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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2000 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 (IRS Employer
incorporation or organization) Identification Number)
99 Front Street Suite 231
Hamilton HM 12 12 Church Street
Bermuda Hamilton HM 11
(Address, including zip code, Bermuda
of principal executive offices) (Mailing address)
(441) 296-5858
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: COMMON SHARES, par
value $1.00 per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
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, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of March 23, 2001 computed by reference to
the closing price of such common equity as of the close of business on March 23,
2001 was $178,746,094. As of March 23, 2001, 11,899,537 of the registrant's
common shares were issued and outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Part III Portions of PXRE Group Ltd.'s definitive Proxy Statement
for the Annual General Meeting of Shareholders to be held
on June 12, 2001.
Part IV Portions of PXRE Corporation's Proxy Statement dated April 12, 1991.
3
PART I
Item 1. Business
Introduction
PXRE Group Ltd. (the "Company" or, collectively with its various
subsidiaries, "PXRE") -- with operations principally in Bermuda, Barbados, the
United States and Europe -- provides reinsurance products and services to a
worldwide marketplace. 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 was formed in 1999 as part of the reorganization of PXRE
Corporation ("PXRE Delaware"), a Delaware corporation. Prior to the
reorganization, PXRE Delaware was the ultimate parent holding company of the
various PXRE companies and its common shares were publicly traded on the New
York Stock Exchange. As a result of the reorganization, the Company became the
ultimate parent holding company of PXRE Delaware and the holders of PXRE
Delaware common stock automatically became holders of the same number of the
Company's common shares. The reorganization was consummated at the close of
business on October 5, 1999 and, on October 6, 1999, the Company's common shares
began to trade on the New York Stock Exchange under the symbol PXT. The
reorganization also involved the establishment of a Bermuda based reinsurance
company, PXRE Reinsurance Ltd. ("PXRE Bermuda"), operations in Barbados through
PXRE (Barbados) Ltd. ("PXRE Barbados"), and PXRE Solutions Inc. ("PXRE
Solutions"), a reinsurance intermediary.
Overview of the Reinsurance Industry
Reinsurance is an arrangement in which a reinsurer agrees to indemnify
a primary insurer or another reinsurer (also known as a ceding company) against
all or a portion of the insurance risks underwritten by the ceding company under
one or more insurance contracts. Reinsurance can provide a ceding company with
several benefits, including a reduction in exposure on individual risks,
protection against catastrophic losses and assistance in maintaining acceptable
financial ratios.
There are two basic types of reinsurance arrangements: treaty and
facultative reinsurance. In treaty reinsurance, the reinsurer and the ceding
company negotiate a contractual arrangement which reinsures a specified portion
of a type or category of risk. Treaty reinsurers, including PXRE, do not
separately evaluate each individual risk assumed; and consequently, after a
review of the ceding company's underwriting practices, are largely dependent on
the original underwriting decisions made by the ceding company. Such dependence
subjects reinsurers in general, including PXRE, to the risk that the primary
insurer has not adequately determined the risks to be reinsured; accordingly,
that the premium ceded to the reinsurer in connection therewith may not
adequately compensate the reinsurer for the risk assumed. Treaty reinsurance
contributed more than 99% of PXRE's net premiums written in 2000.
4
Treaty reinsurance can be written on either a pro rata basis or an
excess of loss basis. In pro rata reinsurance, the reinsurer agrees, in return
for a percentage of the premiums, to share in a proportional amount of the
losses up to the limit, if any, of the reinsurance agreement. Premiums that the
ceding company pays to the reinsurer are proportional to the premiums that the
ceding company receives, and the reinsurer generally pays the ceding company a
ceding commission to reimburse the ceding company for the expenses incurred in
obtaining the business. In excess of loss treaty reinsurance, the reinsurer
indemnifies the ceding company for a portion of the losses and expenses on
underlying policies which exceed a specified dollar amount (known as the ceding
company's retention or the reinsurer's attachment point) generally subject to a
negotiated reinsurance contract limit. Premiums paid by the ceding company for
excess of loss coverage may not be directly proportional to the premiums on the
underlying policies because the reinsurer does not assume a proportional share
of the underlying risk.
Excess of loss treaty reinsurance can, in turn, be written on a per
risk or catastrophe basis. Per risk excess of loss reinsurance protects the
ceding company against a loss resulting from a single risk or location.
Catastrophe excess of loss reinsurance protects a ceding company from an
accumulation of a large number of related losses resulting from a variety of
risks which may occur in a given catastrophe, and hence is a highly volatile
business. Catastrophe-type coverages include catastrophe coverage provided to
ceding insurance companies and retrocessional catastrophe coverage provided to
other reinsurers. Catastrophe-type coverages have represented the bulk of PXRE's
net premiums written during the past three fiscal years, although they have
declined in percentage terms from 76% in 1998 to 46% in 2000. See "Operating
Segments."
Facultative reinsurance involves the reinsurance of specific individual
risks; rather than an agreement to reinsure a specified portion of a type or
category of risk, the reinsurer separately rates and underwrites each risk. In
some cases, risks covered by facultative reinsurance are those excluded from
coverage by treaty reinsurance. Facultative reinsurance contributed less than 1%
of PXRE's net premiums written in 2000.
Reinsurers typically purchase reinsurance to cover their own risk
exposure. Reinsurance of a reinsurer's business is called a retrocession.
Reinsurance companies cede risks under retrocessional agreements to other
reinsurers, known as retrocessionaires, for reasons similar to those that cause
ceding companies to purchase reinsurance.
Reinsurance can be written through professional reinsurance brokers or
directly for ceding companies. From a ceding company's perspective, both the
broker market and the direct market have advantages and disadvantages. A ceding
company's decision to select one market over the other will be influenced by its
perceptions of such advantages and disadvantages relative to the reinsurance
coverage being placed. PXRE writes property and casualty treaty reinsurance
business both through professional reinsurance brokers and on a direct basis.
Overview of the Business
The Company conducts its business primarily through its principal
operating subsidiaries, PXRE Delaware, PXRE Reinsurance Company ("PXRE
Reinsurance"), PXRE Bermuda, PXRE Solutions and PXRE Barbados. PXRE has for many
years specialized in property reinsurance,
5
including a strong focus on catastrophe-type products. In recent years PXRE has
diversified its business through:
o the addition of a reinsurance platform offering primarily casualty
products directly to insurance companies;
o the enhancement of its international broker market reinsurance
platform to include additional lines of business, including
casualty and credit 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.
PXRE Reinsurance is both a brokerage-market reinsurer and a
direct-writing reinsurer, with approximately $348.9 million of statutory capital
and surplus as of December 31, 2000, which principally underwrites treaty
reinsurance for property (including marine and aerospace) and casualty risks.
PXRE Reinsurance is licensed or authorized to transact business in all states
(except for Arkansas as of March 1, 2001) and the District of Columbia, Puerto
Rico, Columbia and Mexico and operates a branch in Belgium ("PXRE's Brussels
Branch").
PXRE Bermuda is a quota share reinsurer of PXRE Reinsurance and PXRE
Reinsurance provides aggregate excess of loss reinsurance protection for PXRE
Bermuda. Effective January 1, 2001, the quota share cession to PXRE Bermuda was
increased from 30% to 35%. PXRE Bermuda, with approximately $30.0 million of
statutory capital and surplus, also provides structured/finite coverages. PXRE
Bermuda is not licensed or admitted as an insurer in any jurisdiction other than
Bermuda. PXRE Solutions performs certain limited reinsurance intermediary
activities on behalf of PXRE Bermuda.
At December 31, 2000, PXRE was a party to retrocessional arrangements
with a number of insurers and reinsurers. Under these arrangements, PXRE cedes
some of its underwritten risks to the participants, subject to maximum aggregate
liabilities per reinsurance program. PXRE receives a management fee or
commission, initially based on premium volume, adjusted in some cases through
contingent profit commissions related to underwriting results measured over a
period of years. Future management fee income is dependent upon the amount of
business ceded to the participants and the profitability of that business.
Along with its diversification strategy, the Company in recent years
has also restructured its investment portfolio to add a diversified portfolio of
hedge funds.
During 2000, PXRE decided to wind down its Lloyd's of London
("Lloyd's") operations and its excess and surplus lines operations. PXRE's
Lloyd's operations consist of PXRE Managing Agency Limited ("PXRE Managing
Agency") and PXRE Limited, the sole member of Syndicate 1224 ("PXRE Lloyd's
Syndicate"). PXRE Lloyd's Syndicate underwrote specialty types of property and
casualty insurance and reinsurance (including certain accident and health
coverages, as well as catastrophe-type coverages, aerospace reinsurance and
facultative reinsurance) on a worldwide basis. During 2000, PXRE Managing Agency
managed, on a fee basis, PXRE Lloyd's Syndicate and other syndicates at Lloyd's.
During the third quarter of 2000, PXRE ceased accepting new or renewal risks at
PXRE Lloyd's Syndicate. As of January 1,
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2001, PXRE Managing Agency ceased managing third party syndicates at Lloyd's.
Final disposition of PXRE Lloyd's Syndicate and PXRE Managing Agency has not
been determined.
During the fourth quarter of 2000, Transnational Insurance Company
("Transnational Insurance"), an excess and surplus lines carrier which had
specialized in non-standard and excess property insurance risks distributed
substantially all of its assets and liabilities to PXRE Reinsurance and the
remaining corporate shell was sold on December 21, 2000. The sale followed
PXRE's withdrawal from the excess and surplus lines market in the first quarter
of 2000. Net premiums earned on this business were not material in 1999 and
2000.
Ratings
PXRE Reinsurance is rated "A" (Excellent) by A.M. Best Company ("A.M.
Best"), an independent insurance industry rating organization. PXRE Bermuda is
not rated by A.M. Best, although it and PXRE Reinsurance have been assigned an
"A" financial strength rating by Standard & Poor's Rating Services ("S&P"), a
division of the McGraw-Hill Companies, Inc. PXRE Reinsurance and PXRE Bermuda
were rated "A+" by S&P prior to a downgrade in 2000, caused primarily by adverse
underwriting results experienced by PXRE in 1999. These ratings are based upon
factors that may be of concern to policyholders, agents and intermediaries, but
may not reflect the considerations applicable to an investment in a reinsurance
or insurance company. A change in any such rating is at the discretion of the
respective rating agencies.
History
PXRE Delaware was organized in July 1986 by Phoenix Home Life Mutual
Insurance Company ("Phoenix Home Life") to succeed, through PXRE Reinsurance, to
the property and casualty reinsurance business carried on since 1982 by Phoenix
General Insurance Company, formerly a wholly-owned subsidiary of Phoenix Home
Life. As of February 12, 2001, Phoenix Home Life owned 1,131,700 of the
Company's common shares.
In November 1993, PXRE Delaware sponsored the initial public offering
of Transnational Re Corporation ("TREX") to raise capital and take advantage of
favorable conditions in the worldwide retrocessional reinsurance market. PXRE
Delaware, through PXRE Reinsurance, retained a 21% ownership position in TREX
and had responsibility for the day-to-day operations of TREX, including all the
reinsurance operations of TREX's subsidiary, Transnational Reinsurance Company
("Transnational Reinsurance").
On December 11, 1996, TREX merged into PXRE Delaware (the "Merger"),
and each share of common stock of TREX was converted into the right to receive
1.0575 shares of PXRE Delaware common stock. Following the Merger, Transnational
Reinsurance became a wholly-owned subsidiary of PXRE Reinsurance and was
re-named Transnational Insurance Company. The Merger has been accounted for
using the purchase method of accounting; therefore, net income of TREX
(including Transnational Reinsurance/Transnational Insurance) has been included
in PXRE Delaware's consolidated results of operations from the date of the
Merger.
In December 1996, PXRE Delaware completed the organization of PXRE
Managing Agency and PXRE Lloyd's Syndicate, thereby establishing a direct
presence in the Lloyd's market. Underwriting premium volume and loss experience
related to the business of PXRE
7
Lloyd's Syndicate is included in PXRE's consolidated results on a one quarter
lag basis, from 1997 through the third quarter of 1999. Beginning with the
fourth quarter of 1999, PXRE Lloyd's Syndicate reports its results currently.
In June 1998, PXRE Reinsurance added direct writing and international
teams. The direct writing team operates as the Direct Treaty operation of PXRE
Reinsurance and provides reinsurance on a direct basis (directly with the
primary insurance company) primarily on casualty and, to a lesser extent,
non-catastrophe type property business. The international team's focus is
property and casualty reinsurance in the brokerage market. Subsequently, in
1998, PXRE Reinsurance also strengthened PXRE Managing Agency with the
recruitment of additional reinsurance professionals.
In mid-1999, PXRE Reinsurance formed a finite reinsurance unit to
provide structured/finite coverages combining elements of risk transfer and
managing the impact of such risks on a cedent's financial statements and cash
flow.
The Company, a Bermuda corporation, was formed in 1999. PXRE Delaware
became a wholly-owned indirect subsidiary of the Company at the close of
business on October 5, 1999, in connection with the reorganization and
redomestication of PXRE Delaware. This reorganization resulted in the Company
becoming the ultimate parent holding company of PXRE Delaware. Simultaneously,
holders of PXRE Delaware's common stock automatically became holders of the same
number of the Company's common shares. The reorganization also involved the
establishment of a Bermuda based reinsurance company, PXRE Bermuda, operations
in Barbados through PXRE Barbados, and PXRE Solutions, a reinsurance
intermediary.
In the fourth quarter of 2000, Transnational Insurance transferred
substantially all of its assets and liabilities to PXRE Reinsurance in a
transaction that was intended to qualify as a tax-free liquidation of
Transnational Insurance pursuant to Section 332 of the U.S. Internal Revenue
Code, leaving Transnational Insurance with only the minimum capital and surplus
necessary to maintain its insurance license and surplus lines authorizations.
PXRE Reinsurance then sold the remaining corporate shell of Transnational
Insurance to United States Fire Insurance Company 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 Insurance plus an additional
amount as a premium for the value of the insurance licenses and surplus lines
authorizations.
On March 16, 2001, PXRE Barbados was licensed as a qualifying insurance
company in Barbados and changed its name to PXRE Reinsurnace (Barbados) Ltd.
PXRE Barbados will commence reinsurance operations shortly and is expected to
focus primarily on finite reinsurance business.
Underwriting Operations
Through its subsidiaries, PXRE is principally engaged in providing
treaty reinsurance to primary insurers and other reinsurers of commercial and
personal property and casualty risks. PXRE also provides marine and aerospace
reinsurance products and services. PXRE has specialized in property reinsurance,
including a strong focus on catastrophe-type products. In mid-1998, PXRE added
new reinsurance lines and expanded its capabilities in existing areas, including
establishing a direct-writing reinsurance unit to complement its existing
brokerage-based reinsurance operations and offering casualty products (including
general liability,
8
commercial auto and personal auto) for casualty markets in which PXRE had not
previously had a significant presence. In late 1999, PXRE established Bermuda
underwriting operations through the formation of PXRE Bermuda.
Operating Segments
PXRE operates in four reportable property and casualty segments --
catastrophe and risk excess, casualty, structured/finite business and 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 once the platform for the diversification strategy was
largely in place. The prior year segment information has been restated to be
consistent with the 1999 segments. The following tables present the distribution
of PXRE's net premiums written, net premiums earned and underwriting operations
for the years ended December 31, 2000, 1999 and 1998:
9
Net Premiums Written (1)
Year Ended December 31,
2000 1999 1998
---------------------- ----------------------- -----------------------
Amount Percent Amount Percent Amount Percent
--------------------------------------------------------------------------------------
(in thousands, except percentages)
Catastrophe and Risk Excess
North American $ 20,354 $ 26,704 $ 12,795
International 74,256 63,957 58,595
Excess of loss cessions (15,489) (18,883) (3,938)
---------- ---------- ----------
79,121 46% 71,778 52% 67,452 76%
---------- ---------- ----------
Casualty
North American 26,766 13,148 650
International 14,876 12,851 4,433
---------- ---------- ----------
41,642 24 25,999 19 5,083 6
---------- ---------- ----------
Structured/Finite Business
North American 0 0 0
International 20,245 0 0
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20,245 12 0 0 0 0
---------- ---------- ----------
Other Lines
North American 1,209 12,073 2,054
International 30,484 28,995 14,105
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31,693 18 41,068 29 16,159 18
---------- --- ---------- --- ---------- ---
Total $ 172,701 100% $ 138,845 100% $ 88,694 100%
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Net Premiums Earned (1)
Year Ended December 31,
2000 1999 1998
-------------------------- ----------------------- ------------------------
Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------------------------------------
(in thousands, except percentages)
Catastrophe and Risk Excess
North American $ 20,517 $ 26,155 $ 13,561
International 73,378 61,241 63,830
Excess of loss cessions (19,115) (14,958) (2,869)
---------- ---------- ----------
74,780 47% 72,438 56% 74,522 81%
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Casualty
North American 19,062 11,593 (152)
International 13,865 9,794 2,207
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32,927 21 21,387 17 2,055 2
---------- ---------- ----------
Structured/Finite Business
North American 0 0 0
International 17,791 0 0
---------- ---------- ----------
17,791 11 0 0 0 0
---------- ---------- ----------
Other Lines
North American 1,308 11,296 3,234
International 33,400 23,383 12,575
---------- ---------- ----------
34,708 21 34,679 27 15,809 17
---------- --- ---------- --- ---------- ---
Total $ 160,206 100% $ 128,504 100% $ 92,386 100%
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Underwriting Operations (2)
Year Ended December 31,
2000 1999 1998
--------------------------- ---------------------- -------------------------
Amount Percent Amount Percent Amount Percent
------------------------------------------------------------------------------------------
(in thousands, except percentages)
Catastrophe and Risk Excess
North American $ 12,701 $ (31,591) $ 6,970
International (2,553) (32,039) 7,081
Excess of loss cessions (11,265) 15,476 8,372
--------- ---------- ---------
(1,117) 15% (48,154) 87% 22,423 141%
--------- ---------- ---------
Casualty
North American (347) (279) (409)
International 100 (242) 87
--------- ---------- ---------
(247) 3 (521) 1 (322) (2)
--------- ---------- ---------
Structured/Finite Business
North American 0 0 0
International 1,661 411 0
--------- ---------- ---------
1,661 (22) 411 (1) 0 0
--------- ---------- ---------
Other Lines
North American (2,746) (715) (1,442)
International (4,980) (6,166) (4,794)
--------- ---------- ---------
(7,726) 104 (6,881) 13 (6,236) (39)
--------- --- ---------- --- --------- ---
Total $ (7,429) 100% $ (55,145) 100% $ 15,865 100%
========= ========== =========
- - ------------------
(1) Premiums written and earned are expressed on a net basis (after
deduction for ceded reinsurance premiums) to more accurately reflect
business written for PXRE's own account.
(2) 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, losses
incurred on weather contracts or management fees for syndicate agency
management.
Catastrophe and Risk Excess
PXRE's catastrophe and risk excess portfolio consists principally of
property catastrophe excess of loss, property retrocessional, property risk
excess, property London Market Excess ("LMX") and marine and aerospace excess
reinsurance coverages. This portfolio can be characterized on a longer term
basis as being comprised of coverages involving higher expected
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margins and greater volatility than other coverages written by PXRE. In 2000,
$94,610,000 of premiums written after reduction for quota share cessions were
attributable to the catastrophe and risk excess portfolio, or $79,121,000 net of
specific excess of loss retrocessional reinsurance ceded to other reinsurers. In
2000 and 1999, this segment produced underwriting losses of $1,117,000 and
$48,154,000, respectively, largely as a consequence of development on French
storms which occurred in the last week of 1999. In contrast, this segment
produced underwriting profits of $22,423,000 in 1998. The increase in premium
volume for catastrophe and risk excess coverages in 2000 was largely
attributable to increases in marine and aerospace coverages. The increase in
premium volume for catastrophe and risk excess coverages in 1999 was
attributable to reinstatement premiums on 1999 catastrophe activity, offset, in
part, by the purchase of increased amounts of retrocessional protection. The
exposures underlying the North American portion of this segment emanate from
East Coast and Gulf hurricanes, Midwest and West Coast earthquakes, major oil
rig explosions, cruise ship disasters, satellite failures, commercial airplane
crashes and similar risks. The exposures underlying the International portion of
this segment emanate principally from European, Japanese and Carribbean
windstorm, flood and earthquake risks.
Casualty
PXRE's casualty segment consists principally of North American general
liability, commercial and personal auto liability, risk excess and other
liability coverages and International pro rata casualty coverages. This segment
can be characterized on a longer term basis as being comprised of coverages
involving lower margins and less volatility than PXRE's catastrophe and risk
excess segment. Additionally, the long-term nature of these liabilities will
generate investment income that is expected to contribute to PXRE's long-term
profitability. The casualty portfolio accounted for $41,642,000 of net premiums
written in 2000, with approximately two-thirds of the business written in the
North American geographic segment and one-third in the International
geographical segment. Premiums written in 2000 represented a substantial
increase over 1999, which was PXRE's first full year of operation in the
casualty market. In 2000, the casualty segment produced an underwriting loss of
$247,000.
Structured/Finite Business
PXRE entered the structured/finite business in mid-1999 with products
combining elements of risk transfer and management of the impact of such risk on
a cedent's financial statements and cash flow. Premiums in this segment are
expected to vary widely from period to period. The risks reinsured are primarily
casualty risks and are subject to some of the same risks as PXRE's casualty
segment. Net premiums written of $20,245,000 were attributable to PXRE's
structured/finite business in 2000. In 2000, the structured/finite segment
produced an underwriting profit of $1,661,000.
Other Lines
PXRE's other lines segment consists of many different coverages, the
largest coverage being accident and health coverages amounting to $9,861,000 in
net premiums written in 2000. Other coverages include property pro rata
business, binding and lineslip authorities written through PXRE Lloyd's
Syndicate and credit coverages. PXRE's other lines segment produced
13
an underwriting loss of $7,726,000, up modestly from 1999. During the third
quarter of 2000, PXRE ceased accepting new and renewal risks at PXRE Lloyd's
Syndicate.
See Note 10 of Notes to Consolidated Financial Statements for
additional information regarding PXRE's reportable segments and geographic
areas.
Underwriting
PXRE's treaty underwriting process emphasizes a team approach among its
underwriters, actuaries and claims staff. Treaties are reviewed for compliance
with PXRE's general underwriting standards and certain treaties are evaluated in
part based upon actuarial analysis conducted by PXRE. PXRE manages its risk of
loss through a combination of aggregate exposure limits, underwriting guidelines
that take into account risks, prices and coverage and retrocessional agreements.
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 event based on historical data. However, no assurance can be given
that these maximums will not be exceeded in some future catastrophe.
Marketing
PXRE provides reinsurance for international insurance and reinsurance
companies headquartered, principally, in the United Kingdom, Continental Europe,
Australia and Asia. In the United States, PXRE currently reinsures both national
and regional insurance and reinsurance companies and specialty insurance
companies.
Historically, PXRE has obtained substantially all of its treaty
reinsurance business through reinsurance intermediaries which represent
reinsureds in negotiations for the purchase of reinsurance. None of the
reinsurance intermediaries through which PXRE obtains this business are
authorized to arrange any business in the name of PXRE without PXRE's approval.
PXRE pays commissions to these intermediaries or brokers which vary in size
based on the amount of premiums and type of business ceded. These commission
payments constitute part of PXRE's total acquisition costs and are included in
its underwriting expenses. PXRE generally pays reinsurance brokerage commissions
believed to be comparable to industry norms.
Approximately 14.2%, 13.2% and 12.5% of gross premiums written in
fiscal year 2000 were arranged through the worldwide branch offices of Aon Group
Ltd., Guy Carpenter & Company, Inc. (a subsidiary of Marsh & McLennan Companies,
Inc.) and Benfield Greig Ltd., respectively. Approximately 93.3% of PXRE's gross
premiums written in the structured/finite business segment in fiscal year 2000
were arranged by Pegasus Advisors - Towers Perrin Reinsurance, a division of
Towers Perrin, in conjunction with PXRE Solutions. The commissions paid by PXRE
to these intermediaries are generally at the same rates as those paid to other
intermediaries.
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In mid-1998, PXRE established a U.S. based direct writing reinsurance
unit to complement its existing brokerage-based reinsurance operations.
Approximately 82.3% and 17.7% of PXRE's 2000 net premiums written were written
in the broker and direct markets, respectively. PXRE's U.S. based direct
writings are comprised principally of casualty business. PXRE's ability to write
reinsurance both through brokers and directly with ceding companies gives it the
flexibility to pursue business regardless of the ceding company's preferred
reinsurance purchasing method.
Competition
Competitive forces in the property and casualty reinsurance and
insurance industry are substantial. PXRE operates in an industry which is highly
competitive and is undergoing a variety of challenging developments. The
industry has in recent years moved toward greater consolidation as ceding
companies have placed increased importance on size and financial strength in the
selection of reinsurers. Additionally, reinsurers are tapping new markets and
complementing their range of traditional reinsurance products with innovative
new products which bring together capital markets and reinsurance experience.
PXRE competes with numerous major reinsurance and insurance companies. These
competitors, many of which have substantially greater financial, marketing and
management resources than PXRE, include independent reinsurance companies,
subsidiaries or affiliates of established worldwide insurance companies,
reinsurance departments of certain commercial insurance companies, and
underwriting syndicates. PXRE also may face competition from new market entrants
or from market participants that decide to devote greater amounts of capital to
the types of business written by PXRE.
Although PXRE historically has obtained most of its reinsurance
business through reinsurance intermediaries or brokers, it competes indirectly
with reinsurers who obtain business directly from primary insurers because
PXRE's brokers must compete with direct reinsurers for business to be forwarded
to PXRE. PXRE's direct writing reinsurance unit competes directly with other
direct reinsurers. PXRE, therefore, competes both with reinsurers that obtain
business directly from reinsureds and with reinsurers that obtain their business
through intermediaries and brokers.
Competition in the types of reinsurance business which PXRE underwrites
is based on many factors, including the perceived overall financial strength of
a reinsurer, premiums charged, other terms and conditions, ratings of A.M. Best,
S&P and Moody's Investors Service, Inc. ("Moody's"), service offered, speed of
service (including claims payment), and perceived technical ability and
experience of staff. The number of jurisdictions in which a reinsurer is
licensed or authorized to do business is also a factor. PXRE Reinsurance is
licensed, accredited, or otherwise authorized or permitted to conduct
reinsurance business in all states (except for Arkansas as of March 1, 2001) and
the District of Columbia, Puerto Rico, Columbia and Mexico, and PXRE's Brussels
Branch operates from Belgium. PXRE Bermuda is licensed to do business only in
Bermuda.
The property and casualty reinsurance industry has been experiencing an
extended period of soft market conditions characterized by inadequate pricing.
Recently, these conditions have begun to improve as a result of recent loss
activity in Europe and the Caribbean region.
