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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________to _______________
Commission File Number 1-15259
PXRE GROUP LTD.
(Exact name of registrant as specified in its charter)
Bermuda 98-0214719
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
99 Front Street Suite 231
Hamilton HM 12 12 Church Street
Bermuda Hamilton HM 11
Bermuda
(Mailing address)
(Address, including zip code, of principal executive offices)
(441) 296-5858
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
As of May 11, 2001 11,909,032 common shares, $1.00 par value per share,
of the Registrant were outstanding.
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PXRE GROUP LTD.
INDEX
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets at March 31, 2001
and December 31, 2000 3
Consolidated Statements of Operations and Comprehensive Income
for the three months ended March 31, 2001 and 2000 4
Consolidated Statements of Stockholders' Equity for the three
months ended March 31, 2001 and 2000 5
Consolidated Statements of Cash Flows for the three months
ended March 31, 2001 and 2000 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION 31
2
PXRE Consolidated Balance Sheets
Group Ltd. (Unaudited)
- --------------------------------------------------------------------------------
March 31, December 31,
2001 2000
---- ----
Assets Investments:
Available for sale:
Fixed maturities, available-for-sale, at fair value (amortized
cost $280,267,000 and $281,474,000, respectively) $282,125,160 $281,721,678
Equity securities, at fair value (cost $4,790,067 and $16,396,000) 4,102,889 16,260,089
Short-term investments
Hedge funds 24,351,708 23,364,843
Non-hedge funds 58,085,657 48,103,034
Trading securities
Hedge funds (cost $20,250,000 and $23,250,000) 24,534,910 27,819,800
Limited partnerships, at equity
Hedge funds (cost $52,760,000 and $39,264,000) 73,302,268 58,570,720
Non-hedge funds (cost $27,311,000 and $27,506,000) 29,414,497 30,251,802
------------ ------------
Total investments 495,917,089 486,091,966
Cash 22,427,006 19,008,897
Accrued investment income 4,328,193 5,010,538
Receivables:
Unreported premiums 59,189,148 54,607,126
Balances due from intermediaries and brokers, net 24,423,794 20,074,909
Other receivables 27,535,474 23,498,041
Reinsurance recoverable 116,577,680 117,196,459
Ceded unearned premiums 17,551,318 13,764,781
Deferred acquisition costs 10,875,961 9,697,003
Income tax recoverable 15,155,255 17,980,985
Other assets 17,527,072 17,816,090
------------ ------------
Total assets $811,507,990 $784,746,795
============ ============
Liabilities Losses and loss expenses $254,135,649 $251,619,635
Unearned premiums 61,567,433 49,548,368
Debt payable 55,000,000 65,000,000
Reinsurance balances payable 58,587,468 34,311,963
Other liabilities 17,144,286 25,355,172
------------ ------------
Total liabilities 446,434,836 425,835,138
------------ ------------
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 99,526,514 99,525,376
------------ ------------
Stockholders' Serial preferred stock, $1.00 par value -- 10,000,000 shares authorized
Equity respectively; 0 shares issued and outstanding 0 0
Common stock, $1.00 par value -- 50,000,000 shares
authorized, 11,898,856 and 11,820,079 shares issued, respectively 11,898,856 11,820,079
Additional paid-in capital 176,632,815 175,014,314
Accumulated other comprehensive income:
Net unrealized depreciation on investments, net of deferred
income tax expense of $449,000 and $39,000, respectively 596,223 (69,147)
Retained earnings 81,226,589 76,301,524
Restricted stock at cost (437,660 and 386,047 shares) (4,807,843) (3,680,489)
------------ ------------
Total stockholders' equity 265,546,640 259,386,281
------------ ------------
Total liabilities and stockholders' equity $811,507,990 $784,746,795
============ ============
The accompanying notes are an integral part of these statements.
3
PXRE Consolidated Statements of Operations and Comprehensive Income
Group Ltd. (Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended March 31,
2001 2000
---- ----
Revenues Net premiums earned $36,265,779 $35,741,576
Net investment income 9,542,640 11,943,818
Net realized investment gains (losses) 386,077 (535,862)
Management fees 1,961,570 1,794,311
----------- -----------
48,156,066 48,943,843
----------- -----------
Losses and Losses and loss expenses incurred 23,497,222 23,695,657
Expenses Commissions and brokerage 4,906,117 7,861,401
Other operating expenses 8,887,873 9,805,047
Interest expense 1,159,820 1,280,045
Minority interest in consolidated subsidiary 2,219,176 2,218,632
----------- -----------
40,670,208 44,860,782
----------- -----------
Income before income taxes 7,485,858 4,083,061
Income tax provision 1,847,000 74,500
----------- -----------
Net income 5,638,858 4,008,561
Comprehensive Other comprehensive income, net of tax:
Income Net unrealized appreciation on investments 665,370 1,183,407
----------- -----------
Comprehensive income $ 6,304,228 $ 5,191,968
=========== ===========
Per Share Basic:
Net income $ 0.49 $ 0.35
=========== ===========
Average shares outstanding 11,481,959 11,384,248
=========== ===========
Diluted:
Net income $ 0.47 $ 0.35
=========== ===========
Average shares outstanding 11,889,726 11,534,771
=========== ===========
The accompanying notes are an integral part of these statements.
