- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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, of principal (Mailing Address)
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 November 12, 2001 11,934,873 common shares, $1.00 par value per
share, of the Registrant were outstanding.
- --------------------------------------------------------------------------------
PXRE GROUP LTD.
INDEX
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets at September 30, 2001
and December 31, 2000 3
Consolidated Statements of Operations and Comprehensive Income
for the three and nine months ended September 30, 2001 and 2000 4
Consolidated Statements of Stockholders' Equity for the three and nine
months ended September 30, 2001 and 2000 5
Consolidated Statements of Cash Flows for the three and nine months ended
September 30, 2001 and 2000 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
PART II. OTHER INFORMATION 32
2
PXRE Consolidated Balance Sheets
Group Ltd. (Unaudited)
- -------------------------------------------------------------------------------
September 30, December 31,
2001 2000
---- ----
Assets Investments:
Available for sale:
Fixed maturities, available-for-sale, at fair value (amortized
cost $212,031,000 and $281,474,000, respectively) $ 216,468,341 $281,721,678
Equity securities, at fair value (cost $3,784,000 and $16,396,000,
respectively) 2,858,351 16,260,089
Short-term investments
Hedge funds 16,404,112 23,364,843
Non-hedge funds 159,050,731 48,103,034
Trading securities
Hedge funds (cost $20,250,000 and $23,250,000, respectively) 24,869,756 27,819,800
Limited partnerships, at equity
Hedge funds (cost $48,760,000 and $39,264,000, respectively) 70,928,248 58,570,720
Non-hedge funds (cost $18,053,000 and $27,506,000,
respectively) 20,390,390 30,251,802
-------------- ------------
Total investments 510,969,929 486,091,966
Cash 25,971,134 19,008,897
Accrued investment income 2,786,625 5,010,538
Receivables:
Unreported premiums 85,161,879 54,607,126
Balances due from intermediaries and brokers, net 27,856,123 20,074,909
Other receivables 15,198,431 23,498,041
Reinsurance recoverable 260,386,939 117,196,459
Ceded unearned premiums 14,395,162 13,764,781
Deferred acquisition costs 8,327,425 9,697,003
Income tax recoverable 25,060,641 17,980,985
Other assets 41,748,761 17,816,090
-------------- ------------
Total assets $1,017,863,049 $784,746,795
============== ============
Liabilities Losses and loss expenses $ 453,713,171 $251,619,635
Unearned premiums 53,589,353 49,548,368
Debt payable 55,000,000 65,000,000
Reinsurance balances payable 87,824,998 34,311,963
Other liabilities 34,273,512 25,355,172
-------------- ------------
Total liabilities 684,401,034 425,835,138
-------------- ------------
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 99,528,858 99,525,376
-------------- ------------
Stockholders' Serial preferred stock, $1.00 par value -- 10,000,000 shares
Equity authorized respectively; 0 shares issued and outstanding 0 0
Common stock, $1.00 par value -- 50,000,000 shares
authorized, 11,928,151 and 11,820,079 shares
issued and outstanding, respectively 11,928,151 11,820,079
Additional paid-in capital 176,886,725 175,014,314
Accumulated other comprehensive income net of deferred income
tax expense of $820,000 and $39,000, respectively 1,273,070 (69,147)
Retained earnings 47,848,080 76,301,524
Restricted stock at cost (422,912 and 386,047 shares) (4,002,869) (3,680,489)
-------------- ------------
Total stockholders' equity 233,933,157 259,386,281
-------------- ------------
Total liabilities and stockholders' equity $1,017,863,049 $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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Revenues Net premiums earned $ 17,543,330 $40,508,153 $108,808,936 $119,889,291
Net investment income 5,766,713 6,778,407 23,887,811 24,460,876
Net realized investment gains (losses) 3,425,882 (127,731) 4,240,666 (589,828)
Management fees 2,335,219 725,564 5,068,903 4,298,795
------------ ----------- ------------ ------------
29,071,144 47,884,393 142,006,316 148,059,134
------------ ----------- ------------ ------------
Losses and Losses and loss expenses incurred 64,133,605 19,114,520 121,774,003 111,470,052
Expenses Commissions and brokerage (3,957,510) 9,045,722 19,072,479 25,782,598
Other operating expenses 7,004,931 8,229,302 23,389,112 26,627,682
Interest expense 854,957 1,176,581 3,593,447 3,605,824
Minority interest in consolidated
subsidiary 2,219,466 2,218,899 6,657,913 6,656,250
------------ ----------- ------------ ------------
70,255,449 39,785,024 174,486,954 174,142,406
------------ ----------- ------------ ------------
(Loss) income before income taxes and
cumulative effect of accounting change (41,184,305) 8,099,369 (32,480,638) (26,083,272)
Income tax benefit (provision) 7,338,000 (4,716,000) 5,851,959 9,948,000
------------ ----------- ------------ ------------
(Loss) income before cumulative effect of
accounting change (33,846,305) 3,383,369 (26,628,679) (16,135,272)
Cumulative effect of accounting change,
net of $171,959 tax benefit 0 0 319,353 0
------------ ----------- ------------ ------------
Net (loss) income $(33,846,305) $ 3,383,369 $(26,309,326) $(16,135,272)
Comprehensive Other comprehensive (loss) income, net of tax:
Income Net unrealized appreciation on investments 2,191,784 2,380,225 2,206,441 4,687,548
Net unrealized (depreciation) appreciation
on cash flow hedge (864,224) 0 (864,224) 0
------------ ----------- ------------ ------------
Comprehensive (loss) income $(32,518,745) $5,763,594 $(24,967,109) $(11,447,724)
============ ========== ============ ============
Per Share Basic:
Net (loss) income before cumulative
effect of accounting change $ (2.94) $ 0.30 $ (2.31) $ (1.42)
Cumulative effect of accounting change 0.00 0.00 0.03 0.00
------------ ----------- ------------ ------------
Net (loss) income $ (2.94) $ 0.30 $ (2.28) $ (1.42)
============ =========== ============ ============
Average shares outstanding 11,501,372 11,396,150 11,503,570 11,385,234
============ =========== ============ ============
Diluted:
Net (loss) income before cumulative
effect of accounting change $ (2.94) $ 0.29 $ (2.31) $ (1.42)
Cumulative effect of accounting change 0.00 0.00 0.03 0.00
------------ ----------- ------------ ------------
Net (loss) income $ (2.94) $ 0.29 $ (2.28) $ (1.42)
============ =========== ============ ============
Average shares outstanding 11,501,372 11,653,279 11,503,570 11,385,234
============ =========== ============ ============
The accompanying notes are an integral part of these statements.