15
Retrocessional Agreements
The following table sets forth certain information regarding the volume
of premiums PXRE has ceded to other reinsurers pursuant to retrocessional
agreements for the periods indicated:
Year Ended December 31,
--------------------------------------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
Gross premiums written $268,990 $221,349 $136,215
Reinsurance premiums ceded:
Managed business participants 63,053 42,549 21,542
Catastrophe coverage, surplus
reinsurance and other 33,236 39,955 25,979
-------- -------- --------
Total reinsurance premiums
Ceded 96,289 82,504 47,521
-------- -------- --------
Net premiums written $172,701 $138,845 $ 88,694
======== ======== ========
PXRE has been able to increase its underwriting commitments and to
generate management fee income by retroceding some of its underwritten risks to
other reinsurers through various retrocessional arrangements whereby it manages
business for such participants. In 2000, PXRE was a party to two such
arrangements. The first such arrangement, which is subject to renewal each
January 1 and which has been renewed effective January 1, 2001, is referred to
as the AMA. The AMA is a pool consisting of a number of insurance companies (the
"Pool"), for which PXRE Reinsurance acts as reinsurance manager. In 2000, the
Pool was comprised of Merrimack Mutual Fire Insurance Company, Pennsylvania
Lumbermens Mutual Insurance Company, NRMA Insurance Limited, Auto-Owners
Insurance Company and the Kyoei Mutual Fire & Marine Insurance Company. It is
PXRE's policy that participating companies must have a rating by A.M. Best of
"A-" or better, other than foreign companies, most of which (including the
foreign participants in the AMA) are not rated by A.M. Best. Under the terms of
the agreements governing the Pool, if a participating company's rating falls
below "A-", it generally will be required to withdraw from the Pool in the
following year. PXRE Reinsurance receives, as reinsurance manager, a commission
based on premiums ceded, as well as a contingent profit commission equal to a
percentage of any ultimate underwriting profits in connection with the
reinsurance ceded. The contingent profit commission is paid after a three-year
period and is subject to adjustment based on cumulative experience.
The second such retrocessional arrangement is with Select Reinsurance
Ltd. ("Select Re"). This quota share arrangement involves a multi-year fee based
undertaking by PXRE through the year ending December 31, 2003 to present
business to Select Re. The undertaking, which is subject to adjustment based on
Select Re's shareholders' equity, was approximately $22.1 million in aggregate
premium for 2000. PXRE receives an override commission on premiums ceded to
Select Re. Because Select Re is not licensed in any jurisdiction in the United
16
States, the retrocessional arrangement provides that a trust fund or letter of
credit be established for the benefit of PXRE or that funds be held by PXRE to
secure Select Re's obligations. Net assets due from Select Re under this
arrangement at December 31, 2000 of $16,959,000 are secured by a trust
agreement, letter of credit and funds held. Gerald L. Radke (Chairman, President
and Chief Executive Officer of the Company) and Jeffrey L. Radke (Executive Vice
President of the Company and President of PXRE Bermuda) are on the Board of
Directors 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. As of March
12, 2001, Select Re owned 1,112,000 of the Company's Common Shares.
A third such retrocessional arrangement with Trenwick America
Reinsurance Corporation ("Trenwick Group") was not renewed upon its expiration
on December 31, 1999. Under this arrangement PXRE received, as reinsurance
manager, a management fee based on premiums ceded, as well as a contingent
profit commission equal to a percentage of any ultimate underwriting profits in
connection with the reinsurance ceded. The contingent profit commission is paid
after a three-year period and is subject to adjustment based on cumulative
experience. Trenwick Group is currently rated "A" (Excellent) by A.M. Best.
The following table sets forth PXRE's earned commissions from
retrocessionaires pursuant to its managed business arrangements for the periods
indicated:
Year Ended December 31,
--------------------------------------------------------
2000 1999 1998
------ ------ ------
(in thousands)
Commission $4,159 $3,851 $2,247
Contingent profit commission (1) (271) (761) (75)
------ ------ ------
Total $3,888 $3,090 $2,172
====== ====== ======
- - -------------------
(1) Contingent profit commission is paid after a three-year period and is
subject to adjustment based on cumulative experience under the AMA and
Trenwick Group arrangements and prior to 1998, under the arrangement
with Select Re.
In addition to the quota share arrangement between Select Re and PXRE,
PXRE entered into several other reinsurance transactions with Select Re during
2000 whereby Select Re provided retrocessional support on a corresponding number
of finite and other lines reinsurance transactions underwritten by PXRE. These
reinsurance transactions involved reinsurance premiums ceded during 2000 of
$26,814,000 in the aggregate. As of December 31, 2000, net assets of $21,226,000
were due in the aggregate from Select Re in connection with such reinsurance
transactions, all of which were fully secured by way of a reinsurance trust,
letters of credit or funds held.
PXRE also purchases catastrophe retrocessional coverage for its own
protection, depending on market conditions. PXRE significantly increased its
purchases of such coverage during the past three years. In 2000, PXRE made
additional retrocessional coverage purchases to
17
protect against exposure to frequent loss occurrences. In 1999 and 1998,
catastrophe and other reinsurance ceded premiums written increased due to
additional coverage associated with new operations and to opportunistic
purchases of catastrophe retrocessional protection. Certain business fronted on
behalf of other reinsurers also contributed to the 1999 increase in catastrophe
and other reinsurance ceded premiums written in 1999.
PXRE has a committee consisting of its chief executive officer and
senior underwriting executives responsible for the selection of reinsurers as
managed business participants or as participating reinsurers in the catastrophe
coverage protecting PXRE. Proposed reinsurers are evaluated at least annually
based on consideration of a number of factors including the management,
financial statements and the historical experience of the reinsurer. This
procedure is followed whether or not a rating has been assigned to a proposed
reinsurer by any rating organization. All reinsurers, whether obtained through
direct contact or the use of reinsurance intermediaries, are subject to approval
by PXRE.
At December 31, 2000, estimated losses recoverable (including incurred
but not reported losses ("IBNR")) from retrocessionaires were $117,196,000,
including $21,080,000 of paid loss recoverables. Although management carefully
selects its retrocessionaires, PXRE is subject to credit risk with respect to
its retrocessions because the ceding of risk to retrocessionaires does not
relieve PXRE of its liability to ceding companies.
Loss Liabilities and Claims
PXRE establishes loss and loss expense liabilities (to cover expenses
related to settling claims, including legal and other fees) to provide for the
ultimate cost of settlement and administration of claims for losses, including
claims that have been reported to it by its reinsureds and claims for losses
that have occurred but have not yet been reported to PXRE. Under United States
generally accepted accounting principles ("GAAP"), PXRE is not permitted to
establish loss reserves until an event which may give rise to a claim occurs.
For reported losses, PXRE establishes liabilities when it receives
notice of the claim. It is PXRE's general policy to establish liabilities for
reported losses in an amount equal to the liability set by the reinsured. In
certain instances, PXRE will conduct an investigation to determine if the amount
established by the reinsured is appropriate or if it should be adjusted.
For incurred but not reported losses, a variety of methods have been
developed in the insurance industry for use in determining such liabilities. In
general, these methods involve the extrapolation of reported loss data to
estimate ultimate losses. PXRE's loss calculation methods generally rely upon a
projection of ultimate losses based upon the historical patterns of reported
loss development. Additionally, PXRE makes provision through its liabilities for
incurred but not reported losses for any identified deficiencies in the
liabilities for reported losses set by its reinsureds.
PXRE's management believes that its overall liability for losses and
loss expenses maintained as of December 31, 2000 is adequate. Because of the
inherent uncertainty in the reserving process, however, there is a risk that
PXRE's liability for losses and loss expenses could prove to be greater than
expected in any year, with a consequent adverse impact on future
18
earnings and shareholders' equity. Estimating the ultimate liability for losses
and loss expenses is an imprecise science subject to variables that are
influenced by both internal and external factors. Historically, PXRE has focused
on property related coverages. In contrast to casualty losses, which frequently
are slow to be reported and may be determined only through the lengthy,
unpredictable process of litigation, property losses tend to be reported more
promptly and usually are settled within a shorter time period. However, 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, PXRE is required to make estimates of losses based on limited
information from ceding companies as well as its own underwriting data due to
the significant reporting delays which normally occur under PXRE's
retrocessional book of business and with respect to insured losses that occur
near the end of a reporting period.
Historically, PXRE has underwritten a small amount of casualty
reinsurance. In 1998, PXRE began underwriting new casualty lines of business
and, in 1999 and 2000, PXRE substantially expanded its casualty and finite
businesses. With respect to casualty business, significant delay, ranging up to
several years or more, can be expected between the reporting of a loss to PXRE
and settlement of PXRE's liability for that loss. As a result, such future claim
settlements could be influenced by changing rates of inflation and other
economic conditions, changing legislative, judicial and social environments and
changes in PXRE's claims handling procedures. In addition, most of the risks
reinsured in PXRE's structural/finite business are also casualty risks and are
subject to some of the same risks as PXRE's casualty business. While the
reserving process is difficult and subjective for ceding companies, the inherent
uncertainties of estimating such reserves are even greater for a reinsurer, due
primarily to the longer time between the date of the occurrence and the
reporting of any attendant claims to the reinsurer, the diversity of development
patterns among different types of reinsurance treaties or facultative contracts,
the necessary reliance on the ceding companies for information regarding
reported claims and differing reserving practices among ceding companies.
PXRE's difficulty in accurately predicting casualty losses may also be
exacerbated by the limited amount of statistically significant historical data
regarding losses on PXRE's new casualty lines of business. PXRE must therefore
rely on the inherently less reliable historical loss patterns reported by ceding
companies and industry loss standards in calculating its casualty reserves.
Thus, the actual casualty losses and loss expenses may deviate, perhaps
substantially, from estimates of liabilities reflected in PXRE's consolidated
financial statements.
19
The following table provides a reconciliation of beginning and ending
loss and loss expense liabilities under GAAP for the fiscal years ended December
31, 2000, 1999 and 1998. Except with respect to certain non-material worker's
compensation liabilities and the reserves maintained by PXRE Bermuda, PXRE does
not discount its loss and loss expense liabilities; that is, it does not
calculate them on a present value basis. PXRE Bermuda's reserves include a
discount of $849,000.
Year Ended December 31,
---------------------------------------------
2000 1999 1998
---------- ---------- ---------
(in thousands)
Gross GAAP liability for losses and loss expenses at
beginning of year...................................... $261,551 $102,592 $57,189
Add - Gross provision for losses and loss expenses:
Occurring in current year............................... 137,123 200,132 94,003
Occurring in prior years................................ 77,330 57,129 90
---------- ---------- ---------
Total gross provision(1).............................. 214,453 257,261 94,093
---------- ---------- ---------
Less - Gross payments for losses and loss expenses:
Occurring in current year............................... 20,920 17,508 19,582
Occurring in prior years................................ 210,520 80,794 29,108
---------- ---------- ---------
Total gross payments.................................. 231,440 98,302 48,690
---------- ---------- ---------
Add - Asset related to retroactive reinsurance assumed 7,056 0 0
Gross GAAP liability for losses and loss expenses at end
of year ................................................. $251,620 $261,551 $102,592
========== ========== ==========
Ceded GAAP liability for losses and loss expenses at end
of year ................................................. (96,117) (101,035) (33,350)
---------- ---------- ----------
Net GAAP liability for losses and loss expenses at end of
year .................................................... $155,503 $160,516 $69,242
========== ========== ==========
Foreign currency adjustment............................... (947) 249 (193)
========== ========== ==========
Gross SAP liability for losses and loss expenses at end of
year(2)............................................... $250,673 $261,800 $102,399
========== ========== ==========
- - ----------------
(1) The GAAP provision for losses and loss expenses includes net foreign
currency exchange (losses) gains of $(1,196,000), $442,000 and
$(675,000) for 2000, 1999 and 1998, respectively.
(2) SAP is U.S. and Bermuda statutory accounting principles.
The following table presents the development of PXRE's GAAP balance
sheet liability for losses and loss expenses for the period 1990 through 2000.
The top line of the table shows the liabilities at the balance sheet date for
each of the indicated years. This reflects the estimated amount of losses and
loss expenses for claims arising in that year and all prior years that are
unpaid at the balance sheet date, including losses incurred but not yet reported
to PXRE. The upper portion of the table shows the cumulative amounts
subsequently paid as of successive years with respect to such liabilities. The
lower portion of the table shows the reestimated amount of previously recorded
liabilities based on experience as of the end of each succeeding year. These
estimates change as more information becomes known about the frequency and
severity of claims for individual years. A redundancy (deficiency) exists when
the reestimated liability at each December 31 is less (greater) than the prior
liability estimate. The "cumulative
20
redundancy (deficiency)" depicted in the table, for any particular calendar
year, represents the aggregate change in the initial estimates over all
subsequent calendar years.
Each amount in the table below includes the effects of all changes in
amounts for prior periods. For example, if a loss determined in 1993 to be
$150,000 was first reserved in 1990 at $100,000, the $50,000 deficiency (actual
loss minus original estimate) would be included in the cumulative redundancy
(deficiency) in each of the years 1990-1992 shown below. This table does not
present accident or policy year development data.
Loss and loss expense liabilities for fiscal years 1991 through 2000
are presented on a gross basis (excluding the effects of losses recoverable from
retrocessionaires). Loss and loss expense liabilities for December 31, 1990, are
stated on a net basis (after deduction for losses recoverable from
retrocessionaires) because gross incurred but not reported liability data were
not developed by PXRE at any date prior to December 31, 1991, as it was not
required for reporting purposes. Furthermore, it is not practicable for PXRE
currently to reconstruct this information.
21
Year Ended December 31,
-------------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(in thousands, except percentages)
Liabilities for losses and
loss expenses......... $251,620 $261,551 $102,592 $57,189 $61,389 $72,719 $81,836
Cumulative amount of
liability paid through:
One year later........ 210,519 75,814 29,108 23,708 42,698 41,601
Two years later....... 102,526 39,853 40,673 55,620 58,968
Three years later..... 47,373 46,545 67,296 67,630
Four years later...... 52,220 70,676 76,762
Five years later...... 74,533 79,433
Six years later....... 82,930
Seven years later.....
Eight years later.....
Nine years later......
Ten years later.......
Liabilities reestimated as of:
One year later........ 338,881 135,227 57,280 66,257 83,228 87,818
Two years later....... 141,087 55,271 63,292 85,162 87,750
Three years later..... 63,151 61,178 83,178 90,409
Four years later...... 66,137 82,129 89,284
Five years later...... 85,820 88,326
Six years later....... 91,663
Seven years later.....
Eight years later.....
Nine years later......
Ten years later.......
Gross reserves of TREX at
date of merger........ 9,589 5,242 2,067
Gross reserves for elimination
of one quarter lag for U.K.
subsidiary............ (1,191)
Gross cumulative redundancy
(deficiency) through
December 31, 2000:....
Amount................ (77,330) (39,686) (5,962) 4,841 (7,859) (7,760)
Percentage............ (30%) (39%) (10%) 7% (10%) (9%)
Retrocessional recoveries 19,099 10,423 5,325 (650) 7,541 3,224
Net cumulative redundancy
(deficiency) through
December 31, 2000:....
-------- -------- -------- -------- -------- --------
Amount................ (58,231) (29,263) (637) 4,191 (318) (4,536)
Percentage............ (36%) (42%) (1%) 8% 1% (9%)
1993 1992 1991 1990
---- ---- ---- ----
Liabilities for losses and
loss expenses......... $71,442 $88,668 $62,664 $31,632
Cumulative amount of
liability paid through:
One year later........ 37,820 59,773 35,575 15,688
Two years later....... 54,400 79,926 48,393 25,466
Three years later..... 60,850 89,519 52,301 29,066
Four years later...... 64,566 94,261 55,022 30,117
Five years later...... 69,414 96,895 56,976 31,528
Six years later....... 70,392 99,864 58,822 32,137
Seven years later..... 71,091 100,724 61,235 33,202
Eight years later..... 101,357 62,130 33,624
Nine years later...... 62,557 33,956
Ten years later....... 34,198
Liabilities reestimated as of:
One year later........ 78,188 101,423 67,165 33,874
Two years later....... 76,902 103,632 62,262 33,726
Three years later..... 74,683 105,165 62,827 33,488
Four years later...... 75,392 103,801 63,032 33,682
Five years later...... 74,880 104,330 62,593 34,310
Six years later....... 74,173 104,222 63,632 33,777
Seven years later..... 73,934 103,854 63,792 34,714
Eight years later..... 103,663 63,633 34,815
Nine years later...... 63,781 34,777
Ten years later....... 35,249
Gross reserves of TREX at
date of merger........ 26
Gross reserves for elimination
of one quarter lag for U.K.
subsidiary............
Gross cumulative redundancy
(deficiency) through
December 31, 2000:....
Amount................ (2,466) (14,995) (1,117) NA
Percentage............ (3%) (17%) (2%) NA
Retrocessional recoveries 741 2,713 (1,858) NA
Net cumulative redundancy
(deficiency) through
December 31, 2000:....
-------- -------- -------- --------
Amount................ (1,725) (12,282) (2,975) (3,187)
Percentage............ (4%) (35%) (8%) (10%)
22
During 2000, PXRE incurred development from prior year losses amounting
to $58,231,000 net of reinsurance, primarily due to French storms Lothar and
Martin.
Conditions and trends that have affected reserve development in the
past may not necessarily occur in the future. Accordingly, it would not be
appropriate to extrapolate the future adequacy or inadequacy of PXRE's reserves
based on the foregoing.
Investments
PXRE's management has established general procedures and guidelines for
its investment portfolio and oversees investment management carried out by
Phoenix Investment Partners, Limited, a subsidiary of Phoenix Home Life 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 stress conservation of principal, diversification of risk and
liquidity. PXRE's invested assets consist primarily of fixed maturities and
limited partnerships, but also include equity securities (primarily real estate
investment trusts ("REIT")) and short-term investments. PXRE's investments are
subject to market-wide risks and fluctuations, as well as to risk inherent in
particular securities.
As of December 31, 2000, PXRE had a fair market value of $281,722,000
in fixed maturities, $71,468,000 in short term investments, $27,819,000 in a
hedge fund trading portfolio, $58,571,000 in hedge fund limited partnerships,
$30,252,000 in other limited partnerships and $16,260,000 in equity securities
(principally REITs). Short-term investments include one hedge fund limited
partnership amounting to $23,365,000, which invests primarily in marketable
fixed income securities and provides for fund withdrawals upon 30 days' notice.
Hedge funds included an investment in a "fund-of-funds" entity affiliated with
Mariner amounting to $26,861,000 representing sixteen funds. As at December 31,
2000, hedge funds included in limited partnership and trading portfolio
investments were allocated among twenty-two managers, with market values ranging
from $856,000 to $26,861,000. Hedge funds in the form of limited partnership
investments and other equity interests in hedge fund entities are accounted for
under the equity method or as part of a trading portfolio, whereby both the
investment income and any change in the market value are recorded through the
investment income line of the income statement. Included in investments in
limited partnerships and the trading portfolio are investments aggregating
$86,391,000 affiliated with Mariner, including an investment of $26,861,000 in
Mariner Select, L.P., which provided approximately $2,389,000 of investment
income for PXRE in 2000. See Note 3 of Notes to Consolidated Financial
Statements. See also, "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Certain Risks and Uncertainties; and
Investments" for further information regarding PXRE's investment portfolio,
including its hedge fund portfolio.
23
The following table summarizes the investments of PXRE at December 31,
2000 and 1999 at fair market value:
Analysis of Investments
December 31, 2000 December 31, 1999
----------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
(in thousands, except percentages)
Fixed maturities:
United States government securities $ 48,759 10.0% $101,520 19.9%
Foreign government securities 4,658 1.0 8,743 1.7
United States government agency mortgage-backed
securities 17,704 3.7 24,599 4.8
Other mortgage and asset-backed securities 70,855 14.6 67,213 13.2
Obligations of states and political subdivisions 89,635 18.4 93,951 18.4
Public utilities, industrial and miscellaneous
securities 50,111 10.3 25,222 5.0
-------- ----- -------- -----
Total fixed maturities 281,722 58.0 321,248 63.0
Short-term investments 71,468 14.7 50,004 9.8
-------- ----- -------- -----
Total fixed maturities & short-term 353,190 72.7 371,252 72.8
Equity securities 16,260 3.3 24,840 4.9
Limited partnerships 88,823 18.3 85,670 16.8
Trading portfolio 27,819 5.7 27,806 5.5
-------- ----- -------- -----
Total investments $486,092 100.0% $509,568 100.0%
======== ========
At December 31, 2000, the fair value of PXRE's investment portfolio
exceeded its amortized cost by $26,734,000, due to equity accounting on the
limited partnerships and trading portfolios amounting to $26,622,000 and
unrealized appreciation on fixed maturities and equity securities amounting to
$112,000. At December 31, 1999, the fair value of PXRE's investment portfolio
exceeded its amortized cost by $15,861,000.
24
The following table indicates the composition of PXRE's fixed maturity
investments (at fair market value), including short-term investments (at fair
market value), by time to maturity at December 31, 2000 and 1999:
Composition of Investments By Maturity
December 31, 2000 December 31, 1999
------------------------ ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
(in thousands, except percentages)
Maturity(1)
- - -----------
One year or less $ 93,192 26.4% $ 56,663 15.3%
Over 1 year through 5 years 81,045 22.9 116,669 31.4
Over 5 years through 10 years 67,630 19.2 76,727 20.7
Over 10 years through 20 years 8,856 2.5 11,301 3.0
Over 20 years 13,908 3.9 17,205 4.6
-------- ----- -------- -----
264,631 74.9 278,565 75.0
United States government agency and other
mortgage and asset-backed securities 88,559 25.1 92,687 25.0
-------- ----- -------- -----
Total $353,190 100.0% $371,252 100.0%
======== ========
- - -----------
(1) Based on stated maturity dates with no prepayment assumptions.
The average market yield to maturity of PXRE's fixed maturities
portfolio at December 31, 2000, and December 31, 1999, was 5.9% and 6.6%,
respectively. At December 31, 2000, the fair value of PXRE's fixed maturities
portfolio exceeded its amortized cost by $248,000. At December 31, 1999, the
fair value of PXRE's fixed maturities portfolio was less than its amortized cost
by $8,714,000.
25
The following table indicates the composition of PXRE's fixed
maturities portfolio (at fair market value), excluding short-term investments,
by rating at December 31, 2000 and 1999:
Composition of Fixed Maturities Portfolio By Rating
December 31, 2000 December 31, 1999
------------------------- -------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(in thousands, except percentages)
Ratings(1)
United States government securities $ 48,759 17.3% $101,520 31.6%
United States government agency
mortgage and asset-backed securities 17,704 6.3 24,599 7.7
Other mortgage and asset-backed securities
Aaa and/or AAA 66,689 23.7 56,219 17.5
Aa2 and/or AA 3,119 1.1 2,920 0.9
A2 and/or A 553 0.2 7,525 2.3
Baa2 and/or BBB 494 0.2 549 0.1
Obligations of states and political subdivisions
Aaa and/or AAA 64,861 23.0 69,572 21.7
Aa2 and/or AA 24,774 8.8 24,379 7.6
Public utilities and industrial and
miscellaneous securities
Aaa and/or AAA 5,908 2.1 2,491 0.8
Aa2 and/or AA 27,365 9.7 5,816 1.8
A2 and/or A 6,204 2.2 3,274 1.0
Baa2 and/or BBB 4,968 1.8 4,275 1.3
Ba2 and/or BB 5,345 1.9 6,916 2.2
B2 and/or B 321 0.1 2,450 0.8
Foreign government securities
Baa2 and/or BBB 0 0.0 2,521 0.8
Ba2 and/or BB 4,658 1.6 4,096 1.3
B2 and/or B 0 0.0 2,126 0.6
-------- ----- -------- -----
Total $281,722 100.0% $321,248 100.0%
======== ========
- - ------------------
(1) Ratings as assigned by Moody's and S&P, respectively. Such ratings are
generally assigned upon the issuance of the securities, subject to revision
on the basis of ongoing evaluations.
PXRE's management periodically evaluates the composition of the
investment portfolio and repositions the portfolio in response to market
conditions in order to improve total returns while maintaining liquidity and
superior credit quality. See "Management's Discussion and
26
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Market Risk."
Regulation
United States
The Company and PXRE Reinsurance are subject to regulation under the
insurance statutes of various U.S. states, including Connecticut, the
domiciliary state of PXRE Reinsurance. The regulation and supervision to which
PXRE Reinsurance is subject relates primarily to the standards of solvency that
must be met and maintained, licensing requirements for reinsurers, the nature of
and limitations on investments, restrictions on the size of risks which may be
insured, deposits of securities for the benefit of a reinsured, methods of
accounting, periodic examinations of the financial condition and affairs of
reinsurers, the form and content of reports of financial condition required to
be filed, reserves for losses and other purposes. In general, such regulation is
for the protection of the reinsureds and policyholders, rather than investors.
In addition, the Company and PXRE Delaware are subject to regulation by
U.S. state insurance authorities under the insurance holding company statutes of
various states, including Connecticut. These laws and regulations vary from
state to state, but generally require an insurance holding company and
reinsurers that are subsidiaries of an insurance holding company to register
with the state regulatory authorities and to file with those authorities certain
reports including information concerning their capital structure, ownership,
financial condition, and general business operations. Moreover, PXRE Reinsurance
may not enter into certain transactions, including certain reinsurance
agreements, management agreements, and service contracts, with members of its
insurance holding company system, unless it has first notified the Connecticut
Insurance Commissioner of its intention to enter into any such transaction and
the Connecticut Insurance Commissioner has not disapproved of such transaction
within the period specified by the Connecticut insurance statute. Among other
things, such related company transactions are subject to the requirements that
their terms be fair and reasonable, charges or fees for services performed be
reasonable and the interests of policyholders not be adversely affected.
U.S. state laws also require prior notice or regulatory agency approval
of direct or indirect changes in control of an insurer, reinsurer, or its
holding company, and of certain significant intercorporate transfers of assets
within the holding company structure. An investor who acquires or attempts to
acquire shares representing or convertible into more than 10% of the voting
power of the securities of the Company would become subject to at least some of
such regulations, would require approval by the Connecticut Insurance
Commissioner prior to acquiring such shares and would be required to file
certain notices and reports with the Connecticut Insurance Commissioner prior to
such acquisition. See "Market for Registrant's Common Equity and Related
Stockholder Matters" for a discussion of other limitations on voting and
ownership of the Company's securities contained in the Company's Bye-Laws.
The principal sources of cash for the payment of operating expenses and
income taxes, debt service obligations, and dividends by the Company are the
receipt of dividends and net tax
27
allocation payments from PXRE Reinsurance and PXRE Bermuda. Under the
Connecticut insurance laws, the maximum amount of dividends or other
distributions that PXRE Reinsurance may declare or pay within any twelve-month
period, without regulatory approval, is limited to the lesser of (a) earned
surplus or (b) the greater of 10% of policyholder surplus at December 31 of the
preceding year or 100% of net income for the twelve-month period ended December
31 of the preceding year, all determined in accordance with U.S. statutory
accounting principles ("SAP"). Accordingly, the Connecticut insurance laws could
limit the amount of dividends available for distribution by PXRE Reinsurance
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
2001, without regulatory approval, is limited to approximately $34,886,000.
During 2000, $16,252,000 in dividends were paid by PXRE Reinsurance. See below
for a discussion of Bermuda dividend restrictions applicable to PXRE Bermuda.