4
PXRE Consolidated Statements of Stockholders' Equity
Group Ltd. (Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
2001 2000
---- ----
Common Stock: Balance at beginning of period $ 11,820,079 $ 11,679,769
Issuance of shares, net 78,777 78,405
------------ ------------
Balance at end of period $ 11,898,856 $ 11,758,174
============ ============
Additional Balance at beginning of period $175,014,314 $173,682,802
Paid-in Capital: Issuance of common shares 2,314,743 1,176,581
Other (696,242) (299,462)
------------ ------------
Balance at end of period $176,632,815 $174,559,921
============ ============
Treasury Stock: Balance at beginning of period $ 0 $ 0
Repurchase of common stock (523,889) (306,906)
Cancellation of common stock 523,889 306,906
------------ ------------
Balance at end of period $ 0 $ 0
============ ============
Unrealized
Appreciation Balance at beginning of period $ (69,147) $ (6,752,002)
(Depreciation) Change in fair value for the period 665,370 1,183,407
on Investments: ------------ ------------
Balance at end of period $ 596,223 $ (5,568,595)
============ =============
Retained Balance at beginning of period $ 76,301,524 $ 89,932,620
Earnings: Net income 5,638,858 4,008,561
Dividends paid to common stockholders (713,793) (705,970)
------------ ------------
Balance at end of period $ 81,226,589 $ 93,235,211
============ ============
Restricted Stock: Balance at beginning of period $ (3,680,489) $ (5,264,206)
Issuance of restricted stock (2,030,799) (1,158,125)
Amortization of restricted stock 657,193 601,577
Other 246,252 0
------------ ------------
Balance at end of period $ (4,807,843) $ (5,820,754)
============ ============
Total Balance at beginning of period $259,386,281 $263,278,983
Stockholders' Issuance of common shares 2,393,520 1,254,986
Equity: Repurchase of common stock (523,889) (306,906)
Restricted stock, net (1,373,606) (556,548)
Unrealized appreciation on investments
net of deferred income tax 665,370 1,183,407
Net income 5,638,858 4,008,561
Dividends (713,793) (705,970)
Other 73,899 7,444
------------ ------------
Balance at end of period $265,546,640 $268,163,957
============ ============
The accompanying notes are an integral part of these statements.
5
PXRE Consolidated Statements of Cash Flows
Group Ltd. (Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended March 31,
2001 2000
---- ----
Cash Flows Net income $ 5,638,858 $ 4,008,561
from Operating Adjustments to reconcile net income to net cash
Activities provided by operating activities:
Losses and loss expenses 2,516,011 (10,972,820)
Unearned premiums 8,232,528 14,601,493
Deferred acquisition costs (1,178,958) (3,886,954)
Receivables (17,850,597) (4,695,559)
Reinsurance balances payable 24,275,506 5,267,097
Reinsurance recoverable 618,780 (5,203,215)
Income tax recoverable (1,052,857) 247,071
Equity in earnings of limited partnerships (3,192,054) (6,686,075)
Other (971,831) 4,662,437
------------ ------------
Net cash provided (used) by operating activities 17,035,386 (2,657,964)
------------ ------------
Cash Flows Cost of fixed maturity investments (24,709,224) (8,792,522)
from Investing Fixed maturity investments matured/disposed 26,500,498 39,261,086
Activities Payable for securities 2,561,992 (2,024,150)
Cost of equity securities (992,820) (1,269,612)
Equity securities disposed 12,260,084 11,921,100
Net change in short-term investments (9,982,623) 4,211,348
Limited partnerships disposed 7,122,939 750,808
Limited partnerships purchased (15,527,103) (8,227,623)
------------ ------------
Net cash (used) provided by investing activities (2,766,257) 35,830,435
------------ ------------
Cash Flows Proceeds from issuance of common stock 386,662 89,887
from Financing Cash dividends paid to common stockholders (713,793) (705,970)
Activities Repayment of debt (10,000,000) (10,000,000)
Cost of stock repurchased (523,890) (306,906)
------------ ------------
Net cash used by financing activities (10,851,021) (10,922,989)
------------ ------------
Net change in cash 3,418,108 22,249,482
Cash, beginning of period 19,008,898 14,735,040
------------ ------------
Cash, end of period $ 22,427,006 $ 36,984,522
============ ============
The accompanying notes are an integral part of these statements.
6
PXRE
Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
- -------------------------------------------------------------------------------
1. Significant Accounting Policies
Basis of Presentation and Consolidation
On October 5, 1999, PXRE Corporation ("PXRE Delaware") completed a
reorganization that involved the formation of PXRE Group Ltd., a Bermuda-based
holding company which became the holding company for PXRE Delaware and its other
operations. The reorganization also involved the establishment of a
Bermuda-based reinsurance subsidiary, PXRE Reinsurance Ltd. ("PXRE Bermuda"),
and operations in Barbados through PXRE Reinsurance (Barbados) Ltd. ("PXRE
Barbados"). The accompanying consolidated financial statements have been
prepared in U.S. dollars in conformity with accounting principles generally
accepted ("GAAP") in the United States. These statements reflect the
consolidated operations of PXRE Group Ltd. (the "Company" or collectively with
its various subsidiaries "PXRE"), and its subsidiaries PXRE Delaware, 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 Bermuda, and PXRE
Barbados.
