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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 SEPTEMBER 30, 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 November 8, 2000, 11,810,729 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 September 30, 2000
and December 31, 1999 3
Consolidated Statements of Operations and Comprehensive Income
for the three and nine months ended September 30, 2000 and 1999 4
Consolidated Statements of Stockholders' Equity for the three and nine
months ended September 30, 2000 and 1999 5
Consolidated Statements of Cash Flows for the three and nine months
ended September 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION 37
2
PXRE CONSOLIDATED BALANCE SHEETS
Group Ltd. (Unaudited)
- --------------------------------------------------------------------------------
September 30, December 31,
2000 1999
---- ----
Assets Investments:
Available for sale:
Fixed maturities, available-for-sale, at fair value (amortized
cost $302,116,000 and $329,962,000, respectively) $297,465,503 $321,247,527
Equity securities, at fair value (cost $16,728,000 and $26,214,000) 18,427,246 24,840,360
Short-term investments 54,775,046 50,004,473
Trading securities (cost $24,500,000 and $26,000,000) 28,586,457 27,806,209
Limited partnerships, at equity (cost $67,797,000 and $67,147,000) 90,869,739 85,669,508
------------ ------------
Total investments 490,123,991 509,568,077
Cash 23,877,643 14,735,040
Accrued investment income 4,513,446 4,186,849
Receivables:
Unreported premiums 52,054,556 40,216,340
Balances due from intermediaries and brokers, net 14,619,466 21,549,113
Other receivables 27,501,401 22,971,088
Reinsurance recoverable 124,589,520 106,702,307
Ceded unearned premiums 18,151,279 19,582,260
Deferred acquisition costs 9,711,065 7,809,971
Current income tax recoverable 0 12,628,414
Deferred tax asset 17,111,132 11,531,000
Other assets 17,086,887 8,699,650
------------ ------------
Total assets $799,340,386 $780,180,109
============ ============
Liabilities Losses and loss expenses $276,920,851 $261,551,353
Unearned premiums 63,127,900 42,218,837
Debt payable 65,000,000 75,000,000
Current income tax payable 896,791 0
Other liabilities 42,522,332 38,609,857
------------ ------------
Total liabilities 448,467,874 417,380,047
------------ ------------
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 99,524,271 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, 11,793,548 and 11,679,769 shares issued, respectively 11,793,548 11,679,769
Additional paid-in capital 174,331,418 173,682,802
Accumulated other comprehensive income:
Net unrealized depreciation on investments, net of deferred
income tax benefit of $1,025,000 and $3,520,000, respectively (2,064,454) (6,752,002)
Retained earnings 71,676,026 89,932,620
Restricted stock at cost (387,047 and 369,483 shares) (4,388,297) (5,264,206)
------------ ------------
Total stockholders' equity 251,348,241 263,278,983
------------ ------------
Total liabilities and stockholders' equity $799,340,386 $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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
Revenues Net premiums earned $40,508,153 $32,458,734 $119,889,291 $ 84,984,167
Net investment income 6,778,407 9,466,325 24,460,876 27,589,037
Net realized investment losses (127,731) (2,194,302) (589,828) (3,576,814)
Management fees 725,564 528,151 4,298,795 1,828,466
----------- ----------- ------------ ------------
47,884,393 40,258,908 148,059,134 110,824,856
----------- ----------- ------------ ------------
Losses and Losses and loss expenses incurred 19,114,520 29,327,207 111,470,052 66,195,129
Expenses Commissions and brokerage 9,045,722 7,871,366 25,782,598 20,417,117
Other operating expenses 8,229,302 7,389,761 26,627,682 20,707,474
Interest expense 1,176,581 885,254 3,605,824 2,559,239
Minority interest in consolidated
subsidiary 2,218,899 2,220,046 6,656,250 6,546,815
----------- ----------- ------------ ------------
39,785,024 47,693,634 174,142,406 116,425,774
----------- ----------- ------------ ------------
Income (loss) before income taxes 8,099,369 (7,434,726) (26,083,272) (5,600,918)
Income tax provision (benefit) 4,716,000 (1,196,130) (9,948,000) (1,646,130)
----------- ----------- ------------ ------------
Net income (loss) $ 3,383,369 $(6,238,596) $(16,135,272) $ (3,954,788)
Comprehensive Other comprehensive income
Income (loss), net of tax:
Net unrealized appreciation
(depreciation) on investments 2,380,225 (244,161) 4,687,548 (6,748,500)
----------- ----------- ------------ ------------
Comprehensive income (loss) $ 5,763,594 $(6,482,757) $(11,447,724) $(10,703,288)
=========== =========== ============ ============
Per Share Basic:
----------- ----------- ------------ ------------
Net income (loss) $ 0.30 $ (0.55) $ (1.42) $ (0.34)
=========== =========== ============ ============
Average shares outstanding 11,396,150 11,441,979 11,385,234 11,611,408
=========== =========== ============ ============
Diluted:
----------- ----------- ------------ ------------
Net income (loss) $ 0.29 $ (0.55) $ (1.42) $ (0.34)
=========== =========== ============ ============
Average shares outstanding 11,653,279 11,441,979 11,385,234 11,611,408
=========== =========== ============ ============
The accompanying notes are an integral part of these statements.