See also "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
Additionally, Connecticut has adopted regulations respecting certain
minimum capital requirements for property and casualty companies, based upon a
model adopted by the National Association of Insurance Commissioners (the
"NAIC"). The NAIC is an organization which assists state insurance supervisory
officials in achieving insurance regulatory objectives, including the
maintenance and improvement of state regulation. The risk-based capital
regulations adopted provide for the use of a formula to measure statutory
capital and surplus needs based on the risk characteristics of a company's
products and investment portfolio to identify weakly capitalized companies. As
at December 31, 2000, PXRE Reinsurance's surplus substantially exceeded its
calculated risk-based capital.
Effective January 1, 2001, the State of Connecticut requires that
insurance companies domiciled in Connecticut prepare their statutory basis
financial statements in accordance with the NAIC Accounting Practices and
Procedures Manual - Version Effective As of January 1, 2001 ("Codification")
subject to any deviations prescribed or permitted by the Insurance Commissioner
of the State of Connecticut. Accounting changes adopted to conform to the
provisions of the Codification are reported as an adjustment to unassigned
surplus in the period of the change in accounting principle. The cumulative
effect is the difference between the amount of capital and surplus at the
beginning of the year and the amount of capital and surplus that would have been
reported at that date if the new accounting had been applied retroactively for
all prior periods. PXRE Reinsurance is currently assessing the effect of the
adoption.
The NAIC's Insurance Regulatory Information System ("IRIS") was
developed by a committee of state insurance regulators and is primarily intended
to assist state insurance departments in executing their statutory mandates to
oversee the financial condition of insurance companies operating in their
respective states. IRIS identifies eleven industry ratios and specifies "usual
values" for each ratio. Departure from the usual values on four or more of the
ratios can lead to inquiries from individual state insurance commissioners as to
certain aspects of an insurer's business. For the years ended December 31, 2000,
1999 and 1998, PXRE Reinsurance's results were within the usual values for each
of the eleven ratios, except for three ratios in 2000 and one ratio in each of
1999 and 1998. PXRE's management believes that the
28
three ratios fell outside the usual range in 2000 due to (a) an increase in PXRE
Reinsurance's net written premium in 2000 as compared with 1999 due to the
nonrenewal in 2000 of the intercompany pooling agreement between Transnational
Insurance and PXRE Reinsurance caused by the sale of Transnational Insurance,
(b) the development of prior year losses primarily arising from the 1999 French
storms, (c) a decrease in investment income from certain alternative limited
partnership investments in 2000 compared to 1999, and (d) the statutory
accounting effect of one retroactive contract. PXRE Reinsurance fell outside a
usual ratio value in 1999 due to the unusual level of catastrophe losses in 1999
and in 1998 due to the substantial turmoil in global securities markets and the
resulting decline in the value of certain limited partnership investments.
From time to time, various regulatory and legislative changes have been
proposed in the U.S. insurance industry, some of which could have an effect on
reinsurers and insurers. Among the proposals that have in the past been or are
at present being considered are the possible introduction of federal regulation
in addition to, or in lieu of, the current system of state regulation of
insurers, an initiative to create a federally guaranteed disaster reinsurance
pool prefunded by insurers and proposals in various state legislatures (some of
which have been enacted) to conform portions of their insurance laws and
regulations to various model acts adopted by the NAIC. PXRE is unable to predict
what effect, if any, the foregoing developments may have on its operations and
financial condition in the future.
United Kingdom
PXRE Limited, PXRE Managing Agency and PXRE Lloyd's Syndicate are
subject to regulation by Lloyd's. The form of that regulation is prescribed by
the Lloyd's Act of 1982 and Lloyd's internal regulatory bye-laws and directions.
The regulation and supervision to which PXRE Limited is subject relates
primarily to the maintenance of a risk based capital requirement (by way of a
deposit of securities and a letter of credit with Lloyd's to support its
underwriting) and prescribed methods of accounting. PXRE Managing Agency must
satisfy a solvency requirement, prescribed methods of accounting and is subject
to periodic examinations of compliance with Lloyd's bye-laws and other purposes.
PXRE Lloyd's Syndicate has to comply with accounting regulation, internal
reporting, and is subject to periodic examinations of compliance. The Lloyd's
market is regulated externally by the Financial Services Authority, although the
day to day regulation of the market remains the responsibility of the Council of
Lloyd's. All invested assets of PXRE Lloyd's Syndicate, amounting to
approximately $18,908,000 at December 31, 2000, are restricted from being paid
as a dividend for at least three years.
Bermuda
The Insurance Act 1978 of Bermuda and related regulations
(collectively, the "Act") imposes on Bermuda insurance companies, including PXRE
Bermuda, solvency and liquidity standards and auditing and reporting
requirements, and grants to the Minister of Finance powers to supervise,
investigate and intervene in the affairs of insurance companies.
The Act provides that the value of the general business assets of a
Class 3 insurer must exceed the amount of its general business liabilities by a
prescribed minimum solvency margin.
29
PXRE Bermuda, as a Class 3 insurer, is required to maintain a minimum solvency
margin equal to the greatest of: (A) $1,000,000, (B) 20% of net premiums written
up to $6,000,000 plus 15% of net premiums written over $6,000,000 or (C) 15% of
loss reserves. In addition, PXRE Bermuda is prohibited from declaring or paying
any dividends during any financial year it is in breach of its minimum solvency
margin or minimum liquidity ratio or if the declaration or payment of such
dividends would cause it to fail to meet such margin or ratio. If it fails to
meet its minimum solvency margin or minimum liquidity ratio on the last day of
any financial year, the insurer will be prohibited, without the approval of the
Minister of Finance, from declaring or paying any dividends during the next
financial year.
As a Class 3 insurer, PXRE Bermuda also is prohibited, without the
approval of the Minister of Finance, from reducing by 15% or more its total
statutory capital, as set out in its previous year's financial statements, and
if it appears to the Minister of Finance that there is a risk of the insurer
becoming insolvent or that it is in breach of the Act or any conditions imposed
upon its registration, the Minister may, in addition to the restrictions
specified above, direct the insurer not to declare or pay any dividends or any
other distributions or may restrict it from making such payments to such extent
as the Minister of Finance may think fit.
The Act provides a minimum liquidity ratio for general business. An
insurer engaged in general business is required to maintain the value of its
relevant assets at not less than 75% of the amount of its relevant liabilities.
Relevant assets include cash and time deposits, quoted investments, unquoted
bonds and debentures, first liens on real estate, investment income due and
accrued, accounts and premiums receivable and reinsurance balances receivable.
There are certain categories of assets which, unless specifically permitted by
the Minister of Finance, do not automatically qualify as relevant assets such as
unquoted equity securities, investments in and advances to affiliates, real
estate and collateral loans. The relevant liabilities are total general business
insurance reserves and total other liabilities less deferred income tax and
sundry liabilities (by interpretation, those not specifically defined).
Under Bermuda law, PXRE Bermuda may not lawfully declare or pay a
dividend unless there are reasonable grounds for believing that it is, or will
after payment of the dividend be, able to pay its liabilities as they become
due, and that the realizable value of its assets will, after payment of the
dividend, be 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, the directors of PXRE Bermuda are, as a matter of prudence,
required to ensure that any dividend declared or paid is not of 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.
At December 31, 2000, PXRE Bermuda's solvency and liquidity margins and
statutory capital and surplus were in excess of the minimum levels required by
the Act.
30
Taxation of PXRE and its Subsidiaries
The following summary of the taxation of the Company, PXRE Bermuda,
PXRE Barbados and PXRE's U.S. subsidiaries, including PXRE Reinsurance
(collectively, the "PXRE U.S. Companies") is based upon current law.
Legislative, judicial or administrative changes may be forthcoming that could
affect this summary. See, for example, "Legislation" below. Certain subsidiaries
and branch offices of PXRE are subject to taxation related to operations in the
United Kingdom and Belgium.
Bermuda
The Company and PXRE Bermuda have each received from the Minister of
Finance an assurance under The Exempted Undertakings Tax Protection Act, 1966 of
Bermuda, to the effect that in the event of there being enacted in Bermuda any
legislation imposing tax computed on profits or income, or computed on any
capital asset, gain or appreciation, or any tax in the nature of estate duty or
inheritance tax, then the imposition of any such tax shall not be applicable to
the Company or PXRE Bermuda or to any of their operations or their shares,
debentures or other obligations until March 28, 2016. These assurances are
subject to the proviso that they are not construed so as to prevent the
application of any tax or duty to such persons as are ordinarily resident in
Bermuda (the Company and PXRE Bermuda are not currently so designated) or to
prevent the application of any tax payable in accordance with the provisions of
The Land Tax Act of 1967 of Bermuda or otherwise payable in relation to the land
leased to the Company or PXRE Bermuda.
Barbados
PXRE Barbados is subject to a Barbados corporation tax assessed at a
rate of 2.5% on profits and gains of up to 10 million Barbados Dollars
(approximately U.S. $5 million) and at declining rates on profits and gains
exceeding 10 million Barbados Dollars. PXRE Barbados may elect to take a credit
in respect of taxes paid to a country other than Barbados, provided that such an
election does not reduce the tax payable in Barbados to a rate less than 1% of
the profits and gains of PXRE Barbados in any income year.
United States
The PXRE U.S. Companies carry on business in, and are subject to
taxation in, the United States. The Company believes that it and its
subsidiaries, other than the PXRE U.S. Companies, have operated and will
continue to operate their business in a manner that will not cause them to be
treated as engaged in a trade or business within the United States. Tax
conventions between the United States and Bermuda or Barbados may provide relief
to PXRE Bermuda and PXRE Barbados, respectively, if either such company is
deemed to be engaged in the conduct of a U.S. trade or business. Under the tax
convention between Bermuda and the United States (the "Bermuda Treaty"), a
Bermuda company predominantly engaged in the insurance business, such as PXRE
Bermuda, is subject to U.S. income tax on its insurance income found to be
effectively connected with a U.S. trade or business only if that trade or
business is conducted through a permanent establishment in the United States. As
a holding company that is not predominantly engaged directly in an insurance
business, the Company is
31
not entitled to the benefits of the Bermuda Treaty. Similarly, under the tax
convention between Barbados and the United States (the "Barbados Treaty"), a
corporation that is a Barbados resident will not be subject to U.S. income tax
on income that is effectively connected with a U.S. business, unless such
business is conducted through a permanent establishment in the United States.
Each of the Company, PXRE Bermuda and PXRE Barbados operate under guidelines
that are intended to minimize the risk that they will be treated as engaged in a
U.S. trade or business; and each of PXRE Bermuda and PXRE Barbados operate under
guidelines that are intended to minimize the risk that they will be found to
have a U.S. permanent establishment.
On this basis, the Company does not expect that it and its
subsidiaries, other than the PXRE U.S. Companies, will be required 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 as described
below). However, irrespective of such guidelines, there can be no assurance that
PXRE Bermuda and PXRE Barbados will qualify for the Bermuda Treaty and the
Barbados Treaty, respectively, now or in the future, or that the Bermuda Treaty
or the Barbados Treaty will not be terminated or revised in a manner that could
adversely affect any protection from U.S. corporate tax that they currently
provide. In addition, because there is uncertainty as to the activities which
constitute being engaged in a trade or business in the United States, there can
be no assurances that the U.S. Internal Revenue Service will not contend
successfully that the Company or a non-U.S. subsidiary is engaged in a trade or
business in the United States. The maximum federal tax rates currently are 35%
for a corporation's income which is effectively connected with being engaged in
a trade or business in the United States. In addition, the U.S. branch profits
tax of 30% is imposed each year on a foreign (or non-US) corporation's earnings
and profits (with certain adjustments) effectively connected with its U.S. trade
or business deemed repatriated out of the United States, for a potential maximum
effective tax rate of approximately 54% on the net business connected with a
U.S. trade or business.
Foreign corporations not engaged in a trade or business in the United
States are subject to U.S. income tax, effected through withholding by the
payor, on certain "fixed or determinable annual or periodic gains, profits and
income" derived from sources within the United States as enumerated in Section
881(a) of the U.S. Internal Revenue Code (the "Code"), which in certain cases
may be reduced or eliminated under applicable tax treaties.
The United States also imposes an excise tax on insurance and
reinsurance premiums paid to foreign insurers or reinsurers with respect to
risks located in the United States. The rate of tax applicable to reinsurance
premiums paid to PXRE Bermuda and PXRE Barbados is 1% of gross premiums.
Legislation
PXRE understands that certain U.S.-based insurance companies are
advocating an amendment to the Code which would impose 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, PXRE 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 PXRE.
32
Employees
PXRE employed 88 full-time employees at December 31, 2000. None of
PXRE's employees is represented by a labor union, and management considers its
relationship with its employees to be excellent.
PXRE Bermuda employees, including senior management of the Company and
PXRE Bermuda, are employed pursuant to work permits granted by Bermuda
authorities. These permits expire at various times over the next few years. PXRE
has no reason to believe that these permits would not be extended at expiration
upon request, although no assurance can be given in this regard.
Item 2. Properties
PXRE leases a total of approximately 81,000 square feet of office space
in Hamilton, Bermuda (the Company's corporate headquarters); Edison, New Jersey;
Norwalk, Connecticut; New York, New York; Larkspur, California; London, England
and Brussels, Belgium. The Hamilton, Bermuda lease, which covers approximately
2,618 square feet of office space, was signed in 1999 and is for a term of two
years at a fixed annual rent of approximately $102,000 and additional rents on
account of PXRE's proportionate share of services. The Edison, New Jersey space
is comprised of (i) a 1994 lease of approximately 24,000 square feet of office
space, for a term of 15 years at a fixed annual rent of approximately $370,000
and additional rents on account of PXRE Delaware's proportionate share of
increases in building operating expenses and property taxes over calendar year
1994, and (ii) a November 1999 lease of approximately 24,000 square feet of
additional office space for a term of 10 years expiring on October 31, 2009, at
fixed rentals of approximately $582,000 for years 1-5 of the term and $676,000
for years 6-10 of the term, in each case plus additional rents on account of
PXRE Delaware's proportionate share of taxes and operating expenses attributable
to the building. Additionally, in February 2000, PXRE Delaware subleased
approximately 11,000 square feet of the additional space covered by the November
1999 lease for a three year term ending on the 36th month next following the
date that the premises are delivered to the subtenant. The sublease provides for
the subtenant to pay fixed rent to PXRE Delaware at the rate of approximately
$274,000 per annum, together with electricity at the rate of approximately
$16,500 per annum. The subtenant is additionally required to pay PXRE Delaware a
proportionate share of taxes and operating expenses payable by PXRE Delaware
under the lease.
Item 3. Pending Legal Proceedings
PXRE is subject to litigation and arbitration in the ordinary course of
its business. Except as disclosed below, management does not believe that the
eventual outcome of any such pending litigation or arbitration is likely to have
a material adverse effect on PXRE's financial condition or business. Pursuant to
PXRE's insurance and reinsurance arrangements, disputes are generally required
to be finally settled by binding arbitration.
In May 1999, PXRE Delaware entered into weather option agreements 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
33
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 has filed suit against Terra Nova in the United States District Court
for the District of New Jersey. Trial of this suit is presently scheduled to
commence on April 10, 2001.
Item 4. Submission of Matters to a Vote of Security Holders
None.
34
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common shares are listed on the New York Stock Exchange
under the symbol "PXT". The following table sets forth, for the periods
indicated, the high and low bid quotations for the Company's common shares as
reported by the New York Stock Exchange and cash dividends per common share
declared and subsequently paid:
Bid Price
----------------------------
High Low Dividends
---- --- ---------
1999:
First Quarter $26.25 $18.00 $0.26
Second Quarter 21.25 16.00 0.26
Third Quarter 19.0625 14.3125 0.06
Fourth Quarter 14.50 10.00 0.06
2000:
First Quarter $17.00 $11.8125 $0.06
Second Quarter 17.00 13.50 0.06
Third Quarter 16.00 12.625 0.06
Fourth Quarter 17.125 12.625 0.06
These prices represent quotations by dealers and do not include
markups, markdowns or commissions, and do not necessarily represent actual
transactions. As of March 23, 2001, there were 11,899,537 common shares issued
and outstanding, which shares were held by approximately 90 shareholders of
record and, based on the Company's best information, by approximately 2200
beneficial owners of the common shares. See Notes 8 and 9 of Notes to
Consolidated Financial Statements for information with respect to shares
reserved for issuance under employee benefit and stock option plans.
The payment of dividends on the common shares is subject to the
discretion of the Company's Board of Directors which will consider, among other
factors, PXRE's operating results, overall financial condition, capital
requirements and general business conditions. There can be no assurance that
dividends will be paid in the future.
As a holding company, the Company is largely dependent upon dividend
payments from its subsidiaries, including PXRE Reinsurance and PXRE Bermuda, to
pay dividends to the Company's shareholders. PXRE Reinsurance is subject to U.S.
state laws, and PXRE Bermuda is subject to Bermuda law, which may restrict their
ability to distribute dividends. In addition, certain covenants in PXRE's bank
credit agreement may restrict PXRE's ability to pay dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business--Regulation" for
further information concerning restrictions contained in PXRE's bank credit
agreement and under U.S. and Bermuda law.
35
Under the Company's Bye-Laws, subject to certain exceptions and to
waiver by the Company's Board of Directors on a case by case basis, no transfer
of the Company's shares is permitted if such transfer would result in a
shareholder owning, directly or indirectly, more than 9.9% of the voting power
of the outstanding shares, including common shares, of the Company or more than
9.9% of the outstanding shares of any class of the Company's stock. Ownership is
broadly defined in the Company's Bye-Laws.
The Company may refuse to register any such transfer on the Company's
share transfer records. A transferee will be permitted to promptly dispose of
any of the Company's shares purchased which violate the restriction and as to
the transfer of which registration is refused. The transferor of such shares of
the Company will be deemed to own such shares for dividend, voting and reporting
purposes until a transfer of such shares has been so registered.
In addition, in the event that the Company becomes aware of a
shareholder owning more than 9.9% of the voting power of the Company's
outstanding shares after a transfer of shares has been registered, the Company's
Bye-Laws provide that, subject to the same exceptions and waiver procedures, the
voting rights with respect to the shares of the Company owned by any such
shareholder will be limited to a voting power of 9.9%. The voting rights with
respect to all shares held by such person in excess of the 9.9% limitation will
be allocated to the other holders of the Company's common shares. Such
allocation will be pro rata based on the number of the Company's common shares
held by all such other holders of the Company's common shares, subject only to
the further limitation that no shareholder allocated any such voting rights may
exceed the 9.9% limitation as a result of such allocation.
36
Item 6. Selected Financial Data.
Year Ended December 31,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
(1) (1)(2) (1)(2) (1)(2) (1)(3)
----- ------ ------ ------ ------
(in thousands, except per share data and ratios)
Income Statement Data:
Gross premiums written $268,990 $221,349 $136,215 $126,232 $114,348
Premiums ceded (96,289) (82,504) (47,521) (26,177) (46,630)
-------- -------- -------- -------- --------
Net premiums written 172,701 138,845 88,694 100,055 67,718
Change in unearned premiums (12,495) (10,342) 3,692 (8,640) 5,078
-------- -------- -------- -------- --------
Net premiums earned 160,206 128,503 92,386 91,415 72,796
Net investment income 30,037 47,173 19,612 31,191 16,782
Net realized investment gains (losses) 3,191 (3,766) (3,862) 2,467 94
Management fees(3) 5,483 3,590 2,172 3,006 6,032
-------- -------- -------- -------- --------
Total revenues 198,917 175,500 110,308 128,079 95,704
-------- -------- -------- -------- --------
Losses and loss expenses incurred 137,765 159,259 57,793 12,491 18,564
Commissions and brokerage 34,899 27,703 20,563 19,138 12,874
Other operating expenses 35,407 30,052 19,313 15,716 12,262
Interest expense 4,778 3,915 1,395 3,325 6,957
Minority interest in consolidated subsidiary 8,875 8,790 8,928 8,184 0
-------- -------- -------- -------- --------
Total losses and expenses 221,724 229,719 107,992 58,854 50,657
-------- -------- -------- -------- --------
(Loss) income before income taxes, cumulative effect
of accounting change, extraordinary
item and equity in net earnings of TREX (22,807) (54,219) 2,316 69,225 45,047
Equity in net earnings of TREX(3) 0 0 0 0 3,898
Income tax (benefit) provision (12,007) (12,775) (1,206) 22,198 15,644
-------- -------- -------- -------- --------
(Loss) income before cumulative effect of accounting (10,800) (41,444) 3,522 47,027 33,301
change and extraordinary loss
Cumulative effect of accounting change, net of tax 0 (695) 0 0 0
Extraordinary loss on debt redemption, net of
tax 0 0 (843) (2,774) 0
-------- -------- -------- -------- --------
Net (loss) income available to Common
Shareholders $(10,800) $(42,139) $ 2,679 $ 44,253 $ 33,301
======== ======== ======== ======== ========
37
Year Ended December 31,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
(1) (1)(2) (1)(2) (1)(2) (1)(3)
----- ------ ------ ------ ------
(in thousands, except per share data and ratios)
Ratio of earnings to fixed charges(4) 0 0 1.09 6.59 7.15
Ratio of earnings to combined fixed charges
and preferred dividends(4) 0 0 1.09 6.59 7.15
Basic earnings per common share:
(Loss) income before cumulative effect of
accounting change and extraordinary item $ (0.95) $ (3.58) $ 0.26 $ 3.41 $ 3.73
Cumulative effect of accounting change 0 (0.06) 0 0 0
Extraordinary loss 0 0 (0.06) (0.20) 0
------- ------- ------- ------- ------
Net (loss) income $ (0.95) $ (3.64) $ 0.20 $ 3.21 $ 3.73
======= ======= ======= ======= ======
Average common shares outstanding(3) 11,394 11,568 13,339 13,776 8,922
======= ======= ======= ======= ======
Diluted earnings per common share:
(Loss) income before cumulative effect of
accounting change and extraordinary item $ (0.95) $ (3.58) $ 0.26 $ 3.39 $ 3.69
Cumulative effect of accounting change 0 (0.06) 0 0 0
Extraordinary loss 0 0 0.06 0.20 0
------- ------- ------- ------- ------
Net (loss) income $ (0.95) $ (3.64) $ 0.20 $ 3.19 $ 3.69
======= ======= ======= ======= ======
Average common shares outstanding(3) 11,394 11,568 13,452 13,893 9,020
======= ======= ======= ======= ======
Cash dividends per common share $ 0.24 $ 0.64 $ 1.01 $ 0.88 $ 0.75
Other Operating Data:
GAAP loss ratio(5) 86.0% 123.9% 62.6% 13.7% 25.5%
GAAP underwriting expense ratio(5) 40.5% 43.0% 40.9% 34.8% 26.2%
------- ------- ------- ------- ------
GAAP combined ratio(5) 126.5% 166.9% 103.5% 48.5% 51.7%
======= ======= ======= ======= ======
As of December 31,
----------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- ------------
(in thousands, except per share data and ratios)
Balance Sheet Data:
Cash and investments $505,101 $524,303 $490,594 $527,738 $467,078
Total assets 784,747 780,180 632,691 608,172 543,324
Losses and loss expenses 251,619 261,551 102,592 57,189 70,977
Minority interest in consolidated subsidiary 99,525 99,521 99,517 99,513 0
Debt payable 65,000 75,000 50,000 21,414 64,725
Total stockholders' equity 259,386 263,279 334,376 386,688 357,678
Book value per common share $ 21.94 $ 22.54 $27.13 $28.10 $25.63
Statutory capital and surplus $378,840 $423,605 $447,229 $451,321 $400,133
- - -------------------
(1) The Company was incorporated on June 1, 1999 as a Bermuda holding company
and a wholly owned subsidiary of PXRE Purpose Trust, a purpose trust
established under the laws of Bermuda. On October 5, 1999, PXRE Delaware
completed a reorganization pursuant to which the Company became the
ultimate parent holding company of PXRE Delaware. PXRE Delaware and its
subsidiaries provide property and
38
casualty reinsurance and insurance products to a national and
international marketplace. In connection with the reorganization, the
Company repurchased for $1.00 per share 100% of the common shares owned
by PXRE Purpose Trust and each outstanding share of PXRE Delaware common
stock (other than shares held by PXRE Delaware and its subsidiaries) was
converted into one common share of the Company. After the consummation of
the reorganization the Company commenced carrying on the holding company
functions previously conducted by PXRE Delaware.
(2) In the fourth quarter of 1999, the Company changed the reporting period
for its U.K. operations from a fiscal year ending September 30 to a
calendar year ending December 31. The results of operations for the
period from October 1, 1998 to December 31, 1998, amounted to a loss of
approximately $140,000. This loss was charged to retained earnings during
1999 in order to report only twelve months operating results. The U.K.
operations of PXRE Limited and PXRE Managing Agency are included in the
consolidated results on a one quarter lag basis from 1997 through the
third quarter of 1999.
(3) On December 11, 1996, PXRE Delaware merged with TREX. The Merger has been
accounted for as a purchase. Accordingly, TREX has been included in
PXRE's consolidated results of operations from the date of acquisition,
which resulted in incremental earnings of $1,253,000 in 1996. For the
period from January 1, 1996 until December 11, 1996, PXRE recorded equity
in net earnings of TREX. Diluted average shares outstanding reflects the
5,680,256 weighted shares issued to holders of TREX common shares in
connection with the Merger. Included in income in 1996 was a management
fee of $2,512,000, earned from TREX prior to the Merger. If the Merger
had taken place at the beginning of 1996 consolidated revenues would have
been $153,410,000 for 1996. Consolidated pro forma net income and diluted
net income per share would have been $49,161,000 and $3.42 in 1996. Such
pro forma amounts are not necessarily indicative of what the actual
consolidated results might have been if the Merger had been effected
prior to December 11, 1996.
(4) The ratios of earnings to fixed charges were determined by dividing
consolidated earnings by total fixed charges. For purposes of these
computations, (i) earnings consist of consolidated income before
considering income taxes, fixed charges and minority interest, and (ii)
fixed charges consist of interest on indebtedness and that portion of
rentals which is deemed by the Company's management to be an appropriate
interest factor. Earnings were inadequate to cover fixed charges by
$22,806,000 and $55,288,000 for the years ended December 31, 2000 and
1999, respectively. The ratios of earnings to combined fixed charges and
preferred dividends were determined by dividing consolidated earnings by
total fixed charges and preferred dividends. Earnings were inadequate to
cover fixed charges and preferred dividends by $22,806,000 and
$55,288,000 for the years ended December 31, 2000 and 1999, respectively.
(5) The loss, underwriting expense and combined ratios included under "Other
Operating Data" have been derived from the audited consolidated
statements of income of the Company prepared in accordance with U.S.
GAAP.