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.
GAAP requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The interim consolidated financial statements are unaudited; however,
in the opinion of management, the foregoing consolidated financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods. These
interim statements should be read in conjunction with the 2000 audited
consolidated financial statements and related notes. The preparation of interim
consolidated financial statements relies significantly upon estimates. Use of
such estimates, and the seasonal nature of a portion of the reinsurance
business, necessitates caution in drawing specific conclusions from interim
results.
During the first quarter of 2001, PXRE adopted Statement of Financial
Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The effect of adoption was not material.
Certain amounts in 2000 were reclassified to be consistent with the
2001 presentation.
7
PXRE
Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
- -------------------------------------------------------------------------------
2. Reinsurance
PXRE purchases catastrophe retrocessional coverage for its own protection,
depending on market conditions. In the event that retrocessionaires are unable
to meet their contractual obligations, PXRE would be liable for such defaulted
amounts. The effects of reinsurance on premiums written and earned are as
follows:
Three Months Ended March 31,
-------------------------------
2001 2000
---- ----
(thousands)
Premiums written
Assumed $ 78,057 $ 82,067
Direct 0 277
-------- --------
Gross premiums written 78,057 82,344
Ceded premiums written (33,559) (25,459)
-------- --------
Net premiums written $ 44,498 $ 56,885
======== ========
Premiums earned
Assumed $ 66,032 $ 56,781
Direct 7 68
Ceded (29,773) (21,107)
-------- --------
Net premiums earned $ 36,266 $ 35,742
======== ========
8
PXRE
Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
- -------------------------------------------------------------------------------
3. Earnings Per Share
The table below presents the computation of basic and diluted earnings
per share:
Three Months Ended March 31,
----------------------------
2001 2000
---- ----
Net income available to
common stockholders $ 5,638,858 $ 4,008,561
Weighted average shares of common
stock outstanding:
Weighted average shares of common
outstanding (basic) 11,481,959 11,384,248
Equivalent shares of stock options 169,304 55,866
Equivalent shares of restricted stock 238,463 94,657
----------- -----------
Weighted average common
equivalent shares (diluted) 11,889,726 11,534,771
=========== ===========
Weighted average common
equivalent shares when anti-
dilutive
Per share amounts:
Basic net income $ 0.49 $ 0.35
Diluted net income $ 0.47 $ 0.35
4. Income Taxes
The Company is incorporated under the laws of Bermuda and, under
current Bermuda law, is not obligated to pay any taxes in Bermuda based upon
income or capital gains. The Company has received an undertaking from the
Minister of Finance in Bermuda pursuant to the provisions of the Exempted
Undertakings Tax Protection Act, 1966, which exempts the Company from any
Bermuda taxes computed on profits, income or any capital asset, gain or
appreciation, or any tax in the nature of estate duty or inheritance tax, at
least until the year 2016.
The Company does not consider itself to be engaged in a trade or
business in the United States and accordingly does not expect to be subject to
direct United States income taxation.
The United States subsidiaries of PXRE file a consolidated U.S. federal
income tax return.
5. Losses and Loss Expense Liabilities
In 2000, PXRE commenced assuming structured product contracts in PXRE
Bermuda, which is a new line of business for PXRE. Such contracts are recorded
on a discounted basis. At March 31, 2001, reserves related to these contracts
amounting to $3,787,000 were discounted by $484,000 at a rate of 5.2% over 20
years.
9
PXRE
Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
- -------------------------------------------------------------------------------
6. Segment Information
PXRE operates in four reportable property and casualty segments -
catastrophe and risk excess, casualty, 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.
There are no significant differences among the accounting policies of
the segments as compared to PXRE's consolidated financial statements.
PXRE does not maintain separate balance sheet data for each of its
operating segments. Accordingly, PXRE does not review and evaluate the financial
results of its operating segments based upon balance sheet data.
The following table summarizes the underwriting profit and (loss) by
segment for the three months ended March 31, 2001 and 2000:
Underwriting Operations
(thousands except percentages) As of March 31, 2001 As of March 31, 2000
-------------------------- --------------------------
Amount Percent Amount Percent
------ ------- ------ ------
Catastrophe and Risk Excess
North American $ 2,351 $ 2,598
International 9,066 5,656
Excess of loss cessions (3,541) (199)
------- -------
7,876 99.4 8,055 134.7
------- -------
Casualty
North American (109) (11)
International (506) (352)
------- -------
(615) (7.8) (363) (6.1)
------- -------
Finite Business
North American 3,559 0
International 0 156
------- -------
3,559 44.9 156 2.6
------- -------
Other Lines
North American (589) (689)
International (2,309) (1,180)
------- -------
(2,898) (36.5) (1,869) (31.2)
------- ------ ------- -----
Total $ 7,922 100% $ 5,979 100%
======= ===== ======= ====
A summary of net premiums written and net premiums earned by segment
is included in Management Discussion and Analysis (see "Comparison of First
Quarter Results for 2001 and 2000").