4
PXRE Consolidated Statements of Stockholders' Equity
Group Ltd. (Unaudited)
- -------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Common Stock: Balance at beginning of period $ 11,902,933 $ 11,766,265 $ 11,820,079 $ 11,679,769
Issuance of shares, net 25,218 27,283 108,072 113,779
------------ ----------- ------------ ------------
Balance at end of period $ 11,928,151 $ 11,793,548 $ 11,928,151 $ 11,793,548
============ ============ ============ ============
Additional Balance at beginning of period $176,630,572 $174,530,456 $175,014,314 $173,682,802
Paid-in Capital: Issuance of common shares 274,109 207,765 3,194,492 1,562,942
Other (17,956) (406,803) (1,322,081) (914,326)
------------ ------------ ------------ ------------
Balance at end of period $176,886,725 $174,331,418 $176,886,725 $174,331,418
============ ============ ============ ============
Treasury Stock: Balance at beginning of period $ 0 $ 0 $ 0 $ 0
Repurchase of common stock 0 (2,424) (1,172,837) (9,312)
Cancellation of common stock 0 2,424 1,172,837 9,312
------------ ------------ ------------ ------------
Balance at end of period $ 0 $ 0 $ 0 $ 0
============ ============ ============ ============
Accumulated Balance at beginning of period $ (54,490) $ (4,444,679) $ (69,147) $ (6,752,002)
Other Change in unrealized gains for
Comprehensive the period 2,191,784 2,380,225 2,206,441 4,687,548
Income Change in cash flow hedge for the period (864,224) 0 (864,224) 0
------------ ------------ ------------ ------------
Balance at end of period $ 1,273,070 $ (2,064,454) $ 1,273,070 $ (2,064,454)
============ ============ ============ ============
Retained Balance at beginning of period $ 82,409,492 $ 69,001,224 $ 76,301,524 $ 89,932,620
Earnings: Net (loss) income (33,846,303) 3,383,369 (26,309,326) (16,135,272)
Dividends paid to common stockholders (715,109) (708,567) (2,144,118) (2,121,322)
------------ ------------ ------------ ------------
Balance at end of period $ 47,848,080 $ 71,676,026 $ 47,848,080 $ 71,676,026
============ ============ ============ ============
Restricted Stock: Balance at beginning of period $ (4,525,445) $ (5,103,605) $ (3,680,489) $ (5,264,206)
Issuance of restricted stock 0 0 (2,449,098) (1,276,445)
Amortization of restricted stock 522,576 667,708 1,880,466 1,939,339
Other 0 47,600 246,252 213,015
------------ ------------ ------------ ------------
Balance at end of period $ (4,002,869) $ (4,388,297) $ (4,002,869) $ (4,388,297)
============ ============ ============ ============
Total Balance at beginning of period $266,363,062 $245,749,661 $259,386,281 $263,278,983
Stockholders' Issuance of common shares 299,327 235,048 3,302,564 1,676,721
Equity: Repurchase of common stock 0 (2,424) (1,172,837) (9,312)
Restricted stock, net 522,576 667,708 (568,632) 662,894
Unrealized appreciation on investments,
net of deferred income tax 2,191,784 2,380,225 2,206,441 4,687,548
Unrealized depreciation on cash flow
hedge, net of deferred income tax (864,224) 0 (864,224) 0
Net (loss) income (33,846,303) 3,383,369 (26,309,326) (16,135,272)
Dividends (715,109) (708,567) (2,144,118) (2,121,322)
Other (17,956) (356,779) 97,008 (691,999)
------------ ------------ ------------ ------------
Balance at end of period $233,933,157 $251,348,241 $233,933,157 $251,348,241
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
5
PXRE Consolidated Statements of Cash Flows
Group Ltd. (Unaudited)
- -------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Cash Flow Net (loss) income $ (33,846,303) $ 3,383,369 $ (26,309,326) $(16,135,272)
from Operating Adjustments to reconcile net income to net cash
Activities provided (used) by operating activities:
Losses and loss expenses 185,189,237 (14,400,664) 202,093,533 15,369,497
Unearned premiums 1,532,520 (2,043,587) 3,410,604 22,340,044
Deferred acquisition costs 1,567,911 750,602 1,369,578 (1,901,094)
Receivables (6,660,329) (12,138,877) (30,382,289) (5,674,609)
Reinsurance balances payable 35,270,076 (3,347,569) 53,513,033 (1,140,507)
Reinsurance recoverable (157,530,064) 26,731,617 (143,190,478) (17,887,212)
Income tax recoverable (5,213,706) 10,720,833 (5,214,814) 13,507,536
Equity in earnings of limited partnerships (653,209) (1,820,449) (6,887,799) (9,641,098)
Other (29,293,441) (6,860,542) (17,421,732) (10,497,848)
------------- ------------ ------------- ------------
Net cash (used) provided by operating
activities (9,637,308) 974,733 30,980,310 (11,660,563)
------------- ------------ ------------- ------------
Cash Flow Cost of fixed maturity investments (37,669,537) (35,081,132) (160,301,064) (52,462,341)
from Investing Fixed maturity investments matured/disposed 110,784,629 18,428,172 233,158,973 78,474,639
Activities Payable for securities (10,011,307) (21,864) 17,887 (1,937,087)
Cost of equity securities (455,012) (7,152,262) (3,481,263) (9,903,609)
Equity securities disposed 1,529,918 6,563,842 15,634,606 19,763,232
Net change in short-term investments (76,634,856) 1,282,997 (101,947,696) (2,359,336)
Other invested assets and trading portfolio
disposed 14,539,347 19,110,894 30,270,692 21,575,708
Other invested assets and trading portfolio
purchased (4,000,000) (2,957,399) (24,968,235) (20,358,327)
------------- ------------ ------------- ------------
Net cash (used) provided by investing
activities (1,916,818) 173,248 (11,616,100) 32,792,879
------------- ------------ ------------- ------------
Cash Flow Proceeds from issuance of common stock 299,312 282,648 914,982 447,825
from Financing Cash dividends paid to parent and common
Activities stockholders (715,109) (708,567) (2,144,118) (2,121,320)
Repayment of debt 0 0 (10,000,000) (10,000,000)
Cost of stock repurchased 0 (2,424) (1,172,838) (316,218)
------------- ------------ ------------- ------------
Net cash used by financing activities (415,797) (428,343) (12,401,974) (11,989,713)
------------- ------------ ------------- ------------
Net change in cash (11,969,923) 719,638 6,962,236 9,142,603
Cash, beginning of period 37,941,057 23,158,005 19,008,898 14,735,040
------------- ------------ ------------- ------------
Cash, end of period $ 25,971,134 $ 23,877,643 $ 25,971,134 $ 23,877,643
============= ============ ============= ============
The accompanying notes are an integral part of these statements.