39
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
PXRE Group Ltd. (the "Company" or collectively with its various
subsidiaries "PXRE")--with operations principally in Bermuda, Barbados, the
United States, 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 was formed in 1999 as part of the reorganization of PXRE
Corporation ("PXRE Delaware"), a Delaware corporation. Prior to the
reorganization, PXRE Delaware was the ultimate parent holding company of the
various PXRE companies and its common shares were publicly traded on the New
York Stock Exchange. As a result of the reorganization, the Company became the
ultimate parent holding company of PXRE Delaware and the holders of PXRE
Delaware common stock automatically became holders of the same number of the
Company's common shares. The reorganization was consummated at the close of
business on October 5, 1999 and, on October 6, 1999, the Company's common shares
began to trade on the New York Stock Exchange under the symbol PXT. The
reorganization also involved the establishment of a Bermuda based reinsurance
company, PXRE Reinsurance Ltd. ("PXRE Bermuda"), operations in Barbados through
PXRE (Barbados) Ltd. ("PXRE Barbados"), and PXRE Solutions Inc. ("PXRE
Solutions"), a reinsurance intermediary.
The Company conducts its business primarily through its principal
operating subsidiaries, PXRE Delaware, PXRE Reinsurance Company ("PXRE
Reinsurance"), PXRE Solutions, PXRE Bermuda and PXRE Barbados.
PXRE has for many years specialized in property reinsurance, including
a strong focus on catastrophe-type products. In recent years, PXRE has
diversified its business through:
o the addition of a reinsurance platform offering primarily
casualty products directly to insurance companies;
o the enhancement of its international broker market reinsurance
platform to include additional lines of business, including
casualty and credit 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.
During 2000, PXRE decided to wind down its excess and surplus lines
insurance operations and its Lloyds' operations.
40
At December 31, 2000, PXRE was a party to retrocessional arrangements
with a number of insurers and reinsurers. Under these arrangements, PXRE cedes a
portion of its underwritten risks to the participants, subject to a maximum
aggregate liability 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 on behalf of 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. At December 31,
2000, Select Re owned 1,112,200 of the Company's common shares, representing
9.4% of the Company's outstanding common shares.
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 Insurance Company
("Transnational Insurance") and Transnational Insurance 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 and 2000.
In light of PXRE's withdrawal from the excess and surplus lines markets,
PXRE transferred substantially all of the assets and liabilities of
Transnational Insurance to PXRE Reinsurance through a series of transactions
that are intended to qualify as a tax-free liquidation of Transnational
Insurance pursuant to Section 332 of the U.S. Internal Revenue Code (the
"Liquidating Transactions") leaving Transnational Insurance with only the
minimum capital and surplus necessary to maintain its insurance license and
surplus lines authorizations. PXRE then sold the remaining corporate shell of
Transnational Insurance 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 Insurance 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 Insurance to USFIC were consummated
during the fourth quarter of 2000.
Also, during the third quarter of 2000, PXRE ceased accepting new or
renewal risks at Lloyd's. PXRE's Lloyd's operations consist of PXRE Managing
Agency Limited ("PXRE Managing Agency") and PXRE Limited, the sole member of
Syndicate 1224 ("PXRE Lloyd's Syndicate"). PXRE Lloyd's Syndicate underwrote
specialty types of property and casualty insurance and reinsurance (including
certain accident and health coverages as well as catastrophe-type coverages,
aerospace reinsurance and facultative reinsurance) on a worldwide basis. PXRE
Managing Agency during 2000 managed, on a fee basis, PXRE Lloyd's Syndicate and
other syndicates at Lloyd's. 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
41
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 PXRE'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.
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 stockholders' equity. Additionally, as a consequence of
its emphasis on property reinsurance, PXRE may forgo potential investment income
because property losses are typically settled within a shorter period of time
than casualty losses.
In addition, the potential for uncertainty for recent underwriting
years is greater than in past years because of the increased casualty exposures
assumed by PXRE through its casualty and finite business. 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 and finite 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.
42
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.
The reinsurance industry is consolidating through mergers and other
acquisitions. PXRE competes with numerous companies, many of which have
substantially greater financial, marketing and management resources.
The Company 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 the Company or a non-U.S. subsidiary is engaged in a trade or business in
the United States. PXRE 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, PXRE 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 the Company or any of its non-U.S. subsidiaries were subject to U.S. income
tax, the Company'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 ("REIT") 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
43
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
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 a) counter-party risk, b) the risk when
transactions settle on foreign exchanges, the protections afforded on U.S.
exchanges will be absent, c) the risk of exchange controls and d) 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 monthly or 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)
44
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.
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 subsidiary of Phoenix Home
Life Mutual Insurance Company, and by Mariner Investment Group, Inc. ("Mariner")
the sole shareholder of which is also the Chairman of the Board and a founding
shareholder of Select Re. The investment policies of PXRE are approved by the
Company's Board of Directors and the performance of Phoenix Investment Partners
and Mariner is monitored by the Investment Committee of the Company's Board of
Directors.
As of December 31, 2000, 72.7% of PXRE's investment portfolio, at fair
value, consisted of fixed maturities and short-term investments.
Of PXRE's fixed maturities portfolio at December 31, 2000, 94.4% of the
fair value was in obligations rated "A1" or "A" or better by Moody's or S&P,
respectively. Mortgage and asset-backed securities accounted for 31.4% of fixed
maturities based on fair value at December 31, 2000. The average market yield to
maturity of PXRE's fixed maturities portfolio, at December 31, 2000 and 1999,
was 5.9% and 6.6%, respectively.
PXRE had no investments in real estate or commercial mortgage loans as
of December 31, 2000; however, PXRE has invested in common and preferred shares
of publicly traded REITs with a market value of $14,933,000 at December 31,
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 2000, PXRE recorded directly to equity an after-tax
unrealized gain of $6,683,000 ($0.57 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 $71,468,000
at December 31, 2000, compared to $50,004,000 at December 31, 1999 including one
hedge fund amounting to $23,365,000 at December 31, 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 December 31, 2000, hedge fund investments held by PXRE
amounted to approximately $109,755,000, representing 14.0% of December 31, 2000
total assets. As at December 31, 2000, hedge fund investments were allocated
among twenty-two managers, with market values ranging from $856,000 to
$26,861,000. At that date, two investments affiliated with Mariner, including
a "fund-of-funds"
45
amounted to approximately $50,226,000, or 45.8% of total hedge fund investments
and were comprised of funds managed by sixteen of the twenty-two managers. Hedge
funds in which PXRE invests utilize a strategy relating to equities that 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 invests 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. Nevertheless, PXRE's investment policies with
respect to its hedge fund investments generally do not restrict it from
participating in particular markets, strategies or investments. In fact, its
hedge fund investments may generally be deployed and redeployed in whatever
investment strategies are deemed appropriate under prevailing economic and
market conditions in an attempt to achieve capital appreciation, including, if
appropriate, a concentration of investments in a relatively small group of
strategies or hedge fund managers. Accordingly, the identity and number of hedge
fund managers is likely to change over time.
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
46
managers. Mariner has invested in some of these strategies and has a
varying level of knowledge of others. New strategies, or strategies not
currently known to Mariner, may come to Mariner's attention and may be adopted
from time to time.
As at December 31, 2000 PXRE's investment portfolio also included
approximately $30,252,000 of mezzanine bond and equity limited partnership
investments, with market values ranging from $2,900,000 to $9,694,000 and
remaining aggregate cash call commitments in respect of such investments of
$1,982,000. 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 twelve months ended December 31, 2000, included $9,630,000 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 2000 with 1999
Year Ended December 31,
Increase
2000 1999 (Decrease)
---- ---- ----------
(in thousands) (percent)
Gross premiums written $268,990 $221,349 21.5%
Ceded premiums:
Managed business participants 63,053 42,549 48.2
Catastrophe coverage, surplus reinsurance and other 33,236 39,955 (16.8)
-------- --------
Total reinsurance premiums ceded 96,289 82,504 16.7
-------- --------
Net premiums written $172,701 $138,845 24.4%
======== ========
Gross premiums written for 2000 increased 21.5% to $268,990,000 from
$221,349,000 for 1999. Net premiums written for the year ended December 31, 2000
increased 24.4% to $172,701,000 from $138,845,000 for 1999. Net premiums earned
for the year ended December 31, 2000, increased 24.7% to $160,206,000 from
$128,504,000 in 1999. Gross written, net written and net earned premium for 2000
increased from prior-year levels reflecting growth in PXRE's Structured/Finite
Business segment, Casualty segment and the Catastrophe and Risk Excess segment,
including one retroactive 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. Gross and net premiums written increased in all
segments except "Other lines" as PXRE curtailed underwriting activities at PXRE
Lloyd's Syndicate during 2000. PXRE's decision to buy additional retrocessional
coverage reduced growth in net written and net earned
47
premium. Reinstatement premiums were lower in 2000 on retrocessional
coverage since the level of loss activity was lower than in 1999.
Catastrophe coverage, surplus and other ceded premiums written
decreased in 2000 from 1999 due to PXRE fronting less business on behalf of
other reinsurers and lower reinstatement premiums which in 1999 were driven by
the December 1999 French Storms, offset in part by additional retrocessional
coverage.
In 2000, PXRE made 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 1999 these
protections did not protect PXRE against exposure to smaller, more frequent loss
occurrences; however, additional purchases in 2000 provided more protection
against such loss occurrences.
Premiums ceded by PXRE to its managed business participants decreased
14.8% to $36,239,000 for 2000 compared with $42,549,000 for 1999. The decrease
in premiums ceded to these programs was due primarily to decreases in gross
premiums written primarily on fronted business. In addition, PXRE ceded premiums
of $26,814,000 from the Structured/Finite Business segment to a managed business
participant, Select Re, commencing in 2000.
The following tables summarize the 2000 and 1999 net premiums written
and earned by PXRE's business segments:
48
Net Premiums Written
(in thousands except percentages) 2000 2000 1999 1999
------ ------- ------ -------
Amount Percent Amount Percent
------ ------- ------ -------
Catastrophe and Risk Excess
North American $ 20,354 $ 26,704
International 74,256 63,957
Excess of loss cessions (15,489) (18,883)
--------- ---------
79,121 46% 71,778 52%
--------- ---------
Casualty
North American 26,766 13,148
International 14,876 12,851
--------- ---------
41,642 24 25,999 19
--------- ---------
Structured/Finite Business
North American 0 0
International 20,245 0
--------- ---------
20,245 12 0 0
--------- ---------
Other Lines
North American 1,209 12,073
International 30,484 28,995
--------- ---------
31,693 18 41,068 29
--------- ---- --------- ---
Total $ 172,701 100% $ 138,845 100%
========= =========
Net Premiums Earned
(in thousands except percentages) 2000 2000 1999 1999
------ ------- ------ -------
Amount Percent Amount Percent
------ ------- ------ -------
Catastrophe and Risk Excess
North American $ 20,517 $ 26,155
International 73,378 61,241
Excess of loss cessions (19,115) (14,958)
--------- ---------
74,780 47% 72,438 56%
--------- ---------
Casualty
North American 19,062 11,593
International 13,865 9,794
--------- ---------
32,927 21 21,387 17
--------- ---------
Structured /Finite Business
North American 0 0
International 17,791 0
--------- ---------
17,791 11 0 0
--------- ---------
Other Lines
North American 1,308 11,296
International 33,400 23,383
--------- ---------
34,708 21 34,679 27
--------- --- --------- ---
Total $ 160,206 100% $ 128,504 100%
========= =========
49
Management fee income from all sources for the year ended December 31,
2000 increased 52.8% to $5,483,000 from $3,590,000 for 1999, reflecting higher
premiums ceded to managed business participants and fees from PXRE Lloyd's
Syndicate and PXRE Managing Agency.
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. statutory accounting practices ("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 86.0% for 2000 compared with 123.9% for 1999 largely
due to French storms Lothar and Martin in both years as well as fifteen
catastrophe events in 1999. Excluding the effect of prior year loss development,
the loss ratio for 2000 would have been 49.7%. The loss ratio for 2000 reflected
incurred catastrophe and risk excess losses of $78,087,000 gross and $51,897,000
net for the 2000 and prior accident years. The loss ratio for 1999 reflected
incurred catastrophe losses of $170,477,000 gross and $92,687,000 net for 1999
and prior accident years.
Significant catastrophe and risk losses affecting the year ended
December 31, 2000 loss ratio are as follows:
Amount of Losses
----------------
Loss Event Gross Net
- - ---------- ----- ---
(in thousands)
French Storm Martin $33,940 $25,446
French Storm Lothar 27,197 17,961
Hurricane Georges 3,828 3,331
1994 Aviation Loss 2,701 2,132
2000 Kuwait National Petroleum 7,555 1,834
Phillips Electronics/Ericsson Fire 2,999 1,572
50
Significant catastrophe and risk losses affecting the year ended
December 31, 1999 loss ratio are as follows:
Amount of Losses
----------------
Loss Event Gross Net
- - ---------- ----- ---
(in thousands)
French Storm Martin $31,300 $24,000
French Storm Lothar 51,900 20,600
Hurricane Floyd 20,900 13,700
Danish Storms 14,800 11,400
Hurricane Lenny 4,300 3,300
Hurricane Bart 5,800 2,500
Three Risk Losses 11,300 3,500
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 loss of $1,196,000 for 2000
compared to an exchange gain of $442,000 for 1999.
During 2000, PXRE experienced adverse development of $58,231,000 net
for prior-year loss and loss expenses primarily related to the French Storms
Lothar and Martin. The loss ratio for 1999 was adversely affected by the
development of $19,781,000 net for prior-year loss and loss expenses.
The underwriting expense ratio was 40.5% for 2000 compared with 43.0%
for 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 18.4% for 2000 compared with
18.8% for 1999. The operating expense ratio was 22.1% for 2000 compared with
24.2% for 1999 reflecting the benefit of growth in the Company's new lines of
business. As a result of the above, the combined ratio was 126.5% for 2000
compared with 166.9% for 1999. The decrease in PXRE's GAAP combined ratio was
due to reduced catastrophe activity.
51
The following table summarizes the 2000 and 1999 underwriting profit
and (loss) by segment:
Underwriting Operations 2000 2000 1999 1999
(in thousands except percentages) ------ ----- ------- ------
Amount Percent Amount Percent
------ ----- ------- ------
Catastrophe and Risk Excess
North American $ 12,701 $(31,591)
International (2,553) (32,039)
Excess of loss cessions (11,265) 15,476
-------- --------
(1,117) 15% (48,154) 87%
-------- --------
Casualty
North American (347) (279)
International 100 (242)
-------- --------
(247) 3 (521) 1
-------- --------
Structured/Finite Business
North American 0 0
International 1,661 411
-------- --------
1,661 (22) 411 (1)
-------- --------
Other Lines
North American (2,746) (715)
International (4,980) (6,166)
-------- --------
(7,726) 104 (6,881) 13
-------- --- -------- ---
Total $ (7,429) 100% $(55,145) 100%
======== ========
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 on weather
contracts or management fees for Lloyd's 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 $35,407,000 for the year ended
December 31, 2000 from $30,052,000 in 1999. The increase was primarily related
to a full year of PXRE's London agency operations 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 $611,000 for 2000
compared to losses of $836,000 for 1999.
Also in 1999, PXRE incurred $695,000 in after-tax expenses associated
with a change in accounting in accordance with the American Institute of
Certified Public Accountants Statement of Position 98-5, for organizational and
start-up costs capitalized in prior years.
52
During 2000, interest expense increased to $4,778,000 compared to
$3,915,000 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, partially
offset by a repayment of $10,000,000 of the credit facility at March 31, 2000.
The variable interest rate on this portion was 7.66% at December 31, 2000. This
is part of PXRE Delaware's Credit Agreement with a syndicate of lenders (as
described under "Liquidity and Capital Resources"). In addition, during 2000,
PXRE incurred minority interest expense amounting to $8,875,000 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
$8,790,000 in 1999.
Net investment income for the year ended December 31, 2000 decreased
36.3% to $30,037,000 from $47,173,000 for 1999. The decrease in net investment
income was caused primarily by certain alternative investments (which are
carried on the equity method, for which the unrealized gains and losses in each
case are recorded through the income statement) and trading portfolio, which
produced a loss of $3,486,000 for 2000 reflecting a loss in two partnerships,
compared to income of $11,067,000 for 1999. PXRE's pre-tax annualized investment
yield was 6.1% for 2000 compared with 10.4% for 1999, both calculated using
amortized cost and investment income before investment expenses. Net realized
investment gains for 2000 were $3,191,000, compared to losses of $3,766,000 for
1999, reflecting the restructuring of the investment portfolio and sale of
Transnational Insurance in 2000 and losses from trading of weather contracts in
1999.
The net effect of foreign currency exchange fluctuations were losses of
$1,807,000 in 2000 compared to losses of $394,000 for 1999.
The tax benefit in 1999 includes a one-time income tax charge in
connection with the Bermuda redomestication of approximately $1.8 million
related to the cancellation of shares of PXRE Delaware held by its subsidiary.
In addition, in 1999, PXRE incurred a tax charge of $2,314,000 upon payment of a
dividend by PXRE Delaware in connection with the redomestication.
For the reasons discussed above, the net loss was $10,800,000 for 2000
compared to net loss of $42,138,000 for 1999. The diluted net loss per common
share was $0.95 for 2000 compared to a net loss per share of $3.64 for 1999,
based on diluted average shares outstanding of approximately 11,394,000 in 2000
and 11,568,000 in 1999.
53
Comparison of 1999 with 1998
Year Ended December 31,
Increase
1999 1998 (Decrease)
---- ---- ----------
(in thousands) (percentage)
Gross premiums written $221,349 $136,215 62.5
Ceded premiums:
Managed business participants 42,549 21,542 97.5
Catastrophe coverage and other
reinsurance 39,955 25,979 53.8
-------- -------
Total reinsurance premiums ceded 82,504 47,521 73.6
-------- -------
Net premiums written $138,845 $88,694 56.5%
======== =======
Gross premiums written for 1999 increased 62.5% to $221,349,000 from
$136,215,000 for 1998. Net premiums written for the year ended December 31, 1999
increased 56.5% to $138,845,000 from $88,694,000 for 1998. Net premiums earned
for the year ended December 31, 1999, increased 39.1% to $128,503,000 from
$92,386,000 in 1998. Gross written, net written and net earned premiums for 1999
increased from prior year levels reflecting new business written through PXRE's
diversification program and approximately $7,548,000 of additional reinstatement
premiums generated by 1999 loss activity.
Premiums ceded by PXRE to its managed business participants increased
97.5% to $42,549,000 for 1999 compared with $21,542,000 for 1998. The increase
in premiums ceded to these programs was due primarily to the increase in gross
premiums written, including reinstatement premiums on 1999 catastrophe losses,
and to fronting certain businesses on behalf of other reinsurers.
In 1999, catastrophe coverage and other reinsurance ceded premiums
written increased due to PXRE fronting certain business on behalf of other
reinsurers, to additional coverage associated with new operations and to
opportunistic purchases of catastrophe retrocessional protection. PXRE's
property business was protected by a series of retrocessional agreements which
provided protection principally against unusual severity of loss rather than
protecting PXRE's exposure to smaller, more frequent loss occurrences.
54
The following tables summarize the 1999 and 1998 net written and earned
premium by PXRE's business segments:
Net Premiums Written
(in thousands except percentages)
1999 1999 1998 1998
---- ---- ---- ----
Amount Percent Amount Percent
------ ------- ------ -------
Catastrophe and Risk Excess
North American $ 26,704 $ 12,795
International 63,957 58,595
Excess of loss cessions (18,883) (3,938)
--------- ---------
71,778 52% 67,452 76%
--------- ---------
Casualty
North American 13,148 650
International 12,851 4,433
--------- ---------
25,999 19 5,083 6
--------- ---------
Structured/Finite Business
North American 0 0
International 0 0
--------- ---------
0 0 0 0
--------- ---------
Other Lines
North American 12,073 2,054
International 28,995 14,105
--------- ---------
41,068 29 16,159 18
--------- --- --------- ---
Total $ 138,845 100% $ 88,694 100%
========= =========
55
Net Premiums Earned
(in thousands except percentages)
1999 1998
------------------- -------------------
Amount Percent Amount Percent
------ ------- ------ ------
Catastrophe and Risk Excess
North American $ 26,155 $13,561
International 61,241 63,830
Excess of loss cessions (14,958) (2,869)
-------- -------
72,438 56% 74,522 81%
-------- -------
Casualty
North American 11,593 (152)
International 9,794 2,207
-------- -------
21,387 17 2,055 2
-------- -------
Structured /Finite Business
North American 0 0
International 0 0
-------- -------
0 0 0 0
-------- -------
Other Lines
North American 11,296 3,234
International 23,383 12,575
-------- -------
34,679 27 15,809 17
-------- --- ------- ---
Total $128,504 100% $92,386 100%
======== =======
Management fee income from all sources for the year ended December 31,
1999 increased 65.3% to $3,590,000 from $2,172,000 for 1998, reflecting higher
ceded premiums written, including higher management fee income earned from
Select Re, offset in part by reduced profit commission from 1999 catastrophe
losses.
The loss ratio was 123.9% for 1999 compared with 62.6% for 1998 largely
due to fifteen catastrophe events in 1999, primarily in the fourth quarter when
$59,635,000 of the $79,465,000 in net catastrophe losses for 1999 occurred. The
loss ratio for 1999 reflected incurred catastrophe losses of $170,477,000 gross
and $92,687,000 net. In comparison, the loss ratio for 1998 reflected incurred
catastrophe losses of $55,564,000 gross and $29,437,000 net largely due to
Hurricane Georges and two aerospace catastrophes.
56
Significant catastrophe and risk losses affecting the year ended
December 31, 1999 loss ratio were as follows:
Amount of Losses
----------------
Loss Event Gross Net
- - ---------- ----- ---
(in thousands)
French Storm Martin $ 31,300 $24,000
French Storm Lothar 51,900 20,600
Hurricane Floyd 20,900 13,700
Danish Storms 14,800 11,400
Hurricane Lenny 4,300 3,300
Hurricane Bart 5,800 2,500
Three Risk Losses 11,300 3,500
Significant catastrophe and satellite losses affecting the year ended
December 31, 1998 loss ratio were as follows:
Amount of Losses
----------------
Loss Event Gross Net
- - ---------- ----- ---
(in thousands)
Hurricane Georges $ 49,106 $ 25,753
Hailstorms 4,521 3,597
Swissair and Delta 3 Satellites 4,087 3,399
The provision for losses and loss expenses and the loss ratio included
the effect of foreign exchange movements on PXRE's liability for losses and loss
expenses, resulting in a foreign currency exchange gain of $442,000 for 1999
compared to a loss of $675,000 for 1998.
During 1999, PXRE experienced adverse development of $19,781,000 net
for prior-year loss and loss expenses primarily related to $8,400,000 of
Hurricane Georges, $1,400,000 of Hurricane Mitch and other 1998 events,
including $3,381,000 in PXRE Lloyd's Syndicate, primarily due to accident and
health and facultative reserve strengthening. During 1998, PXRE experienced
savings of $532,000 net for prior-year loss and loss expenses primarily related
to the triggering of a retrocessional recovery on a 1994 aviation loss offset in
part by adverse development due to the 1997 German, Polish and Czech floods.
The underwriting expense ratio was 43.0% for 1999 compared with 40.9%
for 1998. The increase in underwriting expense ratio was substantially due to an
increase in salary and benefits incurred in building the diversified business.
As a result of the above, the combined ratio was 166.9% for 1999
compared with 103.5% for 1998. The increase in PXRE's GAAP combined ratio was
primarily caused by the catastrophe activity previously discussed.
57
The following table summarizes the 1999 and 1998 underwriting (loss)
and profit by segment:
Underwriting Operations
(in thousands except percentages)
1999 1998
-------------------------- ----------------------------
Amount Percent Amount Percent
------ ------- ------ -------
Catastrophe and Risk Excess
North American $(31,591) $ 6,970
International (32,039) 7,081
Excess of loss cessions 15,476 8,372
-------- --------
(48,154) 87% 22,423 141%
-------- --------
Casualty
North American (279) (409)
International (242) 87
-------- --------
(521) 1 (322) (2)
-------- --------
Structured/Finite Business
North American 0 0
International 411 0
-------- --------
411 (1) 0 (0)
-------- --------
Other Lines
North American (715) (1,442)
International (6,166) (4,794)
-------- --------
(6,881) 13 (6,236) (39)
-------- --- -------- ---
Total $(55,145) 100% $ 15,865 100%
======== ========
Underwriting operations include premiums earned, losses incurred and
commission and brokerage net of management fees, but do not include investment
income, realized gains or losses, interest expense, operating expenses,
unrealized foreign exchange gains or losses on losses incurred or management
fees on weather contracts.
The catastrophe and risk excess underwriting portfolio can be
characterized on a longer term basis as being comprised of coverages involving
higher margins and greater volatility than other coverages written by PXRE. Over
the periods indicated pricing and other coverage terms deteriorated and in
response PXRE moved to layers of risk less affected by competitive pressure; or
reduced commitments. Notwithstanding these moves, in 1999 this portfolio
produced an underwriting loss as a result of major events.
Other operating expenses increased to $30,052,000 for the year ended
December 31, 1999 from $19,313,000 in 1998, as a result of the costs incurred to
implement PXRE's planned diversification including an increase in salary and
related benefit costs of $6,329,000 and data processing costs of $1,462,000.
Included in other operating expenses were foreign currency exchange losses of
$836,000 for 1999 compared to gains of $204,000 for the corresponding period of
1998. In addition, PXRE incurred charges of approximately $1,087,000 after-tax
in connection with the redomestication as well as tax charges discussed below.
Also in 1999, PXRE incurred $695,000 in after-tax expenses associated with a
change in accounting in
58
accordance with the American Institute of Certified Public Accountants Statement
of Position 98-5, for organizational and start-up costs capitalized in prior
years.
During 1999, interest expense increased to $3,915,000 as compared to
$1,395,000 in 1998. The increase in interest expense relates to a drawdown of
$50,000,000 under a credit facility at a fixed rate of 6.34% on December 30,
1998, and a drawdown of the remaining $25,000,000 of this facility in the fourth
quarter of 1999, at a variable annual rate of 7.12% (as described under
"Liquidity and Capital Resources"). Interest in 1998 reflected $21,400,000 of
PXRE's 9.75% Senior Debt which was retired in August 1998. In addition, during
1999, PXRE incurred minority interest expense amounting to $8,790,000 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 $8,928,000 in 1998.
Net investment income for the year ended December 31, 1999 increased
140.5% to $47,173,000 from $19,612,000 for 1998. The increase in net investment
income was caused primarily by strong limited partnership investment returns
amounting to $25,700,000 (which are carried on the equity method). PXRE's
pre-tax investment yield was 10.4% for 1999 compared with 4.3% for 1998, both
calculated using amortized cost and investment income before investment
expenses. Net realized investment losses for 1999 were $3,766,000, reflecting
losses from trading of weather contracts compared to losses of $3,862,000 for
1998 from volatile emerging market bonds offset, in part, by net gains from sale
of other securities.
The net effects of foreign currency exchange fluctuations were losses
of $394,000 in 1999, as compared to losses of $471,000 for 1998.
In 1999, PXRE changed the reporting period for its UK operations from a
fiscal year ending September 30, to a calendar year ending December 31. The
results of operations for the period from October 1, 1998 to December 31, 1998,
amounted to a loss of approximately $140,000. This loss was charged to retained
earnings during the year in order to report only 12 months of operating results.