4
PXRE CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
GROUP LTD. (Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
Common Stock: Balance at beginning of period $ 11,766,265 $ 151,628 $ 11,679,769 $ 149,382
Issuance of shares, net 27,283 77 113,779 2,323
------------ ------------ ------------ ------------
Balance at end of period $ 11,793,548 $ 151,705 $ 11,793,548 $ 151,705
============ ============ ============ ============
Additional Balance at beginning of period $174,530,456 $263,494,315 $173,682,802 $259,147,554
Paid-in Capital: Issuance of common shares 207,765 123,158 1,562,942 4,627,331
Other (406,803) (17,945) (914,326) (175,357)
------------ ------------ ------------ ------------
Balance at end of period $174,331,418 $263,599,528 $174,331,418 $263,599,528
============ ============ ============ ============
Treasury Stock: Balance at beginning of period $ 0 $(77,662,302) $ 0 $(61,420,025)
Repurchase of common stock (2,424) 0 (9,312) (16,195,677)
Cancellation of common stock 2,424 (15,907) 9,312 (62,507)
------------ ------------ ------------ ------------
Balance at end of period $ 0 $(77,678,209) $ 0 $(77,678,209)
============ ============ ============ ============
Unrealized
Appreciation Balance at beginning of period $ (4,444,679) $ (6,498,086) $ (6,752,002) $ 6,253
(Depreciation) Change in fair value for the
on Investments: period 2,380,225 (244,161) 4,687,548 (6,748,500)
------------ ------------ ------------ ------------
Balance at end of period $ (2,064,454) $ (6,742,247) $ (2,064,454) $ (6,742,247)
============ ============ ============ ============
Retained Balance at beginning of period $ 69,001,224 $135,908,176 $ 89,932,620 $139,842,939
Earnings: Net income (loss) 3,383,369 (6,238,596) (16,135,272) (3,954,788)
Dividends paid to common
stockholders (708,567) (705,852) (2,121,322) (6,924,423)
------------ ------------ ------------ ------------
Balance at end of period $ 71,676,026 $128,963,728 $ 71,676,026 $128,963,728
============ ============ ============ ============
Restricted Stock: Balance at beginning of period $ (5,103,605) $ (6,390,996) $ (5,264,206) $ (3,350,597)
Issuance of restricted stock 0 0 (1,276,445) (4,224,844)
Amortization of restricted stock 667,708 632,478 1,939,339 1,770,323
Other 47,600 15,907 213,015 62,507
------------ ------------ ------------ ------------
Balance at end of period $ (4,388,297) $ (5,742,611) $ (4,388,297) $ (5,742,611)
============ ============ ============ ============
Total Balance at beginning of period $245,749,661 $309,002,735 $263,278,983 $334,375,506
Stockholders' Issuance of common shares 235,048 123,235 1,676,721 4,629,654
Equity: Repurchase of common stock (2,424) 0 (9,312) (16,195,677)
Restricted stock, net 667,708 632,478 662,894 (2,454,521)
Unrealized appreciation
(depreciation) on investments
net of deferred income tax 2,380,225 (244,161) 4,687,548 (6,748,500)
Net income (loss) 3,383,369 (6,238,596) (16,135,272) (3,954,788)
Dividends (708,567) (705,852) (2,121,322) (6,924,423)
Other (356,779) (17,945) (691,999) (175,357)
------------ ------------ ------------ ------------
Balance at end of period $251,348,241 $302,551,894 $251,348,241 $302,551,894
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
5
PXRE CONSOLIDATED STATEMENTS OF CASH FLOWS
GROUP LTD. (Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
Cash Flows Net income (loss) $ 3,383,369 $ (6,238,596) $(16,135,272) $ (3,954,788)
from Operating Adjustments to reconcile net income
Activities to net cash provided by operating
activities:
Losses and loss expenses (14,400,664) 29,321,744 15,369,497 28,369,719
Unearned premiums (2,043,587) (499,050) 22,340,044 14,576,831
Deferred acquisition costs 750,602 78 (1,901,094) (3,949,044)
Receivables (12,138,877) (22,361,290) (5,674,609) (33,633,129)
Reinsurance balances payable (3,347,569) 8,731,895 (1,140,507) 7,416,332
Reinsurance recoverable 26,731,617 (11,565,246) (17,887,212) (7,978,758)
Income tax recoverable 10,720,833 2,695,096 13,507,536 13,171,474
Equity in earnings (loss) of
limited partnerships 6,843,155 (4,078,325) (977,494) (11,712,724)
Other (12,567,843) 1,026,965 (16,205,149) (1,609,371)
----------- ----------- ------------ ------------
Net cash provided (used) by
operating activities 3,931,036 (2,966,729) (8,704,260) 696,542
----------- ----------- ------------ ------------
Cash Flows Cost of fixed maturity investments (35,081,132) (19,974,505) (52,462,341) (102,585,750)
from Investing Fixed maturity investments
Activities matured/disposed 18,428,172 29,441,960 78,474,639 82,245,774
Payable for securities (21,864) (10,161,726) (1,937,087) 59,264
Cost of equity securities (7,152,262) (1,621,089) (9,903,609) (8,571,487)
Equity securities disposed 6,563,842 930,535 19,763,232 23,230,225
Net change in short-term investments 1,282,997 (3,995,737) (2,359,336) 10,450,067
Limited partnerships disposed 17,243,817 15,991,107 19,708,631 27,236,819
Limited partnerships purchased (4,046,625) (4,176,805) (21,447,553) (18,460,747)
------------ ------------ ------------ ------------
Net cash (used) provided by
investing activities (2,783,055) 6,433,740 29,836,576 13,604,165
------------ ------------ ------------ ------------
Cash Flows Proceeds from issuance of
from Financing common stock 282,648 123,236 447,825 339,446
Cash dividends paid to common
stockholders (708,567) (705,853) (2,121,320) (6,924,425)
Repurchase of debt 0 0 (10,000,000) 0
Cost of stock repurchased (2,424) 0 (316,218) (16,195,677)
------------ ------------ ------------ ------------
Net cash (used) provided by
financing activities (428,343) (582,617) (11,989,713) (22,780,656)
------------ ------------ ------------ ------------
Net change in cash 719,638 2,884,394 9,142,603 (8,479,949)
Cash, beginning of period 23,158,005 4,753,130 14,735,040 16,117,473
------------ ------------ ------------ ------------
Cash, end of period $ 23,877,643 $ 7,637,524 $ 23,877,643 $ 7,637,524
============ ============ ============ ============
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 nine months ended September 30, 2000, reflect
the financial position and results of operations of PXRE Group Ltd. and
subsidiaries.
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.
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.
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 Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
(thousands) 2000 1999 2000 1999
---- ---- ---- ----
Premiums written
Assumed $ 56,187 $ 60,109 $209,055 $160,427
Direct (16) 530 82 1,664
-------- -------- -------- --------
Gross premiums written 56,171 60,639 209,137 162,091
Ceded premiums written (19,697) (28,679) (72,065) (62,530)
-------- -------- -------- --------
Net premiums written $ 36,474 $ 31,960 $137,072 $ 99,561
======== ======== ======== ========
Premiums earned
Assumed $ 51,590 $ 53,180 $186,738 $130,786
Direct 109 552 1,490 1,258
Ceded (11,191) (21,273) (68,339) (47,060)
-------- -------- -------- --------
Net premiums earned $ 40,508 $ 32,459 $119,889 $ 84,984
======== ======== ======== ========
In the second quarter of 2000 PXRE assumed a retroactive reinsurance
contract. Gross premiums written and earned under the contract were both
$20,024,000. The excess of recorded liabilities over premiums assumed of
$7,401,000 is recorded as other receivables and is being amortized into income
over the expected settlement period of the underlying liabilities using the
interest method. Concurrently, PXRE ceded 50% of this contract. The ceded
liability in excess of amounts paid for reinsurance coverage, amounting to
$3,815,000, is deferred and amortized into income in the same manner as the
assumed contract.
