to PXRE's retrocessional book of
business, the significant delay in losses being reported to insurance carriers,
reinsurers and finally retrocessionaires require PXRE to make estimates of
losses based on limited information from ceding companies and based on its own
11
underwriting data. Because of the uncertainty in the process of estimating its
losses from insured events, there is a risk that PXRE's liabilities for losses
and loss expenses could prove to be inadequate, with a consequent adverse impact
on future earnings and stockholders' equity. Additionally, as a consequence of
its emphasis on property reinsurance, PXRE may forgo potential investment income
because property losses are typically settled within a shorter period of time
than casualty losses.
In addition, the potential for uncertainty for recent underwriting
years is greater than in past years because of the increased casualty exposures
assumed by PXRE. Unlike property losses that tend to be reported more promptly
and usually are settled within a shorter time period, casualty losses are
frequently slower to be reported and may be determined only through the lengthy,
unpredictable process of litigation. Moreover, given its recent expansion of
casualty business, PXRE does not have an established historical loss pattern
that can be used to establish casualty loss liabilities. PXRE must therefore
rely on the inherently less reliable historical loss patterns reported by ceding
companies and industry loss standards in calculating its liabilities.
As PXRE underwrites risks from a large number of insurers based on
information generally supplied by reinsurance brokers, there is a risk of
developing a concentration of exposure to loss in certain geographic areas prone
to specific types of catastrophes. PXRE has developed systems and software tools
to monitor and manage the accumulation of its exposure to such losses.
Management has established guidelines for maximum tolerable losses from a single
or multiple catastrophic events based on historical data; however, no assurance
can be given that these maximums will not be exceeded in some future
catastrophe.
Premiums on reinsurance business assumed are recorded as earned on a
pro rata basis over the contract period based upon estimated subject premiums.
Management must estimate the subject premiums associated with the treaties in
order to determine the level of earned premiums for a reporting period. Such
estimates are based on information from brokers, which can be subject to change
as new information becomes available. Because of the inherent uncertainty in
this process, there is the risk that premiums and related receivable balances
may turn out to be higher or lower than reported.
PXRE's invested assets consist primarily of fixed maturities and
limited partnerships, but also include equities, real estate investment trusts
("REITS") and short-term investments. PXRE's investments are subject to
market-wide risks and fluctuations, as well as to risk inherent in particular
securities. Additionally, the estimated fair value of PXRE's investments does
not necessarily represent the amount which could be realized upon future sale
particularly if PXRE were required to liquidate a substantial portion of its
portfolio to fund catastrophic losses. PXRE's investment guidelines stress
conservation of principal, diversification of risk and liquidity.
Premium receivables and loss reserves include business denominated in
currencies other than U.S. dollars. PXRE is exposed to the possibility of
significant claims in currencies other than U.S. dollars. While PXRE holds
12
positions denominated in foreign currencies to mitigate, in part, the effects of
currency fluctuations on its results of operations, it currently does not hedge
its currency exposures before a catastrophic event which may produce a claim.
PXRE and its non-U.S. subsidiaries intend to operate their business in
a manner that will not cause them to be treated as engaged in a trade or
business in the United States and, thus, will not require them to pay U.S.
federal corporate income taxes (other than withholding taxes on certain U.S.
source investment income and excise taxes on reinsurance premiums). However,
because there is uncertainty as to the activities which constitute being engaged
in a trade or business within the United States, there can be no assurances that
the U.S. Internal Revenue Service will not contend successfully that PXRE Group
or a non-U.S. subsidiary is engaged in a trade or business in the United States.
The Company understands that certain U.S.-based insurance companies are
advocating an amendment to the U.S. Internal Revenue Code which would impose
U.S. federal income tax on a domestic insurer which is controlled by a foreign
reinsurer on the deemed investment income on its reserves on U.S. risks ceded to
one or more foreign reinsurers. At this point, the Company is unable to predict
whether this legislative effort will be successful, what form any such
legislation may ultimately take and what impact any such legislation would have
on the Company. If PXRE Group or any of its non-U.S. subsidiaries were subject
to U.S. income tax, PXRE Group's shareholders' equity and earnings could be
materially adversely affected.