6
PXRE Notes to Consolidated Financial Statements (Unaudited)
Group Ltd.
- -------------------------------------------------------------------------------
1. Significant Accounting Policies
Basis of Presentation and Consolidation
---------------------------------------
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.
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 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
7
PXRE Notes to Consolidated Financial Statements (Unaudited)
Group Ltd.
- --------------------------------------------------------------------------------
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.
As of July 1, 2001, PXRE has recognized the effects of a cash flow
hedge on a portion of its outstanding debt payable, which is reflected as a
component of other comprehensive income, amounting to a decrease of $864,000,
net of tax.
Certain amounts in 2000 were reclassified to be consistent with the
2001 presentation.
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 Nine Months Ended
September 30, September 30,
--------------------- ----------------------
2001 2000 % 2001 2000 %
---- ---- - ---- ---- -
($000's)
Premiums written
Assumed $ 97,092 $ 56,187 $ 223,622 $209,055
Direct 0 (16) 0 82
-------- -------- --------- --------
Gross premiums written 97,092 56,171 223,622 209,137
Ceded premiums written (78,016) (19,697) (111,402) (72,065)
-------- -------- --------- --------
Net premiums written $ 19,076 $ 36,474 (47.7) $ 112,220 $137,072 (18.1)
======== ======== ========= ========
Premiums earned
Assumed $ 92,794 $ 51,590 $ 219,571 $186,738
Direct 0 109 11 1,490
Ceded (75,251) (11,191) (110,773) (68,339)
-------- -------- --------- --------
Net premiums earned $ 17,543 $ 40,508 (56.7) $ 108,809 $119,889 (9.2)
======== ======== ========= ========
8
PXRE Notes to Consolidated Financial Statements (Unaudited)
Group Ltd.
- --------------------------------------------------------------------------------
3. Earnings Per Share
The table below presents the computation of basic and diluted earnings
per share:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2001 2000 2001 2000
---- ---- ---- ----
($000's)
Net (loss) income available to
common stockholders:
(Loss) income before cumulative effect
of accounting change $(33,846) $3,383 $(26,628) $(16,135)
Cumulative effect of accounting
change 0 0 319 0
-------- ------ -------- --------
Net (loss) income available to
stockholders $(33,846) $3,383 $(26,309) $(16,135)
======== ====== ======== ========
Weighted average shares of common stock
outstanding:
Weighted average shares of common
shares outstanding (basic) 11,501 11,396 11,504 11,385
Equivalent shares of stock options 138 68 163 72
Equivalent shares of restricted stock 253 189 280 227
-------- ------ -------- --------
Weighted average common
equivalent shares (diluted) 11,892 11,653 11,947 11,684
======== ====== ======== ========
Weighted average common
equivalent shares when anti-dilutive 11,501 11,504 11,385
======== ======== ========
Per share amounts:
Basic
(Loss) income before change in
accounting $ (2.94) $ 0.30 $ (2.31) $ (1.42)
Cumulative effect of accounting change 0.00 0.00 0.03 0.00
-------- ------ -------- --------
Net (loss) income $ (2.94) $ 0.30 $ (2.28) $ (1.42)
======== ======== ======== ========
Diluted
(Loss) income before change in
accounting $ (2.94) $ 0.29 $ (2.31) $ (1.42)
Cumulative effect of accounting change 0.00 0.00 0.03 0.00
-------- ------ -------- --------
Net (loss) income $ (2.94) $ 0.29 $ (2.28) $ (1.42)
======== ====== ======== ========
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
9
PXRE Notes to Consolidated Financial Statements (Unaudited)
Group Ltd.
- --------------------------------------------------------------------------------
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 Bermuda assumed certain finite reinsurance contracts that
involved long tail casualty risks. Such contracts are recorded on a discounted
basis. At September 30, 2001, reserves related to these contracts amounting to
$2,861,000 were discounted by $260,000 at a rate of 5.06% over 18 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.
10
PXRE Notes to Consolidated Financial Statements (Unaudited)
Group Ltd.
- --------------------------------------------------------------------------------
The following table summarizes the underwriting profit (loss) by
segment:
Underwriting Operations
($000's)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
2001 2000 % 2001 2000 %
---- ---- - ---- ---- -
Catastrophe and Risk Excess
North American $(38,045) $ 4,401 $(35,564) $ 10,429
International (49,865) 8,274 (29,395) (15,055)
Excess of loss cessions 49,513 (1,764) 39,671 (2,121)
-------- ------- -------- --------
(38,397) 10,911 (451.9) (25,288) (6,747) (274.8)
-------- ------- -------- --------
Casualty
North American (472) (146) (1,321) (740)
International 93 115 (274) (948)
-------- ------- -------- --------
(379) (31) (1,122.6) (1,595) (1,688) 5.5
-------- ------- -------- --------
Finite Business
North American 5 (3) 1,792 307
International 0 0 0 0
-------- ------- -------- --------
5 (3) 266.7 1,792 307 483.7
-------- ------- -------- --------
Other Lines
North American (232) (481) 871 (2,570)
International 479 1,041 (2,974) (4,692)
-------- ------- -------- --------
247 560 (55.9) (2,103) (7,262) 71.0
-------- ------- -------- --------
Total $(38,524) $11,437 (436.8) $(27,194) $(15,390) (76.7)
======== ======= ======== ========
11
PXRE Notes to Consolidated Financial Statements (Unaudited)
Group Ltd.