8
PXRE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
GROUP LTD.
- --------------------------------------------------------------------------------
3. EARNINGS PER SHARE
The table below presents the computation of basic and diluted earnings
per share:
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
(thousands) 2000 1999 2000 1999
---- ---- ---- ----
Net income (loss) available to
common stockholders $ 3,383 $ (6,239) $(16,135) $ (3,955)
======== ======== ======== ========
Weighted average shares of common stock
outstanding:
Weighted average shares of common
outstanding (basic) 11,396 11,442 11,385 11,611
Equivalent shares of stock options 68 20 72 26
Equivalent shares of restricted stock 189 133 227 119
-------- -------- -------- --------
Weighted average common
equivalent shares (diluted) 11,653 11,595 11,684 11,756
======== ======== ======== ========
Weighted average common
equivalent shares when anti-dilutive 11,396 11,442 11,385 11,611
======== ======== ======== ========
Per share amounts:
Basic net income (loss) $ 0.30 $ (0.55) $ (1.42) $ (0.34)
Diluted net income (loss) $ 0.29 $ (0.55) $ (1.42) $ (0.34)
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.
5. LOSSES AND LOSS EXPENSE LIABILITIES
In the second quarter of 2000, PXRE commenced assuming structured
product contracts in PXRE Reinsurance Ltd., which is a new line of business for
PXRE. Such contracts are recorded on a discounted basis. At September 30, 2000
reserves related to these contracts were discounted by $3,472,000.
9
PXRE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
GROUP LTD.
- --------------------------------------------------------------------------------
6. SEGMENT INFORMATION
PXRE operates in four reportable property and casualty segments -
catastrophe and risk excess, casualty, structured/finite business and all other
lines - based on PXRE's method of internal management reporting. In addition,
PXRE operates in two geographic segments - North American representing North
American based risks written by North American based reinsureds and
International (principally the United Kingdom, Continental Europe, Australia and
Asia) representing all other premiums written. The reportable segments were
redefined during 1999.
There are no significant 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. Accordingly, PXRE does not review and evaluate the financial
results of its operating segments based upon balance sheet data.
The following table summarizes the underwriting profit and (loss) by
segment for the three and nine months ended September 30, 2000 and 1999:
Underwriting
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
(thousands) 2000 1999 2000 1999
---- ---- ---- ----
Catastrophe and Risk Excess
North American $ 4,401 $ 2,113 $ 10,429 $ 2,920
International 8,288 (1,091) (15,012) 4,386
Excess of loss cessions (1,764) (3,796) (2,121) (6,715)
------- ------- -------- -------
Subtotal 10,925 (2,774) (6,704) 591
------- ------- -------- -------
Casualty
North American (146) 215 (740) (114)
International 115 (273) (948) (142)
------- ------- -------- -------
(31) (58) (1,688) (256)
------- ------- -------- -------
Structured/Finite Business
North American 0 0 0 0
International 253 0 609 0
------- ------- -------- -------
253 0 609 0
------- ------- -------- -------
Other Lines
North American (734) 395 (2,873) 779
International 1,024 (1,471) (4,734) (1,328)
------- ------- -------- -------
290 (1,076) (7,607) (549)
------- ------- -------- -------
Total $11,437 $(3,908) $(15,390) $ (214)
======= ======= ======== =======
10
PXRE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
GROUP LTD.
- --------------------------------------------------------------------------------
The following table reconciles the underwriting operations for the
operating segments to income (loss) before tax as reported in the consolidated
statements of operations and comprehensive income:
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
(thousands) 2000 1999 2000 1999
---- ---- ---- ----
Net underwriting profit (loss) $11,437 $(3,908) $(15,390) $ (214)
Net investment income 6,778 9,466 24,461 27,589
Net realized investment gains (losses) (128) (2,194) (590) (3,577)
Interest expense (1,177) (886) (3,606) (2,559)
Minority interest in consolidated subsidiary (2,219) (2,220) (6,656) (6,547)
Operating expenses (8,229) (7,390) (26,628) (20,707)
Other income 1,637 (303) 2,326 414
------- ------- -------- --------
Income (loss) before income taxes $ 8,099 $(7,435) $(26,083) $ (5,601)
======= ======= ======== ========
Premiums written were assumed principally through reinsurance brokers
or intermediaries. As of September 30, 2000 four reinsurance intermediaries
individually accounted for more than 10% of gross premiums written, and
collectively accounted for approximately 56.4% of gross premiums written.
7. CONTINGENCIES
PXRE entered into weather option agreements in May 1999 with two
counterparties. In April 2000 these counterparties submitted invoices to PXRE
Delaware in the aggregate sum of $8,252,500 seeking payment under the weather
option agreements, which invoices have been paid. PXRE Delaware insured its
obligations under these weather option agreements through two Commercial Inland
Marine Weather Insurance Policies issued by Terra Nova Insurance Company Limited
("Terra Nova"). PXRE Delaware submitted claims under these policies to Terra
Nova in April 2000. Terra Nova has denied coverage, contending that its Managing
General Agent had no authority to issue these policies. PXRE Delaware disagrees
with Terra Nova's denial and will aggressively pursue its available legal
remedies to collect the sums due under these policies.
11
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 industry is 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.
Meanwhile, PXRE has adopted an ambitious diversification strategy including:
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 September 30, 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
12
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 and 2000 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. In the third quarter
of 2000, PXRE purchased coverage at lower retentions in light of the unusual
frequency and severity of losses in 1999.
As previously reported, PXRE decided during the first quarter of 2000 to
withdraw from the excess and surplus lines and property facultative markets.
This business had been conducted through Transnational and Transnational had
been 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.
In light of PXRE's withdrawal from the excess and surplus lines markets,
PXRE has decided to transfer all of the assets and liabilities of Transnational
to PXRE Reinsurance through a series of transactions intended to qualify as a
tax-free liquidation of Transnational pursuant to Section 332 of the U.S.
Internal Revenue Code (the "Liquidating Transactions") and leave Transnational
with only the minimum capital and surplus necessary to maintain its insurance
license and surplus lines authorizations. PXRE will then sell the remaining
corporate shell of Transnational to United States Fire Insurance Company
("USFIC") pursuant to a Stock Purchase Agreement, dated as of October 5, 2000,
in consideration of a purchase price equal to the remaining net assets of
Transnational plus an additional amount as a premium for the value of the
insurance licenses and surplus lines authorizations. Both the Liquidating
Transactions and the sale of Transnational to USFIC remain subject to the
approval of the Insurance Commissioner of the State of Connecticut.
