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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 June 30, 2001
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------- ---------------
Commission File Number 1-15259
PXRE GROUP LTD.
(Exact name of registrant as specified in its charter)
Bermuda 98-0214719
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
99 Front Street Suite 231
Hamilton HM 12 12 Church Street
Bermuda Hamilton HM 11
Bermuda
(Address, including zip code, (Mailing address)
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 August 15, 2001, 11,908,485 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 June 30, 2001
and December 31, 2000 3
Consolidated Statements of Operations and Comprehensive Income
for the three and six months ended June 30, 2001 and 2000 4
Consolidated Statements of Stockholders' Equity for the three and six
months ended June 30, 2001 and 2000 5
Consolidated Statements of Cash Flows for the three and six months
ended June 30, 2001 and 2000 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
PART II. OTHER INFORMATION 32
2
PXRE Consolidated Balance Sheets
Group Ltd. (Unaudited)
- --------------------------------------------------------------------------------
June 30, December 31,
2001 2000
---- ----
Assets Investments:
Available for sale:
Fixed maturities, available-for-sale, at fair value (amortized
cost $282,281,000 and $281,474,000, respectively) $ 282,503,572 $ 281,721,678
Equity securities, at fair value (cost $4,810,000 and
$16,396,000, respectively) 4,732,394 16,260,089
Short-term investments
Hedge funds 25,051,612 23,364,843
Non-hedge funds 73,415,875 48,103,034
Trading securities
Hedge funds (cost $20,250,000 and $23,250,000, respectively) 24,980,512 27,819,800
Limited partnerships, at equity
Hedge funds (cost $52,760,000 and $39,264,000, respectively) 74,750,523 58,570,720
Non-hedge funds (cost $24,323,000 and $27,506,000, respectively) 26,695,998 30,251,802
------------- -------------
Total investments 512,130,486 486,091,966
Cash 37,941,056 19,008,897
Accrued investment income 4,890,889 5,010,538
Receivables:
Unreported premiums 65,951,366 54,607,126
Balances due from intermediaries and brokers, net 21,768,223 20,074,909
Other receivables 33,423,123 23,498,041
Reinsurance recoverable 102,856,869 117,196,459
Ceded unearned premiums 11,006,664 13,764,781
Deferred acquisition costs 9,895,336 9,697,003
Income tax recoverable 18,523,599 17,980,985
Other assets 16,803,121 17,816,090
------------- -------------
Total assets $ 835,190,732 $ 784,746,795
============= =============
Liabilities Losses and loss expenses $ 268,523,930 $ 251,619,635
Unearned premiums 48,668,336 49,548,368
Debt payable 55,000,000 65,000,000
Reinsurance balances payable 52,554,918 34,311,963
Other liabilities 44,552,817 25,355,172
------------- -------------
Total liabilities 469,300,001 425,835,138
------------- -------------
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 99,527,669 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, 11,902,933 and 11,820,079 shares issued and outstanding,
respectively 11,902,933 11,820,079
Additional paid-in capital 176,630,572 175,014,314
Accumulated other comprehensive income:
Net unrealized depreciation on investments, net of deferred
income tax expense of $91,000 and $39,000, respectively (54,490) (69,147)
Retained earnings 82,409,492 76,301,524
Restricted stock at cost (422,912 and 386,047 shares) (4,525,445) (3,680,489)
------------- -------------
Total stockholders' equity 266,363,062 259,386,281
------------- -------------
Total liabilities and stockholders' equity $ 835,190,732 $ 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)
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Three Months Ended June 30, Six Months Ended June 30,
2001 2000 2001 2000
---- ---- ---- ----
Revenues Net premiums earned $ 43,325,826 $ 43,639,562 $ 91,265,605 $ 79,381,138
Net investment income 8,238,457 5,738,651 18,121,097 17,682,469
Net realized investment gains (losses) 428,707 73,765 814,784 (462,097)
Management fees 772,114 1,778,920 2,733,684 3,573,231
------------ ------------ ------------ ------------
52,765,104 51,230,898 112,935,170 100,174,741
------------ ------------ ------------ ------------
Losses and Losses and loss expenses incurred 28,207,176 68,659,875 57,640,398 92,355,532
Expenses Commissions and brokerage 9,561,872 8,875,475 23,029,989 16,736,876
Other operating expenses 7,496,308 8,593,333 16,384,181 18,398,380
Interest expense 766,358 1,149,198 2,738,490 2,429,243
Minority interest in consolidated subsidiary 2,219,271 2,218,719 4,438,447 4,437,351
------------ ------------ ------------ ------------
48,250,985 89,496,600 104,231,505 134,357,382
------------ ------------ ------------ ------------
Income (loss) before income taxes and cumulative
effect of accounting change 4,514,119 (38,265,702) 8,703,665 (34,182,641)
Income tax (provision) benefit (792,350) 14,738,500 (1,486,041) 14,664,000