10
PXRE
Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
- -------------------------------------------------------------------------------
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:
Three Months Ended March 31,
----------------------------
2001 2000
---- ----
(thousands)
Net underwriting profit $ 7,922 $ 5,979
Net investment income 9,543 11,944
Net realized investment gains (losses) 386 (536)
Interest expense (1,160) (1,280)
Minority interest in consolidated subsidiary (2,219) (2,219)
Operating expenses (8,888) (9,805)
Unrealized foreign exchange on losses 2,016 0
Other income (114) 0
------- -------
Income before income taxes $ 7,486 $ 4,083
======= =======
7. Contingencies
PXRE entered into weather option agreements in May 1999 with two
counter-parties. In April 2000 these counter-parties submitted invoices to PXRE
Delaware in the aggregate sum of $8,252,500 seeking payment under the weather
option agreements, which invoices have been paid. PXRE Delaware insured its
obligations under these weather option agreements through two Commercial Inland
Marine Weather Insurance Policies issued by Terra Nova Insurance Company Limited
("Terra Nova"). PXRE Delaware submitted claims under these policies to Terra
Nova in April 2000. Terra Nova has denied coverage, contending that its Managing
General Agent had no authority to issue these policies. PXRE Delaware disagrees
with Terra Nova's denial and 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 in May 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.
11
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 Reinsurance (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.
12
At March 31, 2001, 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 present
business to 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.
During the third quarter of 2000, PXRE ceased accepting new or renewal
risks at Lloyd's. PXRE's Lloyd's operations consists of 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 Limited ("PXRE Managing Agency") during 2000
managed, on a fee basis, PXRE Lloyd's Syndicate and other syndicates at Lloyd's.
In April 2001, PXRE sold its Lloyd's Managing Agency for book value. Final
disposition of the syndicate has not been determined but the costs of
administering the existing book will be incurred over the next three years. 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
13
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.
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
14
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 ("REITS") and short-term
investments. PXRE's investments are subject to market-wide risks and
fluctuations, as well as to risk inherent in particular securities. Although
PXRE seeks to preserve its capital by investing in a portfolio of hedge funds
and other privately held securities designed to provide diversification of risk,
such investments entail substantial risks. Portfolio performance may be
adversely impacted by equity and credit market conditions. A generally strong
equity market in early 2000 may have resulted in portfolio returns that may not
be achieved in subsequent periods. There can be no assurance that the investment
objectives of PXRE will be achieved, and results may vary substantially over
time. In addition, although PXRE seeks to employ investment strategies that are
not correlated with its reinsurance exposures, losses in PXRE's investment
portfolio may occur at the same time as underwriting losses and, therefore,
exacerbate such losses' adverse effect on PXRE. To PXRE's knowledge, other
publicly traded reinsurers generally do not follow PXRE's strategy of investing
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
15
established by the governing documents of such investments. Such valuations may
differ significantly from the values that would have been used had ready markets
existed and the differences could be material.
PXRE utilizes the valuations provided to it by managers of its hedge
funds and other privately held securities in preparing the financial statements
of PXRE. The carrying values used in such financial statements may not reflect
the value received by PXRE when liquidating its investment in a hedge fund or
other privately held security. If liquidity is by redemption, the valuations
supplied quarterly by the manager of the hedge fund or other privately held
security will generally be the value used by the manager to set the redemption
price. However, to the extent a manager has discretion in pricing holdings,
should substantial redemptions occur in a limited period of time that discretion
may be used to price at lower values than would otherwise be used, thus reducing
the redemption price. If liquidation of PXRE's investment occurs by virtue of a
liquidation of a hedge fund or other privately held securities, PXRE may receive
substantially less than the valuation method used by the manager since the
valuation method used by the manager is unlikely to use liquidation values.
Accordingly, the estimated fair value of PXRE's hedge fund and other privately
held investments does not necessarily represent the amount which could be
realized upon future sale, including in the event PXRE required liquidity to
fund catastrophic losses.
As PXRE's investment strategy is to invest a significant portion of its
investment portfolio in hedge funds and other privately held securities, which
are accounted for under the equity method, or in some cases as a trading
portfolio, net realized and unrealized gains (losses) on such investments may
have a greater effect on PXRE's results of operations at the end of any fiscal
period than would be the case for other insurance and/or reinsurance companies.
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 March 31, 2001, 73.5% of PXRE's investment portfolio, at fair
value, consisted of fixed maturities and short-term investments.
Of PXRE's fixed maturities portfolio at March 31, 2001, 93.2% 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 30.7% of fixed
maturities based on fair value at March 31, 2001. The average market yield to
maturity of PXRE's fixed maturities portfolio at March 31, 2001 and 2000, was
5.6% and 6.6%, respectively.
16
PXRE had no investments in real estate or commercial mortgage loans as
of March 31, 2001; however, PXRE has invested in common and preferred shares of
publicly traded REITS with a fair value of $3,079,000 at March 31, 2001.
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. At March 31, 2001 after-tax unrealized gains of $596,000
($0.05 book value per share) were included in shareholders' equity.
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 $82,437,000
at March 31, 2001, compared to $71,468,000 at December 31, 2000 including one
hedge fund amounting to $24,352,000 at March 31, 2001, compared to $23,365,000
at December 31, 2000.