- --------------------------------------------------------------------------------
The following tables summarize the net written and earned premium by
PXRE's business segments:
Net Premiums Written
($000's)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ --------------------------
2001 2000 % 2001 2000 %
---- ---- -- ---- ---- -
Catastrophe and Risk Excess
North American $ 13,352 $ 8,037 $ 27,117 $ 17,294
International 37,027 19,097 76,513 59,864
Excess of loss cessions (52,868) (8,032) (62,514) (14,815)
-------- ------- -------- --------
(2,489) 19,102 (113.0) 41,116 62,343 (34.0)
-------- ------- -------- --------
Casualty
North American 7,391 5,568 19,597 18,867
International 4,285 4,567 11,609 11,100
-------- ------- -------- --------
11,676 10,135 15.2 31,206 29,967 4.1
-------- ------- -------- --------
Finite Business
North American 3,090 826 26,086 18,572
International 0 0 0 0
-------- ------- -------- --------
3,090 826 274.1 26,086 18,572 40.5
-------- ------- -------- --------
Other Lines
North American 3,933 1,123 4,945 1,324
International 2,866 5,288 8,867 24,866
-------- ------- -------- --------
6,799 6,411 6.1 13,812 26,190 (47.3)
-------- ------- -------- --------
Total $ 19,076 $36,474 (47.7) $112,220 $137,072 (18.1)
======== ======= ======== ========
12
PXRE Notes to Consolidated Financial Statements (Unaudited)
Group Ltd.
- --------------------------------------------------------------------------------
Net Premiums Earned
($000's)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
2001 2000 % 2001 2000 %
---- ---- - ---- ---- -
Catastrophe and Risk Excess
North American $ 11,663 $ 5,785 $ 25,575 $ 15,327
International 34,200 17,203 72,671 54,192
Excess of loss cessions (51,018) (4,768) (60,632) (14,716)
-------- -------- -------- --------
(5,155) 18,220 (128.3) 37,614 54,803 (31.4)
-------- -------- -------- --------
Casualty
North American 7,509 4,966 17,100 13,520
International 4,912 4,770 11,169 9,082
-------- -------- -------- --------
12,421 9,736 27.6 28,269 22,602 25.1
-------- -------- -------- --------
Finite Business
North American 3,321 3,239 27,461 15,733
International 0 0 0 0
-------- -------- -------- --------
3,321 3,239 2.5 27,461 15,733 74.5
-------- -------- -------- --------
Other Lines
North American 1,404 924 2,182 1,472
International 5,552 8,389 13,283 25,279
-------- -------- -------- --------
6,956 9,313 (25.3) 15,465 26,751 (42.2)
-------- -------- -------- --------
Total $ 17,543 $ 40,508 (56.7) $108,809 $119,889 (9.2)
======== ======== ======== ========
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 Nine Months
Ended September 30, Ended September 30,
--------------------- ----------------------
2001 2000 2001 2000
---- ---- ---- ----
($000's)
Net underwriting (loss) profit $(38,524) $11,437 $(27,194) $(15,390)
Net investment income 5,767 6,779 23,888 24,461
Net realized investment gains (losses) 3,426 (128) 4,241 (590)
Interest expense (855) (1,177) (3,594) (3,606)
Minority interest in consolidated subsidiary (2,220) (2,219) (6,658) (6,656)
Operating expenses (7,005) (8,230) (23,389) (26,628)
Unrealized foreign exchange on losses (1,672) 1,186 509 1,244
Other (loss) income (101) 451 (284) 1,082
-------- ------- -------- --------
(Loss) income before income taxes $(41,184) $ 8,099 $(32,481) $(26,083)
======== ======= ======== ========
13
PXRE Notes to Consolidated Financial Statements (Unaudited)
Group Ltd.
- --------------------------------------------------------------------------------
7. Contingencies
PXRE entered into weather option agreements in May 1999 with two
counterparties. In April 2000, these counterparties submitted invoices to PXRE
Delaware in the aggregate sum of $8,252,500 seeking payment under the weather
option agreements, which invoices have been paid. PXRE Delaware insured its
obligations under these weather option agreements through two Commercial Inland
Marine Weather Insurance Policies issued by Terra Nova Insurance Company Limited
("Terra Nova"). PXRE Delaware submitted claims under these policies to Terra
Nova in April 2000. Terra Nova has denied coverage, contending that its Managing
General Agent had no authority to issue these policies. PXRE Delaware disagrees
with Terra Nova's denial and 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.
14
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 nine months ended September 30, 2001 and 2000 and financial
condition as of September 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.
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. 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.
PXRE announced in September 2001, that it will return its focus to its
core broker-market, property, marine and aerospace, catastrophe reinsurance,
retrocessional and risk excess business.
RESULTS OF OPERATIONS
Comparison of Third Quarter Results for 2001 with 2000
For the quarter ended September 30, 2001, net loss was $33,846,000
versus a net income of $3,383,000 for the comparable period of 2000. The diluted
net loss per common share was $2.94 for the third quarter of 2001 compared to a
diluted net income per share of $0.29 for the third quarter of 2000, based on
diluted average shares outstanding of approximately 11,501,000 in 2001 and
11,653,000 in 2000.
15
World Trade Center Event
PXRE's estimated losses related to the World Trade Center Event ("WTC")
on September 11, 2001 resulted in a net loss after tax of $35.3 million or $3.07
per diluted share. This loss estimate was developed through a
contract-by-contract review of the Company's entire book of business and
assuming full-limit losses on all contracts deemed affected except where
credibly advised to the contrary by the Company's clients.