The increase in losses in the fourth quarter of 1999 amounted to $3,517,000,
primarily related to the European storms.
The tax benefit includes a one-time income tax charge in connection
with the Bermuda redomestication of approximately $1.8 million related to the
cancellation of shares of PXRE Delaware held by its subsidiary. In addition,
PXRE incurred a tax charge of $2,314,000 upon payment of a dividend by PXRE
Delaware in connection with the redomestication.
For the reasons discussed above, the net loss was $42,139,000 for 1999
compared to net income of $2,679,000 for 1998. The diluted loss per common share
before cumulative effect of accounting change and extraordinary loss was $3.58
for 1999 compared to net income of $0.26 for the prior year. The diluted net
loss per common share was $3.64 for 1999 compared to net income of $0.20 for
1998 based on diluted average shares outstanding of approximately 11,568,000 in
1999 and 13,452,000 in 1998.
59
Liquidity and Capital Resources
The Company relies primarily on dividend payments and net tax
allocation payments from its subsidiaries, including PXRE Reinsurance 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 is subject to limits imposed under the insurance laws and
regulations of Connecticut, the state of incorporation and domicile of PXRE
Reinsurance, 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, 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
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
2001, without regulatory approval, is $34,886,000. During 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 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
60
at all. In the event that PXRE were unable to generate sufficient cash flow and
were otherwise unable to obtain funds necessary to meet required payments of
principal and interest on its indebtedness, PXRE could be in default under the
terms of the agreements governing such indebtedness. In the event of such
default, the holders of such indebtedness could elect to declare all of the
funds borrowed thereunder to be due and payable together with accrued and unpaid
interest.
PXRE Delaware entered into a Credit Agreement dated as of December 30,
1998 (as amended and restated in connection with the reorganization of PXRE
Delaware, 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.
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 rate of 6.34%. The
remaining $25,000,000 was borrowed at a variable annual rate which at December
31, 2000 was 7.66%. Commitments under the Credit Agreement terminate on March
31, 2005 and are subject to annual reductions of $10,000,000 commencing March
31, 2000 and $25,000,000 on March 31, 2005, and, unless due or paid sooner, the
aggregate principal of the loans are due and payable in full on March 31, 2005.
The Credit Agreement contains covenants which, among other things,
limit the ability of PXRE and its subsidiaries and affiliates: (a) to incur
additional Indebtedness (other than certain permitted Indebtedness); (b) to
create Liens upon their properties or assets (other than Permitted Liens); (c)
to sell, transfer or otherwise dispose of their assets, business or properties
(other than certain permitted dispositions); (d) to make additional Investments
(other than certain permitted Investments, including Permitted Acquisitions and
other Investments in compliance with, among other things, applicable law and the
limitations set forth in the companies' investment policies and not exceeding
specified limits); (e) to pay dividends or repurchase stock if after giving
effect thereto a Default or Event of Default exists or the Fixed Charge Coverage
Ratio would be less than 1.5 to 1.0 as defined in the Credit Agreement; (f) to
enter into certain transactions with Affiliates; (g) to engage in any unrelated
business; (h) to enter into or remain a party to certain ceded reinsurance
agreements; or (i) to consolidate, merge or otherwise combine (or agree to do
any of the foregoing) unless, among other things, (1) the Company 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
61
compliance with Leverage Ratio, Fixed Charge Coverage Ratio, Risk-Based Capital
Ratio and Combined Statutory Surplus requirements. As at December 31, 2000,
there was no default under the Credit Agreement.
The Credit Agreement enumerates various Events of Default, including
but not limited to, if: (1) any Person or group becomes the "beneficial owner"
of securities of the Company representing 20% or more of the combined voting
power of the then outstanding securities of the Company ordinarily having the
right to vote in the election of directors; or (2) the Board of Directors of the
Company 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 year ended
December 31, 2000 in respect of the Capital Securities (and related Subordinated
Debt Securities) amounted to $8,875,000. On or after February 1, 2007, PXRE
Delaware has the right to redeem the Subordinated Debt Securities, in whole at
any time or in part from time to time, subject to certain conditions, at call
prices of 104.180% at February 1, 2007, declining to 100.418% at February 1,
2016, and 100% thereafter. PXRE Delaware has the right, at any time, subject to
certain conditions, to defer payments of interest on the Subordinated Debt
Securities for Extension Periods (as defined in the applicable indenture), each
not exceeding 10 consecutive semi-annual periods; provided that no Extension
Period may extend beyond the maturity date of the Subordinated Debt Securities.
As a consequence of PXRE Delaware's extension of any interest payment period on
the Subordinated Debt Securities, distributions on the Capital Securities would
be deferred (though such distributions would continue to accrue interest at a
rate of 8.85% per annum compounded semi-annually). In the event that PXRE
Delaware exercises its right to extend an interest payment period, then during
any Extension Period, subject to certain exceptions, (i) PXRE Delaware may not
declare or pay any dividend on, make any distributions with respect to, or
redeem, purchase, acquire or make a liquidation payment with respect to, any of
its capital stock or rights to acquire such capital stock or make any guarantee
payments (subject to specified exceptions) with respect to the foregoing, and
(ii) PXRE Delaware may not make any payment of interest on, 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
62
Extension Period and the payment of all amounts then due, PXRE Delaware may
commence a new Extension Period, subject to certain requirements.
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. Funds are applied primarily to the payment
of claims, operating expenses, income taxes and to the purchase of investments.
Premiums are typically received in advance of related claim payments.
Net cash flow used by operations was $24,332,000 in 2000 compared with
net cash flow provided by operations of $17,512,000 during 1999, due to the
effects of timing of collection of receivables and reinsurance recoverables and
payments of losses.
Dividends declared in 2000 to shareholders were $2,831,000 compared to
$7,630,000 in 1999 as the dividend per share was $0.24 in 2000 compared to $0.64
in 1999. The expected annual dividend based on shares outstanding at December
31, 2000 is approximately $2,837,000.
Book value per common share was $21.94 at December 31, 2000.
In December 1999, the Company announced a stock repurchase program of
up to 1,000,000 shares. The Company had approximately 11,820,000 common shares
outstanding as of December 31, 2000. No share repurchases were made in 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.
63
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. All invested
assets of PXRE's Lloyd's Syndicate amounting to $18,908,000 at December 31, 2000
are restricted from being paid as a dividend through June, 2003.
In September 1997, PXRE and Phoenix Home Life formed 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 December 31, 2000
are considered by management of PXRE to be collectible in all material respects.
Market Risk
PXRE is exposed to market risks that are principally interest rate and
equity price risks. The potential for losses from changes in interest rates with
respect to its investments, borrowings, and a related interest rate swap exists.
PXRE is exposed to potential losses from changes in equity prices with respect
to its investments. However, PXRE believes its exposure to foreign exchange risk
and exposures to other market risks represented by weather contracts, are not
currently material. PXRE has no open weather contracts as of December 31, 2000.
PXRE's risk management strategy is to accept certain levels of market
risks, principally through its investment activities, in order to offset its
insurance exposures that may be considered actuarial rather than financial. The
objectives of PXRE's investment activities are to generate the required return
from selected market sectors and limit its exposures to market risks that may
prevent PXRE from servicing its insurance obligations. The Company's Board of
Directors approves investment guidelines and the selection of external
investment advisers who manage PXRE's portfolios. The investment managers make
tactical investment decisions within the established guidelines. Management
monitors the external advisers through written reports that are reviewed and
approved by the Board of Directors or a committee thereof. Management also
manages diversification strategies across the portfolios in order to limit
PXRE's potential loss from any single market risk. The performance and risk
profiles of the portfolio are reported in various forms throughout the fiscal
year to management, the Board of Directors, rating agencies, regulators, and
to stockholders.
The investment portfolio of PXRE is summarized in Item 14, Notes to the
Financial Statements; Item 7, Management's Discussion and Analysis; and Item 1,
Business.
Interest Rate Risk
PXRE's principal fixed maturity market risk exposure is to changes in
U.S. interest rates. Changes in interest rates may affect the fair value of
PXRE's fixed-maturity portfolio, borrowings
64
(Bank Debt and Trust Preferred) and a related interest rate swap. PXRE's
holdings subject it to exposures in the treasury, municipal, and various
asset-backed sectors. These sectors consist primarily of investment grade
securities whose fair value is subject to interest rate, credit and prepayment
risk. All fixed maturity investment positions are long with no "short" or
derivative positions.
PXRE's investments in emerging market debt securities are subject to
interest rate risk which is included in the analysis below. During 1999 and
2000, PXRE substantially reduced its investment in emerging market debt
securities to less than 1.7% of the fixed maturity portfolio. Therefore, the
level of credit exposure associated with these securities has been substantially
reduced.
PXRE believes that reinsurance receivables and payables do not expose
it to significant interest rate risk and are excluded from the analysis below.
In order to measure PXRE's exposure to changes in interest rates a
sensitivity analysis was performed. Potential loss is measured as a change in
fair value. The fair value of the fixed maturity portfolio, borrowings and
related interest rate swap at year-end was re-measured from the fair values
reported in the financial statements assuming a 10% increase in interest rates
using a Salomon Analytics "Yield Book." The potential loss in fair value due to
interest rate exposure was estimated at $1.7 million at December 31, 2000 and $3
million at December 31, 1999.
The estimated potential loss is net of prepayment risk associated with
the mortgage-related securities. The mortgage sector is a minor portion of the
portfolio at year-end. The estimate assumes a similar change in fair value
across security sectors with no adjustment for change in value due to credit
risk. The interest rate risk related to the investments of PXRE Lloyd's
Syndicate is not material. The average maturity of these investments is under
one year.
Credit Risk
PXRE significantly reduced its investments in emerging market
securities in 1999 and 2000. The credit risk related to such investments was not
material at December 31, 2000.
Foreign Exchange Risk
PXRE's exposure to foreign exchange risk from its foreign denominated
securities is not material. Only a small portion of PXRE's investment portfolio
is denominated in currencies other than U.S. dollars. Additionally, the carrying
value of certain receivables and payables denominated in foreign currencies are
carried at fair value. For these reasons, these items have been excluded from
the market risk disclosure.
Equity Price Risk
PXRE is exposed to equity price risk in the form of a limited number of
equity investments, including holdings in the common stock of U.S. REITs. Based
on a 10% decrease
65
in equity prices the potential loss in fair value is estimated to be $1.6
million and $2.4 million at December 31, 2000 and 1999, respectively. The
decrease reflects the reduction in the size of the equity portfolio at December
31, 2000. In addition, PXRE is exposed to potential loss in fair value on its
equity trading portfolio estimated to be $2.7 million.
Diversification Benefit
PXRE's risk management strategy includes investments that are expected
to reflect offsetting changes in fair value in response to various changes in
market risks. PXRE's exposure to interest rate risk in its fixed income
portfolio is expected to be offset in part by the change in value of its REITs.
PXRE also invests in REITs to limit the potential loss due to exposures to
changes in interest rates; this loss limit is based on the expected minimum
value of the real estate holdings of the trusts.
PXRE also holds other investments that are excluded from this
disclosure that are expected to provide positive returns under most market
conditions representing adverse changes in interest rates and other market
factors (See Note 3 of Notes to Consolidated Financial Statements).
To compare the magnitude of changes in fair value due to interest rate
changes with those of other risk factors in the investment portfolio, reference
is made to Note 3 of Notes to Consolidated Financial Statements related to
realized and unrealized gains and losses on investments.
Income Taxes
PXRE recognized a tax benefit of $12,007,000 in 2000 compared to a
benefit of $13,149,000 in 1999. The tax benefit in 2000 differed from the
statutory rate primarily due to underwriting losses, tax exempt income and the
dividends received deduction. The tax benefit reported in 1999 differed from the
statutory rate because of underwriting losses, losses ceded to Bermuda which are
not deductible for U.S. tax purposes, tax exempt income and the amortization of
negative goodwill. The tax benefit in 1999 was net of a one-time income tax
charge in connection with the re-organization of approximately $1,800,000 in
connection with the Bermuda redomestication related to the cancellation of
shares of PXRE Corporation held by its subsidiary and by $2.3 million in
connection with the redomestication related to dividends paid by PXRE Delaware.
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
66
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 has filed suit against Terra Nova in the
United States District Court of New Jersey. Trial of this suit is presently
scheduled to commence on April 10, 2001.
PXRE continues to evaluate potential Year 2000 exposures emanating
from its reinsurance business by conducting an analysis of each individual
customer's risk exposures. Where appropriate, PXRE requires that an exclusion
be added to the reinsurance contract or that a letter of intent be received.
PXRE began adding exclusions to reinsurance contracts in early 1998.
Additionally, it is PXRE's position, in common with others in the industry,
that Year 2000 exposures in and of themselves are not fortuitous losses and
thus are not covered under reinsurance contracts even without specific
exclusions. For these reasons, PXRE believes that its exposures to Year 2000
claims wll not be material. However, as was the case with environmental
exposures, changing social and legal trends may create unintended coverage for
exposures by causing courts to reinterpret reinsurance contracts and related
exclusions. It is impossible to predict what, if any, exposure reinsurance
companies may ultimately have for Year 2000 claims whether coverage for the
issue is specifically excluded or included.
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
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; (xii) changes in tax laws, tax
treaties, tax rules and interpretations and (xiii) changes in management's
evaluation of potential Year 2000 exposures emanating from its reinsurance
business.
67
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.
68
Item 8. Financial Statements and Supplementary Data
The following financial statements are filed as part of this Form 10-K:
Page
PXRE Group Ltd.:
Report of Independent Accountants F-1
Consolidated Balance Sheets
at December 31, 2000 and 1999 F-2
Consolidated Statements of Operations and
Comprehensive Income for the years
ended December 31, 2000, 1999 and 1998 F-3
Consolidated Statements of
Stockholders' Equity for the years
ended December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Cash Flow
for the years ended December 31, 2000,
1999 and 1998 F-5
Notes to Consolidated Financial
Statements F-6
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
PXRE's previous auditor, PricewaterhouseCoopers, notified the Company on March
12, 2001 that it declined to stand for re-appointment as PXRE's auditor for
fiscal year 2001. PricewaterhouseCoopers's decision followed the recommendation
of the Audit Committee of the PXRE's Board of Directors, and the Board of
Directors' determination on February 13, 2001, to conduct a review of auditing
services and to invite PricewaterhouseCoopers and two other "big Five" firms of
independent auditors to make proposals to the Board of Directors for the
provision of auditing services.
The reports of PricewaterhouseCoopers on PXRE's financial statements
for the fiscal years ended December 31, 1999 and 2000 were unqualified and
contained no adverse opinion or disclaimer of opinion and no such report was
qualified or modified as to uncertainty, audit scope, or accounting principles.
During the past two fiscal years and the interim period preceding
PricewaterhouseCoopers' election not to stand for re-appointment, PXRE had no
disagreements with PricewaterhouseCoopers on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
and no events of the nature required to be reported under Item 304(a)(1)(v) of
Regulation S-K have occurred.
69
PXRE expects to retain a successor firm to serve as independent
auditors for PXRE at the upcoming meetings of the Audit Committee and Board of
Directors on April 2, 2001 and the appointment of the successor firm will be
submitted to PXRE's shareholders for their approval at PXRE's Annual General
Meeting on June 12, 2001.
PXRE filed its Form 8-K on March 16, 2001, reporting
PricewaterhouseCoopers' election not to stand for reappointment.
70
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item 10 is contained in the Company 's
Proxy Statement, which information is incorporated herein by reference and which
Proxy Statement will be filed within 120 days of the end of the Company's 2000
fiscal year.
Item 11. Executive Compensation
The information required by this Item 11 is contained in the Company 's
Proxy Statement, which information is incorporated herein by reference and which
Proxy Statement will be filed within 120 days of the end of the Company's 2000
fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item 12 is contained in the Company 's
Proxy Statement, which information is incorporated herein by reference and which
Proxy Statement will be filed within 120 days of the end of the Company's 2000
fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required by this Item 13 is contained in the Company 's
Proxy Statement, which information is incorporated herein by reference and which
Proxy Statement will be filed within 120 days of the end of the Company's 2000
fiscal year.
71
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this Form 10-K:
(1) Financial Statements.
Page
PXRE Group Ltd.:
Report of Independent Accountants F-1
Consolidated Balance Sheets at
December 31, 2000 and 1999 F-2
Consolidated Statements of Operations and
Comprehensive Income for the years
ended December 31, 2000, 1999 and 1998 F-3
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Cash Flow for the years
ended December 31, 2000, 1999 and 1998 ` F-5
Notes to Consolidated Financial Statements F-6
(2) Financial Statements Schedules.
Schedule I - Summary of Investments (The information required by this
Schedule is presented in the financial statements and the notes thereto
included in this Form 10-K.) --
Schedule II - Condensed Financial Information of Registrant F-32
Schedule III - Supplementary Insurance Information F-33
Schedule IV - Reinsurance
(The information required by this Schedule is presented
in the financial statements and the notes thereto included
in this Form 10-K.) --
Schedule VI -- Supplemental Information Concerning
Property/Casualty Insurance Operations F-33
Report of Independent Accountants on the Financial Statement
Schedules and Consent of Independent Accountants F-34
All other financial statement schedules have been omitted as inapplicable.
72
(3) Exhibits.
3.1 Memorandum of Association and Bye-laws of PXRE Group Ltd. (Exhibits
3.1 and 3.2, respectively, to the Company's Form S-4 Registration Statement
dated August 18, 1999 (File No. 333-85451), and incorporated herein by
reference).
(4) Instruments Defining the Rights of Security Holders.
4.1 Form of Specimen Common Share certificate, par value $1.00 per
share, of the Company's (Exhibit 4.1 to the Company's Form S-4 Registration
Statement dated August 18, 1999 (File No. 333-85451), and incorporated herein
by reference).
4.2 Credit Agreement dated as of December 30, 1998, among PXRE
Corporation, the banks and financial institutions listed on the signature pages
thereto or that subsequently become parties thereto (collectively, the
"Lenders") and First Union National Bank as agent for the Lenders (Exhibit 4.8
to PXRE Corporation's Form 8-K dated January 8, 1999 (File No. 1-12595), and
incorporated herein by reference).
4.3 First Amendment and Waiver to Credit Agreement, dated as of May 18,
1999, among PXRE Corporation, the Lenders and First Union National Bank, Joinder
Agreements dated May 18, 1999 by Fleet National Bank and Credit Lyonnais New
York Branch, Assignments and Acceptances dated May 18, 1999 between First Union
National Bank and Fleet National Bank and between First Union National Bank and
The First National Bank of Chicago, respectively (Exhibit 4.9 to PXRE
Corporation's Form 10-Q for the quarterly period ended June 30, 1999 (File No.
1-12595), and incorporated herein by reference).
4.4 Second Amendment and Waiver to Credit Agreement, dated as of June
25, 1999, among PXRE Corporation, the Lenders and First Union National Bank,
(Exhibit 4.9 to PXRE Corporation's Form 10-Q for the quarterly period ended June
30, 1999 (File No. 1-12595), and incorporated herein by reference).
4.5 First Amended and Restated Credit Agreement, dated as of August 31,
1999, among PXRE Corporation, as Borrower, PXRE Group Ltd. and PXRE (Barbados)
Ltd., as Guarantors, the Lenders named therein and First Union as agent (Exhibit
4.5 to PXRE Group Ltd.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 (File No. 1-15259) and incorporated herein by reference).
4.6 First Amendment to First Amended and Restated Credit Agreement,
dated as of March 29, 2000, among PXRE Corporation, as borrower, PXRE Group Ltd.
and PXRE (Barbados) Ltd., as guarantors, the Lenders named therein and First
Union National Bank as agent.
4.7 Indenture, dated as of January 29, 1997, between PXRE Corporation
and First Union National Bank, as Trustee (Exhibit 4.3 to PXRE Corporation's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No.
0-15428), and incorporated herein by reference).
73
4.8 First Supplemental Indenture, dated as of January 29, 1997, between
PXRE Corporation and First Union National Bank, as Trustee, in respect of PXRE
Corporation's 8.85% Junior Subordinated Deferrable Interest Debentures due 2027
(Exhibit 4.4 to the Annual Report on Form 10-K of PXRE Corporation for the
fiscal year ended December 31, 1996 (File No. 0-15428), and incorporated herein
by reference).
4.9 Amended and Restated Declaration of Trust of PXRE Capital Trust I,
dated as of January 29, 1997, among PXRE Corporation, as sponsor, the
Administrators thereof, First Union Bank of Delaware, as Delaware Trustee, First
Union National Bank, as Institutional Trustee, and the holders from time to time
of undivided interests in the assets of PXRE Capital Trust I (Exhibit 4.5 to the
Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended
December 31, 1996 (File No. 0-15428), and incorporated herein by reference).
4.10 Capital Securities Guarantee Agreement, dated as of January 29,
1997, between PXRE Corporation and First Union National Bank, as Guarantee
Trustee (Exhibit 4.6 to the Annual Report on Form 10-K of PXRE Corporation for
the fiscal year ended December 31, 1996 (File No.0-15428), and incorporated
herein by reference).
4.11 Common Securities Guarantee Agreement, dated as of January 29,
1997, executed by PXRE Corporation (Exhibit 4.7 to the Annual Report on Form
10-K of PXRE Corporation for the fiscal year ended December 31, 1996 (File No.
0-15428), and incorporated herein by reference).
4.12 Registration Rights Agreement, dated January 29, 1997, among PXRE
Corporation, PXRE Capital Trust I and Salomon Brothers Inc, as Representative of
the Initial Purchasers (Exhibit 10.1 to the Annual Report on Form 10-K of PXRE
Corporation for the fiscal year ended December 31, 1996 (File No. 0-15428), and
incorporated herein by reference).
4.13 Purchase Agreement among PXRE Corporation, PXRE Capital Trust I
and Salomon Brothers Inc, as Representative of the Initial Purchasers, dated
January 24, 1997 (Exhibit 10.2 to the Annual Report on Form 10-K of PXRE
Corporation for the fiscal year ended December 31, 1996 (File No. 0-15428), and
incorporated herein by reference).
(10) Material Contracts.
The material contracts of PXRE are as follows:
10.1 PXRE Reinsurance Company Management Agreement, dated as of January
1, 1990, among PXRE Reinsurance Company and, among others, Merrimack Mutual Fire
Insurance Company ("Merrimack"), Pennsylvania Lumbermens Mutual Insurance
Company ("Pennsylvania Lumbermens"), and NRMA Insurance Limited ("NRMA")
(Exhibit 10.1 to the Annual Report on Form 10-K of PXRE Corporation for the
fiscal year ended December 31, 1991 (File No. 0-15428), and incorporated herein
by reference); letter dated November 28, 1990 from Pennsylvania Lumbermens
confirming reduced participation (Exhibit 10.7 to PXRE Corporation's Form S-2
Registration Statement dated February 21, 1992, as amended by Amendment No. 1
thereto dated April 1, 1992 and by Amendment No. 2 thereto dated April 13, 1992
and by Amendment No. 3 thereto dated April 23, 1992 (File No. 33-45893), and
incorporated herein by reference); cover notes respecting January 1997 renewals
by Merrimack,
74
Pennsylvania Lumbermens and NRMA and cover note respecting participation
commencing January 1, 1997 by Auto-Owners Insurance Company ("Auto-Owners")
(Exhibit 10.3 to the Annual Report on Form 10-K of PXRE Corporation for the
fiscal year ended December 31, 1996 (File No. 0-15428), and incorporated herein
by reference); cover notes respecting January 1999 renewals by NRMA,
Pennsylvania Lumbermens, Auto-Owners and The Andover Companies (a Merrimack
company) (Exhibit 10.3 to the Annual Report on Form 10-K of PXRE Corporation for
the fiscal year ended December 31, 1998 (File No. 0-15428), and incorporated
herein by reference); cover note respecting participation commencing January 1,
1999 by the Kyoei Mutual Fire & Marine Insurance Company. (Exhibit 10.1 to the
Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended December
31, 1999 (File No. 1-15259) and incorporated herein by reference); cover note
from Pennsylvania Lumbermans reflecting the amendment effective January 1, 1996
to put a maximum limit on cessions and the amendment to the Profit Commission
Calculation effective January 1, 1997; cover note from Auto-Owners reflecting a
change in participation effective January 1, 1999; cover note from The
Andover Companies reflecting a change in participation effective January 1,
1999; and cover note from NRMA reflecting a change in participation effective
January 1, 2001.
10.2 Quota Share Retrocessional Agreement, dated as of January 1, 1994,
between PXRE Reinsurance Company and Trenwick America Reinsurance Corporation
("Trenwick Group") (Exhibit 10.21 to the Annual Report on Form 10-K of PXRE
Corporation for the fiscal year ended December 31, 1993 (File No. 0-15428), and
incorporated herein by reference); cover note respecting January 1999 renewal by
Trenwick Group (Exhibit 10.17 to the Annual Report on Form 10-K of PXRE
Corporation for the fiscal year ended December 31, 1998 (File No. 0-15428), and
incorporated herein by reference).
10.3 Undertaking, dated September 1, 1998, between PXRE Reinsurance
Company and Select Reinsurance Ltd., Amended and Restated Facultative Obligatory
Quota Share Retrocessional Agreement between PXRE Reinsurance Company and Select
Reinsurance Ltd. and Variable Quota Share Retrocessional Agreement between PXRE
Reinsurance Company and Select Reinsurance Ltd. (Exhibit 10.36 to the Annual
Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31,
1998 (File No. 0-15428), and incorporated herein by reference); letter dated
November 1, 1999 regarding Undertaking extension; and endorsement regarding
Select Reinsurance Ltd. participation for 2000 (Exhibit 10.3 to the Annual
Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended December 31,
1999 (File No. 1-15259), and incorporated herein by reference); and endorsement,
dated January 1, 2001, regarding Select Reinsurance Ltd. participation for
2001.
10.4 Tax Settlement Agreement, dated June 21, 1991, between PXRE
Corporation, PXRE Reinsurance Company and PM Holdings, Inc. (Exhibit 10.2 to the
Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended
December 31, 1991 (File No. 0-15428), and incorporated herein by reference).
10.5 Investment Advisory Agreement between PXRE Reinsurance Company and
Phoenix Investment Counsel, Inc., dated February 25, 1987 and effective as of
January 1, 1987 (Exhibit 10.10 to Amendment No. 1, dated February 19, 1987 to
PXRE Corporation's Form S-1 Registration Statement dated August 29, 1986, as
subsequently amended by Amendment No. 2 thereto dated March 25, 1987 (File No.
33-8406), and incorporated herein by reference); Amendment to Investment
Advisory Agreement between PXRE Reinsurance Company and Phoenix Investment
Counsel, Inc., effective retroactively as of January 1, 1987 (Exhibit 10.3 to
75
the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended
December 31, 1991 (File No. 0-15428), and incorporated herein by reference);
Amendment No. 2 to Investment Advisory Agreement between PXRE Reinsurance
Company and Phoenix Investment Counsel, Inc., effective as of November 1, 1989
(Exhibit 10.4 to the Annual Report on Form 10-K of PXRE Corporation for the
fiscal year ended December 31, 1991 (File No. 0-15428), and incorporated herein
by reference); Amendment No. 3 to Investment Advisory Agreement between PXRE
Reinsurance Company and Phoenix Investment Counsel, Inc. effective June 1, 1995
(Exhibit 10.26 to the Annual Report on Form 10-K of PXRE Corporation for the
fiscal year ended December 31, 1995 (File No. 0-15428), and incorporated herein
by reference).