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 March 31, 2001, hedge fund investments held by PXRE amounted
to approximately $122,189,000, representing 15.1% of March 31, 2001 total
assets. As at March 31, 2001, hedge fund investments with market values ranging
from $1,034,000 to $26,953,000 were administered by thirty managers. At that
date, one investment, a "fund-of-funds" investment amounted to approximately
$26,953,000, or 22.1% of total hedge fund investments and was comprised of funds
managed by sixteen of the thirty managers, five of which are affiliated with
Mariner. Hedge funds in which PXRE is invested that utilize a strategy relating
to equities are, based on the recent history for such funds, more likely on an
aggregate basis to appreciate in upwardly trending markets and more likely to
depreciate in downwardly trending markets, whereas hedge funds utilizing fixed
income strategies in which PXRE is invested are on an aggregate basis less
correlated to the direction of interest rates based on the recent performance of
such funds.
PXRE's hedge fund managers invest in a variety of markets utilizing a
variety of strategies, generally through the medium of private investment
companies or other entities. Criteria for the selection of hedge fund managers
include, among other factors, the historical performance and/or recognizable
prospects of the particular manager and a substantial personal investment by the
manager in the investment program. However, managers without past trading
histories or substantial personal investment may also be considered. Generally,
PXRE's hedge fund managers may be compensated or receive profit participations
on terms that may include fixed and/or performance-based fees or profit
participations.
Through its hedge fund managers, PXRE may invest or trade in any
securities or instruments including, but not limited to, U.S. and non-U.S.
equities and equity-related instruments, currencies, commodities and
fixed-income and other debt-related instruments and derivative instruments.
Hedge fund managers may use both over-the-counter and exchange traded
instruments (including derivative instruments such as swaps, futures and forward
17
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 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 March 31, 2001 PXRE's investment portfolio also included
approximately $29,414,000 of mezzanine bond and equity limited partnership
investments, with fair values ranging from $2,295,000 to $9,797,000 and
remaining aggregate cash call commitments in respect of such investments of
$1,966,000. Mariner also monitors the performance of these investments.
Hedge funds and other limited partnership investments are accounted for
under the equity method or as part of a trading portfolio. Total investment
income for the three months ended March 31, 2001, included $3,192,000
attributable to hedge funds and other limited partnership investments.
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.
18
Comparison of First Quarter Results for 2001 with 2000
Three Months Ended March 31,
----------------------------
Increase
2001 2000 (Decrease)
---- ---- ----------
(000's) %
Gross premiums written $78,057 $82,344 (5.2)
Ceded premiums:
Managed business participants 24,865 12,000 107.2
Catastrophe coverage, surplus reinsurance and other 8,694 13,459 (35.4)
------- -------
Total reinsurance premiums ceded 33,559 25,459 31.8
------- -------
Net premiums written $44,498 $56,885 (21.8)
======= =======
Gross premiums written for the three months ended March 31, 2001, declined
5.2% to $78,057,000 from $82,344,000 for the corresponding period of 2000. This
decline primarily reflected the Company's cessation of underwriting activities
at its Lloyd's syndicate, which was partially offset by increased writings in
its Catastrophe and Risk Excess and Finite segments. Net premiums written for
the first quarter of 2001, declined 21.8% to $44,498,000 from $56,885,000 for
the corresponding period of 2000. Net written premiums reflected certain
retrocessional contracts that protect the Finite segment and that are expected
to enhance the profitability of that business. Net written premiums in the
Casualty and Other Lines segments were affected by the withdrawal from Lloyd's
and reduced levels of business written. Net premiums earned for the first
quarter of 2001, increased 1.5% to $36,266,000 from $35,741,000 for the
comparable period of 2000. The Catastrophe and Risk Excess segment increased
13.7% on an earned basis before excess of loss cessions, and 25.7% after excess
of loss cessions, which more than offset the termination of the Company's London
business.
Catastrophe coverage, surplus and other ceded premiums written decreased in
2001 from 2000 due to the withdrawal from Lloyd's.
In the first quarter of 2001, PXRE made additional retrocessional coverage
purchases for its non Lloyd's business. 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 commencing in 2000 provide more protection against such loss
occurrences.
Premiums ceded by PXRE to its managed business participants increased
107.2% to $24,865,000 for the first quarter of 2001 compared with $12,000,000
for the corresponding period of 2000. The increase in premiums ceded to these
programs was due primarily to $11,421,000 from the Finite Business segment
ceded to a managed business participant, Select Re., in 2001.