The following depicts the impact on the Company's results in the third
quarter of 2001:
WTC
Event
($000's) ------
Gross premiums written $ 30,030
Net premiums written (29,020)
Net premiums earned (29,020)
Management Fees 613
Net Losses Incurred 27,190
Commissions and Brokerage (11,432)
--------
Underwriting results before taxes (44,165)
Taxes 8,865
--------
Net Loss $(35,300)
========
Gross losses and loss expenses arising from the WTC event totaled
$180,710,000. This gross loss was reduced by specific and corporate
retrocessional recoverables of $153,520,000. Almost 80% of the Company's
reinsurance recoverables are either fully collateralized or reside with entities
rated "AA-" or higher. Only 2% of the total amount is attributable to
uncollaterized contracts with entities rated lower than "A." In this regard,
specific reinsurance coverage, particularly in the risk excess exposure area
reduced PXRE's loss exposure from $47 million to $11 million. Additionally, the
Company had a number of corporate-level retrocessional covers that further
reduced the losses. The first are 19.7% quota share reinsurance contracts
providing $28 million protection, and a series of excess of loss covers
providing a benefit of $89 million. The net result of these covers reduced the
Company's gross loss from $180,710,000 to $27,190,000. Many of these
retrocessional covers on both an assumed and ceded basis have either
reinstatement or additional premiums, resulting in a net premium reduction of
$29 million. These additional costs are partially reduced by approximately $12
million of reduced commission and brokerage, bringing the net impact to $44
million before tax.
16
The following table more fully details the impact of the WTC event on
the third quarter of 2001:
Results
Results Excluding
as WTC WTC
($000's) Reported Event Event
--------- ------ ---------
Gross premiums written $ 97,092 $ 30,030 $67,062
Net premiums written 19,076 (29,020) 48,096
Net premiums earned 17,543 (29,020) 46,563
Management fees 2,335 613 1,722
Net losses incurred 64,134 27,190 36,944
Commission and brokerage (3,958) (11,432) 7,474
-------- -------- -------
Underwriting results before taxes $(40,298) $(44,165) $ 3,867
======== ======== =======
Written premiums for the third quarter of 2001 and 2000 were as
follows:
Three Months Ended September 30,
--------------------------------------------
Increase
2001 2000 (Decrease)
---- ---- ----------
($000's) %
Gross premiums written $97,092 $56,171 72.9
Ceded premiums:
Managed business participants 19,042 8,708 118.7
Catastrophe coverage, surplus reinsurance and other 58,974 10,989 436.7
------- -------
Total reinsurance premiums ceded 78,016 19,697 296.1
------- -------
Net premiums written $19,076 $36,474 (47.7)
======= =======
Gross written premiums in the third quarter increased 72.9% to
$97,092,000 from $56,171,000 in the year-earlier period. Net premiums written
fell 47.7% to $19,076,000 versus $36,474,000 in the third quarter of 2000. Gross
and net premiums written were affected by the WTC event due to reinstatement
premiums and additional premiums payable by and to the Company as a result of
this loss. Excluding the effects of the WTC event and the Company's London
operations, which is winding down, the Company experienced growth in all
segments for premiums written and earned. Gross premiums written decreased
by $7,948,000, net premiums written decreased by $6,849,000 and net premiums
earned decreased by $3,694,000 in the third quarter of 2001 compared to the
third quarter of 2000 due to the London operations.
Premiums ceded by PXRE to its managed business participants increased
to $19,042,000 for the third quarter of 2001 compared with $8,708,000 for the
corresponding period of 2000 due to growth in gross written premiums, including
the WTC event. Ceded premiums written related to the WTC event amounted to
$4,590,000.
Gerald Radke (Chairman, President and Chief Executive Officer of PXRE)
and Jeffrey Radke (Executive Vice President of PXRE and President of PXRE
Bermuda) are members of 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 $90,754,000 as of
September 30, 2001, of which
17
$71,216,000 was secured by either funds withheld, trust assets or letters of
credit as of September 30, 2001.
Management fee income from all sources for the three months ended
September 30, 2001 increased to $2,335,000 from $726,000 for the corresponding
period of 2000, due to an increase in business ceded to its managed business
participants, including the effects of the WTC event.
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 365.6% for the third quarter of 2001 compared with
47.2% for the comparable period of 2000. Excluding the WTC event, the loss ratio
was 79.3% for the third quarter of 2001. The loss ratio for the third quarter of
2001 reflected incurred catastrophe and risk excess losses of $198,171,000 gross
and $39,220,000 net for 2001 and prior accident years. In comparison, the loss
ratio for the third quarter of 2000 reflected incurred catastrophe losses of
$9,329,000 gross and $3,392,000 net.
Significant catastrophe and risk losses affecting the three months
ended September 30, 2001 loss ratio are as follows:
Amount of Losses
----------------
Loss Event Gross Net
---------- ----- ---
($000's)
WTC event $180,713 $27,190
Air Lanka Terrorist Attack 6,569 4,713
2001 Wind and Hail - 2 events 2,832 2,289
Fertilizer Plant Explosion 2,700 1,003
Significant catastrophe and risk losses affecting the three months
ended September 30, 2000 loss ratio are as follows:
Amount of Losses
----------------
Loss Event Gross Net
- ---------- ----- ---
($000's)
Anatol - Danish Storms $5,883 $4,543
1994 Aviation Loss 2,242 2,131
2000 Kuwait National Petroleum 7,273 2,121
Phillips Electronics/Ericsson Fire 2,000 1,057
French Storm Martin 1,827 1,412
Hurricane Lenny (2,551) (1,969)
French Storm Lothar (7,341) (5,931)
18
The provision for losses and loss expenses and the loss ratio includes
the effect of foreign exchange movements on PXRE's liability for losses and loss
expenses, resulting in a foreign currency exchange loss of $1,672,000 for the
three months ended September 30, 2001 compared to a gain of $1,186,000 for the
corresponding period of 2000.