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of
accounting change 3,721,769 (23,527,202) 7,217,624 (19,518,641)
Cumulative effect of accounting change, net of
$171,959 tax expense 0 0 319,353 0
------------ ------------ ------------ ------------
Net income (loss) 3,721,769 (23,527,202) 7,536,977 (19,518,641)
Comprehensive Other comprehensive (loss) income, net of tax:
Income Net unrealized (depreciation) appreciation on
investments (650,713) 1,123,916 14,657 2,307,323
------------ ------------ ------------ ------------
Comprehensive income (loss) 3,071,056 (22,403,286) 7,551,634 (17,211,318)
============ ============ ============ ============
Per Share Basic:
Income (loss) before cumulative effect of
accounting change $ 0.32 $ (2.07) $ 0.63 $ (1.71)
Cumulative effect of accounting change 0.00 0.00 0.03 0.00
------------ ------------ ------------ ------------
Net income (loss) $ 0.32 $ (2.07) $ 0.66 $ (1.71)
============ ============ ============ ============
Average shares outstanding 11,470,253 11,383,097 11,503,482 11,384,085
============ ============ ============ ============
Diluted:
Income (loss) before cumulative effect of
accounting change $ 0.31 $ (2.07) $ 0.60 $ (1.71)
Cumulative effect of accounting change 0.00 0.00 0.03 0.00
------------ ------------ ------------ ------------
Net income (loss) $ 0.31 $ (2.07) $ 0.63 $ (1.71)
============ ============ ============ ============
Average shares outstanding 11,877,925 11,383,097 11,934,099 11,384,085
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
4
PXRE Consolidated Statements of Stockholders' Equity
Group Ltd. (Unaudited)
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Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
Common Stock: Balance at beginning of period $ 11,898,856 $ 11,758,174 $ 11,820,079 $ 11,679,769
Issuance of shares, net 4,077 8,091 82,854 86,496
------------ ------------ ------------ ------------
Balance at end of period $ 11,902,933 $ 11,766,265 $ 11,902,933 $ 11,766,265
============ ============ ============ ============
Additional Balance at beginning of period $176,632,815 $174,559,921 $175,014,314 $173,682,802
Paid-in Capital: Issuance of common shares 605,640 178,596 2,920,383 1,355,177
Other (607,883) (208,061) (1,304,125) (507,523)
------------ ------------ ------------ ------------
Balance at end of period $176,630,572 $174,530,456 $176,630,572 $174,530,456
============ ============ ============ ============
Treasury Stock: Balance at beginning of period $ 0 $ 0 $ 0 $ 0
Repurchase of common stock (648,948) (6,888) (1,172,837) (6,888)
Cancellation of common stock 648,948 6,888 1,172,837 6,888
------------ ------------ ------------ ------------
Balance at end of period $ 0 $ 0 $ 0 $ 0
============ ============ ============ ============
Unrealized
(Depreciation) Balance at beginning of period $ 596,223 $ (5,568,595) $ (69,147) $ (6,752,002)
Appreciation Change in fair value for the period (650,713) 1,123,916 14,657 2,307,323
on Investments: ------------ ------------ ------------ ------------
Balance at end of period $ (54,490) $ (4,444,679) $ (54,490) $ (4,444,679)
============ ============ ============ ============
Retained Balance at beginning of period $ 79,402,935 $ 93,235,211 $ 76,301,524 $ 89,932,620
Earnings: Net income (loss) 3,721,769 (23,527,202) 7,536,977 (19,518,641)
Dividends paid to common stockholders (715,212) (706,783) (1,429,009) (1,412,753)
------------ ------------ ------------ ------------
Balance at end of period $ 82,409,492 $ 69,001,226 $ 82,409,492 $ 69,001,226
============ ============ ============ ============
Restricted Stock: Balance at beginning of period $ (4,807,842) $ (5,820,754) $ (3,680,489) $ (5,264,206)
Issuance of restricted stock (418,299) (118,320) (2,449,098) (1,276,445)
Amortization of restricted stock 700,696 670,054 1,357,890 1,271,631
Other 0 165,413 246,252 165,413
------------ ------------ ------------ ------------
Balance at end of period $ (4,525,445) $ (5,103,607) $ (4,525,445) $ (5,103,607)
============ ============ ============ ============
Total Balance at beginning of period $263,722,987 $268,163,957 $259,386,281 $263,278,983
Stockholders' Issuance of common shares 609,717 186,687 3,003,237 1,441,673
Equity: Repurchase of common stock (648,948) (6,888) (1,172,837) (6,888)
Restricted stock, net 282,397 551,734 (1,091,208) (4,814)
Unrealized (depreciation) appreciation on
investments net of deferred income tax (650,713) 1,123,916 14,657 2,307,323
Net income (loss) 3,721,769 (23,527,202) 7,536,977 (19,518,641)
Dividends (715,212) (706,783) (1,429,009) (1,412,753)
Other 41,065 (35,760) 114,964 (335,222)
------------ ------------ ------------ ------------
Balance at end of period $266,363,062 $245,749,661 $266,363,062 $245,749,661
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
5
PXRE Consolidated Statements of Cash Flows
Group Ltd. (Unaudited)
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Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