COMPARISON OF FIRST QUARTER RESULTS FOR 2000 WITH 1999
Three Months Ended March 31,
----------------------------
Increase
2000 1999 (Decrease)
---- ---- ----------
(000's) %
GROSS PREMIUMS WRITTEN $82,344 $62,208 32.4%
CEDED PREMIUMS:
Managed business participants 12,000 7,540 59.2
Catastrophe coverage 13,459 15,840 (15.0)
------- -------
Total reinsurance premiums
ceded 25,459 23,380 8.9
------- -------
NET PREMIUMS WRITTEN $56,885 $38,828 46.5
======= =======
Gross premiums written for the three months ended March 31, 2000,
increased 32.4% to $82,344,000 from $62,208,000 for the corresponding period of
1999. Net premiums written for the first quarter of 2000, increased 46.5% to
$56,885,000 from $38,828,000 for the corresponding period of 1999. Net premiums
earned for the first quarter of 2000, increased 49.9% to $35,742,000 from
$23,831,000 for the comparable period of 1999. Gross written, net written and
net earned premium for the three months ended March 31, 2000 increased from
prior-year levels reflecting higher premiums in all business segments shown
below.
In the fourth quarter of 1999, PXRE changed the reporting period for
its U.K. operations from a fiscal year ending September 30, to a calendar year
ending December 31. The U.K. operations are included in the consolidated results
13
on a one-quarter lag basis through the end of the third quarter of 1999.
PXRE decided during the quarter to withdraw from the excess and surplus
lines and property facultative markets. These units were unable to write the
planned amounts of profitable, complementary non-catastrophe business without
adding unacceptable amounts of uncapped catastrophe exposure. Net premiums
earned on this business were not material in 1999.
Premiums ceded by PXRE to its managed business participants increased
59.2% to $12,000,000 for the first quarter of 2000 compared with $7,540,000 for
corresponding period of 1999. The increase in premiums ceded to these programs
was due primarily to the increase in gross premiums written, including
reinstatement premiums on 1999 catastrophe loss development.
During the first quarter of 2000, catastrophe coverage and other
reinsurance ceded premiums written decreased due to PXRE fronting less business
on behalf of other reinsurers. PXRE's property business is protected by a series
of retrocessional agreements which currently provide protection principally
against unusual severity of loss and are not designed to protect PXRE's exposure
to smaller, more frequent loss occurrences.
The following tables summarize the first quarter of 2000 and 1999 net
written and earned premium by PXRE's business segments:
Net Premiums Written As of As of
($000's) March 31, March 31,
2000 % 1999 %
---- --- ---- ---
Catastrophe and Risk Excess
North American $ 4,960 $ 5,300
International 28,895 22,651
Excess of loss cessions (5,086) (6,460)
-------- --------
Subtotal 28,769 50.6 21,491 55.3
-------- --------
Casualty
North American 8,588 6,849
International 4,059 3,162
-------- --------
12,647 22.2 10,011 25.8
-------- --------
Structured/Finite Business
North American 0 0
International 2,580 0
-------- --------
2,580 4.5 0 0.00
-------- --------
Other Lines
North American (160) 621
International 13,049 6,705
-------- --------
12,889 22.7 7,326 18.9
-------- ----- -------- -----
Total $ 56,885 100.0% $ 38,828 100.0%
======== ===== ======== =====
14
Net Premiums Earned As of As of
($000's) March 31, March 31,
2000 % 1999 %
---- --- ---- ---
Catastrophe and Risk Excess
North America $ 4,812 $ 3,932
International 19,706 13,253
Excess of loss cessions (6,315) (2,136)
-------- --------
Subtotal 18,203 51.0 15,049 63.1
-------- --------
Casualty
North America 4,097 2,205
International 2,212 1,060
-------- --------
6,309 17.7 3,265 13.7
-------- --------
Structured/Finite Business
North America 0 0
International 226 0
-------- --------
226 0.6 0 0.0
-------- --------
Other Lines
North American 356 769
International 10,648 4,748
-------- --------
11,004 30.7 5,517 23.2
-------- ----- -------- -----
Total $ 35,742 100.0% $ 23,831 100.0%
======== ===== ======== =====
Management fee income from all sources for the three months ended March
31, 2000, increased 100% to $1,794,000 from $897,000 for the corresponding
period of 1999, reflecting higher ceded premiums written, including higher
management fee income earned from Select Re.
The underwriting results of a property and casualty insurer are
discussed frequently by reference to its loss ratio, underwriting expense ratio
and combined ratio. The loss ratio is the result of dividing losses and loss
expenses incurred by net premiums earned. The underwriting expense ratio is the
result of dividing underwriting expenses (reduced by management fees, if any) by
net premiums written for purposes of U.S. SAP and net premiums earned for
purposes of U.S. GAAP. The combined ratio is the sum of the loss ratio and the
underwriting expense ratio. A combined ratio under 100% indicates underwriting
profits and a combined ratio exceeding 100% indicates underwriting losses. The
combined ratio does not reflect the effect of investment income on operating
results. The ratios discussed below have been calculated on a U.S. GAAP basis.