During the third quarter of 2001, PXRE experienced adverse development
of $8,838,000 net for prior-year loss and loss expenses due to reserve
strengthening in casualty, marine and aerospace lines of business, unrealized
foreign exchange losses, and development on a number of significant
catastrophes. The loss ratio for the comparable period of 2000 was affected by
adverse development of $286,000 net largely due to favorable development on the
major 1999 catastrophes offset by $2,100,000 market development on a 1994
aviation loss.
The underwriting expense ratio was 4.0% for the third quarter of 2001
compared with 40.9% for the comparable period of 2000. Excluding the WTC event,
the expense ratio was 27.4%. Excluding the WTC event, the commission and
brokerage ratio net of management fee income was 12.4% in the third quarter of
2001 compared with 20.5% for the comparable period of 2000, primarily due to
increase in premiums earned and the changing mix of business. Excluding the WTC
event, the operating expense ratio was 15% in the third quarter of 2001 compared
with 20.4% for the corresponding period of 2000 largely due to a reduction in
business from the Lloyd's operation. As a result of the above, the combined
ratio was 369.6% for the third quarter of 2001 (106.7% in the third quarter of
2001 excluding the WTC event) compared with 88.1% for the comparable period of
2000.
Other operating expenses decreased 14.9% to $7,005,000 for the three
months ended September 30, 2001 from $8,229,000 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 gains of $298,000 for the three months ended September 30,
2001 compared to losses of $654,000 for the corresponding period of 2000.
During the third quarter of 2001, interest expense decreased to
$855,000 compared to $1,177,000 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
$36,666,000 portion is 5.34% as a result of a cash flow hedge interest rate swap
while the variable interest rate on the remaining $18,334,000 outstanding during
the period from July 1, 2001 to September 30, 2001 was 4.71%. 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 September 30,
2001 and 2000. Included in other comprehensive income is the decrease in the
fair value of the cash flow hedge for the period from July 1, 2001 to
September 30, 2001 of $864,000, net of tax.
Net investment income for the three months ended September 30, 2001
decreased 14.9% to $5,767,000 from $6,778,000 for the comparable period of 2000.
The decrease in net investment income is due to lower returns on hedge funds
offset by increased invested balances. PXRE's pre-tax annualized investment
yield was 4.2% for the third quarter of 2001 compared with 5.8% for the
corresponding quarter in 2000, both calculated using amortized cost and
investment income before investment expenses. Net realized investment gains for
the third quarter of 2001 were $3,426,000, compared to losses of $128,000 in the
third quarter of 2000,
19
resulting from the liquidation of bonds to raise cash in preparation for paying
claims from the WTC event.
The net effect of foreign currency exchange fluctuations was a loss of
$1,374,000 in the third quarter of 2001 compared to gains of $532,000 for 2000.
The London operations which are winding down, resulted in a loss before
taxes of $1,771,000 in the three months ended September 30, 2001 compared to
a loss before taxes of $587,000 in the three months ended September 30, 2000.
PXRE recognized a tax benefit of $7,338,000 in the third quarter of
2001 compared to a provision of $4,716,000 in the prior year period. The tax
benefit 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 nine months ended September 30, 2001, net loss was $26,309,000
compared to a net loss of $16,135,000 for the comparable period of 2000. The
diluted net loss per common share was $2.28 for the first nine months of 2001
compared to a diluted net loss per share of $1.42 for the first nine months of
2000, based on diluted average shares outstanding of approximately 11,504,000 in
2001 and 11,385,000 in 2000.
The following table more fully details the impact of the WTC event on
the first nine months of 2001:
Results
Results Excluding
as WTC WTC
($000's) Reported Event Event
--------- ----- ----
Gross premiums written $223,622 $ 30,030 $193,592
Net premiums written 112,220 (29,020) 141,240
Net premiums earned 108,809 (29,020) 137,829
Management fees 5,069 613 4,456
Net losses incurred 121,774 27,190 94,584
Commission and brokerage 19,072 (11,432) 30,504
-------- -------- --------
Underwriting results before taxes $(26,968) $(44,165) $ 17,197
======== ======== ========
Written premiums for the nine months of 2001 and 2000 were as follows:
Nine Months Ended September 30,
------------------------------- Increase
2001 2000 (Decrease)
---- ---- ----------
($000's) %
Gross premiums written $223,622 $209,137 6.9
Ceded premiums:
Managed business participants 38,781 42,712 (9.2)
Catastrophe coverage, surplus reinsurance
and other 72,621 29,353 147.4
-------- --------
Total reinsurance premiums ceded 111,402 72,065 54.6
-------- --------
Net premiums written $112,220 $137,072 (18.1)
======== ========
Gross written premiums for the first nine months of 2001
increased 6.9% to $223,622,000 from $209,137,000 in the year-earlier period,
while net premiums written declined
20
18.1% to $112,220,000 versus $137,072,000 in the first nine months of 2000.
Excluding the impact of the WTC event and the Company's London operations, the
Company had gross and net premium growth in all segments. Net premiums earned
for the first nine months of 2001 decreased 9.2% to $108,809,000 from
$119,889,000 for the comparable period of 2000, reflecting the WTC event and
cessation of London operations. Excluding the WTC event and London operations,
the Company had growth in all segments, but the other segment. Gross premiums
written decreased by $25,845,000, net premiums written decreased by $18,471,000
and net premiums earned decreased by $11,478,000 in the first nine months of
2001 compared to the first nine months of 2000 due to the London operations.
Premiums ceded by PXRE to its managed business participants decreased
9.2% to $38,781,000 for the first nine months of 2001 compared with $42,712,000
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, due to one large
contract ceded in the second quarter of 2000, partially offset by increases in
premiums ceded from the WTC event.
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, totaling $18,500,000. The
Company believes these retrocessional agreements will enhance the long-term
profitability of the finite contracts to which they relate.
Catastrophe coverage, surplus and other ceded premiums written
increased in 2001 from 2000 primarily due to additional premiums on
retrocessional protection following the WTC event.