10.6 Investment Management Agreement, effective January 29, 1997,
between PXRE Corporation and Phoenix Investment Counsel, Inc. (Exhibit 10.29 to
the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended
December 31, 1996 (File No. 0-15428), and incorporated herein by reference).
10.7 Investment Management Agreement, effective October 15, 1999,
between PXRE Reinsurance Ltd. and Phoenix Investment Counsel, Inc. (Exhibit 10.9
to the Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended
December 31, 1999 (File No. 1.15259), and incorporated herein by reference).
10.8 Investment Advisory Services Agreement between PXRE Reinsurance
Ltd. and Mariner Investment Group, Inc., dated October 1, 1999 (Exhibit 10.10 to
the Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended
December 31, 1999 (File No. 1.15259), and incorporated herein by reference).
10.9 Amended and Restated Agreement Concerning Filing of Consolidated
Federal Income Tax Returns, dated as of August 23, 1993, between PXRE
Corporation and PXRE Reinsurance Company (Exhibit 10.8 to the Annual Report on
Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1993 (File
No. 0-15428), and incorporated herein by reference); Addendum No. 2, dated
November 10, 1994 to the PXRE Corporation Amended and Restated Agreement
Concerning Filing of Consolidated Federal Income Tax Returns (Exhibit 10.22 to
the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended
December 31, 1994 (File No. 0-15428), and incorporated herein by reference);
Addendum No. 3, dated as of December 11, 1996 to the PXRE Corporation Amended
and Restated Agreement Concerning Filing of Consolidated Federal Income Tax
Returns (Exhibit 10.22 to the Annual Report on Form 10-K of PXRE Corporation for
the fiscal year ended December 31, 1996 (File No. 0-15428), and incorporated
herein by reference); and Addendum No. 4 to the PXRE Group Amended and Restated
Agreement Concerning Filing of Consolidated Federal Income Tax Return between
PXRE Corporation and Transnational Insurance Company.
10.10 Employee Stock Purchase Plan as amended (Appendix C to the
Company's Proxy Statement for the 2000 Annual General Meeting of Shareholders
(File No. 33-08405), and incorporated herein by reference).(M)
- - -------------
(M) indicates a management contract or compensatory plan or arrangement in which
the directors and/or executive officers of PXRE participate.
76
10.11 Executive Severance Plan (Exhibit 10.10 to PXRE Group Ltd.'s Form
S-4 Registration Statement dated August 18, 1999 (File No. 333-85451) and
incorporated herein by reference).(M)
10.12 1988 Stock Option Plan as amended (Exhibit A to the first
Prospectus forming part of PXRE Corporation's Form S-8 and S-3 Registration
Statement dated June 21, 1990 (File No. 33-35521), and incorporated herein
by reference).(M)
10.13 Restated Employee Annual Incentive Bonus Plan, as amended
(Appendix A to the Company's Proxy Statement for the 2000 Annual General
Meeting of Shareholders (File No. 33-08406), and incorporated herein by
reference).(M)
10.14 1992 Officer Incentive Plan as amended (Appendix B to PXRE Group
Ltd.'s Proxy Statement for the 2000 Annual General Meeting of Shareholders (File
No. 33-08406), and incorporated herein by reference).(M)
10.15 Director Stock Plan (Appendix D to PXRE Group Ltd.'s Proxy
Statement for the 2000 Annual General Meeting of Shareholders (File No.
33-08406), and incorporated herein by reference).(M)
10.16 Director Equity and Deferred Compensation Plan (Appendix E to
PXRE Group Ltd's Proxy Statement for the 2000 Annual General Meeting of
Shareholders (File No. 33-08406) and incorporated herein by reference).(M)
10.17 Non-Employee Director Deferred Stock Plan.
10.18 Agreement and Plan of Merger, dated as of August 22, 1996,
between PXRE Corporation and Transnational Re Corporation, as amended by
Amendment No. 1 dated as of September 27, 1996 and Amendment No. 2 dated as of
October 24, 1996 (Annex A to PXRE Corporation's Form S-4 Registration Statement
dated October 30, 1996 (File No. 333-15087), and incorporated herein by
reference).
10.19 Quota Share Reinsurance Agreement, dated as of November 30, 2000,
between Transnational Insurance Company and PXRE Reinsurance Company and
Assumption Agreement, dated as of November 30, 2000, between Transnational
Insurance Company and PXRE Reinsurance Company.
10.20 Agreement and Plan of Merger, dated as of July 7, 1999, among
PXRE Corporation, PXRE Group Ltd. and PXRE Merger Corp. (Annex A to PXRE Group
Ltd.'s Form S-4 Registration Statement dated August 18, 1999 (File No.
333-85451), and incorporated herein by reference).
10.21 Facultative Obligatory Quota Share Retrocessional Agreement,
effective October 1, 1999 between PXRE Reinsurance Company and PXRE Reinsurance
Ltd. and Aggregate Excess of Loss Agreement effective October 1, 1999 between
PXRE Reinsurance Ltd. and
- - -------------
(M) indicates a management contract or compensatory plan or arrangement in which
the directors and/or executive officers of PXRE participate.
77
PXRE Reinsurance Company (Exhibit 10.25 to the Annual Report on Form 10-K of
PXRE Group Ltd. for the fiscal year ended December 31, 1999 (File No. 1-15259),
and incorporated herein by reference).
10.22 First Amendment to Facultative Obligatory Quota Share
Retrocessional Agreement, dated as of December 1, 2000, between PXRE Reinsurance
Ltd. and PXRE Reinsurance Company.
10.23 Lease, dated May 9, 1994, between Thornall Associates, L.P. and
PXRE Corporation (Exhibit 10.24 to the Annual Report on Form 10-K of PXRE
Corporation for the fiscal year ended December 31, 1994 (File No. 0-15428), and
incorporated herein by reference); Lease, dated November 1, 1999, between
Thornall Associates, L.P. and PXRE Corporation (Exhibit 10.26 to the Annual
Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended December 31,
1999 (File No. 1-15259), and incorporated herein by reference); and Sublease,
dated July 1, 2000, between I-many, Inc. and PXRE Corporation.
10.24 Lloyd's Deposit Trust Deed (Third Party Deposit) dated November
29, 1996 between PXRE Limited and PXRE Reinsurance Company (Exhibit 10.32 to the
Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended
December 31, 1997 (File No. 0-15428), and incorporated herein by reference).
10.25 Letter of Credit, dated November 22, 1996, issued by The Chase
Manhattan Bank by order of PXRE Reinsurance Company for the benefit of Lloyd's
of London (Exhibit 10.33 to the Annual Report on Form 10-K of PXRE Corporation
for the fiscal year ended December 31, 1997 (File No. 0-15428), and incorporated
herein by reference).
10.26 Lloyd's Security Trust Deed (Letter of Credit and Bank
Guarantee), dated November 29, 1997, between PXRE Limited and Lloyd's of London
(Exhibit 10.34 to the Annual Report on Form 10-K of PXRE Corporation for the
fiscal year ended December 31, 1997 (File No. 0-15428), and incorporated herein
by reference).
10.27 Operating Agreement of Cat Bond Investors L.L.C., effective as of
June 9, 1997, among Cat Bond Investors, Phoenix Home Life Mutual Insurance
Company and PXRE Corporation (Exhibit 10.35 to the Annual Report on Form 10-K of
PXRE Corporation for the fiscal year ended December 31, 1997 (File No. 0-15428),
and incorporated herein by reference).
10.28 Employment Agreement, dated July 16, 1998, between PXRE Managing
Agency Limited and Peter G. Butler (Exhibit 10.37 to the Annual Report on Form
10-K of PXRE Corporation for the fiscal year ended December 31, 1998 (File No.
0-15428), and incorporated herein by reference).(M)
10.29 Employment Agreement, dated June 8, 1998, between PXRE
Corporation and Michael J. Toman (Exhibit 10.38 to the Annual Report on Form
10-K of PXRE Corporation for
78
the fiscal year ended December 31, 1998 (File No. 0-15428), and incorporated
herein by reference).(M)
10.30 Investment Advisory Services Agreement, dated March 14, 2000,
between PXRE Corporation and Mariner Investment Group, Inc. (Exhibit 10.34 to
the Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended
December 31, 1999 (File No. 1-15259), and incorporated herein by reference).
(11) Statement setting forth computation of earnings per share.
The information required by this Exhibit is presented in the financial
statements and the notes thereto included in this Form 10-K.
(12) Statement setting forth computation of ratios. Attached
hereto as Exhibit 12.
(21) List of Subsidiaries. At December 31, 2000, PXRE Group Ltd.
had the following subsidiaries: PXRE Reinsurance Ltd., a Bermuda insurance
company; PXRE (Barbados) Ltd., a Barbados company; PXRE Corporation, a Delaware
corporation; PXRE Reinsurance Company, a Connecticut insurance company; PXRE
Capital Trust I, a Delaware statutory business trust; PXRE Limited, an English
company (the sole member of Syndicate 1224 at Lloyd's of London); PXRE Managing
Agency Limited (the managing agency for Syndicate 1224 at Lloyd's of London);
PXRE Trading Corporation, a Delaware corporation; TREX Trading Corporation, a
Delaware corporation; PX/TX Associates, a Delaware general partnership (of which
PXRE Trading and TREX Trading are the only partners); CAT Fund, L.P., a Delaware
limited partnership (of which PX/TX Associates is the sole general partner and
PXRE Trading Corporation and TREX Trading Corporation are the only limited
partners); Cat Bond Investors L.L.C. (of which PXRE Corporation and Phoenix Home
Life Mutual Insurance Company are the only members); PXRE Solutions Inc., a
Connecticut corporation; PXRE Direct Underwriting Managers, Inc., a Connecticut
corporation; PXRE Underwriting Managers, Inc., a Virginia corporation and Nexus
Management Advisors LLC, a Delaware limited liability company of which PXRE
Corporation holds 70% of the Membership interests. (See the discussion in this
Form 10-K under the captions "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations.")
(23) Consents of Experts and Counsel. The consent of
PricewaterhouseCoopers LLP, independent accountants to the Company, is
included as part of Item 14(a)(2) of this Form 10-K.
(24) Power of Attorney. Copies of the powers of attorney executed
by each of F. Sedgwick Browne, Robert W. Fiondella, Franklin D. Haftl, Bernard
Kelly, Halbert D. Lindquist, Wendy Luscombe, Philip R. McLoughlin and David W.
Searfoss are attached hereto as Exhibit 24.
(27) Financial Data Schedule. Exhibit 27 included in electronic
filing only.
- - -------------
(M) indicates a management contract or compensatory plan or arrangement in which
the directors and/or executive officers of PXRE participate.
79
(28) Information from reports furnished to state insurance
regulatory authorities. Filed in paper under cover of Form SE.
(b) Current Reports. None.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
80
STATEMENT OF DIFFERENCES
------------------------
The service mark symbol shall be expressed as.......................... 'sm'
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, PXRE Group Ltd. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PXRE GROUP LTD.
By: /s/ Gerald L. Radke
Gerald L. Radke
Its Chairman of the Board,
President and Chief
Executive Officer
Date: March 29, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of PXRE
Group Ltd. and in the capacity and on the dates indicated:
By: /s/ Gerald L. Radke By: /s/ James F. Dore
Gerald L. Radke James F. Dore
Its Chairman of the Board, Its Executive Vice President,
President and Chief Treasurer and Chief Financial
Executive Officer Officer
(Principal Executive (Principal Financial
Officer); and Director Officer and Principal
Accounting Officer)
Date: March 29, 2001 Date: March 29, 2001
By* /s/ F. Sedgwick Browne By* /s/ Franklin D. Haftl
------------------------------ -------------------------------
F. Sedgwick Browne Franklin D. Haftl
Director Director
Date: March 29, 2001 Date: March 29, 2001
81
By* /s/ Robert W. Fiondella By* /s/ Wendy Luscombe
------------------------------ -------------------------------
Robert W. Fiondella Wendy Luscombe
Director Director
Date: March 29, 2001 Date: March 29, 2001
By* /s/ Bernard Kelly By* /s/ Philip R. McLoughlin
------------------------------ -------------------------------
Bernard Kelly Philip R. McLoughlin
Director Director
Date: March 29, 2001 Date: March 29, 2001
By* /s/ David W. Searfoss By* /s/ Halbert D. Lindquist
------------------------------ -------------------------------
David W. Searfoss Halbert D. Lindquist
Director Director
Date: March 29, 2001 Date: March 29, 2001
*By: /s/ Gerald L. Radke
Gerald L. Radke
Attorney-in-Fact
82
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
PXRE Group Ltd. (Successor Registrant of PXRE Corporation)
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive income, of
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of PXRE Group Ltd. (Successor Registrant of PXRE
Corporation) and its subsidiaries at December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion.
PricewaterhouseCoopers
Hamilton, Bermuda
February 12, 2001
F-1
PXRE
Group Ltd. Consolidated Balance Sheets
- - ------------------------------------------------------------------------------------------------------------------------------
December 31,
2000 1999
------------- --------------
Assets Investments:
Available for sale:
Fixed maturities, available-for-sale, at fair value
(amortized cost $281,474,000 and $329,962,000, respectively) $ 281,721,678 $ 321,247,527
Equity securities, at fair value (cost $16,396,000 and $26,214,000) 16,260,089 24,840,360
Short-term investments 71,467,877 50,004,473
Trading securities (cost $23,250,000 and $26,000,000) 27,819,800 27,806,209
Limited partnerships, at equity (cost $66,770,000 and $67,147,000) 88,822,522 85,669,508
---------------- ---------------
Total investments 486,091,966 509,568,077
Cash 19,008,897 14,735,040
Accrued investment income 5,010,538 4,186,849
Receivables:
Unreported premiums 54,607,126 40,216,340
Balances due from intermediaries and brokers, net 20,074,909 21,549,113
Other receivables 23,498,041 22,971,088
Reinsurance recoverable 117,196,459 106,702,307
Ceded unearned premiums 13,764,781 19,582,260
Deferred acquisition costs 9,697,003 7,809,971
Current income tax recoverable 2,978,556 12,628,414
Deferred tax asset 15,002,429 11,531,000
Other assets 17,816,090 8,699,650
---------------- ---------------
Total assets $ 784,746,795 $ 780,180,109
================ ===============
Liabilities Losses and loss expenses $ 251,619,635 $ 261,551,353
Unearned premiums 49,548,368 42,218,837
Debt payable 65,000,000 75,000,000
Other liabilities 59,667,135 38,609,857
---------------- ---------------
Total liabilities 425,835,138 417,380,047
---------------- ---------------
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 99,525,376 99,521,079
--------------- --------------
Stockholders' Serial preferred stock, $1.00 par value -- 10,000,000 shares
Equity authorized respectively; 0 shares issued and outstanding 0 0
Common stock, $1.00 par value -- 50,000,000 shares
authorized, 11,820,079 and 11,679,769 shares issued,
respectively 11,820,079 11,679,769
Additional paid-in capital 175,014,314 173,682,802
Accumulated other comprehensive income:
Net unrealized depreciation on investments, net of deferred
income tax (expense) benefit of ($39,000) and $3,520,000,
respectively (69,147) (6,752,002)
Retained earnings 76,301,524 89,932,620
Restricted stock at cost (386,047 and 369,483 shares) (3,680,489) (5,264,206)
---------------- ---------------
Total stockholders' equity 259,386,281 263,278,983
---------------- ---------------
Total liabilities and stockholders' equity $ 784,746,795 $ 780,180,109
================ ===============
The accompanying notes are an integral part of these statements.
F-2
PXRE
Group Ltd. Consolidated Statements of Operations and Comprehensive Income
- - ----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
2000 1999 1998
------------- ------------ ------------
Revenues Net premiums earned $ 160,205,927 $128,503,110 $ 92,386,326
Net investment income 30,036,808 47,172,616 19,611,889
Net realized investment gains (losses) 3,190,857 (3,765,816) (3,862,189)
Management fees 5,483,689 3,590,337 2,172,131
-------------- ------------- -------------
198,917,281 175,500,247 110,308,157
-------------- ------------- -------------
Losses and Losses and loss expenses incurred 137,764,938 159,259,413 57,793,626
Expenses Commissions and brokerage 34,898,983 27,701,644 20,562,688
Other operating expenses 35,406,799 30,052,310 19,313,425
Interest expense 4,777,795 3,915,098 1,394,811
Minority interest in consolidated subsidiary 8,875,239 8,790,106 8,927,863
-------------- ------------- -------------
221,723,754 229,718,571 107,992,413
-------------- ------------- -------------
(Loss) income before income taxes, cumulative effect of
accounting change, and extraordinary item (22,806,473) (54,218,324) 2,315,744
Income tax benefit 12,006,500 12,774,971 1,206,077
-------------- ------------- -------------
(Loss) income before cumulative effect of accounting change
and extraordinary loss (10,799,973) (41,443,353) 3,521,821
Cumulative effect of accounting change, net of $374,381
tax benefit 0 695,278 0
Extraordinary loss on debt redemption, net of $454,000
income tax benefit 0 0 843,000
-------------- ------------- -------------
Net (loss) income $ (10,799,973) $(42,138,631) $ 2,678,821
============== ============= =============
Comprehensive Other comprehensive (loss) income, net of tax:
Income Net unrealized appreciation (depreciation) on investments 6,682,855 (6,758,255) (3,166,753)
-------------- ------------- -------------
Comprehensive (loss) income $ (4,117,118) $(48,896,886) $ (487,932)
============== ============= =============
Per Share Basic:
(Loss) income before cumulative effect of accounting
change and extraordinary item $ (0.95) $ (3.58) $ 0.26
Cumulative effect of accounting change 0.00 (0.06) 0.00
Extraordinary loss 0.00 0.00 (0.06)
-------------- ------------- -------------
Net (loss) income $ (0.95) $ (3.64) $ 0.20
============== ============= =============
Average shares outstanding 11,393,652 11,568,494 13,339,479
============== ============= =============
Diluted:
(Loss) income before cumulative effect of accounting
change and extraordinary item $ (0.95) $ (3.58) $ 0.26
Cumulative effect of accounting change 0.00 (0.06) 0.00
Extraordinary loss 0.00 0.00 (0.06)
-------------- ------------- -------------
Net (loss) income $ (0.95) $ (3.64) $ 0.20
============== ============= =============
Average shares outstanding 11,393,652 11,568,494 13,451,731
============== ============= =============
The accompanying notes are an integral part of these statements.
F-3
PXRE
Group Ltd. Consolidated Statements of Stockholders' Equity
- - -----------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000, 1999 and 1998
Additional Accumulated
Preferred Common Paid-in Treasury
Stock Stock Capital Stock
--------- --------- ------------- --------------
Balance at December 31, 1997 $ 0 $ 148,063 $ 255,060,792 $ (21,660,108)
Net income
Unrealized depreciation on
investments, net
Issuance of common stock 1,319 4,069,940
Repurchase of treasury stock (39,728,564)
Issuance of restricted stock
Amortization of restricted stock
Dividends paid to common stockholders
Other 16,822 (31,353)
-----------------------------------------------------------------
Balance at December 31, 1998 0 149,382 259,147,554 (61,420,025)
Net loss
Unrealized depreciation on
investments, net
Increase in par value upon
redomestication 11,501,792 (11,501,792)
Issuance of common stock 28,595 4,928,345
Repurchase of common stock (17,169,725)
Cancellation of treasury stock (78,697,992) 78,697,992
Issuance of restricted stock
Amortization of restricted stock
Dividends paid to common
stockholders
Elimination of quarter lag in results
of UK subsidiary
Other (193,313) (108,242)
-----------------------------------------------------------------
Balance at December 31, 1999 0 11,679,769 173,682,802 0
Net loss
Unrealized appreciation on investments,
net
Issuance of common stock 140,310 1,802,814
Repurchase of common stock
Issuance of restricted stock
Amortization of restricted stock
Dividends paid to common stockholders
Other (471,302)
-----------------------------------------------------------------
Balance at December 31, 2000 $ 0 $ 11,820,079 $ 175,014,314 $ 0
=================================================================
Years Ended December 31, 2000, 1999 and 1998
Other Total
Comprehensive Retained Restricted Stockholders'
Income Earnings Stock Equity
-------------- ------------- -------------- --------------
Balance at December 31, 1997 $ 3,173,006 $ 150,749,451 $ (782,808) $ 386,688,396
Net income 2,678,821 2,678,821
Unrealized depreciation on
investments, net (3,166,753) (3,166,753)
Issuance of common stock 4,071,259
Repurchase of treasury stock (39,728,564)
Issuance of restricted stock (3,838,227) (3,838,227)
Amortization of restricted stock 1,239,085 1,239,085
Dividends paid to common stockholders (13,585,333) (13,585,333)
Other 31,353 16,822
-----------------------------------------------------------------
Balance at December 31, 1998 6,253 139,842,939 (3,350,597) 334,375,506
Net loss (42,138,631) (42,138,631)
Unrealized depreciation on
investments, net (6,758,255) (6,758,255)
Increase in par value upon
redomestication 0
Issuance of common stock 4,956,940
Repurchase of common stock (17,169,725)
Cancellation of treasury stock 0
Issuance of restricted stock (4,385,780) (4,385,780)
Amortization of restricted stock 2,409,665 2,409,665
Dividends paid to common
stockholders (7,629,924) (7,629,924)
Elimination of quarter lag in results
of UK subsidiary (141,764) (141,764)
Other 62,506 (239,049)
-----------------------------------------------------------------
Balance at December 31, 1999 (6,752,002) 89,932,620 (5,264,206) 263,278,983
Net loss (10,799,973) (10,799,973)
Unrealized appreciation on investments,
net 6,682,855 6,682,855
Issuance of common stock 1,943,124
Repurchase of common stock 0
Issuance of restricted stock (1,276,445) (1,276,445)
Amortization of restricted stock 2,632,357 2,632,357
Dividends paid to common stockholders (2,831,123) (2,831,123)
Other 227,805 (243,497)
-----------------------------------------------------------------
Balance at December 31, 2000 $ (69,147) $ 76,301,524 $ (3,680,489) $ 259,386,281
=================================================================
The accompanying notes are an integral part of these statements.
F-4
PXRE
Group Ltd. Consolidated Statements of Cash Flows from Financing Activities
- - --------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
2000 1999 1998
-------------- -------------- ------------
Cash Flows Net (loss) income $ (10,799,973) $ (42,138,631) $ 2,678,821
from Operating Adjustments to reconcile net income to net cash
Activities provided by operating activities:
Losses and loss expenses (9,931,716) 158,958,959 45,402,940
Unearned premiums 13,147,010 15,512,597 (3,643,393)
Deferred acquisition costs (1,887,032) (3,687,368) (1,156,862)
Receivables (10,580,718) (29,151,184) (16,603,791)
Reinsurance balances payable 14,261,590 10,385,580 10,021,725
Reinsurance recoverable (10,494,153) (70,627,866) (27,018,379)
Income tax recoverable 7,959,103 3,132,135 (7,591,759)
Equity in earnings of limited partnerships (9,495,048) (23,608,098) 5,059,230
Other (6,511,284) (1,263,685) (2,193,465)
-------------- -------------- --------------
Net cash (used) provided by operating activities (24,332,221) 17,512,439 4,955,067
-------------- -------------- --------------
Cash Flows Cost of fixed maturity investments (143,346,661) (129,792,417) (178,648,802)
from Investing Fixed maturity investments matured/disposed 189,268,437 103,388,412 262,534,237
Activities Payable for securities (2,076,481) 2,076,557 0
Cost of equity securities (24,235,314) (9,835,512) (22,871,893)
Equity securities disposed 36,623,456 28,382,068 2,817,183
Net change in short-term investments (18,294,998) 12,717,651 (6,053,033)
Limited partnerships disposed 23,769,726 30,391,215 7,040,660
Limited partnerships purchased (20,641,691) (56,883,257) (34,325,097)
-------------- -------------- --------------
Net cash provided (used) by investing activities 41,066,474 (19,555,283) 30,493,255
-------------- -------------- --------------
Cash Flows Proceeds from issuance of common stock 686,943 505,795 233,032
from Financing Cash dividends paid to common stockholders (2,831,121) (7,629,924) (13,585,333)
Activities Repurchase of debt (10,000,000) 0 (22,527,860)
Proceeds of debt 0 25,000,000 50,000,000
Cost of stock repurchased (316,218) (17,215,460) (39,728,564)
-------------- -------------- --------------
Net cash (used) provided by financing activities (12,460,396) 660,411 (25,608,725)
-------------- -------------- --------------
Net change in cash 4,273,857 (1,382,433) 9,839,597
Cash, beginning of period 14,735,040 16,117,473 6,277,876
-------------- -------------- --------------
Cash, end of period $ 19,008,897 $ 14,735,040 $ 16,117,473
============== ============== ==============
The accompanying notes are an integral part of these statements.
F-5
PXRE Notes to Consolidated Financial Statements
Group Ltd. Years Ended December 31, 2000, 1999 and 1998
- - -------------------------------------------------------------------------------
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. The 2000 and 1999 financial 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., 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 1998 financial statements reflect the
financial position and results of operations of PXRE Corporation and
subsidiaries.
On December 21, 2000, PXRE sold its wholly owned subsidiary Transnational
Insurance Company in consideration of a purchase price equal to the net assets
of Transnational Insurance plus an additional amount as a premium for the value
of the insurance licenses and surplus lines authorizations.
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.
Certain reclassifications have been made for 1999 and 1998 to conform to
the 2000 presentation.
Premiums Assumed and Ceded
--------------------------
Premiums on reinsurance business assumed are recorded as earned on a pro
rata basis over the contract period based on estimated subject premiums.
Adjustments based on actual subject premium are recorded once ascertained. The
portion of premiums written relating to unexpired coverages at the end of the
period is recorded as unearned premiums. Reinsurance premiums ceded are recorded
as incurred on a pro rata basis over the contract period.
Deferred Acquisition Costs
--------------------------
Acquisition costs consist of commission and brokerage expenses incurred in
connection with contract issuance, net of acquisition costs ceded and management
fees. These costs are deferred and amortized over the period in which the
related premiums are earned. Deferred
F-6
acquisition costs are reviewed to determine that they do not exceed recoverable
amounts, after considering investment income.
Management Fees
---------------
Management fees are recorded as earned on a pro-rata basis over the
contract period under various arrangements whereby PXRE acts as underwriting
manager for other insurers and reinsurers. These fees are initially based on
premium volume, but are adjusted in some cases through contingent profit
commissions related to underwriting results measured over a period of years.