The loss ratio was 66.3% for the first quarter of 2000 compared with 79.3% for
the comparable period of 1999. The loss ratio for the first three months of 2000
reflected incurred catastrophe losses of $14,504,000 gross and $9,271,000 net.
In comparison, the loss ratio for the first quarter of 1999 reflected incurred
catastrophe losses of $13,024,000 gross and $7,870,000 net largely due to
Hurricanes Georges and Mitch.
15
Significant catastrophe losses increasing (decreasing) the three months
ended March 31, 2000 loss ratio are as follows:
Amount of Losses
----------------
Loss Event Gross Net
- ---------- ----- ---
($000's)
French Storm Martin $15,570 $11,671
French Storm Lothar 3,473 1,290
Hurricane Floyd (5,131) (3,507)
Significant catastrophe and risk losses affecting the three months
ended March 31, 1999 loss ratio are as follows:
Amount of Losses
----------------
Loss Event Gross Net
- ---------- ----- ---
($000's)
Hurricane Georges $8,536 $5,649
Hurricane Mitch 2,072 1,482
One Risk Loss 2,145 1,242
Colombian Earthquake 1,923 918
The provision for losses and loss expenses and the loss ratio includes
the effect of foreign exchange movements on PXRE's liability for losses and loss
expenses, resulting in a foreign currency exchange gain of $506,000 for the
three months ended March 31, 2000 compared to a gain of $459,000 for the
corresponding period of 1999.
During the first quarter of 2000, PXRE experienced adverse development
of $8,249,000 net largely due to the French storm Martin. During 1999, PXRE
experienced adverse development of $9,196,000 net for prior-year loss and loss
expenses primarily related to Hurricanes Georges and Mitch, some development on
other 1998 loss events and continued frequency of 1999 loss events.
The underwriting expense ratio was 44.4% for the first quarter of 2000
compared with 49.4% for the comparable period of 1999. The decrease in
underwriting expense ratio was substantially due to the increase in management
fee income.
As a result of the above, the combined ratio was 110.7% for the first
quarter of 2000 compared with 128.7% for the comparable period of 1999. The
commission and brokerage ratio net of management fee income was 16.9% in the
first quarter of 2000 and 23.2% for the comparable period of 1999. The operating
expense ratio was 27.4% in the first quarter of 2000 compared with 26.2% in the
year earlier period. The decrease in PXRE's GAAP combined ratio was primarily
caused by the lower loss ratio from increased premiums earned.
16
The following table summarizes the underwriting (loss) and profit by
segment for the three months ended March 31, 2000 and 1999:
Underwriting As of As of
($000's) March 31, March 31,
2000 % 1999 %
---- --- ---- ---
Catastrophe and Risk Excess
North American $ 2,598 $ (284)
International 5,656 (10)
Excess of loss cessions (199) (417)
-------- --------
Subtotal 8,055 134.7 (711) 123.2
-------- --------
Casualty
North American (11) (229)
International (352) (114)
-------- --------
(363) (6.1) (343) 59.5
-------- --------
Structured/Finite Business
North American 0 0
International 156 0
-------- --------
156 2.6 0
-------- --------
Other Lines
North American (689) (122)
International (1,180) 599
-------- --------
(1,869) (31.2) 477 (82.7)
-------- ----- -------- -----
Total $ 5,979 100.0% $ (577) 100.0%
======== ===== ======== =====
Underwriting operations include premiums earned, losses incurred and
commission and brokerage net of management fees, but do not include investment
income, realized gains or losses, interest expense, operating expenses,
unrealized foreign exchange gains or losses on losses incurred or management
fees on weather contracts.
The catastrophe and risk excess underwriting portfolio can be
characterized on a longer term basis as being comprised of coverages involving
higher margins and greater volatility than other coverages written by PXRE.
Other operating expenses increased to $9,805,000 for the three months
ended March 31, 2000 from $6,238,000 in 1999, as a result of the costs incurred
to implement PXRE's planned diversification including an increase in salary and
related benefit costs of $2,147,000 as well as the amortization of negative
goodwill in 1999 that did not recur in 2000. Operating expenses in the first
three months of 2000 increased 5% over the fourth quarter of 1999. Included in
other operating expenses were foreign currency exchange losses of $459,000 for
2000 compared to losses of $465,000 for the corresponding period of 1999.