13
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
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 shareholders' equity. Additionally, as a consequence of
its emphasis on property reinsurance, PXRE may forego 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.
14
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.
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
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.
PXRE's invested assets consist primarily of fixed maturities and a
diversified portfolio of hedge funds, but also include mezzanine bond and equity
limited partnerships, 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. Although
PXRE seeks to preserve its capital by investing in a portfolio of hedge funds
and other privately held securities designed to provide diversification of risk,
such investments entail substantial risks. Portfolio performance may be
adversely impacted by equity and credit market conditions. A generally strong
equity market in 1999 and early in 2000 may have resulted in portfolio returns
that may not be achieved in subsequent periods. There can be no assurance that
the investment objectives of PXRE will be achieved, and results may vary
substantially over time. In addition, although PXRE seeks to employ investment
strategies that are not correlated with its reinsurance exposures, losses in
PXRE's investment portfolio may occur at the same time as underwriting losses
and, therefore, exacerbate such losses' adverse effect on PXRE. To PXRE's
knowledge, other publicly traded reinsurers generally do not follow PXRE's
strategy of investing
15
a significant portion of its invested assets in hedge funds and other privately
held securities. See "Investments".
PXRE's portfolio of hedge funds and other privately held securities is
subject to some or all of the following categories of risk: leverage;
concentration of investments; lack of liquidity; market fluctuations and
direction (including as a result of interest rate fluctuations and direction,
with respect to price levels and volatility); currency fluctuations; credit risk
of the securities issuer; yield curve risk; political risk for emerging market
investments; and spread risk between two or more similar securities. In
addition, PXRE is subject to counter-party risk, the risk, when transactions
settle on foreign exchanges, the protections afforded on U.S. exchanges will be
absent, the risk of exchange controls and the risk that one or more of its hedge
fund managers mishandles trading, hedging or deviates from the agreed upon
strategy, resulting in loss.
Fair values for PXRE's investments in hedge funds and other privately
held securities generally are established on the basis of the valuations
provided quarterly by the managers of such investments. These valuations are
determined based upon the valuation criteria established by the governing
documents of such investments. Such valuations may differ significantly from the
values that would have been used had ready markets existed and the differences
could be material.
PXRE utilizes the valuations provided to it by managers of its hedge
funds and other privately held securities in preparing the financial statements
of PXRE. The carrying values used in such financial statements may not reflect
the value received by PXRE when liquidating its investment in a hedge fund or
other privately held security. If liquidity is by redemption, the valuations
supplied quarterly by the manager of the hedge fund or other privately held
security will generally be the value used by the manager to set the redemption
price. However, to the extent a manager has discretion in pricing holdings,
should substantial redemptions occur in a limited period of time that discretion
may be used to price at lower values than would otherwise be used, thus reducing
the redemption price. If liquidation of PXRE's investment occurs by virtue of a
liquidation of a hedge fund or other privately held securities, PXRE may receive
substantially less than the valuation method used by the manager since the
valuation method used by the manager is unlikely to use liquidation values.
Accordingly, the estimated fair value of PXRE's hedge fund and other privately
held investments does not necessarily represent the amount which could be
realized upon future sale, including in the event PXRE required liquidity to
fund catastrophic losses.
As PXRE's investment strategy is to invest a significant portion of its
investment portfolio in hedge funds and other privately held securities, which
are accounted for under the equity method, or in some cases as a trading
portfolio, net realized and unrealized gains (losses) on such investments may
have a greater effect on PXRE's results of operations at the end of any fiscal
period than would be the case for other insurance and/or reinsurance companies.
16
INVESTMENTS
PXRE's management has established general investment procedures and
guidelines for PXRE's investment portfolio carried out by Phoenix Investment
Partners, Limited ("Phoenix Investment Partners"), 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. The investment policies of
PXRE are approved by PXRE's Board of Directors and the performance of Phoenix
Investment Partners and Mariner is monitored by the Investment Committee of
PXRE's Board of Directors.
PXRE's invested assets consist primarily of fixed maturities and a
diversified portfolio of hedge funds, but also include mezzanine bond and equity
limited partnerships, REITS and short-term investments. As of September 30,
2000, 71.9% of PXRE's investment portfolio, at fair value, consisted of fixed
maturities and short-term investments.
Of PXRE's fixed maturities portfolio at September 30, 2000, 92.2% 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 27.8% of fixed
maturities based on fair value at September 30, 2000. The average market yield
to maturity of PXRE's fixed maturities portfolio at September 30, 2000 and 1999,
was 6.7% and 6.5% respectively.
PXRE had no investments in real estate or commercial mortgage loans as
of September 30, 2000; however, PXRE has invested in common and preferred shares
of publicly traded REITS with a market value of $17,266,000 at September 30,
2000.
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
shareholders' equity. During the first nine months of 2000, PXRE recorded
directly to equity an after-tax unrealized gain of $4,688,000 ($0.40 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 hedge fund investments
which invest primarily in marketable fixed income securities, were $54,775,000
at September 30, 2000, compared to $50,004,000 at December 31, 1999 including
one hedge fund amounting to $22,608,000 at September 30, 2000 compared to
$20,620,000 at December 31, 1999.
A principal component of PXRE's investment strategy is investing a
significant portion of PXRE's invested assets in a diversified portfolio of
hedge funds. As at September 30, 2000, hedge fund investments held by PXRE
amounted to approximately $108,298,000, representing 13.5% of September 30, 2000
total assets. As at September 30, 2000, hedge fund investments were allocated
among twenty-one managers, with market values ranging from $1,335,000 to
$6,626,000. At that date, two investments in "fund-of-funds" entities affiliated
with Mariner amounted to approximately $49,281,000, or 45.5% of total hedge fund
investments. Hedge funds in which PXRE is invested that utilize a strategy
17
relating to equities are, based on the recent history for such funds, more
likely on an aggregate basis to appreciate in upwardly trending markets and
more likely to depreciate in downwardly trending markets, whereas hedge funds
utilizing fixed income strategies in which PXRE is invested are on an aggregate
basis less correlated to the direction of interest rates based on the recent
performance of such funds.
PXRE's 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,
PXRE's hedge fund managers may be compensated or receive profit participations
on terms that may include fixed and/or performance-based fees or profit
participations.