19
The following tables summarize the 2001 and 2000 net premiums written
and earned by PXRE's business segments:
Net Premiums Written
(thousands except percentages)
As of March 31, 2001 As of March 31, 2000
-------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
Catastrophe and Risk Excess
North American $ 8,120 $ 4,960
International 26,515 28,895
Excess of loss cessions (6,202) (5,086)
-------- --------
28,433 63.9 28,769 50.6
-------- --------
Casualty
North American 3,253 8,588
International 4,431 4,059
-------- --------
7,684 17.3 12,647 22.2
-------- --------
Finite Business
North American 2,890 0
International 0 2,580
-------- --------
2,890 6.5 2,580 4.5
-------- --------
Other Lines
North American 119 (160)
International 5,372 13,049
-------- --------
5,491 12.3 12,889 22.7
-------- ---- -------- ----
Total $ 44,498 100% $ 56,885 100%
======== ==== ======== ====
Net Premiums Earned
(thousands except percentages)
As of March 31, 2001 As of March 31, 2000
-------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
Catastrophe and Risk Excess
North American $ 6,751 $ 4,812
International 21,120 19,706
Excess of loss cessions (4,988) (6,315)
-------- -------
22,883 63.1 18,203 51.0
-------- -------
Casualty
North American 4,296 4,097
International 3,008 2,212
-------- -------
7,304 20.1 6,309 17.7
-------- -------
Finite Business
North American 3,051 0
International 0 226
-------- -------
3,051 8.4 226 0.6
-------- -------
Other Lines
North American (227) 356
International 3,255 10,648
-------- -------
3,028 8.4 11,004 30.7
-------- ---- ------- ----
Total $ 36,266 100% $35,742 100%
======== ==== ======= ====
20
Management fee income from all sources for the three months ended March 31,
2001 increased 9.4% to $1,962,000 from $1,794,000 for the corresponding period
of 2000, reflecting growth in the amount and profitability of PXRE's managed
business.
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 Principles
("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 64.8% for the first quarter of 2001 compared with 66.3%
for the comparable period of 2000 largely due to the sinking of the Petrobras
Oil Rig which occurred in the first quarter of 2001 in contrast to development
on the 1999 French Storms experienced in the first quarter of 2000. The loss
ratio for the first three months of 2001 reflected incurred catastrophe and risk
excess losses of $12,183,000 gross and $7,036,000 net for the 2001 and prior
accident years including the Petrobras Oil Rig. The loss ratio for the first
three months of 2000 reflected incurred catastrophe losses of $14,504,000 gross
and $9,271,000 net.
Significant catastrophe and risk losses affecting the three months ended
March 31, 2001 loss ratio are as follows:
Amount of Losses
----------------
Loss Event Gross Net
- ---------- ----- ---
(thousands)
2001 Petrobras Oil Rig $9,061 $6,155
Significant catastrophe and risk losses affecting the three months ended
March 31, 2000 loss ratio are as follows:
Amount of Losses
----------------
Loss Event Gross Net
- ---------- ----- ---
(thousands)
French Storm Martin $15,570 $11,671
French Storm Lothar 3,473 1,290
Hurricane Floyd (5,131) (3,507)
The provision for losses and loss expenses and the loss ratio includes the
effect of foreign exchange movements on PXRE's liability for losses and loss
expenses, resulting in a foreign currency exchange gain of $2,016,000 for the
three months ended March 31, 2001 compared to a gain of $506,000 for the
corresponding period of 2000.
21
During the first quarter of 2001, PXRE experienced adverse development of
$5,065,000 net for prior-year loss and loss expenses primarily due to $2,200,000
of marine excess loss development and $2,000,000 reversal of industry loss
warranty coverage when industry estimates for Hurricane Floyd were reduced. The
loss ratio for the comparable period of 2000 was adversely affected by
development of $8,249,000 net largely due to the French Storm Martin.
The underwriting expense ratio was 32.6% for the first quarter of 2001
compared with 44.4% for the comparable period of 2000 as a result of a shift in
the business written and ceded by PXRE. The commission and brokerage ratio net
of management fee income was 8.1% in the first quarter of 2001 compared with
17.0% for the comparable period of 2000. This change was attributable to the
increase in the amount of business ceded and a reduction of business from the
Lloyd's operations. The operating expense ratio was 24.5% in the first quarter
of 2001 compared with 27.4% for the corresponding period of 2000. The decrease
largely reflected the expense savings associated with the termination of PXRE
Lloyd's operations. As a result of the above, the combined ratio was 97.4% for
the first quarter of 2001 compared with 110.7% for the comparable period of
2000.
The following table summarizes the three months ended March 31, 2001 and
2000 underwriting profit and (loss) by segment:
Underwriting Operations
(thousands except percentages) As of March 31, 2001 As of March 31, 2000
-------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
Catastrophe and Risk Excess
North American $ 2,351 $ 2,598
International 9,066 5,656
Excess of loss cessions (3,541) (199)
-------- --------
7,876 99.4 8,055 134.7
-------- --------
Casualty
North American (109) (11)
International (506) (352)
-------- --------
(615) (7.8) (363) (6.1)
-------- --------
Finite Business
North American 3,559 0
International 0 156
-------- --------
3,559 44.9 156 2.6
-------- --------
Other Lines
North American (589) (689)
International (2,309) (1,180)
-------- --------
(2,898) (36.5) (1,869) (31.2)
-------- ------ -------- ----
Total $ 7,922 100% $ 5,979 100%
======== ====== ======== ====
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
22
losses incurred, 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 decreased to $8,888,000 for the first three months
ended March 31, 2001 from $9,805,000 in 2000. The decrease was primarily related
to the expense savings associated with the termination of PXRE's Lloyd's
operations. Included in other operating expenses were foreign currency exchange
losses of $353,000 for 2001 compared to losses of $459,000 for the corresponding
period of 2000.