17
During the first quarter of 2000, interest expense increased to
$1,280,000 as compared to $831,000 in 1999. The increase in interest expense
relates to a drawdown of $50,000,000 under a credit facility at a fixed rate of
6.34% on December 30, 1998, and a drawdown of the remaining $25,000,000 of this
facility in the fourth quarter of 1999. The variable annual rate on the
$25,000,000 was 7.0425% at March 31, 2000. See "Liquidity and Capital
Resources". In addition, during the three months ended March 31, 2000, PXRE
incurred minority interest expense amounting to $2,219,000 related to PXRE's
$100 million of 8.85% Capital Trust Pass-through Securities 'sm' (TRUPS 'sm')
(as described below under "Liquidity and Capital Resources") compared to
$2,108,000 in 1999.
Net investment income for the three months ended March 31, 2000
increased 65.9% to $11,944,000 from $7,201,000 for the comparable period of
1999. The increase in net investment income was caused by an increase in limited
partnership investment coupled with strong returns on these investments
amounting to $6,750,000 (which are carried on the equity method). PXRE's pre-tax
annualized investment yield was 9.4% for the first quarter of 2000 compared with
6.6% for the corresponding quarter in 1999, both calculated using amortized cost
and investment income before investment expenses. Net realized investment losses
for the first quarter of 2000 were $536,000 related to portfolio restructuring
compared to losses of $2,576,000 in the first quarter of 1999, the latter
reflecting a $5,173,000 loss on weather contracts offset by $2,597,000 in net
capital gains on securities sales.
The net effect of foreign currency exchange fluctuations were gains of
$47,000 in the first quarter of 2000, as compared to losses of $6,000 for 1999.
For the reasons discussed above, net income was $4,009,000 for the
three months ended March 31, 2000 compared to a net loss of $2,762,000 for the
comparable period of 1999. The diluted income per common share was $0.35 for the
first quarter of 2000 compared to a net loss per share of $0.23 for the first
quarter of 1999, based on diluted average shares outstanding of approximately
11,535,000 in 2000 and 11,890,000 in 1999.
LIQUIDITY AND CAPITAL RESOURCES
PXRE relies primarily on cash dividends and net tax allocation payments
from its subsidiaries, including PXRE Reinsurance, Transnational Insurance and
PXRE Bermuda to pay its operating expenses and income taxes, to meet its debt
service obligations and to pay dividends. The payment of dividends by PXRE
Reinsurance to PXRE Delaware and by Transnational Insurance to PXRE Reinsurance
is subject to limits imposed under the insurance laws and regulations of
Connecticut, the state of incorporation and domicile of PXRE Reinsurance and
Transnational Insurance, as well as certain restrictions arising in connection
with PXRE indebtedness discussed below. Under the Connecticut insurance law, the
maximum amount of dividends or other distributions that PXRE Reinsurance may
declare or pay, and that Transnational Insurance may declare or pay to PXRE
Reinsurance, within any twelve-month period, without regulatory approval, is
limited to the lesser of (a) earned surplus or (b) the greater of 10% of
policyholders' surplus at December 31 of the preceding year or 100% of net
income for the twelve-month period ending December 31 of the preceding year, all
18
determined in accordance with U.S. SAP. Accordingly, the Connecticut insurance
laws could limit the amount of dividends available for distribution by PXRE
Reinsurance or Transnational Insurance without prior regulatory approval,
depending upon a variety of factors outside the control of PXRE, including the
frequency and severity of catastrophe and other loss events and changes in the
reinsurance market, in the insurance regulatory environment and in general
economic conditions. The maximum amount of dividends or distributions that PXRE
Reinsurance may declare and pay during 2000, without regulatory approval, is
$39,901,000. Transnational Insurance may not declare or pay any dividend to PXRE
Reinsurance in 2000 without regulatory approval. During the first quarter of
2000, $8,000,000 in dividends were paid by PXRE Reinsurance. Under Bermuda law,
PXRE Bermuda may not pay a dividend unless after payment of the dividend it is
able to pay its liabilities as they become due, and the realizable value of its
assets are greater than the aggregate value of its liabilities, issued share
capital and share premium accounts. PXRE Bermuda is also required to maintain
statutory assets in an amount that permits it to meet the prescribed minimum
solvency margin for the net premium income level of its business from time to
time. In addition, any dividend paid cannot be in an amount that will reduce the
reserves of PXRE Bermuda to a level that is not sufficient to meet the reserve
requirements of its business.