Cash Flow Net income (loss) $ 3,721,769 $ (23,527,202) $ 7,536,977 $(19,518,641)
from Operating Adjustments to reconcile net income to net
Activities cash provided (used) by operating activities:
Losses and loss expenses 14,388,285 40,742,981 16,904,296 29,770,161
Unearned premiums (6,354,444) 9,782,138 1,878,084 24,383,631
Deferred acquisition costs 980,625 1,235,258 (198,333) (2,651,696)
Receivables (10,931,363) 11,159,827 (23,721,960) 6,464,268
Reinsurance balances payable 2,479,451 (3,060,035) 18,242,957 2,207,062
Reinsurance recoverable 7,784,806 (39,415,614) 14,339,586 (44,618,829)
Income tax recoverable 2,033,099 2,539,632 (1,108) 2,786,703
Equity in earnings of limited partnerships (3,042,536) (1,134,574) (6,234,590) (7,820,649)
Other 12,522,540 (8,299,743) 11,871,709 (3,637,306)
----------- ------------- ----------- ------------
Net cash provided (used) by operating
activities 23,582,232 (9,977,332) 40,617,618 (12,635,296)
----------- ------------- ----------- ------------
Cash Flow Cost of fixed maturity investments (97,922,303) (8,588,687) (122,631,527) (17,381,209)
from Investing Fixed maturity investments matured/disposed 95,873,846 20,785,381 122,374,344 60,046,467
Activities Payable for securities 7,467,202 108,927 10,029,194 (1,915,223)
Cost of equity securities (2,033,431) (1,481,735) (3,026,251) (2,751,347)
Equity securities disposed 1,844,604 1,278,290 14,104,688 13,199,390
Net change in short-term investments (15,330,217) (7,853,681) (25,312,840) (3,642,333)
Limited partnerships disposed 8,608,406 1,714,006 15,731,345 2,464,814
Limited partnerships purchased (5,441,132) (9,173,305) (20,968,235) (17,400,928)
----------- ------------- ----------- ------------
Net cash (used) provided by investing
activities (6,933,025) (3,210,804) (9,699,282) 32,619,631
----------- ------------- ----------- ------------
Cash Flow Proceeds from issuance of common stock 229,008 75,290 615,670 165,177
from Financing Cash dividends paid to parent and common
Activities stockholders (715,217) (706,783) (1,429,010) (1,412,753)
Repayment of debt 0 0 (10,000,000) (10,000,000)
Cost of stock repurchased (648,948) (6,888) (1,172,838) (313,794)
----------- ------------- ----------- ------------
Net cash used by financing activities (1,135,157) (638,381) (11,986,178) (11,561,370)
----------- ------------- ----------- ------------
Net change in cash 15,514,050 (13,826,517) 18,932,158 8,422,965
Cash, beginning of period 22,427,006 36,984,522 19,008,898 14,735,040
----------- ------------- ----------- ------------
Cash, end of period $37,941,056 $ 23,158,005 $37,941,056 $ 23,158,005
=========== ============ =========== ============
The accompanying notes are an integral part of these statements.
6
PXRE
Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
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1. Significant Accounting Policies
Basis of Presentation and Consolidation
---------------------------------------
The 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 wholly owned subsidiaries, including PXRE Corporation ("PXRE Delaware"),
PXRE Reinsurance Company ("PXRE Reinsurance"), PXRE Reinsurance Ltd. ("PXRE
Bermuda"), PXRE Reinsurance (Barbados) Ltd. ("PXRE Barbados"), PXRE Solutions
Inc. ("PXRE Solutions"), PXRE Direct Underwriting Managers, Inc., PXRE Trading
Corporation, TREX Trading Corporation, Cat Fund L.P., PXRE Capital Trust I and
PXRE Limited. All material transactions between the consolidated companies have
been eliminated in preparing these consolidated financial statements.
PXRE has amended its quarterly report on Form 10-Q for the three months
ended March 31, 2001 in a report on Form 10-Q/A filed on August 17, 2001 (the
"10-Q/A Report"). All amounts in the accompanying notes give effect to the
restated amounts reflected in the 10Q/A Report.
7
PXRE
Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
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The Company was formed in 1999 as part of the reorganization of 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 subsidiary, PXRE Bermuda, operations in Barbados
through PXRE Barbados and the formation of a reinsurance intermediary, PXRE
Solutions.
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 cumulative effect of adoption, as reflected in the
restated results for the first quarter, was income of $319,000, net of tax.
Assumed reinsurance and retrocessional contracts that do not both
transfer significant insurance risk and result in the reasonable possibility
that the Company or its retrocessionaires may realize a significant loss from
the insurance risk assumed are required to be accounted for as deposits.
These contract deposits are included in other assets and other liabilities in
the Consolidated Balance Sheets and are accounted for as financing transactions
with interest income or expense credited or charged to the contract deposits.
Certain amounts in 2000 were reclassified to be consistent with the
2001 presentation.