Losses and Loss Expense Liabilities
-----------------------------------
Liabilities for losses and loss expenses are established in amounts
estimated to settle incurred losses. Losses and loss expense liabilities are
based on individual case estimates provided for reported losses for known events
and estimates of incurred but not reported losses. Losses and loss expense
liabilities are necessarily based on estimates and the ultimate liabilities may
vary from such estimates. Any adjustments to these estimates are reflected in
income when known. Reinsurance recoverable on paid losses and reinsurance
recoverable on unpaid losses are reported as assets. Reinsurance recoverable on
paid losses represent amounts recoverable from retrocessionaires at the end of
the period for gross losses previously paid. Provisions are established for all
reinsurance recoveries which are considered doubtful.
In 2000, PXRE commenced assuming structured product contracts in PXRE
Reinsurance Ltd., which is a new line of business for PXRE. Such contracts may
be recorded on a discounted basis. At December 31, 2000, reserves related to
these contracts amounting to $4,491,000 were discounted by $849,000 at a rate of
6% over 21 years.
Premiums on assumed retroactive contracts are earned when written with a
corresponding liability established for the estimated loss the Company
ultimately expects to pay out. The initial gain is deferred and amortized into
income over the expected pay out period using the interest method. Premiums on
ceded retroactive contracts are earned when written with a corresponding
reinsurance recoverable established for the amount of reserves ceded. The
initial loss is deferred and amortized into expense over the expected pay-out
period using the interest method.
Investments
-----------
Fixed maturity investments and equity securities are considered
available-for-sale or trading and are reported at fair value. Unrealized gains
and losses associated with the available-for-sale portfolio, as a result of
temporary changes in fair value during the period such investments are held, are
reflected net of income taxes in stockholders' equity. Unrealized losses which
are deemed other than temporary are charged to operations. Unrealized gains and
losses associated with the trading portfolio, as a result of temporary changes
in fair value during the period such investments are held, are recognized in
investment income. Short-term investments, which have an original maturity of
one year or less, are carried at amortized cost which approximates fair value.
Short-term investments also includes a limited partnership that invests
primarily in marketable fixed income securities and provides for fund
withdrawals upon 30 days notice; this partnership is reported under the equity
method. Investments in limited partnerships are reported under the equity
method, which includes the cost of the investment and subsequent proportional
share of the partnership earnings. Realized gains or losses on disposition of
investments are determined on the basis of specific identification. The
amortization of premiums
F-7
and accretion of discount for fixed maturity investments is computed utilizing
the interest method. The effective yield under the interest method is adjusted
for anticipated prepayments.
Fair Value of Financial Instruments
-----------------------------------
Fair values of certain assets and liabilities are based on published market
values, if available, or estimates based upon fair values of similar issues.
Fair values are reported in Notes 3 and 4.
Debt Issuance Costs
-------------------
Debt issuance costs associated with the issuance of $100 million 8.85%
Capital Trust Pass-through Securities'sm' (TRUPS'sm') and the issuance of a
note under a $75 million Credit Agreement are being amortized over the term of
the related outstanding debt on the interest method.
Foreign Exchange
----------------
Foreign currency assets and liabilities are translated at the exchange rate
in effect at the balance sheet date. Resulting gains and losses are reflected in
income for the period.
Federal Income Taxes
--------------------
Deferred tax assets and liabilities reflect the expected future tax
consequences of temporary differences between carrying amounts and the tax bases
of PXRE's assets and liabilities.
Comprehensive Income
--------------------
Comprehensive income is comprised of net income and other comprehensive
income. Other comprehensive income consists of the change in the net unrealized
appreciation or depreciation of investments, net of tax.
Earnings Per Share
------------------
Basic earnings per share are determined by dividing net earnings (after
deducting cumulative preferred stock dividends) by the weighted average number
of common shares outstanding. On a diluted basis both net earnings and shares
outstanding are adjusted to reflect the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity, unless the effect of the assumed conversion is
anti-dilutive.
Stock-Based Compensation
------------------------
PXRE accounts for its stock options in accordance with the provisions of
Accounting Principles Board Opinion No. 25.
Reporting Year for U.K. Operations
----------------------------------
In 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
results of operations for the period from October 1, 1998 to December 31, 1998
amounted to a loss of approximately $140,000. This loss was charged to retained
earnings during 1999 in order to report only 12 months' operating results.
F-8
Organizational and Start-Up Costs
---------------------------------
Commencing in 1999, PXRE adopted Statement of Position 98-5 "Reporting on
the Costs of Start-Up Activities" issued by the American Institute of Certified
Public Accountants. This statement requires that companies expense
organizational and start-up costs as incurred, and that initial application be
reported as the cumulative effect of a change in accounting principle. As a
result, PXRE expensed $695,000 of such expenses, net after tax, in 1999.
Accounting for Derivative Instruments and Hedging Activities
------------------------------------------------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments, including certain instruments embedded in
other contracts. It requires that all derivatives be recognized as either assets
or liabilities in the balance sheet and measured at fair value. Gains or losses
from changes in the derivative values are to be accounted for based on how the
derivative was used and whether it qualifies for hedge accounting.
The statement has been deferred and is now effective beginning in 2001.
PXRE is currently assessing the effect of adopting this statement. It is not
expected, however, that the adoption of this statement will have a material
effect on PXRE's financial position or results of operations.
2. Underwriting Programs
Premiums written and earned for the years ended December 31, 2000, 1999 and
1998 are as follows:
2000 1999 1998
------------- ------------ -------------
Premiums written
Assumed $268,924,177 $218,507,032 $133,143,629
Direct 65,389 2,842,139 3,071,559
------------ ------------ -------------
Gross premiums written 268,989,566 221,349,171 136,215,188
Ceded premiums written (96,288,479) (82,504,050) (47,521,377)
------------ ------------ -------------
Net premiums written $172,701,087 $138,845,121 $ 88,693,811
============ ============ =============
2000 1999 1998
------------ ------------ -------------
Premiums earned
Assumed $259,760,642 $198,342,728 $133,010,858
Direct 1,527,053 2,113,403 424,822
Ceded (101,081,768) (71,953,021) (41,049,354)
------------ ------------ -------------
Net premiums earned $160,205,927 $128,503,110 $ 92,386,326
============ ============ =============
F-9
Premiums written were assumed principally through reinsurance brokers or
intermediaries. In 2000, 1999 and 1998 four reinsurance intermediaries
individually accounted for more than 10% of gross premiums written, and
collectively accounted for approximately 56%, 43% and 47% of gross premiums
written, respectively.
Included in ceded premiums written is $48,931,000, $29,466,000 and
$10,565,000 of premiums ceded to a reinsurer, Select Reinsurance Ltd., whose
Board of Directors includes PXRE's Chief Executive Officer and an Executive
Vice-President, both of whom are shareholders of the reinsurer. Net assets due
from the reinsurer at December 31, 2000, are $38,185,000 which is secured by a
trust agreement, letter of credit and funds held.
PXRE also 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.
Activity in the net losses and loss expense liability for the years ended
December 31, 2000, 1999 and 1998 is as follows:
2000 1999 1998
------------- ------------ -------------
Net balance January 1 $160,516,230 $ 69,242,352 $44,455,998
Adjustment to eliminate quarter lag on U.K. subsidiary 0 (1,677,526) 0
Incurred related to:
Current year 79,534,035 139,478,230 58,325,429
Prior years 58,230,903 19,781,183 (531,803)
------------- ------------ -------------
Total incurred 137,764,938 159,259,413 57,793,626
------------- ------------ -------------
Paid related to:
Current year 14,708,791 17,855,659 11,112,999
Prior years 131,643,666 48,452,350 21,894,273
------------- ------------ -------------
Total paid 146,352,457 66,308,009 33,007,272
------------- ------------ -------------
Net asset related to retroactive reinsurance assumed 3,574,467 0 0
Net balance at December 31 155,503,178 160,516,230 69,242,352
Reinsurance recoverable on unpaid losses and loss expenses 96,116,457 101,035,123 33,350,042
------------- ------------ -------------
Gross balance at December 31 $251,619,635 $261,551,353 $102,592,394
============= ============ =============
As a result of changes in estimates of insured events in prior years, the
provision for losses and loss expenses experienced deficiencies of $58,231,000
on a net basis in 2000, primarily due to French Storms Lothar and Martin. The
net loss ratio was unfavorably affected by an increase to reserves of
$19,781,000 in 1999 and favorably impacted by a savings to reserves of $532,000
in 1998.
F-10
3. Investments
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of investments in fixed maturities and equity securities as
of December 31, 2000 and 1999 are shown below:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ---------- ------------
2000
- - ----
United States government securities $ 48,756,503 $ 327,586 $ 325,403 $ 48,758,686
Foreign government securities 5,600,384 0 942,404 4,657,980
United States government agency
mortgage-backed securities 17,724,673 73,193 93,849 17,704,017
Other mortgage and asset-backed securities 69,995,586 1,086,936 227,785 70,854,737
Obligations of states and political
subdivisions 87,182,603 2,645,971 193,173 89,635,401
Public utilities and industrial and
miscellaneous securities 52,214,050 193,511 2,296,704 50,110,857
------------ ---------- ---------- ------------
Total fixed maturities $281,473,799 $4,327,197 $4,079,318 $281,721,678
============ ========== ========== ============
Equity securities $ 16,395,580 $ 0 $ 135,491 $ 16,260,089
============ ========== ========== ============
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ---------- ------------
1999
- - ----
United States government securities $104,034,363 $ 54,370 $2,568,969 $101,519,764
Foreign government securities 10,115,674 0 1,373,084 8,742,590
United States government agency
mortgage-backed securities 25,416,497 0 817,661 24,598,836
Other mortgage and asset-backed securities 69,105,382 8,288 1,900,332 67,213,338
Obligations of states and political
subdivisions 94,691,998 422,315 1,163,694 93,950,619
Public utilities and industrial and
miscellaneous securities 26,598,316 9,120 1,385,056 25,222,380
------------ ---------- ---------- ------------
Total fixed maturities $329,962,230 $ 494,093 $9,208,796 $321,247,527
============ ========== ========== ============
Equity securities $ 26,214,265 $ 0 $1,373,905 $ 24,840,360
============ ========== ========== ============
F-11
Included in other comprehensive income in 2000 is $6,683,000 of net
unrealized appreciation on investments which includes $9,874,000 of unrealized
net gains arising during the year less $3,191,000 of reclassification
adjustments for net gains, included in net income.
Proceeds, gross realized gains, and gross realized losses from sales of
fixed maturity investments before maturity date or securities that prepay and
from sales of equity securities were as follows:
2000 1999 1998
------------ ------------ ------------
Proceeds from Sale
Fixed maturities $186,380,495 $ 86,040,075 $234,195,041
============ ============ ============
Equity securities $ 36,623,456 $ 28,382,068 $ 3,871,056
============ ============ ============
Gross Gains
Fixed maturities $ 222,669 $ 1,936,898 $ 4,298,138
Equity securities 4,999,134 4,307,178 1,046,699
Other 405,260 3,661,831 2,346,612
------------ ------------ ------------
5,627,063 9,905,907 7,691,449
------------ ------------ ------------
Gross Losses
Fixed maturities (1,504,800) (6,316,161) (10,615,978)
Equity securities (929,848) (687,055) (23,056)
Other (1,558) (6,668,507) (914,604)
------------ ------------ ------------
(2,436,206) (13,671,723) (11,553,638)
------------ ------------ ------------
Net realized gains (losses) $ 3,190,857 $ (3,765,816) $ (3,862,189)
============= ============ ============
Included in gross losses on fixed maturities for 1998 is a realized
loss on the permanent write down of a bond in technical default in the amount of
$6,600,000, which was sold in 1999 at a gain of $596,000.
The components of net investment income were as follows:
2000 1999 1998
----------- ------------ ------------
Fixed maturity investments $18,207,003 $19,096,242 $22,654,993
Equity securities 1,054,802 1,282,199 579,718
Short-term investments 3,154,791 1,984,366 2,044,876
Limited partnerships and trading
portfolio 9,629,676 25,703,702 (4,933,361)
----------- ----------- -----------
32,046,272 48,066,509 20,346,226
Less investment expenses 2,009,464 893,893 734,337
----------- ----------- -----------
Net investment income $30,036,808 $47,172,616 $19,611,889
=========== =========== ===========
Investment expenses represent fees paid to Phoenix Investment Partners,
Limited, a subsidiary of Phoenix Home Life Mutual Insurance Company which owned
9.6%, 7.8% and 5.2% of the outstanding common stock of PXRE at December 31,
2000, 1999 and 1998, respectively, and fees paid to Mariner Investment Group.
The sole shareholder of Mariner Investment Group is the Chairman of the Board
and a founding shareholder of Select Reinsurance Ltd. which owned approximately
9.4%, 9.5% and 0% of the outstanding common stock of PXRE at December 31, 2000,
1999, and 1998, respectively.
F-12
Investment Maturity Distributions
---------------------------------
The amortized cost and estimated fair value of fixed maturity
investments at December 31, 2000, by contractual maturity date is shown below.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
Estimated
Amortized Fair
Cost Value
----------- -----------
Fixed Maturity
One year or less $ 21,697,367 $ 21,723,784
Over 1 through 5 years 80,331,986 81,045,101
Over 5 through 10 years 69,564,789 67,629,763
Over 10 through 20 years 8,040,669 8,856,636
Over 20 years 14,118,729 13,907,640
United States government agency and
other mortgage and asset-backed securities 87,720,259 88,558,754
------------ ------------
Total $281,473,799 $281,721,678
============ ============
In addition to fixed maturities, PXRE held $71,468,000 and $50,004,000
of short-term investments at December 31, 2000 and 1999, respectively, comprised
principally of high-grade commercial paper, U.S. Treasury bills and other
investments with original maturities of one year or less. PXRE also held
$116,642,000 and $113,476,000 of limited partnership and trading portfolio
assets at December 31, 2000 and 1999, respectively, accounted for under the
equity method or at fair market value, as follows:
2000 1999
-------------------------- --------------------------
$ Ownership % $ Ownership %
--- ----------- --- -----------
Mariner Select L.P. 26,861,292 45.1 27,229,000 47.35
Other 89,781,030 0.1 to 34.7 86,246,717 0.3 to 36.6
----------- -----------
Total 116,642,322 113,475,717
=========== ===========
Total net assets and net income of the Mariner Select L.P. Fund
amounted to $59,544,000 and $4,915,000 in 2000, and $57,511,000 and
$16,795,000 in 1999. Mariner Partners L.P., which is included in short-term
investments, has total net assets and net income of $67,281,000 and $7,242,000
in 2000, and $41,493,000 and $7,250,000 in 1999.
F-13
Restricted Assets
-----------------
Under the terms of certain reinsurance agreements, irrevocable letters
of credit in the amount of $209,000 were issued at December 31, 2000, in respect
of reported loss reserves and unearned premiums. Investments with a par value of
$503,000 have been pledged as collateral with issuing banks. In addition,
securities with a par value of $8,422,000 at December 31, 2000 were on deposit
with various state insurance departments in order to comply with insurance laws.
PXRE, in connection with the startup of PXRE Ltd.'s Lloyd's Syndicate
No. 1224, has placed on deposit $46,587,000 par value of United States
government securities and municipal securities as collateral for Lloyd's of
London. In addition, PXRE issued a letter of credit for the benefit of Lloyd's
of London in the amount of $15,355,000. The letter of credit is collateralized
by municipal bonds of approximately $17,835,000. All invested assets of PXRE
Ltd's Syndicate 1224 amounting to $18,908,000 at December 31, 2000 are
restricted from being paid as a dividend for at least three years.
PXRE has $25 million in commitments for funding certain investments in
certain limited partnerships of which approximately $23 million has been funded
at December 31, 2000.
4. Notes Payable and Credit Arrangements
In January 1997, PXRE Corporation issued $100,000,000 of 8.85% TRUPS.
The fair value of the TRUPS'sm' is $77,583,000 and $87,678,000 at
December 31, 2000 and 1999, respectively. Interest is payable on the
TRUPS'sm' semi-annually. The notes are redeemable on or after February 1,
2007, at the option of PXRE Corporation, initially at 104.180% declining to
100.418% at February 1, 2016, and 100% thereafter.
On December 30, 1998, PXRE Corporation entered into a Credit Agreement
with First Union National Bank ("First Union") to arrange and syndicate for it a
revolving credit facility of up to $75 million. At December 31, 1998, $50
million of the total $75 million was underwritten and committed to by First
Union. The additional $25 million of the revolving credit facility was drawn
down October 6, 1999, and PXRE Group Ltd. and PXRE (Barbados) Ltd. were added as
guarantors under the Credit Agreement. First Union syndicated the $75 million
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"). The $75
million borrowings under the Credit Agreement bear interest at First Union's
base rate or at the financial institution's LIBOR rate for periods of 30, 60, 90
or 180 days plus a 1% credit margin. The interest rate charged at December 31,
2000 and 1999, was 7.66% and 6.94%, respectively. In addition, the Credit
Agreement requires PXRE and certain subsidiaries, where applicable, to maintain
certain financial ratios including minimum fixed charge coverage, maximum
consolidated debt to total capitalization, minimum statutory capital and
surplus, and minimum risk based capital ratios. Commitments under this Credit
Agreement terminate on March 31, 2005, and are subject to annual reductions of
$10 million commencing March 31, 2000, and $25 million on March 31, 2005. At
December 31, 2000 and 1999, $65 million and $75 million was outstanding under
this Credit Agreement.
PXRE Corporation entered into an interest rate swap agreement with
First Union that locks in the interest rate on the $50 million portion of the
loan to 5.34% plus a 1.00% credit margin or 6.34%. The swap agreement coincides
with the maturity of the Credit Agreement. The fair value of the loan and the
interest rate swap agreement at December 31, 2000 and 1999, was approximately
$64,509,000 and $72,908,000, respectively.
F-14
Interest paid, including the minority interest in consolidated
subsidiary, was $13,653,000, $12,705,000, and $11,687,000 for 2000, 1999 and
1998, respectively.
5. 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. PXRE 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 PXRE, from any Bermuda taxes computed on profits,
income or any capital asset, gain or appreciation, or any tax in the nature of
estate duty or inheritance tax, at least until the year 2016.
PXRE does not consider itself to be engaged in a trade or business in
the United States and accordingly does not expect to be subject to direct United
States income taxation.
The United States subsidiaries of PXRE file a consolidated U.S. federal
income tax return.
Pretax (loss) income from operations before cumulative effect of
accounting change for the years ended December 31, was taxed under the following
jurisdictions;
2000 1999 1998
----------- ----------- ---------
U.S. $(27,713,000) $(43,808,000) $2,316,000
Bermuda 4,730,000 (11,437,000) 0
Barbados 177,000 1,027,000 0
------------ ------------ ----------
Total $(22,806,000) $(54,218,000) $2,316,000
============ ============ ==========
F-15
The components of the benefit for income taxes for the years ended
December 31, 2000, 1999 and 1998, are as follows:
2000 1999 1998
---------- ---------- ----------
Current
U.S. $ (3,891,000) $(12,819,000) $ 3,321,000
State and local 0 0 21,000
Foreign 137,000 2,314,000 0
------------ ------------ -----------
Subtotal (3,754,000) (10,505,000) 3,342,000
Deferred U.S. (8,253,000) (2,270,000) (2,396,000)
Deferred foreign 0 0 (2,152,000)
------------ ------------ -----------
Income tax benefit
before extraordinary loss and
change in accounting (12,007,000) (12,775,000) (1,206,000)
Income tax benefit from
extraordinary loss 0 0 (454,000)
Income tax benefit from change in
accounting 0 (374,000) 0
------------ ------------ -----------
Income tax benefit $(12,007,000) $(13,149,000) $(1,660,000)
============ ============ ===========
Income taxes paid $ 637,000 $ 1,930,000 $10,900,000
============ ============ ===========
The Company plans to carryback $5 million of the 2000 operating loss to
1998 with the remaining amount carried forward to future periods. The entire
1999 net operating loss was carried back to 1997.
The significant components of the net deferred income tax asset (liability) are
as follows:
Deferred tax asset: 2000 1999
---------- ---------
Discounted reserves and unearned
Premiums $ 7,132,000 $ 7,177,000
U.K. losses not currently deductible 10,377,000 6,478,000
Unrealized depreciation on investments 174,000 3,550,000
Deferred compensation and benefits 1,811,000 1,020,000
Credit carryforwards 2,443,000 1,433,000
Other, net 258,000 265,000
----------- -----------
Total deferred income tax asset $22,195,000 $19,923,000
----------- -----------
Deferred income tax liability:
Deferred acquisition costs (2,037,000) (1,969,000)
Unrealized appreciation on investments (2,998,000) (3,509,000)
Investments and unrealized foreign
exchange (39,000) (1,587,000)
Market discount (1,490,000) (1,181,000)
Other, net (629,000) (146,000)
----------- -----------
Total deferred income tax liability (7,193,000) (8,392,000)
----------- -----------
Net deferred income tax asset $15,002,000 $11,531,000
=========== ===========
Management has reviewed PXRE's deferred tax asset, and has concluded that it is
realizable and no valuation allowance is necessary.
F-16
The benefit for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate of
35% to pretax income from operations as a result of the following differences.
2000 1999 1998
----------- ----------- ----------
Statutory U.S. rate $ (7,982,000) $(18,976,000) $ 357,000
Tax exempt interest (1,316,000) (1,781,000) (1,231,000)
Amortization of intangibles 0 (753,000) (753,000)
Reciprocal shares 0 1,815,000 0
Foreign tax credit
(recoverable)/expiration (670,000) 920,000 0
Bermuda (income)/loss (1,655,000) 4,003,000 0
Foreign Income - Barbados (62,000) (359,000) 0
Barbados tax 137,000 2,314,000 0
Other net (459,000) (332,000) (33,000)
------------ ------------ -----------
Total benefit $(12,007,000) $(13,149,000) $(1,660,000)
============ ============ ===========
6. Stockholders' Equity and Dividend Restrictions
Stockholders' Equity
--------------------
PXRE was incorporated on June 1, 1999, as a Bermuda holding company and
a wholly owned subsidiary of PXRE Purpose Trust, a purpose trust established
under the laws of Bermuda.
In connection with the reorganization, PXRE repurchased for $1.00 per
share, 100% of the common shares owned by PXRE Purpose Trust and each
outstanding share of PXRE Corporation common stock (other than shares held by
PXRE Corporation and its subsidiaries) was converted into one common share of
PXRE. In addition, PXRE retired all of its treasury shares.
On August 9, 1999, PXRE's Board of Directors unanimously approved a
resolution to increase the number of authorized shares from 12,000 to 60,000,000
consisting of 50,000,000 common shares and 10,000,000 preferred shares. In
addition, PXRE's Board of Directors authorized an increase in par value of its
common shares from $0.01 per share to $1.00 per share.
The Company's Bye-laws restrict the ownership and voting rights of any
shareholder who directly or indirectly would own more that 9.9% of the
outstanding common shares of the Company. The restriction requires the prompt
disposition of any shares held in violation of the provision and limits the
voting power of a shareholder with more than 9.9% of the outstanding shares to
the voting power of a shareholder with 9.9% or less of the outstanding common
shares.
F-17
Dividend Restrictions
---------------------
The Insurance Department of the State of Connecticut, in which PXRE
Reinsurance is domiciled, recognizes as net income and surplus (stockholders'
equity) those amounts determined in conformity with statutory accounting
practices ("SAP") prescribed or permitted by the department, which differ in
certain respects from U.S. GAAP. The amount of statutory capital and surplus at
December 31 and statutory net income of PXRE Reinsurance for the years then
ended, as filed with insurance regulatory authorities are as follows:
2000 1999 1998
----------- ----------- -----------
(Unaudited)
PXRE Reinsurance
Statutory capital and surplus $348,858,000 $399,007,000 $447,229,000
Statutory net (loss) income $(14,569,000) $ (1,327,000) $ 4,835,000
PXRE Reinsurance is subject to state regulatory restrictions, which
limit the maximum amount of annual dividends or other distributions, including
loans or cash advances, available to stockholders without prior approval of the
Insurance Commissioner of the State of Connecticut.
As of December 31, 2000, the maximum amount of dividends and other
distributions which may be made by PXRE Reinsurance during 2001 without prior
approval is limited to approximately $34,886,000. Accordingly, the remaining
amount of its capital and surplus is considered restricted. Under the terms of
the Credit Agreement, dividends to PXRE shareholders in any year are limited as
described in Note 4 with respect to the financial covenants.
PXRE Reinsurance prepares its statutory financial statements in
conformity with accounting practices prescribed or permitted by the State of
Connecticut. Effective January 1, 2001, the State of Connecticut required that
insurance companies domiciled in the State of Connecticut prepare their
statutory basis financial statements in accordance with the NAIC Accounting
Practices and Procedures manual - Version effective January 1, 2001, subject to
any deviations prescribed or permitted by the State of Connecticut Insurance
Commissioner. Accounting changes adopted to conform to the provisions of the
NAIC Accounting Practices and Procedures manual - Version effective January 1,
2001, are reported as changes in accounting principles. The cumulative affect of
changes in accounting principles is reported as an adjustment to unassigned
funds (surplus) in the period of the change in accounting principle. The
cumulative effect is the difference between the amount of capital and surplus at
the beginning of the year and the amount of capital and surplus that would have
been reported at that date if the new accounting principles had been applied
retroactively for all prior periods. PXRE is currently assessing the effect of
adopting this statement.
F-18
7. Earnings Per Share
A reconciliation of income before extraordinary item and change in
accounting, and shares, which affect basic and diluted earnings per share, is as
follows:
2000 1999 1998
----------- ----------- -----------
(Loss) income available to common stockholders:
(Loss) income before extraordinary loss and
change in accounting $(10,799,973) $(41,443,353) $ 3,521,821
Extraordinary loss 0 0 (843,000)
Change in accounting 0 (695,278) 0
------------ ------------ -----------
Net (loss) income available to stockholders $(10,799,973) $(42,138,631) $ 2,678,821
============ ============ ===========
Weighted average shares of common stock
outstanding:
Weighted average common shares
outstanding (basic) 11,393,652 11,568,494 13,339,479
Equivalent shares of stock options 0 0 62,218
Equivalent shares of restricted stock 0 0 50,034
------------ ------------ -----------
Weighted average common equivalent shares
(diluted) 11,393,652 11,568,494 13,451,731
============ ============ ===========
Per share amounts:
Basic
(Loss) income before extraordinary loss and
change in accounting $ (0.95) $ (3.58) $ .26
Net (loss) income $ (0.95) $ (3.64) $ .20
Diluted:
(Loss) income before extraordinary loss and
change in accounting $ (0.95) $ (3.58) $ .26
Net (loss) income $ (0.95) $ (3.64) $ .20
F-19
8. Employee Benefits
Benefit Plans
-------------
Effective January 1, 1993, PXRE adopted a non-contributory defined
benefit pension plan covering all U.S. employees with one year or more of
service and who had attained age 21. Benefits are generally based on years of
service and compensation. PXRE funds the plan in amounts not less than the
minimum statutory funding requirement nor more than the maximum amount that can
be deducted for U.S. income tax purposes.
PXRE also sponsors a supplemental executive retirement plan. This plan
is non-qualified and provides certain key employees benefits in excess of normal
pension benefits.