Dividends and other permitted payments from PXRE Delaware to PXRE
Barbados are expected to be subject to U.S. withholding taxes at the rate of 5%
(reduced from 30% under the tax convention between the United States and
Barbados) and a 2.5% Barbados corporate income tax.
In the event the amount of dividends available, together with other
sources of funds, are not sufficient to permit PXRE to meet its debt service and
other obligations and to pay cash dividends, it would be necessary to obtain the
approval of the Connecticut Insurance Commissioner prior to the payment of
additional dividends by PXRE Reinsurance (or Transnational Insurance) or the
approval of the Bermuda Minister of Finance prior to the payment of additional
dividends by PXRE Bermuda. If such approval were not obtained, PXRE would have
to adopt one or more alternatives, such as refinancing or restructuring its
indebtedness or seeking additional equity. There can be no assurance that any of
these strategies could be effected on satisfactory terms, if at all. In the
event that PXRE were unable to generate sufficient cash flow and were otherwise
unable to obtain funds necessary to meet required payments of principal and
interest on its indebtedness, PXRE could be in default under the terms of the
agreements governing such indebtedness. In the event of such default, the
holders of such indebtedness could elect to declare all of the funds borrowed
thereunder to be due and payable together with accrued and unpaid interest.
PXRE Delaware entered into a Credit Agreement dated as of December 30,
1998 (the "Credit Agreement") with First Union National Bank ("First Union") as
Agent and as a Lender, pursuant to which First Union agreed to make available to
PXRE Delaware a $75,000,000 revolving credit facility. On May 18, 1999, pursuant
to various Joinder Agreements and Assignment and Acceptance Agreements, First
Union syndicated the revolving credit facility, joining Fleet National Bank,
Credit Lyonnais New York Branch and Bank One (formerly, The First National
19
Bank of Chicago) as additional lenders (collectively with First Union, the
"Lenders"). As at December 31, 1998, PXRE Delaware had outstanding borrowings
under the Credit Agreement of $50,000,000, and in October 1999, the remaining
$25,000,000 was borrowed. On March 31, 2000, PXRE Delaware fulfilled its
commitment and made a principal payment of $10,000,000, reducing the outstanding
loan to $65,000,000.
The terms of the Credit Agreement have been amended four times pursuant
to a First Amendment and Waiver to Credit Agreement, dated May 18, 1999, and a
second Amendment and Waiver to Credit Agreement, dated June 25, 1999 and the
First Amended and Restated Credit Agreement dated August 31, 1999. The First
Amendment increased the applicable margin percentage for LIBOR loans under the
Credit Agreement by 1/8% and changed the governing law from North Carolina to
New York law. The Second Amendment modified various covenants related to the
investments that PXRE and its subsidiaries are permitted to make under the
Credit Agreement. The First Amended and Restated Credit Agreement was undertaken
to address the Bermuda redomestication and to provide for PXRE Group Ltd. and
PXRE (Barbados) Ltd. as guarantors of the loan obligation. The First Amendment
to the First Amended and Restated Credit Agreement clarified certain
definitions.
As amended, loans under the Credit Agreement bear interest at an annual
rate equal to First Union's base rate, as in effect from time to time, for base
rate loans or at a margin (1.00% as of March 31, 2000) over First Union's
Eurodollar rate for periods of 30, 60, 90 or 180 days for LIBOR loans. In
connection with the Credit Agreement, PXRE Delaware and First Union entered into
an interest rate swap which, effective December 31, 1998, has the intended
effect of converting the initial $50,000,000 borrowings by PXRE Delaware into a
fixed rate borrowing at an annual interest of 6.34%. The remaining $25,000,000,
was borrowed at a variable annual rate at March 31, 2000 of 7.0425%. Commitments
under the Credit Agreement terminate on March 31, 2005 and are subject to annual
reductions of $10,000,000 commencing March 31, 2000 and $25,000,000 on March 31,
2005, and, unless due or paid sooner, the aggregate principal of the loans are
due and payable in full on March 31, 2005.