Through its hedge fund managers, PXRE 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
strategies hedge fund managers are expected to adopt 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 PXRE seeks capital appreciation with respect to its hedge fund
investments, it is also concerned with preservation of capital. For that reason,
its hedge fund portfolio is designed to take advantage of broad market
opportunities and diversify risk. PXRE does not follow a rigid investment policy
with respect to its hedge fund investments that would restrict it from
participating in particular markets, strategies or investments. In fact, its
hedge fund investments may 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 small group of strategies or
hedge fund managers. Accordingly, the identity and number of hedge fund managers
is likely to change over time.
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 PXRE's 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.
18
As at September 30, 2000 PXRE's investment portfolio also included
approximately $33,765,000 of mezzanine bond and equity limited partnership
investments, with market values ranging from $1,033,000 to $9,816,000 and
remaining aggregate cash call commitments in respect of such investments of
$1,602,000. Mariner also monitors the performance of these investments.
Hedge funds and other privately held securities are accounted for under
the equity method or as part of a trading portfolio. Total investment income for
the nine months ended September 30, 2000 included $9,776,000 attributable to
hedge funds and other privately held securities.
PXRE's hedge fund and other privately held securities program should be
viewed as exposing it to the risk of substantial losses, which PXRE seeks to
reduce through its multi-asset and multi-management strategy. There can be no
assurance, however, that this strategy will prove to be successful.
COMPARISON OF THIRD QUARTER RESULTS FOR 2000 WITH 1999
Three Months Ended September 30,
------------------------------------
Increase
(thousands) 2000 1999 (Decrease)
---- ---- ----------
%
Gross premiums written $56,171 $60,639 (7.4)
Ceded premiums:
Managed business participants 8,708 19,689 (55.8)
Catastrophe coverage and surplus reinsurance 10,989 8,990 22.2
------- -------
Total reinsurance premiums ceded 19,697 28,679 (31.3)
------- -------
Net premiums written $36,474 $31,960 14.1
======= =======
Gross premiums written for the three months ended September 30, 2000,
decreased 7.4% to $56,171,000 from $60,639,000 for the corresponding period of
1999. Net premiums written for the third quarter of 2000, increased 14.1% to
$36,474,000 from $31,960,000 for the corresponding period of 1999. Net premiums
earned for the third quarter of 2000, increased 24.8% to $40,508,000 from
$32,459,000 for the comparable period of 1999. Gross premiums written decreased
mainly because of reduced reinstatement premiums in comparison to the prior
year comparable period. Net premiums written increased in all segments except
"other lines" as the company curtailed underwriting activities at PXRE Lloyd's
Syndicate 1224 during the period. The increase in net premiums written in
all other segments was a result of the Company retaining more of its premium
written.
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.
19
Premiums ceded by PXRE to its managed business participants decreased
55.8% to $8,708,000 for the third quarter of 2000 compared with $19,688,000 for
the corresponding period of 1999. The decrease in premiums ceded to these
programs was due primarily to the decrease in certain fronted programs.
During the third quarter of 2000, catastrophe coverage and other
reinsurance ceded premiums written increased due to additional retrocessional
coverage purchases. PXRE's property business is protected by a series of
retrocessional agreements which provide protection against unusual severity of
loss. Through June 30, 2000 these protections did not protect PXRE against
exposure to smaller, more frequent loss occurrences; however, additional
purchases in the third quarter of 2000 provide more protection against smaller,
more frequent loss occurrences.
The following tables summarize the third quarter of 2000 and 1999 net
written and earned premium by PXRE's business segments:
Net Premiums Written Three Months Ended Three Months Ended
(thousands) September 30, September 30,
2000 % 1999 %
---- --- ---- ---
Catastrophe and Risk Excess
North American $ 8,037 $ 6,548
International 19,117 13,586
Excess of loss cessions (8,032) (4,463)
------ ------
Subtotal 19,122 52.4 15,671 49.0
------- -------
Casualty
North American 5,568 1,589
International 4,567 4,227
------ ------
10,135 27.8 5,816 18.2
------ ------
Structured/Finite Business
North American 0 0
International 1,387 0
----- ------
1,387 3.8 0 0.0
----- ------
Other Lines
North American 562 3,877
International 5,268 6,596
----- -----
5,830 16.0 10,473 32.8
----- ---- ------- -----
Total $36,474 100.0% $31,960 100.0%
======= ===== ======= =====
20
Net Premiums Earned Three Months Ended Three Months Ended
(thousands) September 30, September 30,
2000 % 1999 %
---- --- ---- ---
Catastrophe and Risk Excess
North American $ 5,785 $5,380
International 17,218 13,035
Excess of loss cessions (4,768) (1,963)
------ ------
Subtotal 18,235 45.0 16,452 50.7
------ -------
Casualty
North American 4,966 2,768
International 4,770 3,866
------ ------
9,736 24.0 6,634 20.4
------ -------
Structured/Finite Business
North American 0 0
International 3,845 0
------ ------
3,845 9.5 0 0.0
------ ------
Other Lines
North American 319 3,729
International 8,373 5,644
------ ------
8,692 21.5 9,373 28.9
------ ---- ------ -----
Total $40,508 100.0% $32,459 100.0%
======= ===== ======= =====
Management fee income from all sources for the three months ended
September 30, 2000, increased to $726,000 from $528,000 for the corresponding
period of 1999, reflecting higher ceded premiums written subject to management
fees 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 47.2% for the third quarter of 2000 compared with
90.3% for the comparable period of 1999. The loss ratio for the third quarter of
2000 reflected incurred catastrophe losses of $9,329,000 gross and $3,392,000
net. In comparison, the loss ratio for the third quarter of 1999 reflected
incurred catastrophe losses of $25,165,000 gross and $10,187,000 net for 1999
and prior accident years. The third quarter of 2000 was affected by two large
risk losses, Phillips Electronics / Ericsson and Kuwait National Petroleum which
together accounted for $3,000,000 losses.
21
Significant catastrophe losses affecting the three months ended
September 30, 2000 loss ratio are as follows:
Amount of Losses
-------------------
Loss Event Gross Net
- ---------- ----- ---
(thousands)
Anatol - Danish Storms $5,883 $4,543
1994 Aviation Loss 2,242 2,131
2000 Kuwait National Petroleum 7,273 2,121
Phillips Electronics/Ericsson Fire 2,000 1,057
French Storm Martin 1,827 1,412
Hurricane Lenny (2,551) (1,969)
French Storm Lothar (7,341) (5,931)
Significant catastrophe and risk losses affecting the three months
ended September 30, 1999 loss ratio are as follows:
Amount of Losses
--------------------
Loss Event Gross Net
- ---------- ----- ---
(thousands)
Turkish Earthquake $6,140 $4,740
Hurricane Floyd 6,794 3,383
Typhoon Bart 3,000 1,004
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 $1,186,000 for the
three months ended September 30, 2000 compared to a loss of $292,000 for the
corresponding period of 1999.