The net pension expenses for the company-sponsored plans included the
following components at December 31, based on a January 1 valuation date (the
latest actuarial estimate):
2000 1999 1998
--------- ------- -------
Components of net periodic cost
-------------------------------
Service cost $ 680,756 $455,892 $308,916
Interest cost 467,579 352,348 247,025
Expected return on assets (79,371) (44,166) (29,802)
Amortization of prior service costs 212,166 110,301 94,147
Recognized net actuarial costs 30,536 75,280 8,734
---------- -------- --------
Net periodic benefit costs $1,311,666 $949,655 $629,020
========== ======== ========
F-20
The following table sets forth the funded status of the plans and
amounts recognized in the consolidated balance sheets:
2000 1999
---------- ---------
Reconciliation of benefit obligation:
Benefit obligation January 1 $ 5,166,894 $ 4,297,331
Service cost 680,756 455,892
Interest cost 467,579 352,348
Amendments 980,637 199,305
Actuarial loss/(gain) 392,607 (137,982)
----------- -----------
Benefit obligation December 31 $ 7,688,473 $ 5,166,894
=========== ===========
Reconciliation of plan assets:
Fair value of plan assets as of January 1 $ 802,787 $ 453,518
Return on plan assets 86,876 40,327
Employer contributions 672,215 308,942
----------- -----------
Fair value of plan assets December 31 $ 1,561,878 $ 802,787
=========== ===========
Reconciliation of funded status:
Funded status $(6,126,595) $(4,364,107)
Unrecognized prior service cost 2,024,821 1,256,350
Unrecognized net loss 631,823 277,257
----------- -----------
Prepaid cost $(3,469,951) $(2,830,500)
=========== ===========
Weighted average assumptions as of December 31:
Discount rate 7.50% 7.75%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 5.00% 5.00%
The Brussels and London operations cover employees under a defined
contribution type plan. The provision for such plans is $454,000, $326,000 and
$246,000 for 2000, 1999 and 1998 respectively.
Employee Stock Purchase Plan
----------------------------
PXRE maintains an Employee Stock Purchase Plan under which it has
reserved 73,498 common shares for issuance to PXRE personnel. The price per
share is the lesser of 85% of the fair market value at either the date granted
or the date exercised.
F-21
9. Stock Options and Grants
In 1988, PXRE adopted a stock option plan (the "1988 Stock Option
Plan") which provides for the grant of incentive stock options and non-qualified
stock options to officers and key employees. Options granted under the 1988
Stock Option Plan have a term of 10 years and become exercisable in four equal
annual installments. The exercise price for options granted pursuant to the plan
must be equal to or exceed the fair market value of the common shares on the
date the option is granted. In 1992, the Board of Directors resolved to freeze
the 1988 Stock Option Plan as of December 31, 1992. At December 31, 2000 and
1999, 36,323 and 73,380 options are exercisable under this plan.
In 1992, a Restated Employee Annual Incentive Bonus Plan was approved.
Incentive compensation to employees is based in part on return on equity
compared to a target return on equity and in part at the discretion of the
Restated Bonus Plan Committee.
In 1992, PXRE adopted a 1992 Officer Incentive Plan that provides for
the grant of incentive stock options, non-qualified stock options and awards of
shares subject to certain restrictions. Options granted under the plan have a
term of 10 years and generally become exercisable in four equal annual
installments commencing one year from the date of grant. The exercise price for
the incentive shares options must be equal to or exceed the fair market value of
the common shares on the date the option is granted. The exercise price for the
non-qualified options may not be less than the fair market value of the common
stock on the date of grant. At December 31, 2000 and 1999, options for 281,614
and 256,631 shares, respectively, were exercisable under this plan.
In 2000, 1999, and 1998, $3,750,000, $3,170,000, and $1,240,000,
respectively was incurred under these plans, including 30% of any bonus granted
to certain levels of employees paid in restricted shares which vest in 36
months.
Information regarding the option plans described above is as follows:
Number Option Price
of Shares Per Share Range
--------- ---------------
Outstanding at December 31, 1997: 390,688
Options granted 91,586 $ 30.72 - $32.94
Options exercised 4,626 $ 10.875 - $24.88
Options cancelled 4,624 $ 24.75 - $26.69
---------
Outstanding at December 31, 1998: 473,024 $ 8.75 - $32.94
Options granted 0 $0
Options exercised 13,294 $ 10.625 - $11.50
Options cancelled 7,256 $ 24.75 - $32.938
---------
Outstanding at December 31, 1999: 452,474 $ 8.75 - $32.938
Options granted 900,450 $12.50
Options exercised 37,057 $ 8.75
Options cancelled 65,643 $ 12.50 - $32.938
---------
Outstanding at December 31, 2000 1,250,224
=========
In 1995, PXRE adopted a non-employee Director Stock Option Plan, which
provided for an annual grant of 1,000 options per director from 1995 to 1996 and
provides for 3,000 options per director from 1997 to 1999, 5,000 options and
1,000 restricted shares per director from 2000 to 2005 inclusive as amended.
Options granted under the plan have a term of 10 years from the
F-22
date of grant and are vested and exercisable in three equal annual installments
commencing one year from the date of grant. The exercise price of the options is
the fair market value on the date of grant. As of December 31, 2000, options for
250,000 shares were authorized and 71,770 were exercisable.
Beginning January 1, 1998, PXRE allowed its directors to elect to
convert their Board of Directors retainer fee to options. At December 31, 2000,
ten year options for 101,192 shares were granted at prices ranging from $12.812
to $33.455 which are 100% vested and immediately exercisable.
Total authorized common shares reserved for grants of stock options and
restricted stock under the above plans is 2,996,960 shares. Total shares of
490,899 relate to stock options which are vested and exercisable at December 31,
2000, at exercise prices between $10.875 and $33.455. All options become
exercisable upon a change of control of PXRE as defined by the plans.
As permitted by SFAS No. 123, PXRE has elected to continue to account
for its stock option plans under the accounting rules prescribed by APB 25,
under which no compensation costs are recognized as an expense. Had compensation
costs for the stock options been determined using the fair value method of
accounting as recommended by SFAS No. 123, net income and earnings per share for
2000, 1999 and 1998 would have been reduced to the following pro forma amounts:
2000 1999 1998
--------------- --------------- -------------
Net income
As reported $ (10,799,793) $ (42,138,631) $ 2,678,821
Pro forma (12,138,638) (42,612,003) 1,987,264
Basic income per share
As reported $ (0.95) $ (3.64) $ 0.20
Pro forma (1.07) (3.68) 0.15
Diluted income per share
As reported $ (0.95) $ (3.64) $ 0.20
Pro forma (1.07) (3.68) 0.15
The fair value of each option granted in 2000, 1999 and 1998 was
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions:
2000 1999 1998
------ ------ ------
Risk-free rate 5.23% 6.72% 5.07%
Dividend yield 1.42% 1.85% 4.01%
Volatility factor 30.65% 26.71% 24.94%
Weighted average expected life 5 5 5
F-23
A summary of the status of the employee and director stock option plans
at December 31, 2000 and 1999, and changes during the years then ended is
presented below:
2000 1999
----------------------------- -------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
--------- -------------- ------- --------------
Options outstanding at beginning of year 599,068 24.80 561,475 24.58
Options granted 989,048 12.61 58,146 25.87
Options exercised 37,057 8.75 13,294 11.11
Options cancelled 65,643 20.23 7,259 28.62
--------- -------
Options outstanding at end of year 1,485,416 17.27 599,068 24.80
--------- -------
Options exercisable at end of year 490,899 23.74 421,202 21.33
--------- -------
Weighted average fair value per share of options granted 5.36 10.68
Options outstanding at December 31, 2000 included:
Weighted Weighted Weighted
Range Number Outstanding Average Average Number Exercisable at Average
Exercise Prices at December 31, 2000 Remaining Life Exercise Price December 31, 2000 Exercise Price
- - --------------- -------------------- -------------- -------------- --------------------- --------------
$10.88 to $17.70 1,020,884 8.87 12.74 100,864 12.89
$23.25 to $33.46 464,532 5.52 27.23 390,035 26.55
In 1990, PXRE adopted a non-employee Director Deferred Stock Plan
granting 2,000 shares to each non-employee Board member at the time specified in
the plan. At December 31, 2000, the 10,000 shares granted to eligible
non-employee Board members will be issued to Board members at or after their
termination, depending on whether such director elected to defer receipt of
such shares following termination.
F-24
10. 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. Segment information
for 1998 was restated to be consistent with 1999 segments.
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.
F-25
Net Premiums Written
(thousands except percentages)
2000 1999 1998
------------------- ------------------ ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Catastrophe and Risk Excess
North American $ 20,354 $ 26,704 $ 12,795
International 74,256 63,957 58,595
Excess of loss cessions (15,489) (18,883) (3,938)
--------- --------- ---------
79,121 46% 71,778 52% 67,452 76%
--------- --------- ---------
Casualty
North American 26,766 13,148 650
International 14,876 12,851 4,433
--------- --------- ---------
41,642 24 25,999 19 5,083 6
--------- --------- ---------
Structured/Finite Business
North American 0 0 0
International 20,245 0 0
--------- --------- ---------
20,245 12 0 0 0 0
--------- --------- ---------
Other Lines
North American 1,209 12,073 2,054
International 30,484 28,995 14,105
--------- --------- ---------
31,693 18 41,068 29 16,159 18
--------- --- --------- --- --------- ---
Total $ 172,701 100% $138,845 100% $ 88,694 100%
========= ========= =========
Net Premiums Earned
(thousands except percentages)
2000 1999 1998
------------------- ------------------ ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Catastrophe and Risk Excess
North American $ 20,517 $ 26,155 $ 13,561
International 73,378 61,241 63,830
Excess of loss cessions (19,115) (14,958) (2,869)
--------- --------- ---------
74,780 47% 72,438 56% 74,522 81%
--------- --------- ---------
Casualty
North American 19,062 11,593 (152)
International 13,865 9,794 2,207
--------- --------- ---------
32,927 21 21,387 17 2,055 2
--------- --------- ---------
Structured /Finite Business
North American 0 0 0
International 17,791 0 0
--------- --------- ---------
17,791 11 0 0 0 0
--------- --------- ---------
Other Lines
North American 1,308 11,296 3,234
International 33,400 23,383 12,575
--------- --------- ---------
34,708 21 34,679 27 15,809 17
--------- --- --------- --- --------- ---
Total $ 160,206 100% $ 128,504 100% $ 92,386 100%
========= ========= =========
F-26
Underwriting Operations
(in thousands except percentages)
2000 1999 1998
------------------- ------------------ ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Catastrophe and Risk Excess
North American $12,701 $(31,591) $ 6,970
International (2,553) (32,039) 7,081
Excess of loss cessions (11,265) 15,476 8,372
------- -------- -------
(1,117) 15% (48,154) 87% 22,423 141%
------- -------- -------
Casualty
North American (347) (279) (409)
International 100 (242) 87
------- -------- -------
(247) 3 (521) 1 (322) (2)
------- -------- -------
Structured/Finite Business
North American 0 0 0
International 1,661 411 0
------- -------- -------
1,661 (22) 411 (1) 0 0
------- -------- -------
Other Lines
North American (2,746) (715) (1,442)
International (4,980) (6,166) (4,794)
------- -------- -------
(7,726) 104 (6,881) 13 (6,236) (39)
------- --- -------- --- ------- ---
Total $(7,429) 100% $(55,145) 100% $15,865 100%
======= ======== =======
The following table reconciles the underwriting operations for the
operating segments to income before tax as reported in the consolidated
statements of operations and comprehensive income:
(in thousands) 2000 1999 1998
------- ------- -------
Underwriting (loss) profit $ (7,429) $(55,145) $ 15,865
Net investment income 30,037 47,173 19,612
Net realized investment gains (losses) 3,191 (3,766) (3,862)
Interest expense (4,778) (3,915) (1,395)
Minority interest in consolidated subsidiary (8,875) (8,790) (8,928)
Operating expenses (35,407) (30,052) (19,313)
Other income 455 277 336
-------- -------- --------
(Loss) income before income taxes,
cumulative effect of accounting change,
and extraordinary item $(22,806) $(54,218) $ 2,315
======== ======== ========
F-27
11. Quarterly Consolidated Results of Operations (Unaudited)
The following are unaudited quarterly results of operations on a
consolidated basis for the years ended December 31, 2000 and 1999. Quarterly
results necessarily rely heavily on estimates. This and certain other factors,
such as catastrophic losses, call for caution in drawing specific conclusions
from quarterly results. Due to changes in the number of average shares
outstanding, quarterly earnings per share may not add to the total for the year.
The common share price ranges are bid quotations as reported by the New
York Stock Exchange.
Results for the quarter ended September 30, 1999 and prior, includes
results of operations of PXRE prior to the redomestication of PXRE Corporation
and subsidiaries.
F-28
Year 2000
--------------------
(Three Months Ended)
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Net premiums written $56,885,000 $ 43,713,000 $ 36,474,000 $35,629,000
=========== ============ ============ ===========
Revenues:
Net premiums earned $35,741,576 $ 43,639,562 $ 40,508,153 $40,316,636
Net investment income 11,943,818 5,738,651 6,778,407 5,575,932
Realized investment (losses) gains (535,862) 73,765 (127,731) 3,780,685
Management fees 1,794,311 1,778,920 725,564 1,184,894
----------- ------------ ------------ -----------
Total revenues 48,943,843 51,230,898 47,884,393 50,858,147
----------- ------------ ------------ -----------
Losses and expenses:
Losses and loss expenses incurred 23,695,657 68,659,875 19,114,520 26,294,886
Commissions and brokerage 7,861,401 8,875,475 9,045,722 9,116,385
Other operating expenses 9,805,047 8,593,333 8,229,302 8,779,117
Interest expense 1,280,045 1,149,198 1,176,581 1,171,971
Minority interest in consolidated
subsidiary 2,218,632 2,218,719 2,218,899 2,218,989
----------- ------------ ------------ -----------
Total expenses 44,860,782 89,496,600 39,785,024 47,581,348
----------- ------------ ------------ -----------
Income (loss) before income taxes and
change in accounting 4,083,061 (38,265,702) 8,099,369 3,276,799
Income tax (provision) benefit (74,500) 14,738,500 (4,716,000) 2,058,500
----------- ------------ ------------ -----------
Net income (loss) $ 4,008,561 $(23,527,202) $ 3,383,369 $ 5,335,299
=========== ============ ============ ===========
Basic earnings (loss) per common
share:
Net income (loss) $ 0.35 $ (2.07) $ 0.30 $ 0.47
=========== ============ ============ ===========
Average shares outstanding 11,384,248 11,383,097 11,396,150 11,436,722
=========== ============ ============ ===========
Diluted earnings (loss) per common
share:
Net income (loss) $ 0.35 $ (2.07) $ 0.29 $ 0.45
=========== ============ ============ ===========
Average shares outstanding 11,534,771 11,383,097 11,653,279 11,766,290
=========== ============ ============ ===========
Dividends paid per common share $ 0.06 $ 0.06 $ 0.06 $ 0.06
Price Range of Common Share:
High $ 17.00 $ 17.00 $ 16.00 $ 17.125
Low $ 11.8125 $ 13.50 $ 12.625 $ 12.625
F-29
Year 1999
--------------------
(Three Months Ended)
March 31 June 30 September 30 December 31
----------- ----------- ------------ ------------
Net premiums written $38,828,000 $28,774,000 $31,960,000 $ 39,283,000
=========== =========== =========== ============
Revenues:
Net premiums earned $23,830,950 $28,694,483 $32,458,734 $ 43,518,943
Net investment income 7,200,592 10,922,120 9,466,325 19,583,579
Realized investment (losses) gains (2,576,011) 1,193,499 (2,194,302) (189,002)
Management fees 896,616 403,699 528,151 1,761,871
----------- ----------- ----------- ------------
Total revenues 29,352,147 41,213,801 40,258,908 64,675,391
----------- ----------- ----------- ------------
Losses and expenses:
Losses and loss expenses incurred 18,898,062 17,969,860 29,327,207 93,064,284
Commissions and brokerage 6,406,928 6,138,823 7,871,366 7,284,527
Other operating expenses 6,237,793 7,079,920 7,389,761 9,344,836
Interest expense 831,285 842,700 885,254 1,355,859
Minority interest in consolidated
subsidiary 2,108,441 2,218,328 2,220,046 2,243,291
----------- ----------- ----------- ------------
Total expenses 34,482,509 34,249,631 47,693,634 113,292,797
----------- ----------- ----------- ------------
(Loss) income before income taxes and
change in accounting (5,130,362) 6,964,170 (7,434,726) (48,617,406)
Income tax benefit (provision) 2,368,000 (1,918,000) 1,196,130 11,128,841
----------- ----------- ----------- ------------
(Loss) income before change in
accounting (2,762,362) 5,046,170 (6,238,596) (37,488,565)
Cumulative effect of accounting
change, net of $374,381 tax benefit 0 0 0 (695,278)
----------- ----------- ----------- ------------
Net (loss) income $(2,762,362) $ 5,046,170 $(6,238,596) $(38,183,843)
=========== =========== =========== ============
Basic (loss) earnings per common
share:
Net (loss) income $ (0.23) $ 0.44 $ (0.55) $ (3.28)
=========== =========== =========== ============
Average shares outstanding 11,889,636 11,439,018 11,441,979 $ 11,449,872
=========== =========== =========== ============
Diluted (loss) earnings per common
share:
Net (loss) income $ (0.23) $ 0.44 $ (0.55) $ (3.34)
=========== =========== =========== ============
Average shares outstanding 11,889,636 11,584,551 11,441,979 11,449,872
=========== =========== =========== ============
Dividends paid per common share $ 0.26 $ 0.26 $ 0.06 $ 0.06
Price Range of Common Share:
High $ 26.25 $ 21.25 $ 19.0625 $ 14.50
Low $ 18.00 $ 16.00 $ 14.3125 $ 10.00
F-30
12. Contingencies
PXRE Corporation entered into weather option agreements in May 1999
with two counterparties. In April 2000 these counterparties submitted invoices
to PXRE Corporation in the aggregate sum of $8,252,500 seeking payment under the
weather option agreements, which invoices have been paid. PXRE Corporation
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 Corporation 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 Corporation disagrees with Terra Nova's denial and has
filed suit against Terra Nova in the United States District Court for the
District of New Jersey. Trial of this suit is presently scheduled to commence on
April 10, 2001. The aggregate sum of $8,252,500 is included in Other Assets;
management has concluded that it is realizable and no valuation allowance is
necessary.
F-31
Parent Company Information Schedule II
PXRE Group Ltd.'s (successor company registrant to PXRE Corporation) summarized
financial information (parent company only) is as follows:
December 31, December 31,
2000 1999
------------ -----------
BALANCE SHEET
Assets
Cash $ 1,650,425 $ 391,934
Receivable from subsidiaries 651,002 1,066,356
Equity in subsidiaries 258,589,337 263,737,568
Other assets 497,217 0
------------ ------------
Total assets $261,387,981 $265,195,858
============ ============
Liabilities
Loan from subsidiary $ 1,000,000 $ 1,877,000
Other liabilities 1,001,700 39,875
------------ ------------
Total Liabilities 2,001,700 1,916,875
------------ ------------
Stockholders' equity 259,386,281 263,278,983
------------ ------------
Total liabilities and stockholders' equity $261,387,981 $265,195,858
============ ============
INCOME STATEMENT
Years ended December 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
Investment income (loss) $ 7,828 $ 6,361 $ (1,839,856)
Realized (loss)/gain on investment 0 0 1,458,142
Management fee 168,750 44,178 300,380
Interest expense 0 0 (11,046,269)
Other operating expenses (1,891,545) (1,105,792) (36,349)
------------ ------------ ------------
Loss before tax benefit, cumulative effect
of accounting change and extraordinary
item (1,714,967) (1,055,253) (11,163,952)
Income tax benefit 0 0 5,505,896
------------ ------------ ------------
(1,714,967) (1,055,253) (5,658,056)
Equity in earnings of subsidiary (9,085,003) (40,388,100) 9,179,877
------------ ------------ -----------
Net (loss) income before cumulative effect (10,799,970) (41,443,353) 3,521,821
of accounting change and extraordinary loss
Cumulative effect of accounting change, net of tax 0 695,278 0
Extraordinary loss, net of tax 0 0 843,000
------------ ------------ -----------
Net (loss) income $(10,799,970) $ (42,138,631) $ 2,678,821
============ ============= ============
CASH FLOW STATEMENT
Cash from operating activities:
Net (loss) income $(10,799,970) $ (42,138,631) $ 2,678,821
Adjustments to reconcile net income to cash provided by
operating activities:
Equity in earnings of subsidiaries 9,085,003 41,083,378 (9,179,877)
Cash dividends from subsidiaries 2,013,000 36,235,000 57,388,000
Contribution of capital to subsidiaries 0 (35,000,000) (49,745,731)
Investment income receivable 0 0 377,245
Loan from subsidiary 0 (1,539,886) 0
Intercompany accounts 415,354 2,317,744 2,053,111
Deferred income taxes 0 6,741,946 (1,580,912)
Income tax recoverable 0 10,402,439 (1,907,459)
Other 3,005,502 (3,174,770) (4,716,339)
------------ ------------ ------------
Net cash provided (used) by operating activities 3,718,889 14,927,220 (4,633,141)
------------ ------------ ------------
Cash flow from investing activities:
Investment in equity of PXRE Trading Corporation 0 0 3,444,305
Net change in short-term investments 0 1,012,031 4,114,797
Equity securities redomesticated/disposed 0 3,069,554 0
Cost of equity securities acquired 0 0 (45,688)
Fixed maturity investments matured/disposed 0 0 18,482,376
Net change in other invested assets 0 5,490,561 9,193,726
------------ ------------ ------------
Net cash provided (used) by investing activities 0 9,572,146 35,189,516
------------ ------------ ------------
Cash flow from financing activities:
Proceeds from issuance of common stock 686,943 505,796 233,032
Cash dividends paid to common stockholders (2,831,123) (7,629,925) (13,585,333)
Repurchase of debt 0 0 (27,689,000)
Proceeds from issuance of debt 0 0 50,000,000
Cost of stock repurchased (316,218) 0 0
Cost of treasury stock 0 (17,215,460) (39,728,564)
------------ ------------ ------------
Net cash (used) provided by financing activities (2,460,398) (24,339,589) (30,769,865)
------------ ------------ ------------
Net change in cash 1,258,491 159,777 (213,490)
Cash, beginning of period 391,934 232,157 445,647
------------ ------------ ------------
Cash, end of period $ 1,650,425 $ 391,934 $ 232,157
============ ============ ============
F-32
Schedule III
PXRE GROUP AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Column A Column B Column C Column D Column E Column F Column G
-------- -------- -------- -------- -------- -------- --------
Future
policy
benefits, Other
losses, policy
Segment- Deferred claims and claims and
property policy loss Unearned benefits Net
and acquisition expenses premiums payable Premium investment
casualty cost (caption (caption (caption revenue income
insurance (caption 7) 13-a-1) 13-a-2) 13-a-3) (caption 1) (caption 2)
--------- ----------- ------- ------- ------- ----------- -----------
2000 North American $ 40,887,000
International 138,434,000
Corporate Wide (19,115,000)
--------------------------------------------------------------------------------------------
Total $9,697,000 $251,620,000 $49,548,000 $ 0 $160,206,000 $30,037,000
1999 North American $ 49,044,000
International 94,418,000
Corporate Wide (14,958,000)
--------------------------------------------------------------------------------------------
Total $7,810,000 $261,551,000 $42,219,000 $ 0 $128,504,000 $45,185,000
1998 North American $ 16,643,000
International 78,612,000
Corporate Wide (2,869,000)
--------------------------------------------------------------------------------------------
Total $4,123,000 $102,592,000 $20,541,000 $ 0 $ 92,386,000 $19,612,000
Column H Column I Column J Column K
-------- -------- -------- --------
Benefits, Amortiza-
claims, tion of
losses and deferred
settlement policy Other
expenses acquisition operating Premiums
(caption 4) costs expense written
----------- ----- ------- -------
2000 $ 23,560,000 $ 8,236,000 $ 48,329,000
121,445,000 25,684,000 139,861,000
(7,240,000) 978,000 (15,489,000)
--------------------------------------------------------------
$ 137,765,000 $34,898,000 $35,407,000 $172,701,000
1999 $ 91,589,000 $ 7,629,000 $ 51,925,000
99,237,000 15,899,000 105,803,000
(31,567,000) 4,174,000 (18,883,000)
--------------------------------------------------------------
$ 159,259,000 $27,702,000 $30,052,000 $138,845,000
1998 $ 36,531,000 $ 6,697,000 $ 15,499,000
32,903,000 12,213,000 77,133,000
(11,640,000) 1,653,000 (3,938,000)
--------------------------------------------------------------
$ 57,794,000 $20,563,000 $19,313,000 $ 88,694,000
Schedule VI
PXRE GROUP AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
Column A Column B Column C Column D Column E Column F Column G
-------- -------- -------- -------- -------- -------- --------
Reserves for
unpaid
Deferred claims Discount,
Affiliation policy and claim if any Net
with acquisition adjustment deducted in Unearned Earned investment
registrant costs expenses Column C premiums premiums income
---------- ----- -------- -------- -------- -------- ------
2000 Consolidated $ 9,697,000 $ 251,620,000 $ 0 $49,548,000 $ 160,206,000 $ 30,037,000
1999 Consolidated 7,810,000 261,551,000 0 42,219,000 128,503,000 45,185,000
1998 Consolidated 4,123,000 102,592,000 0 20,541,000 92,386,000 19,612,000
Column H Column I Column J Column K
-------- -------- -------- --------
Claims and Claim Amortiza-
adjustment expenses tion of Paid
incurred related to deferred claims
(1) (2) policy and claim
Current Prior acquisi- adjustment Premiums
year years tion costs expenses written
---- ----- ---------- -------- -------
$ 79,534,000 $ 58,231,000 $34,898,000 $146,352,000 $ 172,701,000
139,478,000 19,781,000 27,702,000 66,308,000 138,845,000
58,326,000 (532,000) 20,563,000 33,007,000 88,694,000
F-33
REPORT OF INDEPENDENT ACCOUNTANTS
ON THE FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
of PXRE Group Ltd. (Successor Registrant of PXRE Corporation)
Our audits of the consolidated financial statements referred to in our report
dated February 12, 2001 appearing on page F-1 of PXRE Group Ltd.'s (Successor
Registrant of PXRE Corporation) Annual Report on Form 10-K for the year ended
December 31, 2000, also included an audit of the Financial Statement Schedules
listed in Item 14(a)(2) of this Form 10-K. In our opinion, these Financial
Statement Schedules present fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PRICEWATERHOUSECOOPERS
Hamilton, Bermuda
February 12, 2001
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-4 (No. 333-85451) of PXRE Group Ltd. (Successor Registrant
of PXRE Corporation) of our report dated February 12, 2001 relating to the
financial statements which appear on page F-1 of this Form 10-K. We also consent
to the incorporation by reference of our report dated February 12, 2001 relating
to the Financial Statement Schedules, which appear in this Form 10-K.
PRICEWATERHOUSECOOPERS
Hamilton, Bermuda
March 29, 2001
F-34