8
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 such retrocessional coverage on premiums
written and earned are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ------------------
2001 2000 % 2001 2000 %
---- ---- - ---- ---- -
($000's)
Premiums written
Assumed $48,473 $70,621 $126,530 $152,868
Direct 0 1 0 98
------- ------- -------- --------
Gross premiums written 48,473 70,622 126,530 152,966
Ceded premiums written (11,502) (26,909) (33,386) (52,368)
------- ------- -------- --------
Net premiums written $36,971 $43,713 (15.4) $ 93,144 $100,598 (7.4)
======= ======= ======== ========
Premiums earned
Assumed $60,746 $68,099 $126,777 $124,037
Direct 4 471 11 1,381
Ceded (17,424) (24,930) (35,522) (46,037)
------- ------- -------- --------
Net premiums earned $43,326 $43,640 (0.7) $ 91,266 $ 79,381 15.0
======= ======= ======== =========
9
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 Six Months
Ended June 30, Ended June 30,
-------------- --------------
2001 2000 2001 2000
---- ---- ---- ----
($000's)
Net income (loss) available to common stockholders:
Income (loss) before cumulative effect $3,722 $(23,527) $7,218 $(19,519)
of accounting change
Cumulative effect of accounting change 0 0 319 0
------ -------- ------ --------
Net income (loss) available to stockholders $3,722 $(23,527) $7,537 $(19,519)
====== ========= ====== ========
Weighted average shares of common stock outstanding:
Weighted average shares of common shares
outstanding (basic) 11,470 11,383 11,503 11,384
Equivalent shares of stock options 166 115 170 72
Equivalent shares of restricted stock 242 194 261 199
------ -------- ------ --------
Weighted average common
equivalent shares (diluted) 11,878 11,692 11,934 11,655
====== ======== ====== ========
Weighted average common
equivalent shares when anti-dilutive 11,383 11,384
======== ========
Per share amounts:
Basic
Income (loss) before change in accounting $0.32 $(2.07) $0.63 $(1.71)
Cumulative effect of accounting change 0.00 0.00 0.03 0.00
----- ------ ----- ------
Net income (loss) $0.32 $(2.07) $0.66 $(1.71)
===== ====== ===== ======
Diluted
Income (loss) before change in accounting $0.31 $(2.07) $0.60 $(1.71)
Cumulative effect of accounting change 0.00 0.00 0.03 0.00
----- ------ ----- ------
Net income (loss) $0.31 $(2.07) $0.63 $(1.71)
===== ====== ===== ======
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.
10
PXRE
Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
The United States subsidiaries of PXRE file a consolidated U.S. federal
income tax return.
5. Losses and Loss Expense Liabilities
In 2000, PXRE Bermuda assumed certain finite reinsurance contracts that
involved long tail casualty risks. Such contracts are recorded on a discounted
basis. At June 30, 2001, reserves related to these contracts amounting to
$2,319,000 were discounted by $588,000 at a rate of 5.06% over 20 years.
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.
11
PXRE
Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
The following table summarizes the underwriting profit and (loss) by
segment:
Underwriting Operations
($000's)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2001 2000 % 2001 2000 %
---- ---- - ---- ---- -
Catastrophe and Risk Excess
North American $ 129 $ 3,378 $ 2,482 $ 6,027
International 11,401 (25,782) 20,468 (20,182)
Excess of loss cessions (6,301) (2,779) (9,842) (3,483)
------- -------- -------- --------
5,229 (25,183) 120.8 13,108 (17,638) 174.3
------- -------- -------- --------
Casualty
North American (740) (544) (849) (595)
International 140 (712) (367) (1,063)
------- -------- -------- --------
(600) (1,256) 52.2 (1,216) (1,658) 26.7
------- -------- -------- --------
Finite Business
North American 1,053 0 1,788 0
International 0 202 0 358
------- -------- -------- --------
1,053 202 421.3 1,788 358 399.4
------- -------- -------- --------
Other Lines
North American 1,693 (1,522) 1,103 (2,137)
International (1,144) (4,544) (3,453) (5,759)
------- -------- -------- --------
549 (6,066) 109.1 (2,350) (7,896) 70.2
------- -------- -------- --------
Total $ 6,231 $(32,303) 119.3 $11,330 $(26,834) 142.2
======= ======== ======= ========
12
PXRE
Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
The following tables summarize the net written and earned premium by
PXRE's business segments:
Net Premiums Written
($000's)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2001 2000 % 2001 2000 %
---- ---- - ---- ---- -
Catastrophe and Risk Excess
North American $ 5,645 $ 4,297 $ 13,765 $ 9,257
International 12,971 11,912 39,486 40,806
Excess of loss cessions (3,444) (1,701) (9,647) (6,783)
-------- --------- -------- --------
15,172 14,508 4.6 43,604 43,280
-------- --------- -------- --------
0.7
Casualty
North American 8,953 4,712 12,206 13,300
International 2,893 2,475 7,324 6,532
-------- --------- -------- --------
11,846 7,187 64.8 19,530 19,832
-------- --------- -------- --------
(1.5)
Finite Business
North American 8,431 0 22,996 0
International 0 15,346 0 17,925
-------- --------- -------- --------
8,431 15,346 (45.1) 22,996 17,925 28.3
-------- --------- -------- --------
Other Lines
North American 893 183 1,012 24
International 629 6,489 6,002 19,537
-------- --------- -------- --------
1,522 6,672 (77.2) 7,014 19,561 (64.1)
-------- --------- -------- --------
Total $ 36,971 $ 43,713 (15.4) $ 93,144 $100,598 (7.4)
======== ========= ========= ========
13
PXRE
Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
Net Premiums Earned
($000's)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2001 2000 % 2001 2000 %
---- ---- - ---- ---- -
Catastrophe and Risk Excess
North American $ 7,162 $ 4,730 $ 13,913 $ 9,542
International 17,351 17,316 38,471 37,020
Excess of loss cessions (4,628) (3,636) (9,616) (9,950)
------- -------- -------- --------
19,885 18,410 8.0 42,768 36,612 16.8
------- -------- -------- --------
Casualty
North American 5,296 4,458 9,592 8,554
International 3,248 2,100 6,256 4,312
------- -------- -------- --------
8,544 6,558 30.3 15,848 12,866 23.2
------- -------- -------- --------
Finite Business
North American 9,416 0 24,141 0
International 0 12,358 0 12,582
------- -------- -------- --------
9,416 12,358 (23.8) 24,141 12,582 91.9
------- -------- -------- --------
Other Lines
North American 1,005 107 778 465
International 4,476 6,207 7,731 16,856
------- -------- -------- --------
5,481 6,314 (13.2) 8,509 17,321 (50.9)
------- -------- -------- --------
Total $43,326 $ 43,640 (0.7) $ 91,266 $ 79,381 15.0
======= ======== ======== ========
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 Six Months Ended
June 30, June 30,
------- --------
($000's) 2001 2000 2001 2000
---- ---- ---- ----
Net underwriting profit (loss) $6,231 $(32,303) $11,330 $(26,834)
Net investment income 8,238 5,738 18,121 17,682
Net realized investment gains (losses) 429 74 815 (462)
Interest expense (766) (1,149) (2,739) (2,429)
Minority interest in consolidated subsidiary (2,219) (2,219) (4,438) (4,437)
Operating expenses (7,496) (8,593) (16,384) (18,398)
Unrealized foreign exchange on losses 165 (448) 2,181 59
Other (loss) income (68) 634 (182) 636
------ -------- ------- --------
Income (loss) before income taxes $4,514 $(38,266) $ 8,704 $(34,183)
====== ======== ======= ========
14
PXRE
Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
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 issues 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. Both parties have
submitted motions for summary judgment to the court and the trial of this matter
has been postponed pending the court's ruling on the pending summary judgment
motions. 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.