During the third quarter of 2000, PXRE experienced adverse development
of $286,000 net largely due to favorable development on the major 1999
catastrophes offset by $2,100,000 market development on a 1994 aviation loss.
The loss ratio for the comparable period of 1999 was adversely affected by the
development of $3,370,000 net for prior-year loss and loss expenses primarily
due to medical and facultative reserve strengthening in PXRE Lloyd's Syndicate
and various satellite losses.
The underwriting expense ratio was 40.9% for the third quarter of
2000 compared with 45.4% for the comparable period of 1999. The decrease in
underwriting expense ratio was substantially due to the increase in premiums
earned and management fee income. The commission and brokerage ratio net of
management fee income was 20.5% in the third quarter of 2000 and 22.6% for the
comparable period of 1999. The operating expense ratio was 20.4% in the third
quarter of 2000 compared with 22.8% in the year earlier period reflecting the
benefit of growth in the Company's new lines of business. The decrease in PXRE's
GAAP combined ratio was primarily caused by the lower loss ratio from prior
years loss development. As a result of the above, the combined ratio was 88.1%
for the third quarter of 2000 compared with 135.7% for the comparable period of
1999.
22
The following table summarizes the underwriting profit and (loss) by
segment for the three months ended September 30, 2000 and 1999:
Three Months Ended Three Months Ended
September 30, September 30,
Underwriting
(thousands) 2000 % 1999 %
---- --- ---- ---
Catastrophe and Risk Excess
North American $ 4,401 $2,113
International 8,288 (1,091)
Excess of loss cessions (1,764) (3,796)
-------- ------
Subtotal 10,925 95.5 (2,774) 71.0
-------- ------
Casualty
North American (146) 215
International 115 (273)
-------- ------
(31) (0.2) (58) 1.5
-------- ------
Structured/Finite Business
North American 0 0
International 253 0
-------- ------
253 2.2 0 0.0
-------- ------
Other Lines
North American (734) 395
International 1,024 (1,471)
-------- ------
290 2.5 (1,076) 27.5
-------- ----- ------ ----
Total $ 11,437 100.0% $(3,908) 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 or syndicate agency management.
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 $8,229,000 for the three months
ended September 30, 2000 from $7,390,000 in 1999, as a result of the costs
incurred to implement PXRE's planned diversification as well as amortization of
negative goodwill in 1999 that did not continue in 2000. Included in other
operating expenses were foreign currency exchange losses of $654,000 for 2000
compared to gains of $238,000 for the corresponding period of 1999.
During the third quarter of 2000, interest expense increased to
$1,177,000 compared to $885,000 in the corresponding period in 1999. The
increase in interest expense relates to a drawdown of $25,000,000 under a credit
facility in the fourth quarter of 1999. The variable annual rate on the
$25,000,000 was 7.78% at September 30, 2000. See "Liquidity and Capital
Resources". In addition, during the three months ended September 30, 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
$2,220,000 in 1999.
Net investment income for the three months ended September 30, 2000
decreased 28.4% to $6,778,000 from $9,466,000 for the comparable period of 1999.
The decrease in net investment income in the three months ended September 30,
23
2000 was caused primarily by certain alternative technology investments of the
limited partnerships, (which are carried on the equity method, for which the
unrealized gains and losses in each case are recorded through the income
statement) which produced a loss of $1,401,000 for the three months ended
September 30, 2000 compared to income of $1,458,000 for the three months ended
September 30, 1999, as well as lower returns from last year's strong performance
in PXRE's portfolio of hedge funds. PXRE's pre-tax annualized investment yield
was 5.8% for the third quarter of 2000 compared with 7.9% for the corresponding
quarter in 1999, both calculated using amortized cost and investment income
before investment expenses. Net realized investment losses for the third quarter
of 2000 were $128,000 compared to losses of $2,195,000 in the third quarter of
1999, which were largely driven by last year's decision to dispose of volatile
emerging market bonds.
The net effect of foreign currency exchange fluctuations were gains of
$532,000 in the third quarter of 2000, compared to losses of $54,000 for 1999.
For the reasons discussed above, net income was $3,383,000 for the
three months ended September 30, 2000 compared to net loss of $6,239,000 for the
comparable period of 1999. The diluted earnings per common share was $0.29 for
the third quarter of 2000 compared to a net loss per share of $0.55 for the
third quarter of 1999, based on diluted average shares outstanding of
approximately 11,653,000 in 2000 and 11,442,000 in 1999.
COMPARISON OF YEAR-TO-DATE RESULTS FOR
2000 WITH 1999
Nine Months Ended September 30
------------------------------
Increase
2000 1999 (Decrease)
---- ---- ----------
(thousands) %
Gross premiums written $209,137 $162,091 29.0
Ceded premiums:
Managed business participants 42,712 32,339 32.0
Catastrophe coverage and surplus
Reinsurance 29,353 30,191 (2.8)
-------- --------
Total reinsurance premiums ceded 72,065 62,530 15.2
-------- --------
Net premiums written $137,072 $99,561 37.7
======== ========
Gross premiums written for the first nine months of 2000 increased
29.0% to $209,137,000 from $162,091,000 for the comparable period of 1999. Net
premiums written for the nine months ended September 30, 2000 increased 37.7% to
$137,072,000 from $99,561,000 for the corresponding period of 1999. Net premiums
earned for the first nine months of 2000 increased 41.0% to $119,889,000 from
$84,984,000 in the corresponding period of 1999. Gross written, net written and
net earned premium for the nine months ended September 30, 2000 increased from
prior-year levels reflecting new international casualty, finite and structured
products and direct writing business written by PXRE's new teams of underwriters
including one retrospectively rated finite contract written amounting to
$20,024,000 gross premiums written, ceded premiums written of $10,012,000 and
net premiums written and earned of $10,012,000.
24
PXRE's decision to buy additional retrocessional coverage reduced the level of
increase in net written and net earned premium. Net premiums written increased
in all segments except "other lines" as the Company curtailed underwriting
activities at PXRE Lloyd's Syndicate 1224 during the third quarter of 2000.
Underwriting results related to PXRE Lloyd's Syndicate are included in the
consolidated results on a one-quarter lag basis through the end of the third
quarter of 1999.
PXRE decided during the first quarter of 2000 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.
During the third quarter, PXRE ceased accepting new or renewal risks at
Lloyd's as the business being written there lacked the quality and
diversification which the Company hoped to achieve by entering this market.