During the first quarter of 2001, interest expense decreased to $1,160,000
compared to $1,280,000 in the corresponding period of 2000. The decrease in
interest expense relates to a repayment of $10,000,000 of the credit facility at
March 31, 2000. The fixed interest rate on the $50,000,000 portion is 6.34%
while the variable interest rate on the remaining $15,000,000 outstanding during
the period from January 1, 2001 to March 31, 2001 was 7.44%. The Company repaid
an additional $10,000,000 of the credit facility on March 31, 2001. This is part
of PXRE Delaware's Credit Agreement with a syndicate of lenders (as described
under "Liquidity and Capital Resources"). PXRE incurred minority interest
expense amounting to $2,219,000 related to PXRE's $100 million of 8.85% Capital
Trust Pass-through Securities 'sm' (TRUPS 'sm') (as described below under
"Liquidity and Capital Resources") during both three month periods ending March
31, 2001 and 2000.
Net investment income for the three months ended March 31, 2001 decreased
20.1% to $9,542,000 from a remarkable $11,944,000 for the comparable period of
2000. The decrease in net investment income was caused primarily by certain
other limited partnership investments (which are carried on the equity method,
for which the unrealized gains and losses in each case are recorded through the
income statement), which produced a loss of $643,000 for the three months ended
March 31, 2001, compared to income of $1,471,000 for the three months ended
March 31, 2000. In addition, investment income in the three months ended March
31, 2000 reflected peaks in the world stock markets. PXRE's pre-tax annualized
investment yield was 7.3% for the first quarter of 2001 compared with 9.4% for
the corresponding quarter in 2000, both calculated using amortized cost and
investment income before investment expenses. Net realized investment gains for
the first quarter of 2001 were $386,000, compared to losses of $536,000 in the
first quarter of 2000, reflecting the restructuring of the investment portfolio.
The net effect of foreign currency exchange fluctuations were gains of
$1,663,000 in the first quarter of 2001 compared to gains of $47,000 for 2000.
For the reasons discussed above, net income was $5,639,000 for the
three months ended March 31, 2001 compared to net income of $4,009,000 for the
comparable period of 2000. The diluted net income per common share was $0.47 for
the first quarter of 2001 compared to
23
diluted net income per share of $0.35 for the first quarter of 2000, based on
diluted average shares outstanding of approximately 11,890,000 in 2001 and
11,535,000 in 2000.
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 the first quarter of
2001, $17,000,000 in dividends were paid by PXRE Reinsurance. Under Bermuda law,
PXRE Bermuda may not pay a dividend unless after payment of the dividend it is
able to pay its liabilities as they become due, and the realizable value of its
assets are greater than the aggregate value of its liabilities, issued share
capital and share premium accounts.
PXRE Bermuda is also required to maintain statutory assets in an amount
that permits it to meet the prescribed minimum solvency margin for the net
premium income level of its business from time to time. In addition, any
dividend paid cannot be in an amount that will reduce the reserves of PXRE
Bermuda to a level that is not sufficient to meet the reserve requirements of
its business.
Dividends and other permitted payments from PXRE Delaware to PXRE Barbados
are expected to be subject to U.S. withholding taxes at the rate of 5% (reduced
from 30% under the tax convention between the United States and Barbados) and a
2.5% Barbados corporate income tax.
In the event the amount of dividends available, together with other sources
of funds, are not sufficient to permit PXRE to meet its debt service and other
obligations and to pay cash dividends, it would be necessary to obtain the
approval of the Connecticut Insurance Commissioner prior to the payment of
additional dividends by PXRE Reinsurance or 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
24
alternatives, such as refinancing or restructuring its indebtedness or seeking
additional equity. There can be no assurance that any of these strategies could
be effected on satisfactory terms, if at all. In the event that PXRE were unable
to generate sufficient cash flow and were otherwise unable to obtain funds
necessary to meet required payments of principal and interest on its
indebtedness, PXRE could be in default under the terms of the agreements
governing such indebtedness. In the event of such default, the holders of such
indebtedness could elect to declare all of the funds borrowed thereunder to be
due and payable together with accrued and unpaid interest.
PXRE Delaware entered into a Credit Agreement dated as of December 30, 1998
(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 and March 31, 2001, PXRE Delaware fulfilled its
commitment and made principal payments of $10,000,000 each, reducing the
outstanding loan to $55,000,000 at March 31, 2001.