15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
The following is a discussion of the Company's results of operations
for the three and six months ended June 30, 2001 and 2000 and financial
condition as of June 30, 2001. This discussion and analysis should be read in
conjunction with the attached unaudited consolidated financial statements and
notes thereto and the Company's Annual Report on Form 10-K for the year ended
December 31, 2000 (the "10-K"), including the audited consolidated financial
statements and notes thereto and the discussion of Certain Risks and
Uncertainties contained in the 10-K.
16
The Company provides reinsurance products and services to a worldwide
market place, with a primary emphasis on commercial and personal property and
casualty reinsurance risks. The Company also provides marine and aerospace
reinsurance products and services and it offers both broker-based and
direct-writing distribution capabilities. The Company conducts its business
through its principal operating subsidiaries, PXRE Delaware, PXRE Reinsurance,
PXRE Solutions, PXRE Bermuda and PXRE Barbados, and has operations in Bermuda,
Barbados, the United States and Europe.
PXRE has specialized in property reinsurance for many years with a
strong focus on catastrophe-type products. This focus continues, but PXRE has
diversified its business in recent years through:
o the addition of a platform offering primarily casualty reinsurance
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 and Barbados
markets.
RESULTS OF OPERATIONS
Comparison of Second Quarter Results for 2001 with 2000
For the quarter ended June 30, 2001, net income was $3,722,000 versus a
net loss of $23,527,000 for the comparable period of 2000. The diluted net
income per common share was $0.31 for the second quarter of 2001 compared to a
diluted net loss per share of $2.07 for the second quarter of 2000, based on
diluted average shares outstanding of approximately 11,878,000 in 2001 and
11,383,000 in 2000.
17
Gross written premiums for the second quarter of 2001 and 2000 were as
follows:
Three Months Ended June 30,
-----------------------------------
Increase
2001 2000 (Decrease)
---- ---- ----------
($000's) %
Gross premiums written $48,473 $70,622 (31.4)
Ceded premiums:
Managed business participants 6,458 22,004 (70.7)
Catastrophe coverage, surplus reinsurance and
other 5,044 4,905 2.8
------- -------
Total reinsurance premiums ceded 11,502 26,909 (57.3)
------- -------
Net premiums written $36,971 $43,713 (15.4)
======= =======
The decline in gross and net premiums written primarily reflected
changes in the amount of Finite segment business written as well as 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 Casualty segments. Net premiums earned were comparable in the second quarter
of 2001 and 2000. The Catastrophe and Risk Excess segment increased 11.2% on an
earned basis before excess of loss cessions for the quarter, and 8.0% after
excess of loss cessions, which along with increases in the casualty segment
partially offset the loss of business resulting from the termination of the
Company's London operations.
Premiums ceded by PXRE to its managed business participants decreased
70.7% to $6,458,000 for the second quarter of 2001 compared with $22,004,000 for
the corresponding period of 2000. The decrease in premiums ceded to these
programs was due to a reduction in the Finite Business ceded to a managed
business participant, Select Reinsurance Ltd., a Bermuda based reinsurer
("Select Re"), in 2001.
Finite contracts that do not meet certain accounting requirements of
SFAS No. 113 that generally defines a reinsurance transaction are not booked
as premiums, but rather are treated by PXRE as deposits. During the second
quarter of 2001, PXRE entered into contracts that have expected deposits of
$35,900,000 from ceding companies on this deposit accounting basis. The Company
also has two finite retrocessional agreements in place with Select Re that are
accounted for as deposits pursuant to SFAS No. 113 totalling $18,500,000. In
connection with these agreements, the Company also entered into an interest
rate swap that provides the Company a favorable interest rate spread between
the interest rate credit the Company agreed to pay its cedents and the interest
rate credit it is receiving from Select Re. The Company believes the combination
of these retrocessional agreements and the related swap will enhance the long-
term profitability of the finite contracts to which they relate.