Also, expenses of maintaining this operation proved to be excessive. Final
disposition of the syndicate and agency has not been determined but the costs of
administering the existing book will be incurred over the next three years. The
reduction in expenses that will result from actions taken to date, relative to
the cost of administering the existing book, is expected to be accretive to
earnings in 2001. With the Company's expanded Bermuda presence, PXRE believes it
can write the types of business offered in the Lloyd's market without the cost
structure associated with Lloyd's.
Catastrophe written premiums ceded decreased due to PXRE fronting less
business on behalf of other reinsurers offset by additional retrocessional
coverage purchases.
Premiums ceded by PXRE to its managed business participants increased
32.0% to $42,712,000 for the first nine months of 2000 compared with $32,339,000
for the corresponding period of 1999. The increase in premiums ceded to these
programs was due primarily to increased amounts of premiums written by PXRE as
well as the cession of 50% of the finite transaction mentioned earlier.
25
The following tables summarize the net written and earned premium
by PXRE's business segments for the nine months ended September 30, 2000 and
1999:
Net Premiums Written Nine Months Ended
(thousands) September 30, September 30,
2000 % 1999 %
---- --- ---- ---
Catastrophe and Risk Excess
North American $ 17,294 $ 15,240
International 59,924 46,669
Excess of loss cessions (14,815) (11,527)
-------- --------
Subtotal 62,403 45.5 50,382 50.6
-------- --------
Casualty
North American 18,867 11,528
International 11,100 9,399
-------- --------
29,967 21.9 20,927 21.0
-------- --------
Structured/Finite Business
North American 0 0
International 19,313 0
-------- --------
19,313 14.1 0 0.0
-------- --------
Other Lines
North American 583 7,962
International 24,806 20,290
-------- --------
25,389 18.5 28,252 28.4
-------- ----- -------- -----
Total $137,072 100.0% $ 99,561 100.0%
======== ===== ======== =====
Net Premiums Earned Nine Months Ended
(thousands) September 30, September 30,
2000 % 1999 %
---- --- ---- ---
Catastrophe and Risk Excess
North American $ 15,327 $ 13,852
International 54,239 39,978
Excess of loss cessions (14,716) (7,302)
-------- --------
Subtotal 54,850 45.8 46,528 54.7
-------- --------
Casualty
North American 13,520 8,452
International 9,082 6,803
-------- --------
22,602 18.9 15,255 18.0
-------- --------
Structured/Finite Business
North American 0 0
International 16,426 0
-------- --------
16,426 13.6 0 0.0
-------- --------
Other Lines
North American 778 7,954
International 25,233 15,247
-------- --------
26,011 21.7 23,201 27.3
-------- ----- -------- -----
Total $119,889 100.0% $ 84,984 100.0%
======== ===== ======== =====
26
Management fee income from all sources for the nine months ended
September 30, 2000 increased 135% to $4,299,000 from $1,828,000 for the
corresponding period of 1999 reflecting higher premiums ceded to managed
business participants.
The loss ratio was 93.0% for the nine months ended September 30, 2000
compared with 77.9% for the corresponding period of 1999 largely due to French
storms Lothar and Martin. The loss ratio for the first nine months of 2000
reflected incurred catastrophe losses of $78,720,000 gross and $52,200,000 net
for the 2000 and prior accident years. The loss ratio for the corresponding
period of 1999 reflected incurred catastrophe losses of $48,951,000 gross and
$23,615,000 net for the 1999 and prior accident years.
Significant catastrophe losses affecting the nine months ended
September 30, 2000 loss ratio are as follows:
Loss Event Amount of Losses
---------- ----------------
Gross Net
----- ---
(thousands)
French Storm Martin $27,415 $20,218
French Storm Lothar 21,102 13,102
Anatol-Danish Storms 5,319 3,942
Hurricane Georges 3,081 2,770
1994 Aviation Loss 2,699 2,131
2000 Kuwait National Petroleum 7,273 2,121
Swiss Floods 1,902 1,468
Hurricane Lenny 2,385 1,287
Phillips Electronics/Ericsson Fire 2,000 1,057
Significant catastrophe losses affecting the nine months ended
September 30, 1999 loss ratio are as follows:
Loss Event Amount of Losses
---------- ----------------
Gross Net
----- ---
(thousands)
Hurricane Georges $13,928 $9,170
Turkish Earthquake 6,140 4,740
Hurricane Floyd 6,794 3,383
Rouge Steel Explosion 4,880 2,044
Hurricane Mitch 2,811 1,390
Typhoon Bart 3,000 1,004
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 $1,244,000 for the
first nine months of 2000 compared to a gain of $239,000 for the corresponding
period of 1999.
During 2000, PXRE experienced adverse development of $52,042,000 net
for prior-year loss and loss expenses primarily related to the French Storms
Lothar and Martin. The loss ratio for the comparable period of 1999 experienced
adverse development of $17,475,000 net for prior-year loss and loss expenses
primarily related to Hurricane Georges, Mitch, and other 1998 events.
27
The underwriting expense ratio was 40.1% for the nine months ended
September 30, 2000 compared with 46.2% for the comparable period of 1999. The
decrease in underwriting expense ratio was substantially due to the increase in
premiums earned and management fee income. The commission and brokerage ratio
net of management fee was 17.9% in the first nine months of 2000, compared with
21.8% in the prior year period reflecting higher management fees in the current
period. The operating expense ratio was 22.2% in the first nine months of 2000,
compared to 24.4% in the year earlier period, due to higher premiums earned. The
combined ratio was 133.1% for the first nine months of 2000 compared with 124.1%
for the corresponding period of 1999.
The following tables summarize the underwriting (loss) and profit by
segment for the nine months ended September 30, 2000 and 1999:
Underwriting Nine Months Ended
(thousands) September 30, September 30,
2000 % 1999 %
---- --- ---- ---
Catastrophe and Risk Excess
North American $ 10,429 $ 2,920
International (15,012) 4,386
Excess of loss cessions (2,121) (6,715)
-------- -------
Subtotal (6,704) 43.6 591 (276.2)
-------- -------
Casualty
North American (740) (114)
International (948) (142)
-------- -------
(1,688) 10.9 (256) 119.7
-------- -------
Structured/Finite Business
North American 0 0
International 609 0
-------- -------
609 (3.9) 0 0.0
-------- -------
Other Lines
North American (2,873) 779
International (4,734) (1,328)
-------- -------
(7,607) 49.4 (549) 256.5
-------- ----- ------- -------
Total $(15,390) 100.0% $ (214) 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 or syndicate agency management.