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 $5,000,000 outstanding on March 31, 2001, after paying down
$10,000,000 on March 31, 2001, will incur an interest rate of 5.9025% for the
second quarter of 2001. 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
25
merger or consolidation, (2) such merger or consolidation constitutes a
Permitted Acquisition and the conditions and requirements of the Credit
Agreement are complied with and (3) immediately thereafter no Default or Event
of Default exists. The Credit Agreement also requires compliance with Leverage
Ratio, Fixed Charge Coverage Ratio, Risk-Based Capital Ratio and Combined
Statutory Surplus requirements. As at March 31, 2001, 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 three months
ended March 31, 2001 in respect of the Capital Securities (and related
Subordinated Debt Securities) amounted to $2,219,000. On or after February 1,
2007, PXRE Delaware has the right to redeem the Subordinated Debt Securities, in
whole at any time or in part from time to time, subject to certain conditions,
at call prices of 104.180% at February 1, 2007, declining to 100.418% at
February 1, 2016, and 100% thereafter. PXRE Delaware has the right, at any time,
subject to certain conditions, to defer payments of interest on the Subordinated
Debt Securities for Extension Periods (as defined in the applicable indenture),
each not exceeding 10 consecutive semi-annual periods; provided that no
Extension Period may extend beyond the maturity date of the Subordinated Debt
Securities. As a consequence of PXRE Delaware's extension of any interest
payment period on the Subordinated Debt Securities, distributions on the Capital
Securities would be deferred (though such distributions would continue to accrue
interest at a rate of 8.85% per annum compounded semi-annually). In the event
that PXRE Delaware exercises its right to extend an interest payment period,
then during any Extension Period, subject to certain exceptions, (i) PXRE
Delaware may not declare or pay any dividend on, make any distributions with
respect to, or redeem, purchase, acquire or make a liquidation payment with
respect to, any of its capital stock or rights to acquire such capital stock or
make any guarantee payments (subject to specified exceptions) with respect to
the foregoing, and (ii) PXRE Delaware may not make any payment of interest on,
or principal of (or premium,
26
if any, on), or repay, repurchase or redeem, any debt securities issued by PXRE
Delaware which rank pari passu with or junior to the Subordinated Debt
Securities. Upon the termination of any Extension Period and the payment of all
amounts then due, PXRE Delaware may commence a new Extension Period, subject to
certain requirements.
PXRE Delaware 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 provided by operations was $17,035,000 during the first
quarter of 2001 compared with net cash flow used by operations of $2,658,000
during 2000, due to the effects of timing of collection of receivables and
reinsurance recoverables and payments of losses.
Dividends declared in the first quarter of 2001 to shareholders were
approximately $714,000 compared to $706,000 in 2000. The expected annual
dividend based on shares outstanding at March 31, 2001 is approximately
$2,856,000.
Book value per common share was $22.32 at March 31, 2001.
In December 1999, the Company announced a stock repurchase program of up to
1,000,000 shares. The Company had 11,898,856 common shares outstanding as of
March 31, 2001. No share repurchases were made during the first quarter of 2001
except in connection with tax withholding on the vesting of employee stock
option or restricted stock plans.
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
27
constitute a material portion of PXRE's investment portfolio and, in the opinion
of PXRE's management, are sufficiently liquid for its needs.
In connection with the capitalization of PXRE Lloyd's Syndicate, PXRE has
placed on deposit $46,587,000 par value of U.S. government securities and
municipal bonds as collateral for Lloyd's. In addition, PXRE issued a letter of
credit for the benefit of Lloyd's in the amount of $15,355,000, which is
collateralized by municipal bonds of approximately $17,835,000. Cash and
invested assets of PXRE's Lloyd's Syndicate amounting to $19,109,000 at March
31, 2001 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 March 31, 2001 are
considered by management of PXRE to be collectible in all material respects.
Market Risk
PXRE has reviewed the change in its exposure to market risks since December
31, 2000. The components of PXRE's holdings in derivatives and other financial
instruments have not materially changed. PXRE's risk management strategy and
objectives have not materially changed. PXRE believes that the potential for
loss in each market risk sector described at year-end has not materially
changed; however, PXRE has reduced its equity holdings, thereby reducing equity
risk further from 2000 year end levels. PXRE's potential for loss on its trading
portfolio has not materially changed since year end.
Income Taxes
PXRE recognized a tax expense of $1,847,000 in the first quarter of 2001
compared to an expense of $74,500 in 2000. The tax expense in 2001 differed from
the statutory rate primarily due to tax exempt income and the dividends received
deduction.
Contingencies
PXRE entered into weather option agreements in May 1999 with two counter
parties. In April 2000 these counter parties submitted invoices to PXRE Delaware
in the aggregate sum of $8,252,500 seeking payment under the weather option
agreements, which invoices have been paid. PXRE Delaware insured its obligations
under these weather option agreements through two Commercial Inland Marine
Weather Insurance Policies issued by Terra Nova Insurance Company Limited
("Terra Nova"). PXRE Delaware submitted claims under these policies to Terra
Nova in April 2000. Terra Nova has denied coverage, contending that its Managing
General Agent had no authority to issue these policies. PXRE Delaware disagrees
with Terra
28
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 in May 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 will 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
29
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.
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.
30
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K
On March 16, 2001 and on April 10, 2001, the Company filed
Current Reports on Form 8-K with the Securities and Exchange Commission relating
to a change in its certified accountants from PricewaterhouseCoopers LLP to KPMG
LLP. The March 16, 2001 Form 8-K discussed the Company's decision to review its
auditing services and PricewaterhouseCoopers' election not to stand for
re-appointment. As required by Item 304(a) (3) of Regulation S-K, correspondence
from PricewaterhouseCoopers to the Securities and Exchange Commission was
attached as an exhibit to the March 16, 2001 Form 8-K. The April 10, 2001 Form
8-K described the retention of KPMG to replace PricewaterhouseCoopers.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report or amendment thereto to be signed on its
behalf by the undersigned thereunto duly authorized.
PXRE GROUP LTD.
May 15, 2001 By: \s\ James F. Dore
-----------------
James F. Dore
Executive Vice President
and Chief Financial Officer
32
STATEMENT OF DIFFERENCES
The service mark symbol shall be expressed as...............................'sm'