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 in that capacity seek to
protect PXRE's interest by ensuring that Select Re will remain able to fulfill
its obligations to the Company. Gerald Radke is also Co-Vice Chairman of Select
Re and Jeffrey Radke was formerly the President of Select Re and both are also
shareholders of Select Re, holding less than 1% in the aggregate of Select Re's
outstanding common stock. In the aggregate, the Company had net assets due from
Select Re related to reinsurance and deposit contracts of $61,911,000 as of June
30, 2001. This amount was fully secured by either funds withheld, trust assets
or letters of credit as of June 30, 2001.
18
Management fee income from all sources for the three months ended June
30, 2001 decreased 56.6% to $772,000 from $1,779,000 for the corresponding
period of 2000, reflecting the sale of 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 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 65.1% for the second quarter of 2001 compared with
157.3% for the comparable period of 2000. In comparison, the loss ratio for the
second quarter of 2001 reflected incurred catastrophe and risk excess losses of
$5,097,000 for 2001 and prior accident years. The loss ratio for the second
quarter of 2000 reflected incurred catastrophe losses of $39,535,000 net.
Significant catastrophe and risk losses affecting the three months
ended June 30, 2001 loss ratio are as follows:
Amount of Losses
----------------
Loss Event Gross Net
- ---------- ----- ---
(thousands)
Petrobras Oil Rig Disaster $6,489 $4,556
Tropical Storm Allison 4,533 2,891
Significant catastrophe and risk losses affecting the three months
ended June 30, 2000 loss ratio are as follows:
Amount of Losses
----------------
Loss Event Gross Net
- ---------- ----- ---
(thousands)
French Storm Lothar $28,448 $20,427
French Storm Martin 10,017 7,134
Hurricane Floyd 6,983 5,482
Hurricane Lenny 2,672 1,907
Typhoon Bart 2,019 1,559
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 $165,000 for the
three months ended June 30, 2001 compared to a loss of $448,000 for the
corresponding period of 2000.
19
During the second quarter of 2001, PXRE experienced adverse development
of $2,068,000 net for prior-year loss and loss expenses. The loss ratio for the
comparable period of 2000 was affected by adverse development of $43,507,000
net largely due to the French storms Lothar and Martin.
The underwriting expense ratio was 37.6% for the second quarter of 2001
compared with 36.0% for the comparable period of 2000. The commission and
brokerage ratio net of management fee income was 20.3% in the second quarter of
2001 compared with 16.2% for the comparable period of 2000, primarily due to
the sale of PXRE Managing Agency. The operating expense ratio was 17.3% in the
second quarter of 2001 compared with 19.8% for the corresponding period of 2000
largely due to sharply lower premiums, particularly in the Finite segment and a
reduction in business from the Lloyd's operation. As a result of the above, the
combined ratio was 102.7% for the second quarter of 2001 compared with 193.3%
for the comparable period of 2000.
Other operating expenses decreased to $7,496,000 for the three months
ended June 30, 2001 from $8,593,000 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 $470,000 for the three months ended June 30, 2001 compared to gains of
$399,000 for the corresponding period of 2000.
During the second quarter of 2001, interest expense decreased to
$766,000 compared to $1,149,000 in the corresponding period of 2000. The
decrease in interest expense primarily relates to a repayment of $10,000,000 of
the credit facility at March 31, 2001. The fixed interest rate on the
$50,000,000 portion is 6.34% while the variable interest rate on the remaining
$5,000,000 outstanding during the period from April 1, 2001 to June 29, 2001
was 5.9025%. 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 June 30, 2001 and 2000.
Net investment income for the three months ended June 30, 2001
increased 43.5% to $8,238,000 from $5,739,000 for the comparable period of 2000.
The increase 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 gain of $269,000 for the three months ended
June 30, 2001, compared to a loss of $1,201,000 for the three months ended June
30, 2000. PXRE's pre-tax annualized investment yield was 6.5% for the second
quarter of 2001 compared with 5.1% for the corresponding quarter in 2000, both
calculated using amortized cost and investment income before investment
expenses. Net realized investment gains for the second quarter of 2001 were
$429,000, compared to gains of $74,000 in the second quarter of 2000, resulting
from restructuring of the investment portfolio that was partially offset by a
writedown of certain securities.
20
The net effect of foreign currency exchange fluctuations were losses of
$305,000 in the second quarter of 2001 compared to losses of $49,000 for 2000.
PXRE recognized a tax expense of $792,000 in the second quarter of 2001
compared to a benefit of $14,739,000 in the prior year period. The tax expense
in 2001 differed from the statutory rate primarily due to mix of business in the
U.S. and Bermuda, as well as tax exempt income and the dividends received
deduction.
Comparison of Year-To-Date Results for 2001 with 2000
For the six months ended June 30, 2001, net income was $3,722,000
compared to net loss of $19,519,000 for the comparable period of 2000. The
diluted net income per common share was $0.63 for the first half of 2001
compared to diluted net loss per share of $1.71 for the first half of 2000,
based on diluted average shares outstanding of approximately 11,934,000 in 2001
and 11,384,000 in 2000. Gross written premiums for the first six months of 2001
and 2000 were as follows:
Six Months Ended June 30,
--------------------------- Increase
2001 2000 (Decrease)
---- ---- ----------
(000's) %
Gross premiums written $126,530 $152,966 (17.3)
Ceded premiums:
Managed business participants 19,739 34,005 (42.0)
Catastrophe coverage, surplus reinsurance
and other 13,647 18,363 (25.7)
-------- --------
Total reinsurance premiums ceded 33,386 52,368 (36.2)
-------- --------
Net premiums written $ 93,144 $100,598 (7.4)
======== ========
Gross premiums written for the first six months of 2001, declined 17.3%
to $126,530,000 from $152,966,000 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 six months ended June 30, 2001, declined 7.4% to $93,144,000 from
$100,598,000 for the corresponding period of 2000. Net written premiums in the
Casualty and Other Lines segments were affected by the withdrawal from Lloyd's
and reduced levels of business written partially offset by increases in the
Finite segment. Net premiums earned for the first six months of 2001, increased
15.0% to $91,266,000 from $79,381,000 for the comparable period of 2000. The
Catastrophe and Risk Excess segment increased 12.5% on an earned basis before
excess of loss cessions, and 16.8% after excess of loss cessions, along with
increases in the Casualty and Finite segment, which more than offset the loss of
business resulting from the termination of the Company's London operations.