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 $26,628,000 for the nine months
ended September 30, 2000 from $20,707,000 in the comparable period of 1999. The
increase was primarily related to salaries and benefits associated with PXRE's
new underwriting teams as part of the planned diversification efforts as well
28
amortization of negative goodwill in 1999 that did not continue in 2000.
Included in other operating expenses were foreign currency exchange losses of
$712,000 for the first nine months of 2000 compared to losses of $394,000 for
the corresponding period of 1999.
During the first nine months of 2000, interest expense increased to
$3,606,000 compared to $2,559,000 in the corresponding period in 1999. The
increase in interest expenses relates to a drawdown of $25,000,000 principal
balance in the fourth quarter 1999. The variable annual interest rate on this
portion was 7.78% at September 30, 2000. This is part of PXRE's Credit Agreement
with a syndicate of lenders (as described under "Liquidity and Capital
Resources"). In addition, in the first nine months of 2000 PXRE incurred
minority interest expense amounting to $6,656,000 related to the $100 million of
8.85% Capital Trust Pass-through Securities `sm' (TRUPS `sm') (as described
below under "Liquidity and Capital Resources") compared to $6,547,000 in the
similar period of 1999.
Net investment income for the nine months ended September 30, 2000
decreased 11.3% to $24,461,000 from $27,589,000 for the same period of 1999. The
decrease in net investment income in the nine months ended September 30, 2000
was caused primarily by certain alternative technology investments of the
limited partnerships, (which are carried on the equity method, for which the
unrealized gains and losses in each case are recorded through the income
statement) which produced a loss of $1,130,000 for the nine months ended
September 30, 2000 compared to income of $3,036,000 for the nine months ended
September 30, 1999, as well as lower returns from last year's strong performance
in PXRE's portfolio of hedge funds. PXRE's pre-tax annualized investment yield
was 6.8% for the nine months ended September 30, 2000 compared with 7.8% for the
corresponding period in 1999, both calculated using amortized cost and
investment income before investment expenses. Net realized investment losses for
the first nine months of 2000 were $590,000 compared to losses of $3,577,000 for
the corresponding period of 1999 reflecting losses from trading of weather
contracts in the first quarter of 1999 offset, in part, by net gains from sale
of securities.
The net effects of foreign currency exchange fluctuations were gains of
$532,000 in the nine months ended September 30, 2000, compared to losses of
$155,000 for the comparable period of 1999.
For the reasons discussed above, net loss was $16,135,000 for the nine
months ended September 30, 2000 compared to net loss of $3,955,000 for the
corresponding period of 1999. Diluted net loss per common share was $1.42 for
the nine months ended September 30, 2000 compared to net loss of $0.34 for the
corresponding period of 1999 based on diluted average shares outstanding of
approximately 11,385,000 in the first nine months of 2000 and 11,611,000 in the
comparable period of 1999. The decrease in shares outstanding was due to a share
repurchase program.
29
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
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 nine months of
2000, $16,252,000 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
30
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 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. 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%) as of September 30, 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 which at September 30, 2000 was 7.78%.
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
31
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
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
September 30, 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 nine months
ended September 30, 2000 in respect of the Capital Securities (and related
Subordinated Debt Securities) amounted to $6,656,000. 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
32
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,
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.
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 (to the extent allowed) 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 provided by operations was $3,931,000 during the third
quarter of 2000 compared with net cash flow used by operations of $2,967,000
during the corresponding period of 1999, due to the effects of timing of
collection of receivables and reinsurance recoverables and payments of losses.
Dividends declared in 2000 were $2,121,000 compared to $6,924,000 in
the corresponding period of 1999, as a result of the decrease in the per share
quarterly dividend from $0.26 to $0.06 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 September 30,
2000 is approximately $2,830,000.
33
Book value per common share was $21.31 at September 30, 2000.
In December 1999, PXRE announced a new stock repurchase program of up
to 1,000,000 shares. PXRE had approximately 11,794,000 common shares outstanding
as of September 30, 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
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
$20 million. 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 September 30, 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's potential for loss
on its trading portfolio has not materially changed since year-end.
PXRE has observed significant changes in volatility across many markets
during the past nine months. The potential loss estimate at September 30, 2000
may not reflect the level of loss PXRE could experience under certain
circumstances in this market.
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INCOME TAXES
PXRE recognized a tax provision of $4,716,000 in the third quarter of
2000 compared to tax benefit of $1,196,000 in the corresponding period of 1999.
The tax expense in 2000 differed from the statutory rate primarily due to
underwriting losses, losses ceded to Bermuda which are not deductible for U.S.
tax purposes, tax exempt income and the dividends received deduction. The tax
benefit reported in 1999 differed from the statutory rate because of tax exempt
income and the amortization of negative goodwill. The tax benefit in 1999 is net
of a one-time income tax charge in connection with the re-organization of
approximately $1,800,000 related to the cancellation of shares of PXRE
Corporation held by its subsidiary.
CONTINGENCIES
PXRE entered into weather option agreements in May 1999 with two
counter parties. In April 2000 these counter parties submitted invoices to PXRE
Delaware in the aggregate sum of $8,252,500 seeking payment under the weather
option agreements, which invoices have been paid. PXRE Delaware insured its
obligations under these weather option agreements through two Commercial Inland
Marine Weather Insurance Policies issued by Terra Nova Insurance Company Limited
("Terra Nova"). PXRE Delaware submitted claims under these policies to Terra
Nova in April 2000. Terra Nova has denied coverage, contending that its Managing
General Agent had no authority to issue these policies. PXRE Delaware disagrees
with Terra Nova's denial and will aggressively pursue its available legal
remedies to collect the sums due under these policies.
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)
significant catastrophe losses or losses under other coverages, the timing and
extent of which are difficult to predict; (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 intensification 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
35
reduction in the market value of PXRE's interest rate sensitive investments,
including its fixed income investment portfolio and potential underperformance
in PXRE's structured/finite coverages; (viii) decreases in interest rates
causing a reduction of income earned on net cash flow from operations and the
reinvestment of the proceeds from sales, calls or maturities of existing
investments and short falls in cash flows necessary to pay fixed rate amounts
due to structured contract counterparties; (ix) market fluctuations in equity
securities and with respect to PXRE's portfolio of hedge funds and other
privately held securities: leverage, concentration of investments, lack of
liquidity, market fluctuations and direction (including as a result of interest
rate fluctuations and direction, with respect to price levels and volatility
thereof) currency fluctuations, credit risk, yield curve risk, spread risk
between two or more similar securities, political risk, counterparty risk and
risks relating to settlements on foreign exchanges; (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.
November 14, 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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