The Credit Agreement contains covenants which, among other things,
limit the ability of PXRE and its subsidiaries and affiliates: (a) to incur
additional Indebtedness (other than certain permitted Indebtedness); (b) to
create Liens upon their properties or assets (other than Permitted Liens); (c)
to sell, transfer or otherwise dispose of their assets, business or properties
(other than certain permitted dispositions); (d) to make additional Investments
(other than certain permitted Investments, including Permitted Acquisitions and
other Investments in compliance with, among other things, applicable law and the
limitations set forth in the companies' investment policies and not exceeding
specified limits); (e) to pay dividends or repurchase stock if after giving
effect thereto a Default or Event of Default exists or the Fixed Charge Coverage
Ratio would be less than 1.5 to 1.0 as defined in the Credit Agreement; (f) to
enter into certain transactions with Affiliates; (g) to engage in any unrelated
business; (h) to enter into or remain a party to certain ceded reinsurance
agreements or; (i) to consolidate, merge or otherwise combine (or agree to do
any of the foregoing) unless, among other things, (1) PXRE Group Ltd. is the
surviving entity in such merger or consolidation, (2) such merger or
consolidation constitutes a Permitted Acquisition and the conditions and
20
requirements of the Credit Agreement are complied with and (3) immediately
thereafter no Default or Event of Default exists. The Credit Agreement also
requires compliance with Leverage Ratio, Fixed Charge Coverage Ratio, Risk-Based
Capital Ratio and Combined Statutory Surplus requirements. As at March 31, 2000,
there was no default under the Credit Agreement.
The Credit Agreement enumerates various Events of Default, including
but not limited to, if: (1) any Person or group becomes the "beneficial owner"
of securities of PXRE Group Ltd. representing 20% or more of the combined voting
power of the then outstanding securities of PXRE Group Ltd. ordinarily having
the right to vote in the election of directors; or (2) the Board of Directors of
PXRE Group Ltd. ceases to consist of a majority of the individuals who
constituted the Board as of the date of the Credit Agreement or who subsequently
become members after having been nominated, or otherwise approved in writing, by
at least a majority of individuals who constituted the Board as of the date of
the Credit Agreement (or their approved replacements).
On January 29, 1997, PXRE Capital Trust I, ("PXRE Capital Trust") a
Delaware statutory business trust and a wholly-owned subsidiary of PXRE
Delaware, issued $100,000,000 principal amount of its 8.85% TRUPS 'sm' 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"). On April 23, 1997, PXRE Delaware and PXRE
Capital Trust completed the registration with the Securities and Exchange
Commission 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. Minority interest
expense, including amortization of debt offering costs, for the three months
ended March 31, 2000 in respect of the Capital Securities (and related
Subordinated Debt Securities) amounted to $2,219,000. 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. PXRE Delaware has the right, at any time,
subject to certain conditions, to defer payments of interest on the Subordinated
Debt Securities for Extension Periods (as defined in the applicable indenture),
each not exceeding 10 consecutive semi-annual periods; provided that no
Extension Period may extend beyond the maturity date of the Subordinated Debt
Securities. As a consequence of PXRE Delaware's extension of any interest
payment period on the Subordinated Debt Securities, distributions on the Capital
Securities would be deferred (though such distributions would continue to accrue
interest at a rate of 8.85% per annum compounded semi-annually). In the event
that PXRE Delaware exercises its right to extend an interest payment period,
then during any Extension Period, subject to certain exceptions, (i) PXRE
Delaware may not declare or pay any dividend on, make any distributions with
respect to, or redeem, purchase, acquire or make a liquidation payment with
respect to, any of its capital stock or rights to acquire such capital stock or
make any guarantee payments (subject to specified exceptions) with respect to
the foregoing, and (ii) PXRE Delaware may not make any payment of interest on,
21
or principal of (or premium, if any, on), or repay, repurchase or redeem, any
debt securities issued by PXRE Delaware which rank pari passu with or junior to
the Subordinated Debt Securities. Upon the termination of any Extension Period
and the payment of all amounts then due, PXRE Delaware may commence a new
Extension Period, subject to certain requirements.
PXRE Delaware has used the net proceeds from the sale of the Capital
Securities for general corporate purposes, including the redemption and the
purchase of outstanding indebtedness and common stock of PXRE Delaware.
PXRE Delaware files U.S. income tax returns for itself and all of its
direct or indirect subsidiaries that satisfy the stock ownership requirements
for consolidation (collectively, the "Subsidiaries"). PXRE Delaware is party to
an Agreement Concerning Filing of Consolidated Federal Income Tax Returns (the
"Tax Allocation Agreement") pursuant to which each U.S. Subsidiary makes tax
payments to PXRE Delaware in an amount equal to the federal income tax payment
that would have been payable by such Subsidiary for such year if it had filed a
separate income tax return for such year. PXRE Delaware is required to provide
for 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 a U.S.