21
Premiums ceded by PXRE to its managed business participants decreased
42.0% to $19,739,000 for the first six months of 2001 compared with $34,005,000
for the corresponding period of 2000. The decrease in premiums ceded to these
programs was due primarily to a reduction in ceded business from the Finite
segment to a managed business participant, Select Re, in 2001.
Catastrophe coverage, surplus and other ceded premiums written
decreased in 2001 from 2000 primarily due to a fronting program in 2000 that was
not renewed.
Management fee income from all sources for the six months ended June
30, 2001 decreased 23.5% to $2,734,000 from $3,573,000 for the corresponding
period of 2000, reflecting the sale of PXRE Managing Agency.
The loss ratio was 63.2% for the six months ended June 30, 2001
compared with 116.3% for the comparable period of 2000. The loss ratio for
the first six months of 2001 reflected incurred catastrophe and risk excess
losses of $12,132,000 net for the 2001 and prior accident years, largely due to
the sinking of the Petrobras Oil Rig. The loss ratio for the corresponding
period of 2000 reflected incurred catastrophe losses of $48,912,000 net.
Significant catastrophe and risk losses affecting the six months ended
June 30, 2001 loss ratio are as follows:
Amount of Losses
-----------------
Loss Event Gross Net
- ---------- ----- ---
(thousands)
Petrobras Oil Rig Disaster $15,550 $10,711
Tropical Storm Allison 4,533 2,891
Significant catastrophe and risk losses affecting the six months ended
June 30, 2000 loss ratio are as follows:
Amount of Losses
--------------------------------
Loss Event Gross Net
- ---------- ----- ---
(thousands)
French Storm Lothar $28,443 $19,033
French Storm Martin 25,588 18,806
Hurricane Lenny 4,936 3,256
Taiwan Earthquake 4,729 2,547
Hurricane Georges 2,648 2,357
Hurricane Floyd 1,852 1,975
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 $2,181,000 for the
first six months of 2001 compared to a gain of $59,000 for the corresponding
period of 2000.
22
During 2001, PXRE experienced adverse development of $7,133,000 net for
prior-year loss and loss expenses primarily due to casualty, marine and risk
excess loss development. The loss ratio for the comparable period of 2000 was
adversely affected by development of $51,756,000 net for prior year loss and
loss expenses largely due to the French storms Lothar and Martin.
The underwriting expense ratio was 40.2% for the six months ended June
30, 2001 compared with 39.8% or the comparable period of 2000. The commission
and brokerage ratio, net of management fee income was 22.3% in the first half of
2001, compared with 16.6% 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 17.9% in
the first half of 2001 compared with 23.2% 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 103.4% for the first six months of 2001 compared with 156.1% for the
comparable period of 2000.
Other operating expenses decreased to $16,384,000 for the six months
ended June 30, 2001 from $18,398,000 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 $824,000 for 2001 compared to losses of $61,000 for the corresponding
period of 2000.
During the first six months of 2001, interest expense increased to
$2,738,000 compared to $2,429,000 in the corresponding period of 2000 including
a charge for the change in the fair value of a derivative of $668,000. The
interest expense reflects the repayments of $10,000,000 of the credit facility
at March 31, 2000 and 2001. The fixed interest rate on the $50,000,000 portion
is 6.34% while the variable interest rate on the remaining $5,000,000
outstanding during the period from April 1, 2001 to June 29, 2001 was 5.9025%.
This is part of PXRE Delaware's Credit Agreement with a syndicate of lenders
(as described under "Liquidity and Capital Resources"). In addition, the Company
recorded income of $319,000, after tax in the first quarter of 2001, for the
cumulative effect of adoption of a change of accounting principle under No. 133,
related to the credit facility. PXRE incurred minority interest expense
amounting to $4,438,000 related to PXRE's $100 million TRUPs during the six
month period ending June 30, 2001 compared to $4,437,000 in the corresponding
period of 2000.
Net investment income for the six months ended June 30, 2001 increased
2.5% to $18,121,000 from $17,682,000 for the comparable period of 2000. PXRE's
pre-tax annualized investment yield was 6.9% for the six months ended June 30,
2001 compared with 7.3% for the corresponding quarter in 2000, both calculated
using amortized cost and investment income before investment expenses. Net
realized investment gains for the six months of 2001 were $815,000, compared to
losses of $462,000 for the corresponding period of 2000, reflecting the
restructuring of the investment portfolio that was partially offset by a
writedown of certain securities.