Management fee income from all sources for the nine months ended
September 30, 2001 increased 17.9% to $5,069,000 from $4,299,000 for the
corresponding period of 2000, reflecting the increase in business ceded to its
managed business participants, including the effects of the WTC event.
The loss ratio was 111.9% for the nine months ended September 30, 2001
compared with 93.0% for the comparable period of 2000. Excluding the effects of
the WTC event, the loss ratio was 68.6%. The loss ratio for the nine months of
2001 reflected incurred catastrophe and risk excess losses of $218,192,000 gross
and $51,358,000 net for the 2001 and prior accident years. The loss ratio for
the corresponding period of 2000 reflected incurred catastrophe losses of
$78,720,000 gross and $52,200,000 net.
21
Significant catastrophe and risk losses affecting the nine months ended
September 30, 2001 loss ratio are as follows:
Amount of Losses
----------------
Loss Event Gross Net
- ---------- ----- ---
($000's)
WTC event $180,713 $27,190
Petrobras Oil Rig Disaster 16,779 11,670
Air Lanka Terrorist Attack 6,569 4,713
Tropical Storm Allison 5,461 3,505
2001 Wind and Hail - 2 events 4,263 3,423
Significant catastrophe and risk losses affecting the nine months ended
September 30, 2000 loss ratio are as follows:
Amount of Losses
----------------
Loss Event Gross Net
- ---------- ----- ---
($000's)
French Storm Martin $27,415 $20,218
French Storm Lothar 21,102 13,102
Anatol-Danish Storms 5,319 3,942
Hurricane Georges 3,081 2,770
1994 Aviation Loss 2,699 2,131
2000 Kuwait National Petroleum 7,273 2,121
Swiss Floods 1,902 1,468
Hurricane Lenny 2,385 1,287
Phillips Electronics/Ericsson Fire 2,000 1,057
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 gains of $509,000 for the
nine months of 2001 compared to gains of $1,244,000 for the corresponding period
of 2000.
During 2001, PXRE experienced adverse development of $15,972,000 net
for prior-year loss and loss expenses primarily due to casualty, marine and
aerospace loss development. The loss ratio for the comparable period of 2000 was
adversely affected by development of $52,042,000 net for prior year loss and
loss expenses largely due to the French storms Lothar and Martin.
The underwriting expense ratio was 34.4% for the nine months ended
September 30, 2001 compared with 40.1% for the comparable period of 2000.
Excluding the WTC event, the expense ratio was 35.9%. Excluding the WTC event,
the commission and brokerage ratio, net of management fee income, was 18.9% in
the first nine months of 2001, compared with 17.9% for the comparable period of
2000. The operating expense ratio was 17.0% in the first nine months of 2001
compared with 22.2% 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 146.3% for the
first nine months of 2001 (104.5% excluding the WTC event) compared with 133.1%
for the comparable period of 2000.
Other operating expenses decreased 12.2% to $23,389,000 for the nine
months ended September 30, 2001 from $26,628,000 in 2000. The decrease was
primarily related to the
22
expense savings associated with the termination of PXRE's Lloyd's operations.
Included in other operating expenses were foreign currency exchange losses of
$525,000 for 2001 compared to losses of $712,000 for the corresponding period
of 2000.
During the first nine months of 2001, interest expense decreased to
$3,593,000 compared to $3,606,000 in the corresponding period of 2000. 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 $36,666,000 portion
is 5.34% as a result of a cash flow hedge interest rate swap while the variable
interest rate on the remaining $18,334,000 outstanding during the period from
July 1, 2001 to September 30, 2001 was 4.71%. 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. PXRE incurred minority interest
expense amounting to $6,658,000 related to PXRE's $100 million TRUPS during the
nine month period ending September 30, 2001 compared to $6,656,000 in the
corresponding period of 2000. Included in other comprehensive income is the
decrease in the fair value of the cash flow hedge for the period from July 1,
2001 to September 30, 2001 of $864,000, net of tax.
Net investment income for the nine months ended September 30, 2001
decreased 2.3% to $23,888,000 from $24,461,000 for the comparable period of
2000. PXRE's pre-tax annualized investment yield was 6.2% for the nine months
ended September 30, 2001 compared with 6.8% for the corresponding nine months in
2000, both calculated using amortized cost and investment income before
investment expenses. Net realized investment gains for the nine months of 2001
were $4,241,000, compared to losses of $590,000 for the corresponding period of
2000, resulting from the liquidation of bonds to raise cash in preparation for
paying claims from the WTC event.
The net effect of foreign currency exchange fluctuations were losses of
$17,000 in the nine months ended September 30, 2001 compared to gains of
$532,000 for 2000.
The London operations, which are winding down, resulted in a loss
before taxes, of $5,265,000 in the nine months ended September 30, 2001
compared to a loss before taxes of $9,569,000 in the nine months ended
September 30, 2000.
PXRE recognized a tax benefit of $5,852,000 in the first nine months of
2001 compared to a benefit of $9,948,000 in 2000. The tax benefit 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 has engaged Lazard to assist it in evaluating various
capital raising alternatives.
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
23
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 nine
months of 2001, $19,500,000 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 September 30,
2001, the statutory capital and surplus of PXRE Bermuda was estimated to be
$12,706,000 and the amount required to be maintained was estimated to be
$7,680,000.
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 tax convention between the United States and
Barbados) and (based on source of insurance business) and effective corporate
income tax rate of 2.5%.
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
24
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 September 30, 2001.
In connection with the Credit Agreement, PXRE Delaware and First Union
entered into a cash flow hedge interest rate swap which, effective December 31,
1998, has the intended effect of converting the initial $36,666,000 borrowings
by PXRE Delaware into a fixed rate borrowing at an annual interest rate of
6.34%. The remaining $18,334,000 outstanding on September 30, 2001, after paying
down $10,000,000 on March 31, 2001 and March 31, 2000, is expected to incur an
interest rate of 3.59% for the fourth 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 merger or consolidation, (2) such merger or
consolidation constitutes a Permitted Acquisition and the conditions and
requirements of the Credit Agreement are complied with and (3) immediately
thereafter no Default or Event of Default exists. The Credit Agreement also
requires compliance with Leverage Ratio, Fixed Charge Coverage Ratio, Risk-Based
Capital Ratio and Combined Statutory Surplus requirements. As at September 30,
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
25
been nominated, or otherwise approved in writing, by at least a majority of
individuals who constituted the Board as of the date of the Credit Agreement (or
their approved replacements).