Subsidiary is less than (or greater than) the annual tax liability for such
Subsidiary on a stand-alone basis for such year, such Subsidiary will be
required to make up such deficiency to PXRE Delaware (or will be entitled to
receive a credit if payments exceed the separate return tax liability of the
Subsidiary.
The primary sources of liquidity for PXRE's principal operating
subsidiaries are net cash flow from operating activities (including interest
income from investments), the maturity or sale of investments, borrowings,
capital contributions and advances and in the case of PXRE Reinsurance,
dividends from Transnational Insurance. Funds are applied primarily to the
payment of claims, operating expenses, income taxes and to the purchase of
investments. Premiums are typically received in advance of related claim
payments.
Net cash flow used by operations was $2,658,000 during the first
quarter of 2000 compared with $2,598,000 in 1999, due to the effects of timing
of collection of receivables and reinsurance recoverables and payments of
losses.
PXRE's management has established general investment procedures and
guidelines for its investment portfolio and oversees investment management
carried out by Phoenix Investment Partners, Limited, a public majority-owned
subsidiary of Phoenix Home Life Mutual Insurance Company, and by Mariner
Investment Group, Inc. ("Mariner") the sole shareholder of which is the Chairman
of the Board and a founding shareholder of Select Re. PXRE's invested assets
consist primarily of fixed maturities and limited partnerships, but also include
equities, REITS and short-term investments. PXRE investments are subject to
market-wide risks and fluctuations, as well as to risk inherent in particular
securities. As at March 31, 2000, 70.5% of PXRE's investment portfolio, at fair
value, consisted of fixed maturities and short-term investments, while the
balance was in various limited partnerships, mutual funds and equity securities.
22
The limited partnerships primarily include a fund of funds investing in a
multiple number of hedge strategies. The investment policies of PXRE are
approved by its Board of Directors.
During the first quarter of 2000, PXRE has substantially reduced its
investment in equities, therefore, reducing its ownership in equities, other
than REITS, to less than 1% of the portfolio.
Of PXRE's fixed maturities portfolio at March 31, 2000, 88.1% of the
fair value was in obligations rated "A2" or "A" or better by Moody's or S&P,
respectively. Mortgage and asset-backed securities accounted for 31.7% of fixed
maturities based on fair value at March 31, 2000. PXRE had no investments in
real estate or commercial mortgage loans as of March 31, 2000; however, PXRE has
invested in common and preferred shares of publicly traded REITS. The average
market yield to maturity of PXRE's fixed maturities portfolio at March 31, 2000
and 1999, was 6.6% and 6.4%, respectively.
Fixed maturity and equity investments are reported at fair value, with
the net unrealized gain or loss, net of tax, reported as a separate component of
stockholders' equity. During the first quarter of 2000, PXRE recorded directly
to equity an after-tax unrealized gain of $1,183,000 ($0.10 book value per
share) in the value of its investment portfolio.
Short-term investments are carried at amortized cost, which
approximates fair value. PXRE's short-term investments, principally high-grade
commercial paper, marketable fixed income securities and investments in limited
partnerships which invest primarily in marketable fixed income securities, were
$46,760,000 at March 31, 2000, compared to $50,004,000 at December 31, 1999.
Limited partnership assets amounting to $126,693,000 at March 31, 2000, compared
to $113,476,000 at December 31, 1999, were accounted for under the equity
method. Total investment income for limited partnership assets amounted to
$6,750,000 for the quarter ended March 31, 2000.
Dividends declared in the first quarter of 2000 were $706,000 compared
to $3,163,000 in the corresponding period of 1999, as a result of the decrease
in the per share quarterly dividend from $.26 to $.06 in the third quarter of
1999 in anticipation of the Bermuda redomestication as well as share repurchases
in 1999. The expected annual dividend based on shares outstanding at December
31, 1999 is approximately $2,821,000.
Book value per common share was $22.81 at March 31, 2000.
In December 1999, PXRE announced a new stock repurchase program of up
to 1,000,000 shares. PXRE had approximately 11,758,000 common shares outstanding
as of March 31, 2000.
PXRE may be subject to gains and losses resulting from currency
fluctuations because substantially all of its investments are denominated in
U.S. dollars, while some of its net liability exposure is in currencies other
than U.S. dollars. PXRE holds, and expects to continue to hold, currency
23
positions and has made, and expects to continue to make, investments denominated
in foreign currencies to mitigate, in part, the effects of currency fluctuations
on its results of operations. Currency holdings and investments denominated in
foreign currencies do not constitute a material portion of PXRE's investment
portfolio and, in the opinion of PXRE's management, are sufficiently liquid for
its needs.