23
The net effect of foreign currency exchange fluctuations were gains of
$1,357,000 in the six months ended June 30, 2001 compared to losses of $2,000
for 2000.
PXRE recognized a tax expense of $1,658,000 in the first six months of
2001 compared to a benefit of $14,664,000 in 2000. The tax expense in 2001
differed from the statutory rate primarily due to mix of business in the U.S.
and Bermuda, as well as tax exempt income and the dividends received deduction.
FINANCIAL CONDITION
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 $35,031,000. During the first six months
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. As at June 30,
2001, the statutory capital and surplus of PXRE Bermuda was estimated to be
$34,631,000 and the amount required to be maintained was estimated to be
$7,006,000.
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
24
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 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 June 30, 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 June 30, 2001, after paying down $10,000,000
on March 31, 2001 and March 31, 2000, is expected to incur an interest rate of
4.71% for the third 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
25
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 compliance with Leverage Ratio, Fixed Charge Coverage Ratio, Risk-Based
Capital Ratio and Combined Statutory Surplus requirements. As at June 30, 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 six months ended
June 30, 2001 in respect of the Capital Securities (and related Subordinated
Debt Securities) amounted to $4,438,000. 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
26
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 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).
Investments
As of June 30, 2001, 74.4% of PXRE's investment portfolio, at fair
value, consisted of fixed maturities and short-term investments.
Of PXRE's fixed maturities portfolio at June 30, 2001, 93.1% 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 57.9% of fixed
maturities based on fair value at June 30, 2001. The average market yield to
maturity of PXRE's fixed maturities portfolio at June 30, 2001 and 2000, was
5.5% and 6.6%, respectively.
PXRE had no investments in real estate or commercial mortgage loans as
of June 30, 2001; however, PXRE has invested in common and preferred shares of
publicly traded REITS with a fair value of $3,584,000 at June 30, 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 June 30,
27
2001 after-tax unrealized loss of $54,000 ($0.01 book value per share) was
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 $98,467,000
at June 30, 2001, compared to $71,468,000 at December 31, 2000 including one
hedge fund amounting to $25,052,000 at June 30, 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 June 30, 2001, hedge fund investments held by PXRE amounted
to approximately $124,783,000 (including $25,052,000 in short term investments
mentioned above), representing 14.9% of June 30, 2001 total assets. As at June
30, 2001, hedge fund investments with market values ranging from $966,000 to
$25,052,000 were administered by thirty-two managers. At that date, one
investment, a "fund-of-funds" investment amounted to approximately $22,341,000,
or 17.9% of total hedge fund investments and was comprised of funds managed by
sixteen of the thirty-two managers, five of which are affiliated with Mariner
Investment Group, Inc. ("Mariner"), the sole shareholder of which is also the
Chairman of the Board and a founding shareholder of Select Re.
As at June 30, 2001 PXRE's investment portfolio also included
approximately $26,696,000 of mezzanine bond and equity limited partnership
investments, with fair values ranging from $2,050,000 to $9,357,000 and
remaining aggregate cash call commitments in respect of such investments of
$964,000. 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 June 30, 2001, included $3,043,000
attributable to hedge funds and other limited partnership investments.
Liquidity
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 $23,582,000 during the second
quarter of 2001 compared with net cash flow used by operations of $9,977,000
during 2000, due to the effects of timing of collection of receivables and
reinsurance recoverables and payments of losses.
28
Dividends declared in the second quarter of 2001 to shareholders were
approximately $715,000 compared to $707,000 in 2000. The expected annual
dividend based on shares outstanding at June 30, 2001 is approximately
$2,857,000.
Book value per common share was $22.38 at June 30, 2001.
In December 1999, the Company announced a stock repurchase program of
up to 1,000,000 shares. The Company had 11,902,933 common shares outstanding as
of June 30, 2001. No share repurchases were made during the second 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 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's 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 $19,644,000 at June 30,
2001 are restricted from being paid as a dividend through June, 2003.
All amounts classified as reinsurance recoverable at June 30, 2001 are
considered by management of PXRE to be collectible in all material respects.
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
29
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 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.
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. The factors listed above should not be construed as
exhaustive.
The Company undertakes no obligation to release publicly the results
of any future revisions the Company may make to forward looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
30
ITEM 3. 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.
31
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At PXRE's Annual Meeting of Shareholders held on June 12, 2001, the
holders of Common Shares of PXRE approved the following:
(1) The election of three Class III directors to serve
until the 2004 Annual Meeting of Shareholders and
until their successors have been elected and have
qualified:
Nominee Votes For Votes Withheld
--------------------------------------------------------------
F. Sedgwick Browne 8,291,574 365,946
David W. Searfoss 8,291,574 365,946
Bernard Kelly 8,291,574 365,946
(ii) The appointment of KPMG as PXRE's independent
auditors for the fiscal year ending December 31,
2001, and referral to the Board of the determination
of their remuneration by the vote of 8,504,390 votes
for, 8,260 votes against.
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 Forms 8-K and 8-K/A with the Securities and Exchange Commission
relating to a change in its certified accountants from PricewaterhouseCoopers
LLP to KPMG. 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/A described the retention of KPMG to replace
PricewaterhouseCoopers.
32
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.
August 17, 2001 By:\s\ James F. Dore
-----------------
James F. Dore
Executive Vice President
and Chief Financial Officer
33
STATEMENT OF DIFFERENCES
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The service mark symbol shall be expressed as..................... 'sm'