On January 29, 1997, PXRE Capital Trust I ("PXRE Capital Trust"), a
Delaware statutory business trust and a wholly-owned subsidiary of PXRE
Delaware, issued $100,000,000 principal amount of its 8.85% TRUPS `sm' due
February 1, 2027 in an institutional private placement. Proceeds from the sale
of these securities were used to purchase PXRE Delaware's 8.85% Junior
Subordinated Deferrable Interest Debentures due February 1, 2027 (the
"Subordinated Debt Securities"). On April 23, 1997, PXRE Delaware and PXRE
Capital Trust completed the registration with the Securities and Exchange
Commission of an exchange offer for these securities and the securities were
exchanged for substantially similar securities (the "Capital Securities").
Distributions on the Capital Securities (and interest on the related
Subordinated Debt Securities) are payable semi-annually, in arrears, on February
1 and August 1 of each year, commencing August 1, 1997. Minority interest
expense, including amortization of debt offering costs, for the nine months
ended September 30, 2001 in respect of the Capital Securities (and related
Subordinated Debt Securities) amounted to $6,658,000. On or after February 1,
2007, PXRE Delaware has the right to redeem the Subordinated Debt Securities, in
whole at any time or in part from time to time, subject to certain conditions,
at call prices of 104.180% at February 1, 2007, declining to 100.418% at
February 1, 2016, and 100% thereafter. PXRE Delaware has the right, at any time,
subject to certain conditions, to defer payments of interest on the Subordinated
Debt Securities for Extension Periods (as defined in the applicable indenture),
each not exceeding 10 consecutive semi-annual periods; provided that no
Extension Period may extend beyond the maturity date of the Subordinated Debt
Securities. As a consequence of PXRE Delaware's extension of any interest
payment period on the Subordinated Debt Securities, distributions on the Capital
Securities would be deferred (though such distributions would continue to accrue
interest at a rate of 8.85% per annum compounded semi-annually). In the event
that PXRE Delaware exercises its right to extend an interest payment period,
then during any Extension Period, subject to certain exceptions, (i) PXRE
Delaware may not declare or pay any dividend on, make any distributions with
respect to, or redeem, purchase, acquire or make a liquidation payment with
respect to, any of its capital stock or rights to acquire such capital stock or
make any guarantee payments (subject to specified exceptions) with respect to
the foregoing, and (ii) PXRE Delaware may not make any payment of interest on,
or principal of (or premium, if any, on), or repay, repurchase or redeem, any
debt securities issued by PXRE Delaware which rank pari passu with or junior to
the Subordinated Debt Securities. Upon the termination of any 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
26
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 September 30, 2001, 76.7% of PXRE's investment portfolio, at fair
value, consisted of fixed maturities and short-term investments.
Of PXRE's fixed maturities portfolio at September 30, 2001, 90.7% 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 49.2% of fixed
maturities based on fair value at September 30, 2001. The average market yield
to maturity of PXRE's fixed maturities portfolio at September 30, 2001 and 2000,
was 4.8% and 6.7%, respectively.
PXRE had no investments in real estate or commercial mortgage loans as
of September 30, 2001; however, PXRE has invested in common and preferred shares
of publicly traded REITS with a fair value of $2,289,000 at September 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 September 30, 2001, an after-tax unrealized gain of
$2,137,000 ($0.18 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 $175,455,000
at September 30, 2001, compared to $71,468,000 at December 31, 2000 including
one hedge fund amounting to $16,404,000 at September 30, 2001, compared to
$23,365,000 at December 31, 2000. The amount of short-term investments was
increased to raise cash in preparation for paying claims related to the WTC
event.
A principal component of PXRE's investment strategy is investing a
significant portion of PXRE's invested assets in a diversified portfolio of
hedge funds. As at September 30, 2001, hedge fund investments held by PXRE
amounted to $112,202,000 (including $16,404,000 in short term investments
mentioned above), representing 22.0% of September 30, 2001 total assets. As at
September 30, 2001, hedge fund investments with market values ranging from
$763,000 to $16,404,000 were administered by thirty-two managers. Five of the
managers 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 September 30, 2001 PXRE's investment portfolio also included
approximately $20,390,000 of mezzanine bond and equity limited partnership
investments, with fair values ranging from $1,572,000 to $9,161,000 and
remaining aggregate cash call commitments in respect of such investments of
$1,142,000. 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 nine months ended
27
September 30, 2001, included $6,894,000 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 used by operations was $9,637,000 during the third
quarter of 2001 compared with net cash flow provided by operations of $975,000
during the corresponding period of 2000, due to the effects of timing of
collection of receivables and reinsurance recoverables and payments of losses.
Dividends declared in the third quarter of 2001 to shareholders were
approximately $715,000 compared to $709,000 in 2000. The expected annual
dividend based on shares outstanding at September 30, 2001 is approximately
$2,863,000.
Book value per common share was $19.61 at September 30, 2001.
In December 1999, the Company announced a stock repurchase program of
up to 1,000,000 shares. The Company had 11,928,000 common shares outstanding as
of September 30, 2001. No share repurchases were made during the third 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 $47,430,000 par value of U.S. government agency and
municipal bonds as collateral for Lloyd's. Cash and invested assets of PXRE's
Lloyd's Syndicate amounting to $16,289,000 at September 30, 2001 are restricted
from being paid as a dividend through June, 2003.
All amounts classified as reinsurance recoverable at September 30, 2001
are considered by management of PXRE to be collectible in all material respects.
28
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 current and 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 shortfalls 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;
29
(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
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K
None
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.
November 14, 2001 By:/s/ James F. Dore
-----------------
James F. Dore
Executive Vice President
and Chief Financial Officer
33