In connection with the capitalization of PXRE Lloyd's Syndicate, PXRE
has placed on deposit $46,587,000 par value of U.S. government securities and
municipal bonds as collateral for Lloyd's. In addition, PXRE issued a letter of
credit for the benefit of Lloyd's in the amount of $15,355,000, which is
collateralized by municipal bonds of approximately $17,835,000.
In September 1997, PXRE and Phoenix Home Life completed the formation
of a joint venture, Cat Bond Investors L.L.C., with initial committed capital of
$10,000,000. The joint venture specializes in investing in instruments, the
returns on which are determined, in whole or in part, by the nature, magnitude
and/or effects of certain catastrophe events or meteorological conditions.
All amounts classified as reinsurance recoverable at March 31, 2000 are
considered by management of PXRE to be collectible in all material respects.
MARKET RISK
PXRE has reviewed the change in its exposure to market risks since
December 31, 1999. The components of PXRE's holdings in derivatives and other
financial instruments have not materially changed. PXRE's risk management
strategy and objectives have not materially changed. PXRE believes that the
potential for loss in each market risk sector described at year-end has not
materially changed however, PXRE has sold its remaining exposures to emerging
market bonds and reduced its equity holdings, thereby reducing credit, market
and interest risk further from 1999 year end levels.
PXRE has observed significant changes in volatility across many markets
during the past two months. The potential loss estimate at March 31, 2000, may
not reflect the level of loss PXRE could experience under certain circumstances
in this market.
INCOME TAXES
PXRE recognized a tax expense of $74,500 in the first quarter of 2000
compared to tax benefit of $2,368,000 in the corresponding period of 1999. Tax
expense in 2000 differed from the statutory rate primarily due to tax exempt
income and the dividends received deduction. The tax benefit reported in 1999
was primarily attributable to underwriting losses, tax exempt income and the
amortization of negative goodwill.
24
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains various forward-looking statements and includes
assumptions concerning PXRE's operations, future results and prospects.
Statements included herein, as well as statements made by or on behalf of PXRE
in press releases, written statements or other documents filed with the
Securities and Exchange Commission, or in its communications and discussions
with investors and analysts in the normal course of business through meetings,
phone calls and conference calls, which are not historical in nature are
intended to be, and are hereby identified as, "forward-looking statements" for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934 as amended. These forward-looking statements, identified by words
such as "intend", "believe", or "expects" or variations of such words or similar
expressions are based on current expectations and are subject to risk and
uncertainties. PXRE cautions investors and analysts that actual results or
events could differ materially from those set forth or implied by the
forward-looking statements and related assumptions, depending on the outcome of
certain important factors including, but not limited to, the following: (i) the
frequency and severity of catastrophic events; (ii) changes in the level of
competition in the reinsurance or primary insurance markets that impact the
volume or profitability of business (these changes include, but are not limited
to, the intensity of price competition, the entry of new competitors, existing
competitors exiting the market and competitors' development of new products);
(iii) changes in the demand for reinsurance, including changes in the amount of
ceding companies' retentions; (iv) the ability of PXRE to execute its
diversification initiatives in markets in which PXRE has not had a significant
presence; (v) adverse development on loss reserves related to business written
in prior years; (vi) lower than estimated retrocessional recoveries on unpaid
losses, including the effects of losses due to a decline in the creditworthiness
of PXRE's retrocessionaires; (vii) increases in interest rates, which cause a
reduction in the market value of PXRE's interest rate sensitive investments,
including its fixed income investment portfolio; (viii) decreases in interest
rates causing a reduction of income earned on new cash flow from operations and
the reinvestment of the proceeds from sales, calls or maturities of existing
investments; (ix) market fluctuations in equity securities and securities
underlying limited partnership investments; (x) foreign currency fluctuations
resulting in exchange gains or losses; (xi) changes in the composition of PXRE's
investment portfolio; and (xii) changes in tax laws, tax treaties, tax rules and
interpretations. In addition to the factors outlined above that are directly
related to PXRE's business, PXRE is also subject to general business risks,
including, but not limited to, adverse state, federal or foreign legislation and
regulation, adverse publicity or news coverage, changes in general economic
factors and the loss of key employees.
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report or amendment thereto to be signed on its
behalf by the undersigned thereunto duly authorized.
PXRE GROUP LTD.
May 12, 2000 By: \s\ James F. Dore
------------------
James F. Dore
Executive Vice President
and Chief Financial Officer
STATEMENT OF DIFFERENCES
The service mark symbol shall be expressed as...........................'sm'
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